Artificial Scarcity and My Failed Quest for an NES Classic

Confession time: on November 11, I went to a Target store before it opened and waited outside for the launch of Nintendo’s NES Classic Edition.  I went home empty handed.  Just this morning (December 20), I went to a Best Buy store in 40 degree weather about an hour before it opened only to find out all the tickets for NES Classics had already been handed out to people who had camped outside the store overnight.  I’ve made probably two dozen calls over the past month, stopped by numerous stores, and even attempted to bribe employees for more information about shipments.  I’ve had absolutely no luck.  The simple fact is the NES Classic is by far the most difficult to procure item of this holiday season.

But the whole experience has me thinking: why would a company refuse to meet demand for one of its products, if even temporarily?  Nintendo is a $4.4B company and has been releasing globally-successful video game hardware for 36 years; I can’t believe that the company is this bad at predicting demand that the shortage is an accident.  So is a temporary shortage a strategy and, if so, how could it be beneficial to the company?

Before diving into the strategy for the shortage, let’s talk about the three possible reasons a shortage could occur:

1. The company cannot produce enough to meet demand.  There are very legitimate instances in which this could occur, often due to limitations in natural resources.  A great example of this is the most hard-to-find beer in Atlanta, Tropicália.  Atlanta beer drinkers have grown accustom to the empty grocery store shelf with a Tropicália label under it.  But the beer uses very specific ingredients, like Galaxy hops from Australia, and, as the CEO himself has said, “the brand can only grow as fast as the raw materials will let it.”¹
2. The company will not produce enough to meet demand.  In this instance, the company is fully aware that there is a shortage of its product and still refuses to produce more for a given time.  As a father of a young child, I am intimately familiar with the “Disney Vault,” which is Disney’s term for its storage of a movie that it simply refuses to currently sell (if you don’t believe me, try and buy a copy of The Lion King anywhere right now).  In Disney’s case, the strategy is due to the fact that the movies tend to target young children, which is a demographic that is constantly in flux.  By putting a movie in the “Disney Vault” and then re-releasing it every seven years or so, it can build excitement for a new generation of children that has never been exposed to the movie.
3. The company underestimated demand and has not yet caught up.  As a telecommunications employee, I still remember the original iPhone launch in 2007 and the massive overhaul to mobile networks that occurred as data usage exploded.  Not even Apple had foreseen the complete shift to users primarily accessing the internet through their mobile device, and the mobile networks were congested as the service providers made improvements to meet the additional demand.

Now which one of these applies in the case of Nintendo’s NES Classic?  The President of Nintendo America is on the record as saying “The overall level of demand is certainly greater than we anticipated, that’s why we’re suffering through the shortages out there in the marketplace.”²  Poppycock!  Limiting supply is a classic strategy that Nintendo has been using for decades with its newest products.  So why would Nintendo deliberately produce so few units?  As it turns out, there are many reasons.

The most obvious is the ensuing buzz that is built for the item.  Why buy advertisements for your product when you can make a newsworthy story about the product and thus promote it for free?  When I went to the Best Buy this morning, I spoke with someone else there about the status of the NES Classics, simply assuming he was another consumer.  At the end of our conversation, he said he was with a local news station and was reporting on the story of people camping out to buy the system.  It’s hard to fault Nintendo in this respect, as there is no question that this has been one of the most talked about items of this holiday season.  At least some of that is due to the scarcity.

But there’s more at play here.  After the launch date when it became clear that these units would be difficult to acquire, a secondary market immediately sprang up.  According to eBay, the average sales price was $230 for an item that was selling in stores for $60.³  This raises the obvious question: if consumers were willing to pay $230 for it, why did Nintendo not increase the retail price and enjoy the higher margin?

That answer is somewhat complicated.  Keep in mind that this is in absolutely no way revolutionary technology; in fact, it can be viewed as an item that has already been in existence for 30 years.  Users are willing to pay a relatively low price for the convenience it affords, but might scoff (or even protest) at such a high price for what amounts to a piece of nostalgia.  And remember how Nintendo wants to drive organic marketing for their product through the media?  That message is muddled when everyone is complaining about the price of the product.  Not to mention, it can be seen as price gouging children with a device that is in no way educational.  Nintendo very deftly side-stepped this situation and sacrificed the additional marginal profit to scalpers in order to continue to be seen as a “good” company.

