Nintendo's Origins

Summary Notes


In the late 1970s and early 1980s, while the American video game industry faced a catastrophic crash, Nintendo, under the leadership of Hiroshi Yamauchi and with the creative genius of Shigeru Miyamoto, quietly revolutionized gaming in Japan with the Famicom. By focusing on high-quality, narrative-driven games and a superior home console that could accurately port arcade hits, Nintendo not only revived the industry but also built a global monopoly. With strategic distribution, a direct relationship with customers, and a library of iconic games like Super Mario Bros. and The Legend of Zelda, Nintendo's NES became a household staple, achieving 95% global market share. Their innovative business model, including third-party licensing with strict quality control and the creation of a coveted brand experience, positioned Nintendo as an unrivaled titan in the gaming world by 1990.

Summary Notes

Ben Gilbert's Mario Impression

  • Ben Gilbert reveals he has a Mario impression.
  • David Rosenthal expresses surprise as he wasn't expecting Ben to have such an impression.
  • Ben attributes his impression skills possibly to playing Super Smash in college.
  • David is highly impressed by Ben's impression.

"Oh. Have I ever done my Mario impression for you?" "That is amazing."

This quote shows Ben introducing his Mario impression and David's positive reaction, highlighting a light-hearted moment before delving into more serious discussion.

Nintendo's Role in Reviving the Video Game Industry

  • Nintendo's significant impact on the video game industry is discussed.
  • David Rosenthal looks forward to covering Nintendo's history.
  • The focus is on Nintendo's market dominance and its role in resuscitating the industry.
  • The episode will cover Nintendo's early years up to about 1990.

"I had no idea what an incredible story it is of how Nintendo single-handedly resuscitated this industry and achieved 95% global market share and dominated this multibillion-dollar industry that was left for dead."

The quote emphasizes the remarkable story of Nintendo's rise to dominance in the video game industry, which will be the main topic of the podcast episode.

The Early Years of Video Games and Atari's Influence

  • Discussion on the origins of video games and Atari's role.
  • Nolan Bushnell's background and his vision for video games in arcades.
  • The creation of the first commercialized arcade video game, Computer Space.
  • The success of Pong as a relatable and competitive arcade game.
  • The transition of video games from arcades to home consoles with the Atari 2600.

"So Nolan, in addition to having this incredible entrepreneurial streak and background in arcades, he does something pretty unique."

This quote refers to Nolan Bushnell's entrepreneurial spirit and his unique contribution to the early video game industry, which laid the groundwork for the home video game console market.

The Rise and Fall of the Home Video Game Industry

  • The explosive growth of the home video game industry in the early 1980s.
  • The overcrowded market and the subsequent crash due to poor-quality games and consoles.
  • The infamous E.T. game and its impact on the industry's downfall.
  • The perception of video games as a fad similar to toys.

"By 1985, [the home video game console market] would be worth $100 million, a reduction of 32x in the market size, because the entire category just evaporated."

The quote highlights the dramatic collapse of the home video game industry, illustrating the volatility and challenges faced by early video game companies.

Nintendo's Founding and its Card Game Roots

  • Nintendo's founding in 1889 by Fusajiro Yamauchi.
  • The company's start in the playing card business and its success in Japan.
  • The historical context of playing cards and gambling in Japan.
  • The connection between Nintendo's early card games and its eventual evolution into video games.

"Nintendo becomes quite successful in this new industry. So successful, in fact, that they become the largest playing card manufacturer in Japan."

This quote summarizes Nintendo's early success in the playing card industry, which would later serve as a foundation for its entry into video games.

Introduction to Acquired Season 12 Episode 3

  • Ben Gilbert and David Rosenthal introduce themselves as the hosts of the podcast.
  • The episode is part of a series covering great technology companies.
  • The focus is on the video game industry and Nintendo's role in its development.

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

The quote serves as the formal introduction to the episode, setting the stage for the discussion on Nintendo and the broader video game industry.

Announcement of LP Show Renaming to ACQ2

  • The LP Show has been public for a year and is renamed to ACQ2.
  • The show features expert interviews and will continue to be updated for listeners.
  • The LP program is revamped to bring listeners closer to the Acquired community.

"The LP show is now known as ACQ2. It still has the same great expert interviews with founders and investors"

This quote announces the rebranding of the LP Show to ACQ2, indicating a continuation of the show's content with a new name.

Sponsorship and Community Engagement

  • Pilot, a company providing accounting, tax, and bookkeeping services, is a sponsor of the episode.
  • The importance of focusing on core business activities and outsourcing others like accounting.
  • The Acquired community on Slack is mentioned for further discussion among listeners.

