Thursday, January 11, 2007

Company Review: Nintendo *)

Power Play (A):
Nintendo in 8-bit Video Games

The home video-game industry began in 1972 with the founding of Atari. After riding a dramatic boom and bust in the early 1980s, most players left the business. Nintendo of Japan then rebuilt the industry, establishing a commanding worldwide position by the end of the decade. By 1990, Nintendo game systems could be found in one out of every three households, in both Japan and the United States. The company's stock market value exceeded that of Sony or Nissan.

Home Video Game Systems
Video games were a form of home entertainment whose system consisted of three types of component: a console, controllers, and cartridges. The console, essentially a microprocessor-based computer, was designed to receive information from the controllers, process it according to instructions contained in the game cartridge, and send signals to the TV monitor. Controllers were hand-held devices used to direct the on-screen action. When a player pushed the buttons or joystick on the top of the controller, a signal was transmitted to the console. Cartridges contained chips encoding the instructions for a particular game and was designed to be inserted into the console.
Three technical factors determined the quality of a video game: data width (in bits), clock speed (in MHz), and the amount of RAM (in bytes).

Atari, which means “Check” in the Japanese game Go, was founded in 1972 by an entrepreneur, Nolan Bushnell.

The Arcade Game Business
In the early 1970s, coin-operated game machines were electromechanical devices that played games such as pinball, shuffleboard, and football. Manufacturers sold the machine to distributors, who sold or leased them to operators who, in turn, placed the machines in arcades, malls, bowling alleys, and other locations.
At Atari, Bushnell and his team developed a computer-based arcade machine called Pong, in which two players batted a light beam back and forth between on-screen paddles. At a time, when the best arcade game grossed $45 a week, Pong machines brought in $200 a week.

The Home Market
In 1975, Bushnell introduced Home Pong, the Pong machine that was compressed down to a few integrated circuits and designed to be hooked up to a TV. A total of 150.000 Home Pong games were sold in the first year.
Fueled by the runaway success of the arcade game Space Invaders, the home video game market quickly bounced back from the 1978 crash. However, the U.S. home video game market collapsed again in 1985. A flood of low-quality software was blamed for the bust.

Nintendo in Japan
Nintendo, based in Kyoto, Japan, was controlled by the old, established Yamauchi family. In the early part of this century, the company was the largest maker of Japanese playing-cards, introducing Western-style cards and building a sales force that called on shops all over Japan.
In 1978, Nintendo started putting out coin-op video games. In 1980, Nintendo put out Game & Watch, a handheld combination of video game and digital clock. In 1981, Nintendo had its first smash hit with the coin-op video game Donkey Kong.

The Famicom
By 1983, there were several players in the Japanese home video game industry, including Atari, Commodore from US, Casio and Sharp. The game sold out for around $200-350. In the same year, Nintendo launched Famicom at a $100 price and significantly undercut the competition. Overtime, the Nintendo engineers learned to make more complex game by using powerful new chips in the cartridge to take over processing activities from the console (Super Mario Brothers and the Legend of Zelda). As a result, makers of competing home video game system withdrew from the market.

Nintendo decided to license other companies to develop games for its system. By 1988, there were 50 licensees. Nintendo continued with its outsourcing policy, working with some 30 subcontractors including many of the leading chipmakers. Later, Nintendo launched the Family Computer Communications Network System equipped by a modem and a special cartridge enabled of interacting with other terminals or a central computer.

Nintendo in the U.S
In the US, Nintendo established a subsidiary named as Nintendo of America (NOA) by 1980. At first, NOA had a shaky start importing Nintendo coin-op game and attempt to gain a foothold in the U.S arcade game business. However, in 1983, NOA entered the U.S consumer market with Game & Watch, brought over from Japan. The product, aimed at the toy market, was failure. Therefore, in 1985, Nintendo tried to launch the Famicom in America with the games which were redesigned to look more like a computer and given a hi-tech package. The decision was made to reposition the video game system as a consumer electronics product rather than a toy. At that time, NOA targeted electronics retailer and offered to stock stores for free, with retailer having to pay for only what they have manage to sell after 90 days. To the surprise of the trade, consumer reaction was favorable. A national roll-out followed in 1986

Marketing and Distribution
NOA spent about 2% of sales budget for advertising and also sought out promotion partner such as Pepsi, Proctor and Gamble, and McDonalds. In 1988, Arakawa started a magazine named Nintendo Power for NES users which gave tips on existing games, announced new release, and rated games. Very soon it became the highest circulated magazine targeted to children in USA. Nintendo’s products were sold through toy stores, mass merchandiser, departmental stores, electronic retailers and other outlets. NOA also set up interactive display nation wide which allowed any one to stop and try NES. NOA practiced careful inventory management in releasing its new games. It supplied less than the retailers demand. There was allegation against Nintendo for abuse of power to create scarcity of games in market and threatening to cut off retailers if they carried competitor’s products or discounted Nintendo machines and Games.

Position in the late 1980s
By 1990, Nintendo had a greater than 90% share of U.S home video game market and one NES unit for every three house hold in America. By 1989 in collaboration with AT&T it tried to bring all NES users under networking but finally the project was dissolved.

Game Boy
In April 1989, Nintendo launched a handheld monochrome video game named game boy which became one of the best selling games and through 1992, a total of 32 million game boy was sold through out the world.

Legal Maneuvers
US Justice Department investigated allegation against Nintendo in five areas – anti-competitive purpose of the NES security chip, software developer became almost entirely dependent on Nintendo due to agreement, creating artificial shortage of games during Christmas 1988, practice of software with hardware and exercising market power by threatening retailers with limit on their supply. At the same time, the Attorney general of New York and Maryland began investigation for enforcing retailers to keep price of game more than $99.95. NOA signed a consent decree with federal Trade commission along with the attorneys generals of Mary land, New York and 39 other states agreeing to stop action which could be construed as resale price maintenance.

