Nintendo The Console Wars

In this episode, Ben Gilbert and David Rosenthal of "Acquired" delve into the tumultuous journey of Nintendo from the 1990s to the present day. They discuss Nintendo's fall from market dominance due to strategic missteps with the Super Nintendo and N64, as well as its resurgence with the innovative Wii console, which redefined gaming with motion controls. Despite the Wii's success, Nintendo struggled with the Wii U's failure and the threat posed by the rise of smartphone gaming. The episode highlights Nintendo's handheld market triumphs with the Game Boy and DS, which capitalized on the casual gaming segment and children's market, keeping the company afloat. They also touch on Nintendo's recent success with the Switch, a hybrid console that has reinvigorated their position in the gaming industry. The episode concludes with speculation on Nintendo's future strategies, emphasizing the importance of maintaining the Switch's momentum and leveraging their iconic IP across various platforms.

• David Rosenthal and Ben Gilbert discuss the physical demands of recording long podcast episodes.
• Ben has stopped morning workouts before recording to preserve energy.
• David suggests incorporating exercise into recording, joking about recording on a Peloton.

I feel like I got to warm up physically before acquired episodes. These days, it's like a marathon.

The quote highlights the physical preparation David feels is necessary for recording lengthy podcast episodes, likening it to a marathon.

Yeah, we should figure out, like, recording on the peloton or something.

David jests about combining exercise with recording, suggesting a Peloton as a possible method.

• Ben Gilbert introduces the episode and his co-host, David Rosenthal.
• They set the stage for discussing Nintendo's cyclical journey of wins and losses.
• The episode will focus on Nintendo's fall and rise in the video game industry, facing competitors like Sega, Sony, Microsoft, and Apple.

Welcome to season twelve, episode four of acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert.

Ben introduces the podcast, its theme, and himself as the host.

Indeed they did. And then they won, and then they lost, and then they won, and then they lost, and then they won again.

David summarizes Nintendo's fluctuating success in the gaming market.

• Nintendo had a strong competitive position with a 95% global market share in the video game industry by 1990.
• They performed a "seven powers" analysis, concluding Nintendo's position was historically strong.
• Despite this, Nintendo experienced significant losses, particularly between 2011 to 2018.

We last left our Nintendo heroes in 1990 when they single handedly revived the video game industry and captured 95% of the market share globally.

Ben recounts Nintendo's dominant market position in 1990, emphasizing their role in reviving the video game industry.

• The Slack community is a valuable research tool for David and Ben.
• It provides insights and real work experience in the areas they cover on the podcast.
• The community continues discussions post-recording, adding to the knowledge base.

The Slack community has become a critical research tool for David and I since so many of you have insights and real work experience in the areas that we are covering.

Ben expresses the importance of the Slack community in contributing to their research and understanding of topics.

• David Rosenthal discusses the Game Boy's significance and its deliberate omission from the previous episode.
• The Game Boy's importance in Nintendo's history is emphasized, setting the stage for its detailed discussion in the podcast.

It'll be very fun at the end of the episode to talk about whether we think Nintendo is a good stock to own at this point in time or not here in 2023. But before we talk about all that, we first need to talk about one more giant success from Nintendo in the 1980s. A very small giant success that we intentionally left off in the last episode, because it's going to be very, very important here in part two. And that is, of course, the Game Boy.

David introduces the topic of the Game Boy, hinting at its critical role in Nintendo's history and its relevance to the current discussion.

• Gunpei Yukoi was a key figure behind many of Nintendo's successes, including the Game & Watch.
• The Game & Watch was a portable, dedicated handheld video game system with individual games per hardware.
• Yukoi's invention of the D-pad revolutionized game controller design.

So we talked last time all about Gunpei Yukoi, Nintendo's effectively chief engineer and his genius behind building everything from the ultra hand to the light gun shooting range to mentoring Shigaro Miyamoto and everything he did for Nintendo. One of his first early successes that we kind of glossed over last time was the game and watch business.

