Nintendo: The Console Wars

Transcript from https://podmenti.com/t/4138e499f6eacd08

I feel like I gotta
Warm up physically before acquired episodes these days. It's like a marathon.
My back does start to hurt by the end from just standing still the whole time. Oh, me too. Me too.
I've actually stopped working out mornings before we record because I don't wanna be too tired. Like I need my stamina. Yeah.

We should figure out like recording on the Peloton or something.
That'd be a breathy. Who got the truth?
Is it you, is it you, is it you Who got the truth now?
Is it you, is it you, is it you
Me down
Another story

Welcome to Season 12, Episode 4 of Acquired, the podcast about great technology companies and the stories and playbooks behind them.
I'm Ben Gilbert. I'm David Rosenthal.
And we are your hosts.
We last left our Nintendo heroes in nineteen ninety, when they single handedly revived the video game industry and captured ninety five percent of the market share globally.
We did our seven powers analysis and determined.
The company had a better competitive position than
basically any company in history, and the game was theirs to lose.
But somehow.
They did just that. Indeed they did.
And then they won. And then they lost. And then they won. And then they lost.
And then they won again.
Exactly.
Today's story will be about the fall and how Nintendo managed to blow a 10 run lead in the bottom of the ninth.
But like all great heroes when faced with foes like
Sega, Sony, Microsoft, and eventually even Apple.
Nintendo's creativity and cleverness has kept them a major player, and certainly the most unique player in the video game landscape today.
So David, as you mentioned, this is a weird story for us. Usually the narrative on acquired goes something like revenues kept climbing every year and now they're making more money than they ever had before. But with Nintendo, it's been a very cyclical road, and they actually lost money in long periods of time, like 2011 to 2018.
And their greatest strengths are their greatest weaknesses all the way through.
So on the eve of the release of the Chris Pratt movie, Super Mario Brothers,
We tell Nintendo's part two story today from the console wars of the nineties forward.
Well, before we get into it, we want to let you know about the latest over at ACQ2, which you can search in any podcast player. It's got some great episodes. The next one to drop will be with the CEO of Retool, David Shu. He's a super contrarian founder and really interesting to just hear his take on uh startup wisdom generally.
We've also gotten lots of emails from folks saying you really love the Stat Sig episode with Vijay Raji, so that is a great one to check out too.
There's also the slack.
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.
If you are not in the Slack yet.
That is definitely where the best discussion is happening on top of what we were able to learn before we recorded an episode.
Kind of about it all afterwards. So that is acquire dot fm slash slack.
And David, without further ado, please take us in. And listeners, as always, this is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only.
Ooh, it'll be very fun at the end of the episode to talk about.
Whether we uh
Think Nintendo is a good stock to own at this point in time or not.
Here in twenty twenty three.
But
Before we talk about all that.
We first need to talk about one more
Giant
Success.
From Nintendo in the nineteen eighties.
A very small giant success that we intentionally left off in the last episode because it's gonna be very, very important.
Here in part two.
And that is
Of course.
The game boy.
Yes.
So we talked last time all about Gunpay Ukoi. Nintendo is effectively chief engineer and his genius behind building everything from the ultra hand to the light gun shooting range to
Mentor Shigeru 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.
Now these were portable, dedicated
handheld video game systems.
Meaning by dedicated.
Each piece of hardware only played.
One game.
There was a Donkey Kong game and watch, there was a Mario game and watch, there was a Zelda game and watch, even of course
A Mickey Mouse.
Game and watch, but each piece of hardware only played
That one.
Game.
It was also actually on the Game and Watch where Gunpei invented the D pad that is, you know, on like
Every single controller. Yeah. That is where the D pad was invented with the game and watch. Huh.
Pretty pretty freaking awesome.
And the Game and Watch actually sold a ton of units. I think forty three million units got sold before it end of life. Yes. And this is the thing. Western audiences don't know that much about it, because it was never that popular in the West. It was huge in Asia, though. Like you said, 43 million units.