"Pilot both sets up and operates your company's entire financial stack."

The quote introduces Pilot's services, emphasizing their comprehensive approach to financial management for startups and growth companies.

Uniting the Stories of Nintendo Japan and Nintendo America

  • The unique global story of Nintendo's rise and the interdependence of Nintendo Japan and America.
  • The intention to tell a unified story of Nintendo's history.
  • The importance of combining the narratives of video games in America and Japan.

"The rise of video games and the rise of Nintendo is this incredible, interwoven global tale."

This quote stresses the interconnectedness of Nintendo's history across different regions, underscoring the podcast's aim to provide a cohesive narrative.

Yakuza Involvement in Nintendo's History

  • Nintendo had historical ties with the Yakuza, the Japanese mafia.
  • Yakuza operated gambling parlors and casinos, requiring fresh packs of cards for each game.
  • Nintendo supplied thousands of packs of cards to Yakuza-run gaming parlors.
  • This relationship contributed to Nintendo's distribution capabilities.

"Casino, basically, it's organized crime. It's the yakuza in Japan, the japanese mafia." "These gaming parlors run by the yakuza who need thousands and thousands of packs of cards." "Very successful business and a quite interesting distribution capability that Nintendo builds up over these 50 plus years that they're just a playing cards company."

The quotes highlight the unexpected connection between Nintendo and organized crime, with the Yakuza being a significant customer for Nintendo's playing cards, which in turn helped Nintendo establish its distribution network.

Nintendo's Early Leadership and Family Succession

  • Fusajiro Yamauchi, the founder of Nintendo, faced succession issues due to lack of a male heir.
  • Adopted heirs continued the family business, leading to Hiroshi Yamauchi eventually taking over.
  • Hiroshi Yamauchi faced personal challenges, including being orphaned and dealing with family pressures.
  • Despite these challenges, he developed strong leadership skills and a keen sense for successful games.

"So Fusajiro Yama Yuji runs this business for a number of decades quite successfully." "Sekiro also doesn't have any male heirs." "Hiroshi is five years old. Shikanojo walks out on the family and abandons the business, the family son, and leaves." "He escapes Kyoto and goes to Tokyo to study law at Waseta University."

These quotes outline the succession challenges faced by the Yamauchi family and the emergence of Hiroshi Yamauchi as a future leader of Nintendo. They also set the stage for Hiroshi's eventual role in transforming the company.

Hiroshi Yamauchi's Leadership and Nintendo's Transformation

  • Hiroshi Yamauchi took over Nintendo at the age of 21 after his grandfather's stroke.
  • He conducted a massive purge in the company, establishing his control.
  • Yamauchi sought to differentiate Nintendo and partnered with Disney to enter new markets.
  • Nintendo began producing toys, leveraging the Disney brand to gain distribution and market power.

"He institutes a massive purge. He fires not just anyone who is loyal to Sekiro in the company. He fires every single manager in Nintendo just decapitates everybody." "Nintendo licenses Walt Disney characters and puts them on playing cards, and they sell playing cards to kids in Japan." "Nintendo transforms itself into a japanese toy company."

The quotes reflect Hiroshi Yamauchi's decisive actions to take control of Nintendo and his strategic moves to pivot the company towards the toy industry and partnerships with powerful brands like Disney, laying the groundwork for Nintendo's future success.

Nintendo's Early Video Game Ventures

  • Nintendo invested in failed bowling alleys to repurpose them for entertainment.
  • Gunpei Yokoi, originally a maintenance engineer, became a key designer for Nintendo.
  • Nintendo explored light gun technology and entered the arcade business.
  • A relationship with Magnavox led to Nintendo distributing the Odyssey console in Japan.

"Nintendo's getting into indoor light gun shooting ranges." "Nintendo, who single handedly, in a minute, comes in and dominates not just the american, but the worldwide market for home video game consoles and builds this incredible juggernaut around the world." "Nintendo, thanks to this relationship with Magnavox, is in this incredibly privileged position in this new industry."

These quotes illustrate Nintendo's innovative approach to repurposing spaces for entertainment, the rise of Gunpei Yokoi as an influential designer, and Nintendo's strategic positioning in the early video game market through its relationship with Magnavox.

Nintendo's Home Console Development and Strategy

  • Nintendo aimed to develop a home video game console superior to competitors.
  • Hiroshi Yamauchi wanted the console to be affordable and economically viable on its own.
  • R&D teams were split to focus on different projects, including the Game & Watch and arcade titles.
  • Nintendo's strategy involved learning from the American market and building a strong software lineup.