But the fact is that essentially the only units available in the market are at these inflated prices.  This turns the unit into an extremely prestigious, almost luxury item.  Being able to acquire one is either a sign of wealth or a herculean effort.  Either way, owning one is a status symbol and creates a halo effect around all of Nintendo’s products.  Essentially, Nintendo gets all the credit for high prices with none of the downside.  The buzz ensures that Nintendo is on the mind of anyone with a passing interest in video games.

Well, what does Nintendo do with all this mindshare?  Releases “Super Mario Run” on iOS, of course!  Though the success of the game is debatable at this time, it is clear that there was more buzz around the game than otherwise would have been since so many people were already salivating over playing Super Mario games on the NES Classic that they had tried (and, most likely, failed) to acquire.

Nintendo also has to keep in mind its other stakeholder: retail stores.  Nintendo does a small fraction of its sales directly to consumers and instead relies on stores such as GameStop and Best Buy to sell its products.  By releasing units so slowly and in such an inscrutable and seemingly-haphazard manner, Nintendo has driven a ton of foot traffic to these stores.  Consumers are calling and stopping by much more frequently to try and get an inside track on when the next shipment is coming in.  While they are asking, they might make an impulse purchase or two.  I personally called a Toy”R”Us at one point to ask about shipments and received a pre-recorded message saying that they did not know when more shipments were arriving, so I should come in the store frequently to ask for the latest information.  The message was clear: we love you asking about this product, but make sure to do it from within the store where we can cross-sell you for our trouble.

So it’s clear that there are a lot of benefits to an artificial shortage, such as the one Nintendo has created.  But certainly there are negative effects as well, right?  In fact, there are many.

First, there is a definite risk that the brand will suffer more than it benefits.  While this does make Nintendo appear to be a prestigious, luxury company, it also makes Nintendo look like a company that is too incompetent to manufacture a video game system, which is its main business.  There has actually been a lot of vitriol directed at the company on Twitter stemming from the continued refusal to meet demand (only a small fraction of this hatred has come from me).

One must also remember the time-sensitive nature of the holiday season.  This would make a perfect Christmas present, but only if you can get it by Christmas.  At this point, it looks like most people will not be able to.  Nintendo obviously released to coincide with the holiday season, so failing to capitalize on that demand is puzzling.  The most committed consumers will buy this unit whenever they can, but some will not buy it after December 25.  In fact, many people might play the system at a friend’s house and realize that they don’t need a unit for themselves.

And don’t forget about the retail stores.  While they enjoy the increased traffic, there is certainly a lot of employee time being spent on repeating the same message over and over to customers.  When this takes place over the phone (as it often would), there is very little benefit to the store.  If the stores start to feel like this is an unfair expense, Nintendo’s shelf placement at these stores could easily suffer.  Nintendo has already announced its next-generation console, the Nintendo Switch.  If stores are still reeling from this experience, that unit could be buried behind a stack of PlayStations and XBoxes when it is released.

Finally, remember that Nintendo is a publicly traded company.  As the end of the quarter nears, Nintendo risks pushing sales into a future quarter, at best.  By recognizing these sales earlier, Nintendo could invest the revenue from these items and receive a return in the time between when the sale would have occurred and when it actually occurs.  Now everyone knows that the rate of return on short-term savings or treasuries is extremely low, but there still is a time value of money that Nintendo is sacrificing here.

In the end, I personally feel like Nintendo has botched this release and I think that the NES Classic will be a successful failure.  There is no question that the system itself is a success as it has already sold over 200,000 units⁴, but I believe that Nintendo has left revenue on the table with its artificial scarcity strategy.  The strategy only works if a company quickly builds buzz for an item and then meets the demand in a timely fashion.  At this point, the buzz has been built for some time and consumers are just feeling spurned and frustrated at their continued inability to acquire the system.  Perhaps there truly was a miscalculation in demand projections, but I don’t think it fully explains the continued shortage.  I think that it will be interesting to see how the system continues to roll out after the holidays and how this launch affects future launches by Nintendo.

So what do you think?  Is Nintendo outsmarting us all?  Will the company flood the market at some point soon?  Let me know in the comments.  And if you like this article, PLEASE send me a donation so that I can buy an NES Classic from a scalper on eBay.  I’m dying here.

"Your Interview Just Started" and Other Mistakes I've Seen (and Made) In Recruiting

I should start by saying that I actually really love recruiting.  I’ve helped a lot of people get roles on my current team and I think that it’s very fulfilling to match a talented person with a role that can further their career.  I’m the person who honestly gets excited when a person that I believe in asks me if I know of any available opportunities.

