POWER PLAY(A): NINTENDO IN 8-BIT VIDEO GAMES

CASE ANALYSIS
Evolution of Home Video Game System:
Timelines:
A brief journey of the industry of video games over the period with a stress on the life cycle of
Nintendo and its competitors can be summaries as follows;

Timeline Description
Creation of a ball and paddle game named Odyssey that could be played on a TV
1966
set by Sanders Associates, a U.S military systems consulting firm
Foundation of Atari Corporation, their most common arcade coin-op game
1972 being a Table tennis video game called Pong. The arcade business was high
during the 1970s
Nintedo acquired license to manufacture and sell Magnavoxs home video
1973
game system in Japan
1975 Bushnell introduced home pong at toy industry show to target the home market
Fairchild- U.S electronics company introduced 1 st video game system capable
1976
of handling multiple games
Nintendo entered home video game system in japan under license from US
1977
Television manufacturer Magnavox
Nintendo teamed with Mitsubishi to launch various coin-op games like Pong,
1977-81
Game and Watch and Donkey Kong
Entry into home video game system by RCA, National semiconductors,
1978 General Instrument, Coleco. However low sales led to exist of most players
except Atari and Coleco
Chunks of Atari engineers left Atari to set up individual house, Activision
1979
making VCS compatible video game.
In this period the home video game market bounced back from its crash with the
help of some successful arcade games like Space Invaders, Asteroids, Pac-Man.
1979-82
Atari, Namco, Coleco, Mattel entered the video game industry with second
generation game systems with improved graphics.
1980 Nintendo established a US subsidiary, Nintendo of America (NOA)
NOA sales was propelled to $100 million. Extra revenue came from licensing
the game to Coleco and of the characters for use in T-shirt, cereals pack etc. At
1981
the same time, there were issues of numerous copyright infringement suits as
the games were easily imitable
Home video game industry captured 17% of US homes, retail sales hit $3
1982
billion
Launch of Famicon in Japan by Nintendo. Famicon was priced at $100, which
1983-85 was below market price, which was $200-$350. This helped Nintendo undercut
competition
 U.S. home video game collapsed due to low quality software. Atari collapsed
due to over built inventory. Warner sold off Ataris hardware division under the
1985
name Atari Corporation. Coin-up business was sold, as Atari Games, to
Namco.
US Launch of Famicon under the name Nintendo entertainment system (NES).
1986 NOA targeted electronics retailers and offered to stock for free, with the
retailers having to pay for only what they had managed to sell after 90 days
Nintendo launched new games- Super Mario Brothers, The Legend of Zelda and
1985-87
Metroid

Nintendo had 50 licensees, the 6 major licensees being Namco, Hudson, Taito,
Konami, Capcom, Bandai. These licensees paid 20% royalty to Nintendo.
1988 Nintendo also started a magazine, called Nintendo power, for NES users. In
1990. Its readership reached 6 million a month, Nintendo also set up consumer
hot line, with game counselors

Rivals started complaining that Nintendo is monopolizing the market as their

contract renewal had no changes although the industry was still in its growing
phase. Computer games had proved to be a limited business, bringing in total
of only $250 million-Nintendo launched Game Boy, priced at $100 with
1989
special compact game cartridges from $20 to $25. Atari filed suit against NOA,
charging that NOAs exclusivity clause amounted to unfair restraint of trade.
Eckart started investigation on Nintendo for allegations that Nintendo unfairly
reduced competition

17 million units of Famicon were sold, acquiring 95% of Japanese home video
By 1990 game market. Nintendo launched family computer communication network
system in 1988. NOA had also acquired 90% share of US home video game
A total of 130000 households joined the network and subscribed to services
like stock-brokerage services, home shopping, on-line banking. There were
1991
100 license for the NES, only 10% of software development remained in-house
at Nintendo.
A lot of legal suits were under way during this period. Atari games was found
1991 to have obtained the Nintendo security code illegally and was ordered to stop
selling of NES compatible cartridges.
In April 1991, Nintendo signed a consent decree with FTC to stop actions that
could be construed as resale maintenance.
Atari field suit against NOAs exclusivity clause amounting to restraint of trade
1992 which was decided in NOA's favor in May 1992. The FTC dropped all
investigations against Nintendo in December 1992
Background of Nintendo:
Nintendo, a company based in Kyoto Japan had monopolized the industry of home video games
in 1980s and 1990s. They have become a household name covering almost 95% share of the
Japanese 8-bit home video game market by 1990. It had also captured about 17% of the US
market in the business. They are a solid force in the video game industry as a developer of both
the consoles and the video games themselves. Despite troubles and an ever-changing industry,
Nintendo has always been a constant, solid, driving force forward; unwavering and the largest
player in the industry. A key reason being their extensive Research and Development team.
Nintendos dedicated R&D team that targets one or two hit games per year instead of several
minor successes thus giving the team around 12-18-month period to develop more complex
games with innovation technologies that gave them an upper hand over the other easily available
games in the market.

Nintendo was founded in Kyoto, Japan. They made decks of playing cards, known as Hanafuda,
in Japan. The cards were made by hand originally and became very popular. With the limitations
of the playing card industry, began to seek out other ventures. Their line of Disney themed cards
had given the company a large cash injection, and risks could be taken. So, they ventured in to
the industry of video games.