Over a billion dollars in lifetime revenue from this product line, which back then in the eighties and kind of pre NES, that was
Super, super significant.
For Nintendo.
Now.
If you're thinking about this
Given everything we talked about last time about
technological and video game innovation and marvels that Donkey Kong and Mario were and the NES and how advanced it was.
How the hell did Goonpei and Nintendo
Get Donkey Kong running on a portable piece of hardware in nineteen eighty two. Pre NES. How did this come about? It would be
The Goonpei's
Philosophy which really becomes sort of
The second core piece of Nintendo philosophy beyond the name of the game is the game is
And Gunpei's technology philosophy is
Lateral thinking with withered technology. Because the NES still was cutting edge hardware in many ways. Absolutely. It was years ahead of the competition. It had the first GPU architecture in a consumer focused device.
It was
Not weathered technology. It was the opposite of that.
So
Sitting all of this
Silicon and
PC and computing and graphics innovation that's happening in the nineteen eighties that the NES
Took part in.
was another adjacent
market and silicon ecosystem.
Which was calculators.
We've talked about it.
a little bit about the calculator industry on the show in the past on like our TSM C episode, specifically the history of Morris Chang and Texas instruments. We gotta cover T I at some point in the future. I think that was on our voting for LPs for next potential episode.
But by the early eighties
Yeah.
Calculator industry was kind of like the PC industry is today, other than the Mac and Apple Silicon. It was total commodity.
Very mature.
Cheap, completely understood technology.
And you can make it for very, very low cost. It was also
Specifically.
Dominated.
By Japanese semiconductor companies.
Very convenient for Nintendo.
So
Gunpei just expanded his mind a little bit in what could be
Silicon technology powering video games.
And he reached over and grabbed a bunch of mature technology from the calculator industry and voila.
Portable Donkey Kong.
And you know, with the L C D screen it's basically the same type of screen. It's no more advanced of a processor doing simple math to decide whether the character moves left or right and summing points and things like that. It's a calculator.
Nobody would mistake this for an arcade quality port of Donkey Kong.
But it doesn't matter.
People now can play Donkey Kong on the go. This is amazing. People love it. Huge deal.
Legend has it that the way Goon Pei came up with
The idea for doing the game and watch in the first place.
Was he was on the train in Tokyo.
And he observed a
Businessman.
Who was also on the train.
Who was just killing time by pressing buttons on his calculator and doing random things on his like business calculator.
And I think that tells you
a ton about the potential demand for on the go.
video entertainment in the nineteen eighties. Man, I'd say that was apocryphal, but that has literally happened to me where I pull out my phone and I'm up to date on my email. I'm up to date on Twitter. I pull down no new tweets are coming in. So I'm like scrolling around on the home screen doing nothing, opening and closing the same apps over again just because it's entrancing. Now imagine
No smartphone, no Twitter, no Instagram. Seriously. What else are you gonna do? Like how did people even live back then?
Barbaric.
Newspapers, man.
Newspapers. Right.
Ha ha ha.
So
Time marches forward, everything that we talked about in episode one on Nintendo comes to pass, the NES launches, achieves ninety five percent global market share, Nintendo's on top of the world, et cetera, et cetera.
While this is all happening.
Goon Payne.
who remember was not involved with the development of the NES.
Gompei goes over.
Yamuchi and says.
Hey, I think
We can basically
Combine
The N E S
And this old game and watch technology.
And make a similarly awesome
Portable cartridge based.
Console.
And Yamuchi and the rest of Nintendo are like
Well.
Yes, of course, if you could do that, that would be amazing. Who wouldn't want to buy one of those things? But
Part of what made the NES so great was
It was years ahead of all the competition and technology. Like how are we gonna do that?
And
The portable era.
Gunpei's like
Don't worry.
Mr. Yamayuti, I've got it. I can make it all work.
This device that I have in mind, it'll play awesome games.
It'll have great battery life.
We can get it to market super fast and
Get this.
I'm pretty sure we can sell this thing even cheaper.
Than the NES.
Everybody's like
This is too good to be true. How are we gonna do this? That's quite the promise.