Having worked at several different companies, I’ve been involved in a lot of very different recruiting processes, both as the candidate and as the recruiter.  I thought that it might be interesting and informative to share some of the mistakes that I have seen (including one that I personally made) throughout these processes.  Let me say that this is obviously not intended to poke fun at those that are being described, and I’ve gone to great lengths to not give away the names or any unnecessary info about the people described.  But each one of these stories did really happen and illustrates a somewhat deeper lesson when it comes to recruiting.  Read carefully and avoid these mistakes when looking for your next role!

Your Interview Just Started

This happened many years ago when I was tasked as a greeter for on-campus recruiting.  My job was simple: my company was bringing in a high volume of candidates to interview, and I would stand outside the interview rooms and shake hands, answer basic questions, tell people where to get coffee or use the bathroom, and generally keep the machine running smoothly.  I actually found this role very satisfying, because most people are very friendly and complimentary when they're encountering someone who works for the company with which they are interviewing.

Unfortunately, not all people are this way.  Despite so much time passing, I still remember one candidate that came in a few minutes early for his interview.  He seemed frazzled and nervous and he had a stack of paper with him.  I introduced myself and told him that they were still finishing up with the previous interview.  I then asked if he needed anything.  I don't remember his exact response, but it was something to the effect of:

"No, I don't need anything.  Actually, if you could just leave me alone for a minute so I can prepare for my interview, that’d be great."

Bad news: your interview just started and you've already messed up.

Now this candidate was young and I'm sure had no idea how the decision process for offers would go.  In reality, everyone (including interviewers and greeters) came together in a room at the end and all shared notes.  When I was asked my opinion on this candidate, I had to relay that story.  Now, I don't believe that it was the deciding factor in his candidacy, but it certainly didn't help his case.  This raises a rule that I've always tried to adhere to: the second you finish dressing for the interview, you are in the middle of the interview.  Every interaction needs to be professional and friendly, because you never know what will factor into the company's decision on whether to hire you.

The Long Pause

Of all the faux pas that I've seen during interviews, I will say that this one was fairly mild.  That said, since it wasn't as obvious as some of the others, it bears repeating because a reasonable person could be convinced that this wasn't a mistake.

I was part of a group conducting an interview one time and the candidate was asked a question.  Now, I don't remember the exact question, but I do know that it wasn't completely out of left field.  Maybe something that the candidate hadn't prepared for specifically, but reasonable enough to expect that it will be asked.  The candidate's response was to ask "May I have a few moments to gather my thoughts?"  Reasonable enough, we all thought.  So we sat there in silence.

What I thought would be five seconds must have stretched into 45 or even a full minute.  I can't describe how uncomfortable it felt to sit in a room with five people, everyone looking at the table or aimlessly at the wall, in complete and utter silence for that long.

Then, he started to speak.  I don't remember his exact response either, but I feel like it was probably pretty good (one would hope after having that much time to get mentally prepared).  Unfortunately, all these years later, I don't remember the question or answer, but I'll never forget the awkward feeling during that long pause.

The fact is that you should always thoroughly prepare for an interview, but you need to be able to improvise as well.  In the workplace, you won't always be completely prepared for every question you get.  Every job involves a certain amount of sales skills and if you can't think on your feet, your career will suffer for it.  Most people conducting interviews will realize this and be unimpressed if you are unable to come up with an impromptu answer.  Sometimes spending the requisite amount of time coming up with the absolutely perfect answer to every question can be fatal.

The Great Leader

I can't impress upon you how serious I am: this example is not a joke and it actually happened.

Someone I have worked with at one point once told me a story about an on-campus interview that he or she had during school.  Near the end of the interview, the recruiter asked this person for an example of a great leader.  Honestly, this should be a slam dunk: there are hundreds of great leaders out there, and the question is asking your opinions, so there really is no wrong answer.  An obvious answer would have been Warren Buffett, which nobody would question.  Steve Jobs, John Mackey, Larry Ellison, Jack Welch.  All of these would have been defensible answers.  You could even go outside business and mention Gregg Popovich, Mike Krzyzewski, or Bill Belichick.  It's a little riskier due to individual sensitivities, but mentioning a well-known politician would probably be acceptable.

No.  This person's response when asked for a great leader?  Adolph Hitler.

To hear the story, this person tried to hedge by saying that Hitler was obviously a horrible person, but that the way he unified Germany showed that he had the confidence and rhetorical skills that are essential for leadership.  I suppose you could consider that a fair point, but I can almost guarantee that the interviewer stopped listening as soon as the words "Adolph Hitler" were mentioned and started mentally planning on how best to relay this story to friends later.  Needless to say, an offer was not extended.

