Surface Studio, Nintendo Switch, and Niche Strategies

There are few things that can bring geeks (like me) to the edge of hyperbolic hysteria like compelling new hardware videos, and this last week had not one but two!

First, the Nintendo Switch:

Then, yesterday, the Microsoft Surface Studio:

There’s no question both products are exciting in their own right; what makes them compelling, though, is not simply the technology demonstrated, but the fact both, unlike their forbearers, are clearly designed with the smartphone in mind.

The Wii U Mistake

The Nintendo Wii U and the Surface RT were both launched at the end of 2012; both were miserable disasters, and both for largely the same reasons: they targeted markets that no longer existed.

Back in 2006 the Wii came out of nowhere to win the seventh-generation of consoles, outselling the Xbox 360 and PlayStation 3 despite the fact Nintendo’s hardware was significantly underpowered relative to its competition. The key was the Wii’s motion control, best manifested by the seemingly simplistic Wii Sports; it turned out that simplicity was a virtue, attracting casual gamers who had long since abandoned consoles or never considered one in the first place, and Wii Sports went on to become the best-selling video game of all time.1

Nintendo sought to recreate the Wii’s success with the Wii U; the eighth-generation console finally supported high-definition graphics, but it was still significantly underpowered relative to the Xbox One and PS4. Instead Nintendo relied on another gimmick — a second touch screen on a tablet-like controller — but not only was the gimmick a flop with developers (including Nintendo), it was completely ignored by consumers; the console has been all-but discontinued after selling fewer than 15 million units.

There are lots of reasons the Wii U failed — including a name that was easily conflated with its predecessor, a lack of compelling first-party titles at launch, and Nintendo’s usual struggles with 3rd-party developers (much of it self-inflicted through both business practices and product decisions) — but the most important reason is that the market Nintendo exploited with the Wii no longer existed: casual gamers now owned smartphones, and smartphone gaming was good enough (and superior, if you considered convenience and ease-of-use). Meanwhile, Microsoft and especially Sony had continued their focus on dedicated gamers and 3rd-party developers, leaving the Wii U in the middle of nowhere: not good enough for hard-core gamers, and superfluous for everyone else.

The Surface Mistake

The Surface, meanwhile, was designed to be the physical manifestation of Windows 8: a touch-based tablet combined with the power of a traditional PC. Steve Ballmer said at the launch event:

The past several years have seen great change in the industry and great innovations coming from Microsoft. We’ve helped usher in a new era of cloud computing, we’ve embraced mobility, we’re redefining communications, and attempting to transform entertainment. In all that we have done Windows is the heart and soul of Microsoft: from Windows PCs to Windows servers to Windows Phones and Windows Azure, Windows has proven to be the most flexible general purpose software ever created…

With Windows 8 we’ve reimagined…Windows from the chipset to the user experience to power a new generation of PCs that enable new capabilities and new scenarios. We approached the Windows 8 product design in a forward-looking way: we designed Windows 8 for the world we know in which most PCs are mobile and people want access to information and the ability to create content from anywhere, anytime. People want to do all of that without compromising the productivity that PCs are uniquely known for, from personal productivity applications to technical applications, business software and literally millions of other applications that are written for Windows.

The problem is that while Windows may have still been the heart of Microsoft, it was no longer the heart of computing: the smartphone was. Much like the Wii U, the original ARM-based Surface RT failed for lots of product-related reasons — including the fact it was under-powered, lacked compelling 3rd-party applications,2 and the fact that Windows 8’s looks far outweighed its ease-of-use — but the most important reason is that the market Microsoft exploited with the general-purpose PC no longer existed: casual PC users now owned smartphones, and smartphone computing was good enough (and superior, if you considered convenience and ease-of-use). Meanwhile, traditional Windows OEMs and especially Apple had continued their focus on dedicated PC users, leaving the Surface in the middle of nowhere: not good enough for hard-core PC users, and superfluous for everyone else.

Microsoft’s Transformation

In the intervening years the advice for Nintendo and Microsoft has been strikingly similar: stop making hardware (I haven’t said that about Nintendo, but I certainly did about the Surface). The world has changed, it’s time to move on and adapt.

Microsoft in particular has done exactly that, to a degree I frankly didn’t think was possible as long as Windows was around. There are two divisions of the company — Productivity and Business Processes and Intelligent Cloud — that are building for a future where Windows is one of many computing platforms, and an increasingly unimportant one at that.3 Meanwhile, the company’s third division (More Personal Computing) is basically a collection of businesses, most prominently Windows, that are cash cows but don’t figure into Microsoft’s long-term future as a services company.

I have applauded Microsoft CEO Satya Nadella for pulling this split off, not just organizationally but culturally; Ballmer’s (correct) contention that Windows was the center of Microsoft was holding the entire company back, and it was why he needed to be replaced for Microsoft to survive in a world centered on iOS and Android. What I didn’t expect, though, was that the demotion of Windows would be just as good for Windows — specifically Surface — as it was for Microsoft.

The Surface Studio

Perhaps the most important feature of the Surface Studio is its price: $3,000 for the lowest-end model, and that doesn’t include the innovative “Dial”. This price point immediately attracted a lot of consternation on Twitter amongst Windows fans in particular, while some industry observers argued that most consumers weren’t artists anyways. Both true!

But what is also true is that all PCs are niche devices: for most people, particularly outside the U.S., a smartphone is all they need or care to buy. The world today is the exact opposite of the world a mere decade ago, where we bought dedicated devices to plug into our digital hub PCs; the smartphone (and cloud) is the hub, and everything else is optional.