"We, Nintendo, need to build a programmable home video game console like the Atari 2600." "Let's take our time, and let's make something really amazing." "Nintendo's R&D teams from one singular team that's working on all of their video game business into multiple teams."

The quotes convey Nintendo's ambitious goal to create a home console that would surpass its rivals in quality and price, the strategic division of R&D efforts, and the company's methodical approach to market entry and product development.

Nintendo's Strategic Decisions

  • Nintendo of America's decision to distribute Donkey Kong in-house proved to be a multi-billion dollar correct decision.
  • Yamauchi trusted Arakawa to make the final call on the distribution of Donkey Kong, reinforcing Yamauchi's confidence in Arakawa.

"Yamauchi's kind of inclined to sell because, remember, he doesn't really care about the arcade business. He really just wants to set up Nintendo of America to get the distribution arm for the console that's coming. But he lets Arakawa make the final call."

  • The quote emphasizes Yamauchi's initial willingness to sell the distribution rights but ultimately deferring to Arakawa's judgment, which led to a highly profitable decision for Nintendo.
  • MCA Universal, led by Sid Scheinberg, files a lawsuit against Nintendo of America for trademark infringement over Donkey Kong.
  • Howard Lincoln, Nintendo's lawyer, and John Kirby, an antitrust lawyer, successfully defend Nintendo by proving King Kong was public domain.
  • The victory in court was significant, as it revealed MCA Universal's awareness of their lack of a case and their use of legal suits as a profit center.

"Nintendo, led by Seattle lawyer Howard Lincoln, who would go on to succeed Arkawa as the president of Nintendo America."

  • The quote introduces Howard Lincoln as a pivotal figure in defending Nintendo against MCA Universal's lawsuit, contributing to Nintendo's legal success.

Shigeru Miyamoto's Impact on Nintendo

  • Shigeru Miyamoto's ability to create successful games leads to the establishment of a fourth R&D division within Nintendo, focused solely on game development.
  • Miyamoto's approach to game design prioritizes fun and inspiration over conforming to existing game categories or trends.
  • Yamauchi recognizes the rarity and value of exceptional game designers like Miyamoto, who can create games that significantly outperform those designed by others.

"Yamauchi completely understands this, just like he understood with Kumpayokoi that there are these certain engineers out there who are so talented and so creative that they can do things and enable things with technology that nobody else can do."

  • The quote highlights Yamauchi's recognition of exceptional talent like Miyamoto's and his strategic decision to empower such individuals within Nintendo.

The Innovation of the NES (Nintendo Entertainment System)

  • The NES features a cost-effective CPU paired with a Picture Processing Unit (PPU), possibly marking one of the first instances of a dedicated GPU in hardware.
  • The innovative architecture allows the NES to have superior graphical capabilities while using cheaper, off-the-shelf technology.
  • Nintendo's strategy emphasizes fun and inventiveness with technology over using the latest, most expensive hardware.

"They've created a home video game console that is not just a year, many years ahead of the competition and will sell for cheaper and profitably."

  • This quote underscores the technological innovation behind the NES, which provided advanced gaming experiences at an affordable price, setting it years ahead of competitors.

Nintendo's Market Strategy and Distribution

  • The NES is launched in Japan as the Famicom, with broader ambitions than just gaming.
  • Nintendo of America innovates in third-party licensing, creating a lockout chip to ensure only Nintendo-approved games could be played on the NES.
  • The company employs a strategic rollout in the US market, starting with a test market in New York City, and later rationing supply to create demand.

"They're going to launch in a test market to start the New York City metro market."

  • The quote details Nintendo of America's cautious and strategic approach to entering the US market by testing the waters in a significant metro area first.

Nintendo's Dominance and Cultural Impact

  • By the end of 1991, the NES reaches a third of American households.
  • Mario becomes more recognizable among American kids than Mickey Mouse, indicating Nintendo's cultural impact.
  • Nintendo's business model includes a toll-free game counseling line and a strict approach to third-party licensing, maintaining high-quality standards for games.

"By the end of 1991, third of American households, 30 million American households have an NES."

  • The quote highlights the widespread adoption and cultural penetration of the NES in American households, signifying Nintendo's dominance in the market.

Employee Perks at Nintendo

  • Working at Nintendo comes with significant perks, including free game systems and games.
  • These perks contribute to employee satisfaction and make them appear "cool" to others, such as being a "cool parent."