It's like here's the big reveal.
It's gonna be black and white.
And not even black and white, but black and green. Yeah.
So
God bless Yamauchi.
That man was a visionary and he completed
He understood technology better than anybody, but
Because he gives Goon Pei to go ahead on this.
Everybody else at Nintendo is like
This is
Not gonna work. You know, I know we're still in the nineteen eighties here, but the nineteen eighties are more advanced than you might think. Like black and white is like the nineteen sixties. Nobody wants black and white, especially in
The video game market.
Which is supposed to be this advanced technology graphical market. And to play
games that they're accustomed to seeing in color.
You're gonna go downgrade.
Mario? Like that's a terrible experience. Right. Terrible, terrible idea. So internally, this project gets the nickname
I'm not exactly sure how to pronounce this, but
It's either Dama game or Dame Game. D-A-M-E-G A M E.
Yeah.
Which basically means hopeless game.
But nevertheless, they push ahead.
And in April.
Nineteen eighty nine.
They released this device in Japan.
followed shortly in the US.
For eighty nine dollars and ninety five cents.
And this device, of course, is named
The Game Boy.
We talk about this all the time on acquired things that are
in technology in our industry in the past that
just seem so natural we don't even think about them.
Why did they call it the Game Boy?
They called it the Game Boy to dig at Sony, who if they've made it, would have called it the game man.
Why?
Because they have the walk van.
Uh
No way. That's really why? Isn't this hilarious? It's so obvious when you think about it, but the Game Boy, it's like a Kleenex. It's like oh portable handheld gaming system. It's a Game Boy.
This is Nintendo on the rise, looking over it, they're kinda like
big brother in Japanese technology corporations at Sony and be like, We are beating you to the punch here on technology.
Oh, I love it. I had no idea.
So freaking awesome.
It obviously becomes a huge success. So the first
Japanese production run of the Game Boy.
sells three hundred thousand units almost immediately.
And
The first US shipment.
Of one point one million units.
Also sells out.
Immediately.
And
The killer app, especially in the US.
Driving sales is
Not a kids game.
But
Tetris.
And
We won't tell the whole uh
Story. It's pretty amazing of how Tetris
The game.
comes out of the communist Soviet Union and makes it onto the Game Boy in the US and becomes
The most popular game of all time.
But go watch the movie. I've heard that it's great.
It is, yeah, I watched it this week.
It's obviously a little overdramatized, but it is pretty crazy that
You know, talk about the name of the game is the game.
a Soviet programmer invented this game that
was then so
obvious to everybody who looked at it that this thing was
the perfect game.
That
There was this massive geopolitical
mini war over who could get the rights to this thing and all these different countries on all these different consoles.
And Nintendo.
We think of them as this very sort of nice and shiny company.
Making stuff for kids.
But executing the steps they needed to take to obtain the license for Tetris
is a wild story. The movie is awesome.
The important thing.
That the movie does a good job of underscoring is
Minoru Arakawa.
Deeply understood.
once he saw a demo of Tetris for Game Boy.
That
This
could expand the market.
Beyond just
Games for
Little boys and teenage boys. This is not a kids' game.
This is an adult game. Yes, and now we could sell Game Boys.
to everyone of all ages everywhere.
And not just as a toy.
Totally.
It's funny, I was laughing as you were saying all that Ben about you know image of Nintendo as this friendly, you know, cuddly company. I think we debunked that in part one pretty well. Right. There's plenty of corporate espionage behind the Mario smile. Oh yeah. Plenty, plenty, plenty.
But
Yes, A, the Tetra story is amazing on its own, but B, like for our purposes here
And it really was
Arakawa in the US who saw this at Nintendo of America.
The opportunity
Just like Gunpeza with the businessman
Playing with his calculator on the train back in Tokyo.
Everybody loves games. It's not just kids.
And if they can get
This device that is easily adoptable.
And at a low enough price point by
a broader market.
Nintendo is just gonna crush it. So
Nintendo America.
in their tradition as we talked about in part one.