The success of the Nintendo Entertainment System(NES) is what laid the foundation for
Nintendo to become a leader in the industry. After the NESs release, Nintendo developed and
launched the bestselling Game Boy.

Handling internal and external environments:

Internal Environment:

Nintendo was able to control its power on the industry by keeping most of their in-house
information within. Although they subcontracted manufacturing of its game systems to others,
the final assembly alone took place in the companys facilities. This allowed little leakage of the
companys trade secrets and hence allowed them to maintain differentiability. In facts, their
strategies were posed to place Nintendo as a monopoly in the industry of gaming industry by
trying to handicap most of its rivals by contracting licenses so that their contractors cannot
venture with other rivals for a period of 2 years thus forcing loyalty. Their main strategy is to
maintain their technological advantage and hence spends more of research and development.
This gives them a competitive advantage both in the technological aspect as well as in marketing
and sales.

External Environment:
A company must adapt to each pressure and conform to the standards in order to sustain in the
market. Nintendo has always been a driving force in many of these areas, although they still face
pressure in the legal, economic, and technological fronts of the industry.

I. Legal aspects:

Video games are not publicly broadcasted like TV, but are still a digital media. There are legal
aspects that handle the content of the games and so Nintendo needs to be very careful as to which
games they approve and which not. Certain violent or other sexually intended games are not
allowed since they may affect the young kids which are the main market for video games.
Moreover, they need to deal with copyright issues and patenting since there are hackers available
who are spending a lot on decoding the security codes of Nintendo and launching pirated games
into the market. These unlicensed markets cant eat away a lot of Nintendos profit and so they
need to take care of them legally.

II. Economic:

Nintendo is based in Japan and thus operates using the Japanese Yen as its primary currency.
Since Nintendo is also present in the US market and is dependent on exporting to external
countries, they are vulnerable to the fluctuation and changes in the exchange rate of the Yen.

III. Technological:

Nintendo has always placed innovation as its prime driving force to lead the market. And since
newer technologies are never going to stay new for long, they need to keep reinvesting in
skillsets to build more complex games using upcoming technologies before their competitors to
maintain their control over the market.

Monopoly strategies
 I. Reducing Bargaining powers of suppliers
Nintendo outsourced most if it products from chips to console to controllers. The main game
based chips were licensed. Not only did they have a wired frame which would not let any other
cartridge run on its consoles. They issued licenses to others consisting of 6 major companies who
had to succumb to the demands of Nintendo. The demands included-

a. Giving a royalty of about 20%to Nintendo of a cartridge selling for $30 that is after they
already paid the manufacturing costs of around $8. A minimum cap of around 10000
units were also made mandatory in JAPAN.
b. It had a halo around most of the video games magazines (Nintendo Power) wherein it
made sure that there was no counterfeit and even ensured a public apology from one of
its suppliers who started selling unauthorized chips.
c. The only place which it did not have a monopoly was a bit coin video games into which
it made strides into hardware.
d. The licenses also had to go through Nintendos approval before the game could be
released. Limited NES titles to 5 a year. It had to place a minimum order of 30000 and
also had to make the developers wait for 3 months before it would be shipped. It also
made it a law that they could sell it to other video game systems for a period of 2 years
in USA.

II. Reducing bargaining power of buyers

Nintendo being the market leader made sure it maximized it profits.

a. It was traditional in toy industry to ship orders in January and February and pay in
December however Nintendo made it mandatory to make successive payments on orders.
b. Retails stores like Walmart and Kmart were forbidden and threatened against holding
other video games and also were strictly forbidden from offering any discounts on
Nintendo products. They were asked not to sell below the cost of$99.95.
c. Nintendo strategy was to squeeze supply and harness profits. For example when retailers
requested 110 million cartridges they just supplied a mere 33 million copies.
d. It increased its market leverage by reducing the supplies specially during the festive
season like the festival of Christmas 1988.

III. Mitigating Threat of new entrants

a. The EA sports producer Trip Hawkins who was a visionary who saw that personal
computers would be used for entertainment was subdued by the sheer volume of the sales
 of Nintendo. Even though he made $250 million dollars he gave up the idea and went in
for licensing for Nintendo. Hence this was a way Nintendo managed to increase its
monopoly leverage.

The size of the distribution networks, the size of the gaming market, and the cost
associated with entering that market has kept new entrants out. Even if new entrants have
come in, Nintendo is in a cushioned place. So there is low threat from new entrants as
Nintendo has been able to capture quite most of the market and it will soon reach a
maturity. And with increase in loyal customers it can further reduce the threat of new
entrants.

IV. Substitutes
a. Since this is a technology intensive gaming system which was in itself a substitute to the
traditional games it currently has no substitutes. However the video game industry is also
a source of entertainment. So even if the Nintendo games are the best in market, there are
other available sources of entertainment that can act as substitutes like TV, Manual games,
theatre etc. But being low cost products in the market gives them that leverage to keep
away threats from substitutes.

V. Competition from Rivalry

a. Atari was instrumental in propelling the Justice Department of the US in filing a suit
against Nintendo for using unfair trade practices for monopolizing the market.

b. Although Nintendo is a market leader in the home video games they target mostly the
younger customers and they have strict policies for family games without violence and
other mature content. So they have a threat if other rivals go into those category and
capture the other demographic of higher age customers.