Pretty amazing perks to get to work there. You end up with free game systems and free games, and you are a cool parent.

The quote highlights the benefits employees receive at Nintendo, emphasizing the appeal of working for the company and the positive image it can bestow on employees in their personal lives.

Nintendo's Innovative Direct Customer Relationship

  • Nintendo of America's innovative approach includes Nintendo Power magazine.
  • Issues of Nintendo Power can sell for thousands of dollars on eBay, indicating strong brand affinity.
  • Nintendo Power had a significant readership, with a circulation of 6 million.

So this is one half of the amazingly innovative direct relationship with customers that Nintendo of America comes up with.

This quote points to Nintendo's innovative strategy of building a direct relationship with customers, which is exemplified by the creation and success of Nintendo Power magazine.

Nintendo Power's Role in Gameplay

  • Nintendo Power provided detailed maps and guides, enhancing gameplay for titles like Pokemon.
  • The magazine format allowed players to better understand game worlds that were originally confined to small screens.
  • Editorial content and game secrets divulged in the magazine contributed to its popularity.

Well, I used to buy so much of next episode is going to be about Pokemon, but I used to buy Nintendo power for the maps of the Pokemon levels to be able to show you where you need to go, walk to unlock something and where different Pokemon are found.

This quote explains how Nintendo Power was a valuable resource for players, offering detailed guides that enhanced the gaming experience, particularly for games with complex worlds or levels.

Nintendo Fun Club and Marketing Genius

  • The Nintendo Fun Club was a marketing strategy that collected customer information.
  • Marketing leaders Peter Maine and Gail Tilden were instrumental in developing the strategy.
  • Nintendo Power evolved from a free newsletter to a subscription-based magazine with a rapid rise in subscriptions.

Everybody who mails in the warranty card for an NES automatically gets added to the Nintendo Fun Club fan club.

The quote explains Nintendo's method of collecting customer data through warranty card registrations, which was a clever marketing tactic that helped build a direct line of communication with their customer base.

Nintendo's Revenue and Market Dominance

  • In 1989, Nintendo's sales were ten times the market's bottom, with significant revenue growth by 1990.
  • Nintendo's profits surpassed those of major movie studios and television networks combined by 1992.
  • The NES sold 62 million consoles worldwide, showcasing Nintendo's impressive market dominance.

Nintendo's revenue alone in 1990 is the same as the entire industry in 1983 at the height of the mania.

This quote emphasizes the scale of Nintendo's financial success and market dominance by comparing its revenue to the entire industry's market size at its previous peak.

Nintendo's Business Model and Margins

  • Nintendo's business model was not just about hardware but also about selling games and controlling the marketing channel.
  • Their net income margins were substantial, and the company was investing heavily in R&D and manufacturing.
  • Nintendo managed to build an impressive monopoly and a global brand.

It's one of the greatest businesses that's created of all time.

The quote praises Nintendo's business model and its success in creating one of the most impressive monopolies in the history of business, highlighting its comprehensive control over the gaming ecosystem.

Nintendo's Direct Customer Relationship Compared to NFL

  • Nintendo's strategy of building hype around their media properties is compared to the NFL's approach.
  • Nintendo went further by creating a direct relationship with customers, amassing a CRM of over 6 million Nintendo buyers.

Not only are you doing what the NFL did, which is building hype around your media properties and around all of your intellectual property, you are going one level further.

This quote compares Nintendo's marketing and customer relationship strategies to that of the NFL, noting how Nintendo's approach was even more direct and engaging, leading to a massive customer database.

Control Video Corporation and AOL's Origin

  • Control Video Corporation started in 1983 as a gaming company but pivoted to become America Online (AOL).
  • The initial product, Gameline for the Atari 2600, showcased innovative technology for online game services.

It started as Control Video Corporation in 1983.

The quote reveals the origins of AOL, which began with a focus on gaming but shifted to become a major internet service provider, demonstrating how companies can pivot from their initial business plans to find success in different markets.

Nintendo's Missed Opportunity with id Software

  • Id Software approached Nintendo with a port of Super Mario Bros 3 for PC, which Nintendo declined.
  • Id Software went on to create iconic games like Commander Keen, Wolfenstein 3D, Doom, and Quake.

Id would then go on to rip Mario out of that pc side scroller and turn that into Commander Keen.

This quote discusses a pivotal moment where Nintendo's decision not to pursue PC gaming led id Software to develop its own successful games, illustrating how business decisions can lead to significant shifts in the industry landscape.

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