David highlights Gunpei Yukoi's contributions to Nintendo, including the creation of the Game & Watch.

• The Game & Watch sold 43 million units and generated over a billion dollars in lifetime revenue.
• It was particularly popular in Asia, though less known in Western markets.
• The Game & Watch's success demonstrated the demand for portable video entertainment in the 1980s.

And the gaming Watch actually sold a ton of units. I think 43 million units got sold before it end of life. Yes.

Ben acknowledges the commercial success of the Game & Watch, with substantial unit sales.

• Nintendo's philosophy of using mature, low-cost technology for innovation is discussed.
• Gunpei Yukoi's approach led to the development of the Game & Watch using calculator industry technology.
• This philosophy was instrumental in creating portable versions of popular games like Donkey Kong.

And Goonpei's technology philosophy is lateral thinking with withered technology.

David explains Yukoi's philosophy of innovating with established technology, which was key to Nintendo's product development strategy.

• The Game Boy's launch in 1989 was met with skepticism due to its black and white display.
• Despite initial doubts, the Game Boy became a huge success, selling millions of units.
• The inclusion of Tetris as a pack-in game broadened the Game Boy's appeal beyond children to adults.

And in April 1989, they release this device in Japan, followed shortly in the US for $89.95. And this device, of course, is named the Game Boy.

David marks the release of the Game Boy, setting up the discussion for its impact on the gaming market.

• The Game Boy's cultural impact was significant, becoming a status symbol among businessmen.
• Nintendo's marketing campaigns targeted a diverse audience, including business travelers.
• The Game Boy and Game Boy Color together sold 118 million units, making it one of the best-selling consoles of all time.

So in the US, 46% of Game Boy players are adults. This is so different from the NES market. It becomes this businessman status symbol.

David discusses the Game Boy's unexpected popularity with adult consumers, highlighting its broad appeal.

• Sega aimed to compete with Nintendo by launching the 16-bit Mega Drive (Genesis in the US).
• Tom Kalinsky's leadership at Sega of America led to aggressive marketing and strategic decisions.
• Sega's focus on American-made games and partnerships with companies like EA helped it compete against Nintendo.

Sega's response to the NES. In Japan, they release a home video game console called the SG 1000. It does okay, but also only sells about a million units.

Ben begins the narrative of Sega's efforts to challenge Nintendo in the console market.

• Super Nintendo and Genesis versions of sports games like Madden and FIFA were different due to the consoles' distinct architectures.
• Super Nintendo's architecture limited its frame rate, often making games perform better on the Genesis.

Yeah, back in the day they were actually made by different studios and there were some things about the Super Nintendo architecture that limited the frame rate that it could run at. So basically it was always better on the Genesis.

The quote explains that the technical limitations of the Super Nintendo's architecture resulted in a lower frame rate for games compared to the Genesis, affecting overall game performance.

• Nintendo and Sega were on an even playing field due to the elimination of backwards compatibility.
• Sega's marketing portrayed Sonic as a more exciting and advanced character than Mario, appealing to players looking for something new.
• Sega's marketing strategies, led by Steve Race, shifted the video game industry's image from toys to media technology.

And it's worth saying point one, in eliminating the backwards compatibility, it made Nintendo have to fight Sega on an even playing field. That negated their advantage of large previous install base.

Ben Gilbert notes that by not including backwards compatibility, Nintendo lost its advantage of a large install base, leveling the competition with Sega.

On the surface it is much more compelling.

David Rosenthal agrees that Sega's marketing made Sonic appear more compelling than Mario, emphasizing the impact of presentation in consumer appeal.

So .4 punching Nintendo in the mouth. Kalinsky goes out and brings on a guy named Steve Race who had masterminded Reeboks resurgence against Nike in the pump sneakers.

David Rosenthal highlights Tom Kalinske's aggressive marketing strategy for Sega by hiring Steve Race, who had a successful marketing background with Reebok.

