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Quick takeaways
- Nintendo's transformation from a playing card company to a global multi-billion dollar media monopoly was led by a patriarch who never played a video game.
- Nintendo's success in the gaming industry was fueled by their ability to identify consumer preferences and secure distribution channels through their Disney partnership.
- Nintendo entered the video game market through the success of their light gun shooting ranges and went on to develop groundbreaking consoles like the NES.
- The Famicom's innovative design and successful launch in Japan solidified Nintendo's dominance in the Japanese gaming market.
- Nintendo's strategic moves, such as partnering with Atari and implementing innovative marketing strategies, helped them dominate the US gaming market and become a cultural phenomenon.
Deep dives
Nintendo's Transformation into a Toy Company
In the late 1950s, Nintendo enters the toy market by licensing Disney characters for their playing cards. They expand into selling other Disney-branded toys, which gives them leverage with retailers and secures distribution channels. During the 1960s, Nintendo becomes a prominent Japanese toy company, creating novelty gadgets and toys like the ultra hand and remote control vacuum. Their success is fueled by their ability to identify consumer preferences and using their Disney partnership to gain favor with retailers.
Entry into the Gaming Industry
In the 1970s, Nintendo explores new avenues and enters the gaming industry. They start with light gun shooting ranges in former bowling alleys by adapting toy technology. This venture becomes successful and paves the way for their entry into the video game market.
Emergence of Nintendo as a Video Game Company
Nintendo's focus shifts to the video game market in the late 1970s and early 1980s. They release the Color TV-Game series, simple home consoles that become popular in Japan. This success leads to the development of the groundbreaking NES (Nintendo Entertainment System) in 1983, which features memorable games like Super Mario Bros. and The Legend of Zelda. Nintendo's innovative gameplay and beloved characters propel them to become a dominant force in the gaming industry, gaining global recognition and transforming the company into a household name.
The Launch of the Famicom in Japan
In 1983, Nintendo launched the Famicom (Family Computer) in Japan. The console quickly sold out and became a hit, with sales reaching almost 20 million units in just a few years. The Famicom's success can be attributed to its innovative design, which paired a cheap off-the-shelf CPU with a dedicated picture processing unit (PPU). This allowed for more advanced graphics and accurate ports of arcade games. Nintendo placed a 3 million unit order with Rico, the semiconductor manufacturer, to meet demand. With almost 50% penetration into Japanese households, the Famicom solidified Nintendo's dominance in the Japanese gaming market.
The Decision to Launch the NES in the US
While the Famicom was successful in Japan, the US market was struggling due to the video game crash. However, Nintendo's president, Hiroshi Yamauchi, wanted to launch the Famicom as the Nintendo Entertainment System (NES) in the US. This decision was met with hesitation from Nintendo of America's president, Minoru Arakawa, who believed it was not the right time. However, Yamauchi overruled Arakawa and decided to partner with someone who believed in the project. The specific details of this decision are unclear, but it marked the beginning of Nintendo's entry into the US market.
The Challenging US Market
Launching the NES in the US was a risky move, considering the recent video game crash and the decline in consumer interest. However, Nintendo saw the potential in the US market, which had a high number of households with televisions and a strong GDP per capita. Yamauchi believed that the NES, with its innovative gameplay and high-quality games, could stand out and capture the attention of American consumers. While the market conditions were tough, Nintendo's commitment to fun-centric game design and the unique features of the NES set them apart from their competitors.
The Rise of Nintendo in the US Gaming Market
Nintendo made strategic moves to enter the US gaming market with its Famicom console. They negotiated a deal with Atari to distribute the Famicom globally and agreed on a per unit royalty fee. However, due to Atari's financial decline and the video game crash, the deal fell through. Nintendo decided to release the NES in the US in the 1985 holiday season, starting with a test market in New York City. They implemented innovative strategies such as limiting the number of games third-party developers could release per year and introducing the Nintendo Seal of Quality. These tactics, along with the launch of Nintendo Power and a toll-free game counseling line, helped Nintendo dominate the market, selling millions of consoles and becoming a cultural phenomenon.
Nintendo's Business Model and Success
Nintendo's business model revolved around controlling every aspect of the gaming ecosystem. They focused on high-quality hardware and had exclusive rights to game distribution. By limiting the number of games developers could release, they ensured a higher quality standard for NES games. Nintendo built a direct relationship with customers through initiatives like Nintendo Power and the toll-free game counseling line. Their marketing efforts emphasized their seal of quality and commitment to delivering the best gaming experience. These strategies, along with their dominance in the US gaming market, allowed Nintendo to achieve record-breaking sales and profits, surpassing even major entertainment companies.
Nintendo's Success in Gaming
Nintendo's success in the gaming industry from the 1970s to 1990 is attributed to their excellent execution of their business strategy. They achieved 95% global market share, mainly due to their scale economies and network economies. Nintendo's focus on producing high-quality games, their control over their IP, and their strong customer relationships contributed to their dominance in the industry. They also demonstrated process power through their game design and had a cornered resource in the form of Shigeru Miyamoto, who was responsible for creating iconic games like Super Mario Brothers. While there were missed opportunities and unforced errors along the way, Nintendo's performance during this period deserves an A+ grade.
The Future Outlook for Nintendo
While Nintendo's success in the gaming industry has been impressive, there are challenges and uncertainties on the horizon. The rapid growth of the gaming market and the emergence of new technologies may disrupt the industry and pose threats to Nintendo's market position. Additionally, the company will need to adapt to changing consumer preferences and stay innovative to maintain their competitive edge. However, with their strong IP, loyal customer base, and experienced leadership, Nintendo is well-positioned to navigate these challenges and continue their success in the gaming industry.
54.
The NES Has a Graphic Capability, but It Doesn't Need the Most Expensive Hardware
1min
62.
The Power of a Platform and a Network Effect in the Video Game Console Business
2min
You may think you know the Nintendo story: a plumber named Mario, a princess named Zelda… and didn’t they buy the Seattle Mariners at some point? We thought we knew it too. And then we started researching and were blown away.
The lovable Disney-like Nintendo that we know today is a 130 year-old a playing card company (i.e. gambling), forged in the shadowy world of the Yakuza and shaped by a four-generation cycle of bitter family betrayal. And its unlikely transformation into a global multi-billion dollar media monopoly was led by an iron-fisted patriarch who — amazingly — never played a video game in his life! Get ready for one of our favorite stories Acquired has ever told — we couldn’t make this one up if we tried!
Links:
- Our Atari episode with Nolan Bushnell
- Video of id Software’s legendary PC “port” of Super Mario Brothers 3
- Episode sources
Carve Outs:
- Everything Everywhere All At Once
- Michael Lewis on Tim Ferriss and on CSPAN
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