Selling a niche device is a fundamentally different proposition than selling a general purpose one: the question of why a consumer would buy a general purpose device (like a PC ten years ago, or a smartphone today) is a solved one; the only question is which. Niche devices, on the other hand, face two hurdles to adoption: before a consumer chooses which device to buy they need to be convinced as to why they need a niche device in the first place. And, because answering “why” is even more difficult than winning “which”, niche device makers ought to focus on being a clearly superior solution to an identified market need; being cheap is not only not a priority, it’s a distraction.

The Surface Studio does this brilliantly; as the launch video shows, an incredible amount of engineering and expensive manufacturing went into the physical product, particularly the screen and hinge. The result, though, is that if you are an artist or graphic designer or architect or musician or do any sort of activity that requires drawing on or touching your display, and need the productivity capabilities of a PC (hello file system!), then there is nothing on the market like the Surface Studio (including the Surface Pro). Microsoft has rightly pulled out all the stops to make the perfect device for you. Does it cost a lot? Of course it does! But as Apple has demonstrated for years price is less important than differentiation. To insist that Microsoft make the product cheaper is the exact wrong strategy for a niche device maker, and I suspect it is rooted in the false assumption that the PC is a general purpose device that ought to appeal to everyone.

Certainly the Studio’s success is not assured, in large part because Microsoft’s target audience is using OS X. It is a tall order to get people to switch operating systems they are familiar with, which emphasizes the importance of Microsoft focusing on differentiation, not price (if price was all that mattered Windows would have never lost share to OS X in the first place). Just as importantly, though, is that today more people are even considering the possibility: the single best way to build a brand that attracts (as opposed to being the default) is to build a product that is the best possible one you can build, and only then make it as affordable as possible. For too long Microsoft approached that problem backwards, exacerbating the secular shift from PCs to smartphones.

The Nintendo Switch

As for Nintendo, the beloved gaming company has certainly taken steps in the right direction: the company lent its intellectual property (and investment dollars) to Niantic, driving the phenomenal success of Pokémon Go. Perhaps more significantly for the bottom line, the company has leveraged its partnership with mobile game developer DeNA to develop the upcoming Super Mario Run; encouragingly, like Pokémon Go, Nintendo is taking an established concept (a “runner”, in this case) and applying its intellectual property on top. It’s a great way to leverage Nintendo’s most valuable assets.

There are encouraging signs when it comes to the Switch as well:

  • It looks like (but is not confirmed) that Nintendo is abandoning touch as an input, which is exactly right. Touch on Nintendo products debuted in 2004 on the Nintendo DS, when the iPhone was but a gleam in Steve Jobs’ eye; today touch-focused games are going to be developed for the far larger smartphone market, and keeping the technology will only make Nintendo’s product significantly more expensive and/or far worse with regards to screen quality (the current 3DS and Wii U touch screens are embarrassing).
  • What Nintendo is doubling down on is controllers, another smart move. I argued in 2014 that controllers are so important to the user experience of consoles that they will hold off general purpose devices like Apple TVs when it comes to living room gaming; Nintendo’s bet is that they can attract gamers who want mobility by offering high fidelity control that smartphones can not4.
  • Nintendo also looks set to unleash a flurry of first-party titles: the company clearly gave up on the Wii U quite a while ago, shifting resources to the Switch. If the product launches with titles like Mario, Zelda, etc. it will provide a big boost that may actually attract third party developers

However, there remain two big questions: first, while Microsoft is a highly diversified business that can afford to sell Surface Studio to a very narrow niche, Nintendo’s entire business, outside of its nascent smartphone efforts, is its consoles. There is definitely a console niche, but Sony and Microsoft are filling it admirably. Is a portable niche big enough to support Nintendo?

Secondly, will Nintendo fully embrace a niche strategy? As I noted above, in a niche it is most important to convince consumers that they want your device; only then will they decide if they can afford it. If Nintendo skimps on the quality of its components, the performance of the device, or battery life just to save a few bucks, they may well please the people who were going to buy the device anyways, but plenty of others will stick with their good-enough smartphones or clearly superior consoles. Obviously the Switch should not be absurdly expensive, but it can definitely be too cheap.

Over the last couple of years, as it has become clear that rounded rectangles of glass and aluminum running either iOS or Android “won” the smartphone wars, it has been tempting to fret that hardware innovation would slow; and, arguably, in the case of smartphones, it has. In fact, though, I expect that the reality of the smartphone being the dominant general purpose device will open the doors for more and more devices like Surface Studio and the Nintendo Switch.

What might be created if you start with the assumption that the smartphone exists? Perhaps you would make sunglasses with a camera, or a watch, or an activity tracker, or a drone. I noted in Snapchat Spectacles and the Future of Wearables that the establishment of the PC led to an explosion of dedicated devices like PDAs, digital cameras, GPS devices, and digital music players. Now that those have been subsumed into the smartphone there are new opportunities, and in a twist of fate it is smartphone also-rans like Microsoft and Nintendo — along with smartphone native companies like Snapchat — that have more freedom to experiment given they have nothing to protect. It’s never been better to be a geek!

  1. Including bundled versions, breaking the record held for 20 years by Super Mario Bros. 

  2. I am painfully aware of this point, as I was on the Windows 8 team charged with bringing 3rd-party applications on board 

  3. To be fair, the majority of revenue in both divisions — from Office and Windows Server and its related products — still rests on Windows PC being the center of enterprise 

  4. Yes, there are add-on controllers for the iPhone, but games can’t require them which dramatically reduces their utility)