• Sega's marketing campaigns, like "Welcome to the next level," were highly influential and targeted at the MTV generation.
• The term "blast processing" was a marketing creation to promote the Sega Genesis's speed advantage.

They also invent the term blast processing. If folks remember this, the genesis has blast processing and that's what makes sonic fast. It's a completely made up marketing term.

David Rosenthal explains that "blast processing" was a fabricated term used to market the Sega Genesis, demonstrating the power of marketing in shaping consumer perception.

• Sega of America introduced organized worldwide release days for video games, similar to movie premieres.
• This innovation in game marketing and launch events was a significant shift from the previous unorganized release patterns.

Before this era of Sega, there weren't actually release dates for video games. When new Nintendo games would come out, they'd just start showing up at retailers and not even on the same day, just like some regions of the country would get them before others. There was no organization.

David Rosenthal describes how Sega of America revolutionized the video game release process by implementing organized worldwide release dates, a practice that is now standard in the industry.

• Sega used tactics like the Pepsi challenge to directly compare the Sega Genesis with the Super Nintendo.
• These comparisons favored Sega's products in short-term playtests, despite potential long-term drawbacks.

So they take trucks like 18 wheelers. And they outfit them with Super Nintendo's and Sega Genesis in the back and they drive them around to malls across America and they invite kids in to play head to head Sonic versus Super Mario world.

David Rosenthal shares Sega's strategy of mobile comparison tests that showcased their product's strengths, which effectively influenced consumer preferences.

• Nintendo's conservative approach with the Super Nintendo was seen as a failure to innovate.
• Sega's combination of strategies led to a significant market share gain at Nintendo's expense.

You play the Mario game for it, you're like, okay, yes, it's Mario again. And it's nice. I like Mario, but this isn't new.

Ben Gilbert critiques Nintendo's lack of innovation with the Super Nintendo, suggesting that it contributed to their declining market position against Sega's more aggressive tactics.

• Sega's internal conflicts and mismanagement during the transition to the Sega Saturn led to their market downfall.
• Nintendo's market share dropped significantly, fighting to a draw with Sega despite the Super Nintendo's success.

By God, they do it. So it's tough to tell exactly, because both companies, Nintendo and Sega, were highly incentivized at this time to be creative in what they were reporting as their console sales data, shall we say?

David Rosenthal acknowledges the difficulty in assessing exact sales figures due to the creative reporting by both Nintendo and Sega, but recognizes Sega's success in competing with Nintendo.

• Nintendo faced antitrust lawsuits and brand image issues during the late '80s and early '90s.
• Aggressive legal actions against companies like Blockbuster and the Game Genie creator tarnished Nintendo's family-friendly image.

Starting in 1988, they actually get embroiled in two separate antitrust lawsuits with each of the successor Atari entities both the hardware side and the game side.

David Rosenthal points out that Nintendo's involvement in antitrust lawsuits and aggressive legal battles damaged their public image, which had been perceived as family-oriented and friendly.

• Nintendo occupies a unique niche in the gaming industry, focusing on the handheld gaming market and casual gamers.
• The company has historically maintained steady revenue and operating profits, even when their home console business struggled.
• Handheld gaming has been a strong segment for Nintendo, often compensating for any shortcomings in their home console offerings.

"Nintendo had this lane wide open because everyone else who's trying to come into the industry is coming after the core gaming segment or the serious gaming segment or the high ARPU, the high average revenue per user people that are buying $60 DVD discs to play."

This quote highlights Nintendo's strategic positioning in the gaming market, targeting a different audience compared to competitors who focus on hardcore gamers with high spending habits.

• Despite challenges in the home console market, Nintendo's financial stability was largely unaffected due to strong handheld console sales.
• The success of handheld consoles like the Game Boy and DS series provided a solid financial foundation for the company.
• The handheld market allowed Nintendo to sustain its business, even when their home consoles did not perform as expected.

"Nintendo is kind of always doing a solid four to 5 billion in revenue a year, call it, and maybe half a billion to a billion dollars in operating income. Like, there's no gun to their head."

