(Nintendo 2)​ The main network effect that is prevalent within the video game industry is the 

effect of console adoption on games that are developed. Developers, wanting to reach the 
largest number of consumers, prefer to develop games that are compatible with the most 
popular console industry. This is then perpetuated because the most popular games are only 
available on a certain console (due to exclusivity restrictions), which drives more users to adopt 
that particular console. Once this network externality has iterated several times, there will be 
only one or a small number of big-name consoles controlling the market, and all of the games 
available will be compatible with only one of the options. Buying the console with the largest 
market share, then, makes sense for consumers who want the largest game selection, while 
also perpetuating that specific brand’s market share. 
 
Specifically, we see the consequences of network effects with VCS and Fairchild -- though 
similar systems, only one survived because if its influence, and popularity, and ultimate market 
share. That being said, once the video gaming systems were created, the network grew 
substantially as over 17% of US homes owning a video game system within 4 years and 1/3rd of 
Japanese homes in 7 years . Because of this, game cartridge sales were thriving as well 
revealing the sheer strength of the gaming market as a whole. Nintendo while controlling the 
market did spur interest and revenues for the market at large including games, developers, 
chips, and retailers. 
 
(Nintendo 3)
Nintendo's strategy in pricing of consoles and games
● Nintendo kept a close eye on the pricing of consoles and games. The strategy employed
was to manipulate the number of games in circulation to induce scarcity and reduce
excess games on shelves. Additionally, the strategy deployed for games saw that few
games were released each year by Nintendo in house; in fact, for those licensing out the
right, it took more than a month for Nintendo to approve the request.​ ​Nintendo also
intentionally kept the price of consoles low so that the game could be accessible to a
wider customer base.
● This negatively affected the value created by the industry because it stymied creativity in
the field. It also created market inefficiencies because the market was not
cleared--consumers remained who would have purchased the system at the listed price.
● Due to its large control of the marketplace, Nintendo’s strategy in pricing was to focus on
quality and not flood the industry. Nintendo captured a huge portion of the value in the
market. Once game consoles were in users’ homes, they were essentially locked in to
providing more revenue to Nintendo in the form of compatible games, either those
developed solely by Nintendo, or those licensed with very favorable terms & conditions
for Nintendo.

Nintendo's strategy toward game developers

 ● With regard to game developers, Nintendo’s strategy was to license other companies to
develop games for its system. They required strict terms and conditions on production
levels, manufacturing subcontracting, and sign off on the game to ensure it wasn’t too
violent or sexual. Finally, Nintendo designed in a security chip requirement for
compatibility between console and cartridge in order to hold tight control over what
games could be released for Nintendo and to prevent unlicensed games.
● This action added to the value created by the industry because it encouraged other
companies to create new games and invest in the industry through this license
partnership. It reduced costs for other firms who were able to participate in the licensing
agreement because it allowed companies to focus only on software development rather
than each one having to create an associated compatible console.
● The demand for licenses was so prolific (over 50 given by 1988) that not only was
Nintendo able to capture more value through the licenses, but it was able to set further
restrictions to boost the benefit to Nintendo (i.e. setting large minimum orders and
insisting on payment in advance). Furthermore, by use of the security chip, Nintendo
was able to capture value of ​every ​game developer who created games for the system,
rather than allowing for unlicensed games in the market to profit without paying Nintendo
their fee.
Nintendo's strategy toward chip suppliers
● Nintendo sourced their chips from industry leaders, starting with Ricoh but later growing
their supply base to about 30 chip suppliers. Nintendo made the decision to to include a
secondary ‘security’ chip which ensured that only Nintendo-approved cartridges could
work with their system.
● Nintendo’s decision to source rather than vertically integrate for chip production created
industry value and provided better benefits than what Nintendo would have done
in-house. Producers like Ricoh were better-positioned to develop and create increasingly
better technology, allowing Nintendo to focus engineering efforts on the systems
themselves. Furthermore, suppliers enjoyed economies of scale which allowed for lower
costs.
● Nintendo was able to capture more value by extracting rock-bottom prices from their
suppliers caused by the scale at which they were operating. They became Ricoh’s
largest customer, accounting for 60-70% of sales, giving Nintendo strong bargaining
power to continue to capture value in price negotiations.
Nintendo's strategy toward retailers
● Because the toy-retail angle was not taken well in America, Nintendo (Of America) took
the action of re-focusing their delivery from a consumer toy product to an electronic
product. Nintendo offered at first to stock targeted stores for free as a strategy to
eventually roll out nationwide, and eventually toy stores adopted the systems as well.
Nintendo took a tough (potentially questionable) strategy with all of their retailers -
setting price limitations, restricting retailers from carrying competitors’ products, and
threatening these retailers with cutting off supply if they did not comply.
● Nintendo destroyed overall industry value in these actions by artificially reducing
competition as well as supply. This move ultimately hurt consumers. Supply was
 restricted to lowers much lower than demand, causing market inefficiencies. Consumers
were also unable to compare benefits across systems as easily due to Nintendo’s
anti-competition tactics.
● Nintendo’s tough strategy with their retailers allowed them to capture a large portion of
the value, since they were able to essentially mandate retail price and keep competition
off of the shelves. However, it got them into hot water with the FTC, prompting an
investigation and eventually causing Nintendo to reach a settlement where they agreed
to cease and desist some of these tactics.

(Nintendo 4) The strategy Nintendo should take is dependent on technological considerations.

Because of the industry model of selling relatively low-cost consoles that accommodate
higher-margin game cartridges, the cartridges need to be a primary consideration. Will
backwards-compatibility be technologically possible? If so, users may be comfortable with the
upgrade since they can continue to use their old games. In this case, Nintendo can move
forward with the 16-bit console, assuring users that their old games can still be used. This could
create a virtuous spiral, where a better console leads to better game development, and so on,
increasing customer spending.

If backwards compatibility is not technologically feasible, users will likely to be hesitant to adopt
the new technology given that they would need to rebuild their game library. This is akin to a
situation of ​excess intertia​. If they really wanted to promote this technology, Nintendo could limit
their licensees to only move forward with creating 16-bit compatible games. However, there is
~1 year lead time associated with this. If there is no backwards compatibility, Nintendo is best to
delay adoption as it works with developers to get a library of 16-bit games ready for the release.
The other firms entering with 16-bit systems face the same compatibility issue with users’
current Nintendo game libraries, so Nintendo should not be concerned with customers being
poached as long as they can continue having exclusive game rights (which have been written
into their terms and conditions). Therefore, in this case, we conclude that Nintendo delays while
building up 16-bit game options and ensuring their customers are ready for a forced upgrade.