They just have the most amazing advertising campaigns around the launch of the Game Boy. At Father's Day, I don't know if it was nineteen ninety or nineteen eighty nine. It must have been nineteen ninety.
They come out with a campaign called Punish Your Father. And the whole thing is like, your dad has been stealing like the kid's game boy. And so for Father's Day this year, punish him by buying his own and stopping him from stealing the kid's game boy.
This is so brilliant.
They start buying ads in
Airplane magazines and the ads say like if you're reading this, you are obviously bored and you need a game boy and you need Tetris.
Oh, that's awesome.
They're literally marketing it at business travelers.
Which makes sense.
Seriously, you walk on an airplane today and who's playing Candy Crush. It's a lot of business travelers. Exactly. So
In the US
Forty six percent of Game Boy players are adults.
This is so different from the NES market. It becomes this businessman.
Status symbol. And like I remember this in my own life. Like everything in these Nintendo ads actually happened in my family. Like my dad used to steal my Game Boy all the time. We had to go get him his own. Did you have one of the original fat ones? Oh, totally. I was five years old when it came out. So I was exactly in the target kid demographic.
And I think my dad, I was talking with him about this this weekend. He's still
Players.
the original Tetris cartridge on
Like an old Game Boy Advance at this point.
To this day.
This is how universal
the appeal of this game and this system is. It's unbelievable.
So
Nintendo ends up selling
Thirty two million
Game boys in the first three years, which is way more than the NES. That's roughly three billion dollars in hardware sales alone.
The Game Boy and then it's
sort of quasi successor, but really the same platform, the Game Boy Color.
They would go on to sell a hundred and eighteen million units.
worldwide, which is over double the NES.
And the fourth highest selling console of all time, period.
Wow.
Just amazing. And this was Nintendo's first taste and really the whole industry's first taste.
of massively expanding
What already was a huge gaming market.
Yeah.
It also was at a completely different price point.
I wasn't allowed to get a console, but
my first video game system was a Game Boy Color because I think it was I don't know a little over a hundred bucks or something for the color one versus around the two hundred or more price point for the at home consoles.
It takes both the kids gaming market
and the casual adult gaming market that it creates.
And marries those into one device and leaves the core gaming market to the home console.
Yeah.
You would have been like exactly in the target demo.
For Pokemon when it came out. Absolutely. You bet. I bought the translucent purple Game Boy color so that I could get Pokemon blue.
Oh my god. Probably like seventy percent of people listening right now. Regardless of their age are in that bucket. I mean, I bought Pokemon when it came out, even though I was a teenager at the time.
Yeah.
All right listeners.
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Okay, so we're in this era, Game Boy is flying off the shelves, but the NES is getting a little long in the tooth, and so how does the whole Super Nintendo thing work?
Yeah.
Here's where we're gonna change gear. So Game Boy
Another incredible smash.
Success.
For Nintendo.
But
Back on the home console side of things.
We're entering some choppy waters here.
So
Where we ended last episode.
One third of US households have an NES. Nintendo has roughly ninety percent global market share. They've got this
Amazing combination scale economy, network economy, distribution power.
By the midpoint of the eight bit generation in the NES.
You know, it looks like Nintendo's moat is
Impenetrable. And the reality was for the eight bit generation, it

There were other competitors on the market.
The
hardware side of the former Atari. Remember, Atari got split into two companies when Warner Brothers sold it off.
The hardware side of Atari
releases a new console, the seventy eight hundred.
It sells about a million units, like
Okay, you know, also RAM.
And the NES lifetime sold sixty two million, just to put that in context.
Sega?
In response to the NES in Japan.
They release a home video game console called the SG One Thousand.
It does okay, but also only sells about a million units.
They take the third revision of that console called the Mark III.
And they export it to the rest of the world as a system call the master system.
It flops.
In the US
Where they sell off the distribution rights to it to Tonka, like the Tonka truck toy company. Oh, Tonka has no idea what to do with this thing. And also this underscores how much people thought of this as kids' toys.
the pure set is Mattel and Tyco and Tonka Hasbro. Exactly. This is the toy. Nobody understands this stuff in the US.
