GS: Nintendo Could Achieve Success Like Apple? Reaaaaly?

So Nintendo hit a new all-time high yesterday. This, according to Reuters, was due to Goldman Sachs initiating research coverage with buy rating. Please take note of my highlighting below.

TOKYO (Reuters) - Shares in Nintendo Co Ltd (7974.OS: Quote, Profile, Research) hit a record high on Wednesday after Goldman Sachs initiated coverage of the maker of the Wii game console with a "buy" rating, while speculation the firm could raise its earnings forecast again gave it an extra boost.

Shares in Nintendo rose as high as 64,800 yen, an all-time high, before closing up 2.7 percent at 64,300 yen.

Goldman Sachs' target price for Nintendo is 71,000 yen, a 10 percent premium to the closing price.

"We believe Nintendo's talent in creating new markets, evident from the launch of the DS and Wii, could bring it close to the level of Apple, whose high valuations are due in large part to its innovative business model," Goldman said in a report.

There has been a lot of great stuff written about Nintendo and its business model on the Internet over the past 12-18 months. And some of these analyses also drew comparisons between the successes enjoyed by both Nintendo and Apple. I'd be interested to see the report and compare its central thesis relative to the commentary that has been bandied about the Internet for a long, long time. I personally have written about this quite a bit, but excerpts of two of my favorite posts that touched upon the structural and strategic similarities between the two companies are below.

5/06/2007: From the Mailbag: Why is Vertical Integration Working Today

So what of Apple and Nintendo? Why, as my commenter mentioned, do these models succeed when other vertically integrated business models fail? My hypothesis is as follows:

Vertical integration succeeds today because the integration is around IP, not raw materials. The integration of IP "wraps" the value stack, serving as the glue that seamlessly links one process to the next - hardware design, software design, user interface, and the user experience, which is an amalgam of the three. These are not three serial processes but a single integrated unit made up of three components, more akin to a single project than three discrete and independent processes.

If Apple and Nintendo opened their own fabs to control their chip supply, this would be silly. So the vertical integration metaphor is a little different in their case. Sure, they may build their boxes, design their operating system, publish their own software and polish their user experience, but this is different type of vertical model than had previously existed. The value is around starting from the user experience and working backwards, instead of starting with an engineered piece of hardware and then designing software and a user experience to make it work. This is the Sony model. This isn't working so well if the goal is to sell a product with broad market acceptance.

Unless you are close to the market and know what it wants and needs, how can you come up with the right design? It seems that you just can't get the pieces stitched together right in a manner that broadly resonates with the marketplace unless you have tight linkages up and down the value stack, which cries for the type of vertical integration practiced by Nintendo and Apple. I don't think this is a fad; I think it is reflective of a world that is increasingly consumer-driven, as opposed to the world we used to live in where the mantra went kind of like "What GM builds people buy." This mind-set is certain failure in today's marketplace, and one only need look at the road-kill that are companies founded in eras past that got the joke just a little too late. I'm not sure if I have sufficiently answered the business model question but hopefully I've gotten my reader part of the way there.

5/15/2007: Marketing-Push vs. Evangelism-Pull: Microsoft/Sony vs. Apple/Nintendo

Nintendo and Apple products are being effectively pushed by evangelists. Sure, slick advertising augments these more organic efforts, but make no mistake: in general, people that own Apple products love them and talk about them. Frequently. The same with Nintendo and the Wii. I just can't get people to shut up about these products. But I can't say the same for Microsoft and Sony, notwithstanding how cool or slick their graphics are or how many features and functions their consoles have. Either I don't know the people that are the evangelists (notwithstanding the fact that I know dozens of people that have the Xbox 360 and the PS3, yet never evangelize to me about them) or they are just not into spreading the gospel. And this is a problem. And raises risk. The holy grail is to have millions of evangelists out there pounding the pavement for you, completely unpaid. They are the best sales, marketing and PR force money can't buy.

Just my little contribution to the bubbling dialogue. I wonder if the Goldman guys are reading the commentary across the blogosphere and feeding that into their thought process? Hmmm...