Assignment 4.1 - Supply and Demand of the Wii Console

INTRODUCTION

Nintendo is known for its innovation and creativity in the gaming console market. The Wii is no exception. In September of 2006 Nintendo launched the Wii, which was a new gaming experience that appealed to a wide audience. The Wii had WiFi capabilities, wireless controllers, blue tooth, and games that require moving your body. For all these reasons, the Wii's demand was very high when it was first launched.

BACKGROUND

The Wii controller revolutionized gaming. It used motion sensing technology and a pointer to provide a new level of gaming interactivity. The accelerometer and optical sensor system allowed the controller to detect its orientation. These capabilities were harnessed to produce the new and unique highly interactive gaming experience. The controller came in a sleek design that functioned more like a mouse than a traditional controller. To highlight these new capabilities, Nintendo developed the Wii Sports gaming package. The package included five games: baseball, boxing, bowling, tennis, and golf. The controller could be used as if the player was actually playing these games, as opposed to just controlling a character who is playing these games, as many consoles do. For instance, in golf, the controller was used as a golf club. The Wii could easily be viewed as a whole new type of toy that was fun for the young, old, and everyone in between.

Launch

Information about the Wii was first released in September of 2006. Dates, prices, and the number of units that would be available were released and Nintendo announced that most of the shipments would go the Americas. The Wii launched in November 2006 in the U.S. at a price point of $249.99. This compares to a price point of $399.99 for the Xbox 360 and $499.99 for the PlayStation 3, its main competitors.

Sales

The Wii was a huge success worldwide right from the get-go. In the U.S., demand for the Wii outpaced supply from November 2006 through June 2007. A similar story played out in many other countries and regions as well. The U.K. suffered shortages until March of 2007 and in Australia the Wii became the fastest-selling game console in Australian history. In anticipation of the holiday season, Nintendo increased production between October and December 2008. Its worldwide production increased from 1.6 million per month in 2007 to 2.4 million per month. However, demand for the Wii continued to remain high and it was not until March of 2009 that the Wii was available for walk-in purchases at retail stores in the U.S. At this point, 48 million Wii consoles had been sold.

Profit

Even with at a lower price point, Nintendo directly profited from each sale of a Wii console. In 2006 and 2007, for each unit sold in the U.S. Nintendo made $49. They claimed to do this by optimizing production costs. In contrast, Microsoft (Xbox) and Sony (PlayStation 3) rely on software sales to produce a long-term profit and generally lose money on the sale of the consoles. Nintendo's optimization strategy worked. Even after robust years in 2007 and 2008, both operating profits and sales increased in 2009, and 2009 earnings beat 2008 earnings.

Price Drop

In 2009, sales of the Wii console declined until September when Nintendo decided to drop the price for the Wii console to $199.99. This was the first price drop and proved to be effective at generating additional demand. In December of 2009, over three million Wii consoles were sold in the U.S., which set a record for monthly sales in the U.S. Further, the record setting sales in the month of December pushed the Wii to become Nintendo's best-selling home video console, selling over 67 million units at that point. To date, the Wii remains Nintendo's best-selling console, having sold over 100 million units worldwide.

Resources for this case:

https://en.wikipedia.org/wiki/Wii_Remote

https://en.wikipedia.org/wiki/Xbox_360_launch#Release_dates_and_pricing

https://en.wikipedia.org/wiki/Wii

https://en.wikipedia.org/wiki/PlayStation_3

Further Reading:

http://wii.com/

http://www.nintendo.com/corp/history.jsp

Questions

Would the demand for the Wii console be relatively inelastic or relatively elastic in 2006 through 2007? State why. (15 points)

Would the supply for the Wii console be relatively inelastic or relatively elastic in 2006 through 2007? State why. (15 points)

Draw the demand and supply curves as you have described them. (10 points)

Was the severe shortage for over two years an old marketing ploy called intentional scarcity, in which a company purposely keeps its hot product in short supply to build buzz? Or was it simply bad planning on Nintendo's part? Explain your answer and include some outside research to support your conclusion. (20 points)

Can you suggest a reason why Nintendo dropped the price of the Wii Console in late 2009? How would you expect this to affect demand and revenues? (15 points)

Elasticity of supply and demand can change over time. In 2009, would you describe demand for the Wii as elastic or inelastic? What about supply? Provide an explanation for your answers. (15 points)

Draw the demand and supply curves for the Nintendo Wii in 2009 as you have described in number 6. (10 points)