A New Game
In late 1991, Seattle’s major league baseball team, the Mariners was put up for sale. But due to be a non North American Nintendo failed to buy Seattle’s major league base ball team, the Mariners.

Questions and Answers

1) Nintendo successfully recreated the home video game business following the Atari-era boom and bust. How did it so?
Nintendo’s success in the home video game business was achieved by:
 Making an innovative new game system which had some competitive advantages such as cheaper, superior image quality, faster hardware processing and a connector that can be used for future addition of a modem and keyboard.
 Preventing the possibility of product counterfeits by embedding into the system a security chip ensuring that only Nintendo-approved cartridges would be able to run on the system. This is a very important measure because it could lead customers into negative perception about the company reputation from using low-quality pirate products. Moreover, the company’s profit would be decreased.
 Keeping the hardware cost down by including some code into each cartridge. This code was needed for console operation to be read into the system’s memory each time a game was loaded.
 Proposing the policy of insulating R&D personnel from the marketing people in order to improve the chances of coming up with truly fresh game concepts.
 Focusing resources on trying to come up with one or two hit games per year rather than with several minor successes.
 Licensing other companies to develop games for its system.

2) What was the key difference between the Nintendo and Atari strategies?

The key differences between two companies are shown in the table format based on the information provided in this course.

Item Nintendo Atari
Technology Cartridge console with security chips VCS (Video Computer System), not cryptic
Market price Cheaper game having superior graphics and faster action Relatively more expensive
Market strategies  Insulated R&D
 one or two hit games per year preferable than several minor successes
 expanding strategy by using highly targeted advertising with support of partners such as Pepsi, P&G and McDonald’s
 Outsourcing policy and royalty  be played by predominantly youths of elementary and high-school age
 collaborate with other game producers
 allow reciprocal play using other games in the same platform

3) How was Nintendo able to capture value from the home video game business?
There are many factors which encouraged Nintendo to capture value from the home video game business as follow:
 Firstly, Nintendo had a good potential in technology of game production because it succeeded to develop new video game system that better than its competitors and it was cheaper. These were also good potential for Nintendo to promote its products in the markets and attracted the customers to buy its games.
 Secondly, in 1985, there was a factor which encouraged Nintendo to monopolize the game business because the home video game market collapsed. The big game companies such as Atari and others had the problems and the weakness points. This was the good chance for Nintendo to negotiate and license other companies to develop games for its system such as Namco, Hudson, Taito, etc.
 Thirdly, Nintendo succeeded to expand its distribution in the United State which was the biggest market for game business by advertising strategy and using the popular cartoon and movies characters to attract its consumer. Therefore, Nintendo game systems were very popular and could be found one system for every three households in both Japan and the United States.
 Fourthly, Nintendo used the regulation, contract, and patent license to limit the other game companies which tried to share the value of its game business. And also it used market strategy to ban the retailers who sold its competitors’ products or discounted its products.
 Fifthly, it had very good image because it achieved to launch the game such as Game & Watch, the coin-op video game Donkey Kong, The legend of Zelda, Metroid and Supper Mario Brothers. These made the customers relied on Nintendo and satisfied to pay for Nintendo’s new release games. These were the main factors that Nintendo could capture the home video game business.

4) What were Nintendo strategies towards its customers, suppliers, complementors and substitutors.
Nintendo is known as one of the top companies for customer service. Main objective of Nintendo was to provide video game that would be cheaper than competitors but having superior graphics and faster in action. To make its product available to customers it distributed products through toy stores, mass merchandiser, electronic retailers and other outlet. Nintendo published magazine for customers to give tips on new video games, announced new release, and rated game. NOA set up a consumer hot line to, with game counselors to give hints – but not complete answer- how to play the games. Nintendo also connected its user with a family computer communication network system that offered stock-brokerage services, home shopping, online banking, rail and airline reservation services, electronic mail, and access to information about new video game. NOA also set up interactive displays in stores nationwide, allowing anyone to stop and try the NES.
One of the strategies of Nintendo was outsourcing. All manufacturing of Nintendo’s game system was subcontracted, with final assembly alone taking place at company’s facility. It worked with around 30 subcontractors including many of the leading cheap makers. Specialized chips were sourced from electronic giant Ricoh. Suppliers who made software for Nintendo were restricted from moving another video game for next two years.
Nintendo provided new video games that would be cheaper than substitutors but having superior graphics and faster in action. They concentrated on come up with one or two hit game per year rather than several minor successes. Nintendo tried to monopolizing the market. They encouraged the retailers not to sell competitors game. In order or increase market demand, Nintendo did not fill all of the retailers demand, and kept more than half of its game library in active. It also withdrew game from the market quickly as soon as interest waned.
Nintendo provided license to other companies to develop games for its system. Initially six companies got license. They had to pay royalties to Nintendo set at 20% wholesaled price of Cartridge. By 1988, there were 50 licenses. Except the initial six, others had to pay 20% royalty and also had to absorb manufacturing cost. They also needed to make a minimum order of 10000 units with pay in advance. They insisted the retailers not to sell the competitors product and discounted Nintendo’s machine and games. Capitalizing the game characters NOA licensed its game characters to a wide variety of other business. Mario and other Nintendo creations turned up on TV shows, cereal packets, T-shirts, records and tapes, in books and board games, as toys, and elsewhere. NOA spent about 2% of sales budget for advertising and also sought out promotion partner such as Pepsi, Proctor and Gamble, and McDonalds. It also published a magazine. NOA set up a consumer hot line to, with game counselors to give hints about games.

*) International Technology and Management 3E (ITM) – 70674
Professor HIBARA Nobuhiko


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