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LONG BLOG

Nintendo is not at Fault for the Amiibo Situation

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It might be a unique Nintendo thing, to release something that invites so much passion as well as so much anger, sometimes from the same people. That is the case with Amiibos in the US, many are hunting for them, but not everyone manages to get what they want. If you check gaming websites, you might think the only ones who have the rarest figures are scalpers and the lucky few.

In all of this, Nintendo is being portrayed like the Duck Hunt Dog, laughing in the background as their fans stumble on each other trying to get Ness at a pre-order event in Gamestop.

Seriously, few corperations are like this guy

At the center of all this is a psychological reason to distribute blame, to find someone at fault. However, there must not be any fault in any given situation, there isn’t always a bad guy to point your pitchforks at.

Yet, looking at the entire Amiibo situation from a real-life perspective, from an actual economic and project-based view, we can actually understand how the entire problem came to be. Here, I am going to explain Amiibo situation from a Project Engineering POV, suggesting that Nintendo might actually not be at much fault here.

Neither is anyone really.

First, we are going to debunk the notion that Nintendo intentionally created this scarcity situation to “create demand”. Then, we discuss how Nintendo actually gauged how much figures to make through Retailer input. Finally, a brief explanation of the supply chain we keep hearing about.

On False Scarcity and why it’s a Myth:

Intentional scarcity as a marketing strategy for fixed products is a myth.

We are going to discuss that through careful reading of Economic principles, the central principle being that of supply and demand. Regarding Amiibo’s, Nintendo have been accused to intentionally understock Amiibo’s to increase demand. In essence, Nintendo are accused of intentional scarcity to push demand. Which does not make any sense economically, because Amiibo’s are fixed price products.

Supply and demand principles talk about the price as a cause by fluctuating of the two, not each being affected by the other. Take the Marth Amiibo for example; demand far outweigh the supply, therefore the price of it increased. Mario in the other hand stays at the MSRP for Amiibo’s. However, it is not Nintendo profiting from Marth’s price increase, because they can only sell at the MSRP price.

Supply and Demand affects price, nothing about one affecting the other

Therefore, any intentional demand people argue they are creating through scarcity, is not demand that they can profit from. In fact, any demand that is not being met through Nintendo’s own stock is simply lost sales. Similar things happened with the Wii (where people again accused Nintendo of false scarcity tactics).

Simply, false scarcity tactics do not work for fixed price products, at least not for the core company. However, scarcity does push the price of the secondhand market, which brings no profit to Nintendo.

Rather than intentional scarcity, the Amiibo situation is simply that of Nintendo AND retailers misjudging demand. You see, Nintendo wouldn’t order the production of hundreds of thousand variable figures without consulting the retailers who would actually do the selling.

The Influence of Retail on Supply:

Many Amiibo’s are incredibly rare, and Nintendo is often called on to “fix” the situation. However, this ignores many real-life steps that prevent Nintendo from being able to “fix” anything at all.

Here we will attempt to explain the origins of the Amiibo scarcity problem and explain how Nintendo can do very little about it while still maintain profitability.

To start, let us go back to the moment if this idea’s conception. Nintendo planned to make nearly 50 unique figures that interact limitedly with many of its games and sell them. There are three huge consequences of that statement: 1- There would be 50 figures, 2- Someone needs to “sell” them, 3- This is a first foray of Nintendo into the figure market.

Here, we go to the most important player in Nintendo’s decisions in how it decided to manufacture the Amiibo’s; the sellers. Contrary to what a lot might think, Nintendo doesn’t sell to us customers, but it sells to retailers who then move the products to us. Therefore, when Nintendo brought this idea up, it must have talked to retailers and asked about how they were willing to sell these figures, and how much do they want.

These guys are the real power behind supply and demand

Imagine this, Target executives get this proposal from Nintendo outlining their plan to sell 50 unique figures. Target has limited shelf-space, and it is only willing to give one shelf to these Amiibo’s. In consequence, Nintendo must divide the 50 in waves. Second, Target is the one that decides how much of each Amiibo they want. Of course, they would think that the more famous ones are safer bets to sell. Every Target exec knows Mario, probably most know Donkey Kong and Pikachu, and maybe one or two know about Peach and Yoshi. No one know about fucking Marth and Villager.

In fact, this is the number-one reason we get exclusive Amiibo’s. When you have several competing retailers, the look at these more niche figures as a hindrance. They believe they have a limited audience that might stock up completely from rival retailers. Thus, they would only stock the more niche figures if they were exclusive to them. These exclusivity agreements have been signed months in advance, and any change is both expensive, and a sign of future mistrust.

While it is ultimately Nintendo’s decision the numbers of figures it makes, this decision is heavily influenced by retailer’s readiness to buy stock. Which is what end up influencing the numbers of all initial waves.

Managing the Supply Chain:

In short, a company must always try to match demand to get the most out of their product. When a company supplies less than demand, it is not because of any sinister motives, but because of lower expectations and faulty market research.

OK then, says the Nintendo fan, now that they know there is enough demand, why don’t they increase supply?

Here, I am going to answer just that question. Due to the complex nature of global supply chain management, few companies are able to alter the supply chain once it is in place. In the case of Amiibos, the supply chain goes something like this: Corporate (Nintendo), Manufacturing (China), Transport (From China), and Transport again (within each country), and Retail. As you can see, Nintendo is only one part of the global Amiibo Supply Chain. All the rest are contracted by Nintendo.