Now this person has gone on to have a very enviable career.  So the good news: a mistake like this can be overcome.  But it proves what should be a very obvious point: make sure any answer you give in an interview passes a quick sanity check.  Not every answer needs to be perfect, but you need to avoid huge, memorable mistakes.

My Biases on Display

To show that I am not above some of these blunders, I will include an example of a mistake that I personally made during a recruiting process a while ago.

I was conducting interviews for a variety of roles and had seen candidates all day.  Honestly, it's very difficult to remember details after such a whirlwind of a day, so I relied on some key notes that I had made.  I had a read a book that said to not ignore your biases and personal experiences in recruiting, the idea being that if you have something in common with the candidate that you know has helped at the company, don’t discount that under the guise of trying to be as impartial as possible.  Personally, I had an extremely difficult major in undergrad (electrical engineering) that required a herculean effort on my part to graduate with a fairly average overall GPA.  I wear it as a bit of a badge of honor these days, and I am predisposed to be more impressed by others who have undertaken majors that were outside of their comfort zone.

When all of the interviewers convened to talk about the candidates, I clearly had my favorites.  There was a lot of widespread agreement on many of the candidates, while others inspired vigorous debate.  One candidate in particular seemed to have almost unanimous agreement from the group as one of the best.  This candidate had a 3.9 GPA and graduated with the highest honors with a degree in psychology.  Nearly everyone in the room was in awe of the GPA and seemed ready to move on to discussing the next candidate.  Then, I decided to open my mouth:

"Well, sure she has a high GPA, but it was in a psychology major.  I would be more impressed if she had actually challenged herself."

The room went silent.

What I had forgotten is that while I am biased towards students that have studied subjects that are traditionally seen as more difficult, not everyone else has that bias.  In fact, anyone who has read Malcolm Gladwell knows that there is evidence that “the best students from mediocre schools [are] almost always a better bet than good students from the very best schools.”¹  In other words, students with proven success might even be better hires than those who pushed outside their comfort zone and weren’t as successful.  Not to mention, I found out later that there was a psychology major or two in the room.

In the end, this candidate got an offer and I had my foot stuck in my mouth.  I didn't impress any of the other leaders in the room with my comment and I ruined what could have been a great networking opportunity for myself.

I think the best lesson from this is not to ignore all of your personal experiences during the recruiting process, but to use those to make decisions in a way that is respectful of your peers and with an understanding that group consensus often should outweigh your individual predilections.

So that’s it.  What interesting stories do you have from recruiting and what have you learned from them?

1 - Gladwell, Malcolm. David and Goliath: Underdogs, Misfits, and the Art of Battling Giants (p. 87). Little, Brown and Company. Kindle Edition.

A Federal Reserve Primer for Mark Wahlberg

“And the Federal Reserve is a...prison?” - Detective Terry Hoitz, The Other Guys

If you haven’t seen it already, go rent The Other Guys.  You will not be disappointed.  It has one scene in which Mark Wahlberg’s character, Detective Terry Hoitz, and Will Ferrell’s character, Detective Allen Gamble, listen to an SEC employee attempting to explain the function of the Federal Reserve.  Mark Wahlberg refuses to be educated and continues to believe that the Federal Reserve is a jail where he can lock up criminals.  Will Ferrell’s character remarks in frustration, “He still doesn’t understand the concept.”

Well, I really hope Mark Wahlberg is reading this post (I can only assume he spends his downtime perusing my blog).  Central Banking, of which the Federal Reserve is just one example, is one of the most commonly misunderstood concepts in the world.  I had no idea what the Federal Reserve was until I was probably 24; even then, it took me 8 years and an MBA to gain a really deep understanding.  I’ve spent a lot of time studying the Federal Reserve (or “The Fed” in common parlance).  In fact, I took a vacation day in 2013 to tour the Federal Reserve building in Atlanta, something my wife views as nerdier than driving a DeLorean to a Star Trek convention dressed as Gandalf.

Though the average person might not grasp all of the functions of the Fed, I think most people have a vague understanding that the Fed sets interest rates.  But what does this really mean?  Is the Fed actually telling banks what rates they can charge on loans?  I don’t want to focus on the goals or historical results of the Fed at this time; the subject is far too complicated for one short post and I don’t feel fully-qualified to write it.  What I want to do is to attempt to describe what interest rates really are and how the actions of the Fed affect these rates.  I hope that this will done at a level that will bore an economics major, be fairly insightful to an MBA, and be a thunderbolt of information to someone without a business education (Mark Wahlberg, I’m sorry, but I’m assuming you’re in the last category).  Alright, here we go!