But
Importantly,
This
quote unquote master system console from Sega.
Does fairly well in Europe and in Brazil.
And so it ends up selling between ten and fifteen million units worldwide. Again, no NES, but
This is enough of a success.
From Sega.
To give them some hope. They're like, Well
Maybe we should continue investing in
The home console business.
And as we mentioned in part one, Sega at this point was primarily an arcade company.
Did you know this?
Sega was actually founded by Americans. Yes. Even though it's a Japanese company.
It was originally an American company?
involved in like World War Two military service in Hawaii, is that right? Exactly. So Sega
is a portmanteau of service games.
And the company was started
To make
Kinda like Nintendo. Like
Gamblings are thinly disguised gambling games and that morphs into arcade games.
Four
US military service bases.
Around the world.
Crazy.
I love how these companies evolve to sort of morph and survive over time.
They know that they're not going to dethrone the NES in the eight bit generation.
But they think maybe
We can try and do what Nintendo did.
to get this huge advantage with the NES, which remember was just like Steve Jobs and the iPhone.
We want to produce something that is years ahead of the competition.
We might actually be able to leapfrog Nintendo here and do the same thing.
To them.
And Sega actually has two advantages at this point in time that Nintendo does not have.
One.
Moore's Law has continued to progress since nineteen eighty three when the Famicom came out in Japan.
And
More advanced and cheaper processors are now available to everybody.
Specifically.
Sixteen bit processors are now cheap enough that you can put these in a living room quasi kids toy home console.
Nintendo, obviously.
also had access to this technology.
But sort of in a innovator's dilemma type situation.
they don't really have the motivation to pursue it.
'Cause the NES is the gift that keeps on giving for them. Like they want to keep that console generation going as long as possible. Right. It's like they do have to come out with something eventually, but if they can delay that eventually another year and no one forces their hand, that is very good news. Exactly. And
Sega, again, because they were so successful in the arcade business, and the arcade business moves so much faster than the console business. New technologies, new games, new game concepts are coming out all the time.
They already have
A pretty robust
Sixteen bit arcade board.
that they've been using on some of their arcade hits at the time, like Shinobi or Golden Axe.
Those were sixteen bit games running on advanced arcade boards that Sega was producing.
And so what does it mean when you say the eight bit generation, the sixteen bit generation, eventually we'll get to thirty two, sixty-four?
Sixty four becomes part of the marketing, in fact, for Nintendo.
Yes.
It basically means that the CPU for the machine can process eight bits at a time. And so that affects everything downstream. Sound, graphics processing power.
It's basically the uh effectively bandwidth that the CPU has in order to
process information concurrently.
Right. And uh specifically I remember at this time in the jump from eight bit to sixteen bit.
Processors like the color palettes that the games could use. Like with 8-bit processors, you couldn't even fit so many colors in there, but 16-bit processors you could fit.
hundreds more different colors that could be used in the game, you know, stuff like that.
Yep. And of course this stuff is exponential. So eight bits, what does that mean? Well, two to the eighth different combinations that are possible. So two hundred and fifty six.
different values in each chunk of data that it's processing. You could see how going from eight bit to sixteen bit, which takes you from two hundred and fifty six different possible values to sixty five thousand five hundred and thirty six different values, it is a sort of enormously forward.
Right at this moment in time, that's this whole soup of factors that come together to really give Sega an opportunity to break into the market.
Even though the NES is so dominant.
Older consumers, especially teenagers and adults
they value graphical performance and they're willing to pay for it.
As long as they're good games to actually back it up.
And so Sega's like
Well,
We've got a bunch of really good sixteen bit games that we've made for the arcades.
We can probably do this.
Yeah, it is interesting how much graphical capability mattered in those days. And it still matters today, but it kinda matters less.
When you go from like
almost photorealistic to even more almost photorealistic. It makes them more impressive and it makes it more interesting to look at on a 4K TV, but does it literally make it more fun
than playing something on my switch.