Like cogs in a machine, every part is affected by others

Here is a brief idea on each of these:

Corporate:

This is the decision making body and the central stakeholder in the entire operation. Nintendo is responsible for setting up the Amiibo caravan, getting all the contracts done, and locking down the supply number.

Often, Nintendo is also responsible for the artistic design of the Amiibos themselves, and their functionality.

Manufacturing:

These are the guys in China making all 50+ Amiibos. They design the assembly line, switch-overs (change from one character to the next), and general quality of the product. Of course, they are contracted by Nintendo to achieve certain quality thresholds and to produce a certain number of Amiibos.

Note that these guys are also contracted with other companies, and are only obligated to follow the initial contract. Any change that Nintendo would want to suggest is subject to a “change order” form, which I will explain later.

Transportation:

This is where the Amiibos are transported from one place to another. Basically, Nintendo is usually responsible for finding a contractor to transport the Amiibos from China to the rest of the world. After that, it is usually retailer’s responsibility to transport the Amiibos from each harbor to stores in the country.

As with Manufacturing, Nintendo contracts transportation companies with delivery dates and numbers of Amiibo. Usually, transportation companies are the ones responsible for storage issues as well (which can be expensive).

Retail:

Contrary to their position in the Supply Chain, Retail are usually the first to be contacted by corporate. It is their input that usually has the most on the number of supply being manufactured.

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Even though this is a somewhat straightforward supply chain, there is a limited ability to change it once it is in place. That is because how contracting works:

Contracting and Change Orders:

Contracts work on two phases, the initial contract, and during the contract.

In the initial contract phase, the contractors usually agree on relatively low terms. That is because of two reasons: because they would want a repeat customer, and because they might compensate when corporate asks for a change in the contract.

When a company asks for a “change order”, they are at the mercy of the contractor, who usually make it really expensive. Because at this moment, corporate exposes their “need” for that change, and they negotiate at a position of weakness.

Because of the nature of both contracting and the supply chain, Nintendo is not able to adjust only one contract, but the entirety of the supply chain. Hence, any change they suggest, is going to be too expensive for them to implement.

I love these comics

***************************************************

With the Supply Chain explained, everyone should now realize how complex the situation is for Nintendo. Through their initial order, Nintendo were committing to their first impressions of demand. Once everyone realized that there is more demand than supply, the contracts have already been in place for at least a year’s worth of Amiibos.

Nintendo didn’t even do that bad of a job predicating demand, with them actually supplying NA with more than half their Amiibo supply. However, once news of rarity went down, scalpers started ordering by the dozens. This is actually retailer’s responsibility, and not Nintendo.

With Amiibos, I disagree with Nintendo with a lot about their functionality. However, I don’t think they did anything wrong from a project management POV regarding supply and demand.

The US is getting nearly two thirds of the Amiibo supply, is that intentional scarcity?

Please discuss in the comments, and I will update the blog with the most important discussion points accordingly.

Point: Maybe Nintendo is Using False Scarcity now to push demand for later figures?

Theoretically, a company can “raise” demand for a scarce product, then increase supplies to meet that demand. However, this would be very dumb for Nintendo to do for the following reasons:

  • Each figure is unique; demand for Marth =/= demand for Rosalina.
  • Nintendo doesn’t directly control the Supply Chain, they are using contractors, and change order issues still apply.
  • There is no guarantee that scarcity would push demand.
  • Scarcity generates consumer fatigue, which is bad for the long run.
  • There is no guarantee that Nintendo can sustain the same level of demand.
  • Economically, to get money now is more valuable than the possibility of getting more money in the future.

Point: Why not make more than what you think is demand, just in case you find it is higher?

Generally, companies usually make more than what they think they can sell. However, depending on the product, they only make “that much” more. For Amiibos, they are a terrible product to make a lot off, because of the following reasons:

  • They are relatively cheap (to other producs being sold in the same stores).
  • They are huge (one Amiibo box nearly takes the volume of 6 game disks).
  • They are not very stackable.

Hence, for Amiibos, storage is as serious problem. Why would Gamestop want to store doezens of Amiibo when they can store more games? Or even more PS4s which are sure to sell. For products like Amiibos, they start generating losses 2 weeks to 1 month after introduction. If you have a mountain of unsold Amiibos (as it might have happened), that is going to be costly for everyone involved.

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About Lord Spencerone of us since 5:57 PM on 01.12.2014

Hello all, I am Lord Spencer, your friendly neighborhood royalty. Yes, the ancient bloodlines are letting absolutely anyone in these days.

Being the lurker that I am, I have been following Destructoid for more than four years. Well, its 3 AM where I live now, and I just plunged in getting HUGE in the way.

Here is hoping for a fun time.

Oh yes, here is a little more info about me that is probably not as interesting as I think it is:

-I owned and played about 1000+ games.
-I owned and read about 2000+ books (I counted comic books I read as a kid so this is not as impressive as it sounds).
-I absolutely love Legos.

Out of all the games I played, I only regret playing a few. I am a big fan of gaming, and thus I really like most of what I play.

Thanks to the excellent work of community member Dango, now I have a cool infographic of my top 20 games. This list is not my final one, but what I thought off at the moment. If you notice, they are presented in chronological order:





Oh, and here is a link to my blogs:
My Blogs