I think that most people realize that when you deposit money in the bank, the bank doesn’t actually take all of your money and store it in a vault.  Some of it is placed in a vault and the rest is loaned out to other individuals or institutions in need of capital.  The idea is that, if you want your money at some point, you will be just as happy if the bank pays you back with someone else’s money as your own.  The concept is referred to as fractional reserve banking and it is the foundation of our financial system.

But wait.  What if everyone wants their money at the same time?  The bank can’t pay everyone with someone else’s money.  This causes a run on the banks, where everyone tries to rush to get their money out before it’s all gone.  In order to ensure this doesn’t happen, the Fed has instituted a reserve requirement of 10%.  This means that the bank can only loan out 90 cents for every dollar that you deposit, and it is supposed to instill stability in the system.

So what happens at the end of the day when a bank only has 9% or 8% of its total deposits in reserve?  In order to not run afoul of the law, the bank does what anyone else does when they need money: get a loan!  And who would want to make an overnight loan to a bank?  Usually, it’s another bank that has reserves in excess of the reserve requirement.  Since the extra money will not earn anything sitting in the vault, banks are happy to make an overnight loan to other banks in need.  The rate at which banks will loan each other money is referred to as the Federal Funds rate, despite the money not coming from federal funds.  Though the Federal Funds rate is referred to as if it is one discrete number, it is actually a target range of interest rates that banks charge each other.

How does the Fed come into play?  Banks also have the option of borrowing from the Fed at a set rate, referred to as the discount rate.  The discount rate is higher than the Federal Funds rate, causing banks to prefer to borrow from other banks.  But due to the simplicity of the transaction, banks still chose to borrow from the Fed sometimes.  While the Fed does not directly dictate the rate that the banks can borrow from each other, the simple fact is that the discount rate sets the ceiling for the Federal Funds rate.  If a bank is offering a rate on overnight loans at or higher than the discount rate, banks would simply prefer to borrow from the Fed at the discount rate.  After all, the Fed has unlimited funds that it is always willing to loan at a predetermined rate, making the search for funds very simple.

But who cares about the rate on overnight loans between banks?  Well, if a bank can borrow money very cheaply to make up a shortfall with regards to the reserve requirement, that bank is much more likely to aggressively lend out money to individuals and corporations during the day.  Conversely, if it is expensive to borrow to make up a shortfall, banks are going to be very careful about lending during the day to make sure their reserves are over 10%.  This applies significant pressure on the rates for loans that the bank offers; if the Federal Funds rate goes down, all else being equal, the interest rate on loans from banks will also go down.

These actions have a tremendous effect on the interest rates on car loans and mortgages.  But looking at recent history, the Fed did not raise its target for the Federal Funds rate from essentially zero from 2008 until 2015.  Does this mean that loans were interest-free during that time?

If only we were so lucky!  Though the discount rate puts significant pressure on the interest rates for personal loans, it is not the only factor.  In fact, when a bank is making a loan, it is essentially making an investment in debt.  As such, your debt needs to be competitive with other debt instruments available on the free market.  And who is the most ubiquitous debtor in the world?  The U.S. Government, of course!

Your mortgage is actually competing on the open market most closely with U.S. Treasury bonds that mature in 10 years.  As the yield on these bonds rises and falls, so will the rate that you are offered for a mortgage.  Certainly, the rates on Treasuries is affected by the Fed (particularly during the Treasury-purchase program known as Quantitative Easing that was just recently ended), but many other factors come into play as well.  An increase in demand for bonds, for instance from a tanking stock market, would increase the prices of these bonds, causing the yields to go down.  As these rates rise and fall, so will the rate on personal loans.

So why is the Fed involved in loaning money to banks at all?  What are its aims and how successful has it been in the past at achieving its goals?  I could discuss this or a thousand other relevant issues, but digging deeper into the Fed can often result in more confusion.  Since Mark Wahlberg is a busy man, I want to respect his time and keep this post short and readable.

The Fed is complicated and very frequently misunderstood, but its influence on the business cycle and global economy cannot be understated.  Though it may require an economics PhD to fully understand it, knowing its functions at a basic level is relevant to every person working in business today...even Hollywood actors.