This quote indicates that Nintendo's financial performance remained consistent over the years, with handheld consoles playing a key role in their revenue stream.

• Crusoe is a clean compute cloud provider specializing in AI workloads.
• The company partners with Nvidia and utilizes stranded or clean energy to power their data centers.
• Crusoe's approach offers better performance per dollar and environmental benefits compared to traditional cloud providers.

"Crusoe's data centers are nothing but racks and racks of AI."

This quote describes Crusoe's focus on AI workloads and their specialized infrastructure designed to efficiently handle such tasks.

• Nintendo underwent leadership changes with Satoru Iwata and Reggie Fils-Aimé taking key positions.
• The company recognized the need for innovation, which led to the development of the Wii console.
• The Wii introduced novel gaming experiences and became a massive success, significantly boosting Nintendo's revenue.

"And right around this same time in 2003, ish Reggie Fisame works his way up the ranks and comes in as the president of Nintendo of America."

This quote marks a pivotal moment in Nintendo's history, with new leadership poised to bring fresh ideas and change to the company.

• The Wii's unique motion-sensing technology and casual gaming focus opened up new markets.
• Nintendo strategically positioned the Wii as a counter to competitors, resulting in high sales and market dominance.
• The success of the Wii highlighted the effectiveness of Nintendo's approach to lateral thinking with withered technology.

"The Wii is such an enormous success on basically every level, but it really is the triumph now fully across all of Nintendo as a company and all their product lines of the Goompei Yukoi lateral thinking with withered technology, Maxim infrared motion sensing, which is what the Wiimote uses, is an incredibly novel technology to bring to video games."

This quote emphasizes the innovative approach Nintendo took with the Wii, utilizing established technology in a groundbreaking way to revolutionize gaming.

• The gaming market is segmented into casual, mid-core, and core gaming audiences.
• Casual games are broadly appealing and easy to pick up, with monetization primarily through free-to-play models.
• Mid-core games offer more depth, requiring some time to learn, and have higher revenue potential per user.
• Core gaming focuses on a dedicated, skilled audience with high revenue per user but a smaller market size.

"There are many segments of games, but it's worth breaking it down to three. There's casual, there's mid-core in the middle, and then there's a core gaming audience."

This quote categorizes the gaming market into distinct segments, each with its own characteristics and business opportunities.

• The Wii U console was a commercial failure, leading to significant financial losses for Nintendo.
• The rise of mobile gaming presented a threat to Nintendo's handheld market, as consumers shifted towards playing games on smartphones.
• Nintendo was initially resistant to entering the mobile gaming market, adhering to their philosophy of controlling the entire gaming experience.

"So they rush out the three ds. They rush out the Wii U as the successor to the Wii. Oh, the Wii U is a piece of garbage. The thing sucked."

This quote reflects the difficulties Nintendo faced with the Wii U, which failed to resonate with consumers and contributed to the company's financial struggles.

• Nintendo recognized the need to adapt and embraced mobile gaming while maintaining their hardware business.
• The launch of the Nintendo Switch marked a significant turnaround, offering a unique hybrid console that catered to both home and portable gaming.
• The Switch's success was driven by quality content and the ability to seamlessly transition between playing at home and on the go.

"The Switch is an evolution of that. The fact that you can play something at home and take it outside, this is the gamer's dream."

This quote captures the core appeal of the Nintendo Switch, fulfilling a long-standing desire among gamers for a versatile and portable gaming experience.

• Nintendo Switch sells out its initial 2 million unit production run immediately upon launch.
• Nintendo airships additional units at a cost of $45 per unit to meet high demand.
• The strategy to serve demand and build out the install base is seen as a departure from old Nintendo practices.

"So once they launch the switch, it is an immediate hit. Nintendo plans an initial 2 million unit worldwide production run... They have to airship more units from their production lines to retailers across the world at a cost of $45 per unit just to get more in the hands of demand out there, which was a brilliant move that the old Nintendo never would have done."

