For the better part of two decades, Microsoft (MSFT), Sony (SNE), and Nintendo have been in a relentless battle to develop video games with more realistic graphics, more sophisticated game play, and increased processing power. But in 2006, Kyoto-based Nintendo (NTDOY), which had fallen to third place in market share, started to change its Wii strategy. It stunned the gaming industry announcing that it would do away with joysticks and with complicated buttons, and that its graphics on future game players would not be exceptional – but just good enough. Instead of catering to what consumers said they wanted, Nintendo would provide them with something different -- a new, simpler, more intuitive way to play games.

Gamers and analysts snickered at the strategy. But when the Nintendo Wii hit store shelves in November 2006, it was an instant hit. Part of the reason: embedded within the controller of the Wii was a chip, made by Massachusetts-based Analog Devices (ADI), called a "three-axis accelerometer." That chip allowed gamers to use natural motions -- swinging, jabbing, whapping the air with imaginary tennis rackets, golf clubs, and bowling balls. The sensor would pick up the motion and replicate the move on the video game in real time.

Besides being tons of fun, the Wii was far more affordable for most families, priced at just $250 per console. The Sony PlayStation at the time sold for up to $600; the Microsoft Xbox sold between $300 and $400. Nintendo's sales took off, and the company couldn't make enough Wiis to meet the demand. During the Christmas shopping season, shoppers camped outside toystores, sleeping on cardboard boxes, to get them.

Nintendo's accomplishment here emanated from its Blue Ocean strategy -- the notion of creating a market where none had existed. Nintendo disrupted the video-game market by creating a game player that not only attracted existing gamers, but also those who had never considered playing video games. New Wii machines showed up in living rooms, and more unlikely locations like schools and nursing homes. The company quickly rose to become the dominant player, with the greatest market share.

The Wii's success continues to gather steam. So far the company has sold about 50 million units of the Wii, and last year Nintendo released the Wii Fit, a pressure-sensitive controller that looks like an aerobic exercise step, for $90. By the end of 2008, Nintendo had shipped more than 14 million Wii Fit games.

Nintendo will have to continue to innovate to stay ahead of the pack. At the Electronic Entertainment Expo in Los Angeles this month, Sony and Microsoft announced their own motion-controller game players, expected out next year. And Nintendo could very well announce the Wii 2 in Japan. The battle continues.

Nikhil Hutheesing is an editor at Dailyfinance. While he admires the success of the Nintendo Wii, he spends way too much time telling his sons to shut the machine off. You can follow him on Twitter at Nikhil212.

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