The quote highlights the successful launch of the Nintendo Switch and Nintendo's proactive approach to meet consumer demand, marking a strategic shift from previous practices.

• Ben Gilbert notes that Nintendo may still be engaging in strategies to limit supply, as suggested by personal experiences of difficulty in obtaining a Switch.
• David Rosenthal considers the chip shortage excuse not applicable to the Tegra chip used in the Switch, suggesting Nintendo's success is not hindered by supply issues.

"Yes. Although I wonder if they still have some of that in them. I mean, it's the 6th year of the switch and I was backed up to a month to get one online and I drove to a target and got the last one in."

Ben Gilbert's experience reflects ongoing consumer challenges in obtaining the Switch, suggesting Nintendo may still be controlling supply to some degree.

• The Legend of Zelda: Breath of the Wild is a key title that contributes to the Switch's success.
• The game sells at a one-to-one rate with the console, a historical first for a non-bundled game.
• The industry's high regard for the game's design is noted, with insiders pausing work to play its sequel.

"It launches with Zelda breath of the Wild, which originally was supposed to be a Wi U game... You can't separate out Breath of the Wild from the Switch's initial success in that first year or two."

The quote emphasizes the critical role of The Legend of Zelda: Breath of the Wild in the Switch's early success, highlighting its exceptional sales and impact on the gaming industry.

• The Switch surpasses the lifetime sales of the Wii U within its first year.
• Nintendo's revenue and stock value see significant growth following the Switch's success.
• Despite a slowdown in the sixth year, Nintendo maintains substantial operating income and market cap.

"The Switch sells over 15 million units in the first year. So, like, more than the Wi U just in the first year goes on, as you say, to sell 123,000,000 units."

This quote details the impressive sales figures of the Nintendo Switch, outperforming the Wii U and contributing to Nintendo's financial success.

• Nintendo expands its IP strategy with movies, theme parks, and mobile games.
• The upcoming Super Mario Bros. movie and the opening of Super Nintendo World theme parks are highlighted.
• The discussion acknowledges the potential for future revenue from these ventures despite the current non-material impact on top-line revenue.

"The first Super Nintendo world opened at Universal Studios Japan in 2021, and the first american one opened at Universal Studios Hollywood just a couple of months ago."

The quote illustrates Nintendo's efforts to diversify and leverage its IP through theme parks, indicating a strategic move beyond traditional gaming products.

• Nintendo aims for generational brand management, continuously engaging new cohorts of children with their IP.
• The comparison is made to the NFL's approach to brand engagement rather than Disney's operational model.

"I think the additional goal is generational management, that, frankly, the Pokemon company has done so well, every year is a new cohort of children in the world who can and should be brought into the Nintendo fold."

David Rosenthal explains that Nintendo's strategy involves engaging new generations with its IP, similar to the Pokemon company's successful approach.

• Nintendo Switch Online grows rapidly, with millions of subscribers contributing to recurring revenue.
• The service's attach rate and revenue are discussed, emphasizing its importance in Nintendo's business model.

"With the Nintendo Switch online, there are 40 million people who are your current customers who are paying you money."

Ben Gilbert points out the significant number of subscribers to Nintendo Switch Online, highlighting its contribution to Nintendo's recurring revenue stream.

• Speculation on the release of a potential "Switch 2" and its implications for Nintendo's strategy.
• The importance of backward compatibility and the possibility of a recurring hardware upgrade cycle similar to smartphones are discussed.

"My money's on Switch two in the next six months."

Ben Gilbert expresses his expectation for the release of the next iteration of the Nintendo Switch, reflecting industry anticipation and consumer interest.

• The conversation touches on the potential for Nintendo to make strategic errors with future consoles.
• The discussion contrasts Nintendo's unique position with other gaming companies and their approaches to the market.

"If they don't get things right, consumers will just leave and go back to mobile. They can't do another Wi U now."

David Rosenthal emphasizes the precarious position Nintendo faces, where a significant misstep could lead to loss of consumer loyalty, underscoring the importance of strategic decisions for the company's future.