Probably not.
But back in those days, that's a huge leap forward.
Totally. I mean even like
On the switch and on the virtual consoles.
I love going back and playing Super Nintendo games and
Sega Genesis games, which you can do on the virtual console on the Switch, which is so fun.
But going back to the NES era, it's tough.
I grew up with those games. I remember playing them and loving them, but like
I can go back to sixteen bit games.
Eight bit is pretty tough.
Yeah. And I'll say, like, I still play my N sixty four Super Smash Brothers.
That game is more fun than Super Smash on my Switch.
So
you do hit some point, I think around sixty four bit graphics where like
More bits no longer equals more fun.
So
Back to Sega here in sixteen pip.
In nineteen eighty eight, they launch
A new console called the Mega Drive.
in Japan.
That was in late eighty eight, and then they turn around in early nineteen eighty nine and launch it in the US.
And they decide, of course, that the mega drive is probably not a good brand name for the US.
And so they name it.
The Sega.
Genesis.
New beginning.
For Sega.
And
America.
Yes. Surprisingly.
It doesn't sell well in Japan, either at launch or really.
Ever.
It's really weird. I couldn't figure out why.
Yeah.
Maybe just like Nintendo had such a lock on
distribution and develop game developers and market share
in Japan that even like the quality arcade games that Sego is making
Wasn't enough for the Japanese market.
And when it launched in Japan, it didn't have Sonic yet.
Exactly.
Well, we will get to that. So
It doesn't have Sonic in the US either. So even if you think you know the history of the console wars and the Genesis in America or you lived it
As I did.
I didn't remember this exactly as it happened.
So
Initially the genesis is always
Also a flop.
in America. It sells about five hundred thousand units in the first year, which, you know, like again is okay, but this isn't that much better than the old master system here.
And Nintendo isn't necessarily viewing it as the
competitive threat that says, okay, we need to release our next generation system ASAP. They're like, okay, cool, this one also isn't beating us, so I guess let's keep rideing the sales of the NES.
Right. Why would we change things?
So
The next year in
Nineteen ninety.
Sega
decides like, hey, we need to make a change here, and specifically we need to make a change in Sega of America.
So they install a new CEO.
A guy named Tom.
Kalinsky.
Now if you're looking for an executive to come in and turn around
Your ailing
Video game console business.
To do things differently.
You probably wouldn't go hire Tom Tom at this point.
Is a
Toy executive.
He's in his late forties.
He knows nothing about video games.
And his most recent job is he was the CEO of Mattel.
before being ousted by the board for
underperformance.
And his big success was Barbie.
Right. Yeah. This doesn't exactly scream like
Video games.
Now video games are part of the toy market, but Sega's trying to change this. They're trying to appeal to teenagers and older adults.
Well
It turns out that actually.
Tom had a second act at him and ends up being
the very best hire that Sega ever could have made.
'Cause he shows up.
He's like
Guys, if our strategy is to
Literally
do what the marketing slogan was at the time when he showed up, which is Genesis does what Nintendo.
Which is kinda great, yeah.
The problem though is
They were doing like a
Piss poor job of executing on it.
So
Even with this great tagline.
The actual commerci that Sega was showing on TV where this
really cheesy eighties jingle. I'm not even gonna try it. Like go look it up. Like they're just like weenie.
So when Tom shows up.
And surprising, coming from the toy industry, he's like
If we're gonna do this.
We gotta go.
All out. We can't
still like keep one foot in the toy industry here.
We need to go full on.
Punk rock, MTV
directly appealing to teenagers. None of this like 80s jingles in our commercials anymore. No, it needs to be the what everyone knows, Sega, Nat Sheen, and we need to pivot the whole company. Sega needs to be the aggressive video game company full stop.
Yes.
So he
Presents.
to the Sega board back in Japan. He flies over to Tokyo.
And presents a four point plan.
of how exactly Sega of America is gonna dethrone Nintendo.
And it's great. The way he gets recruited for this, David and I both read this book, Console Wars, which is really fun if you want the whole blow by blow on this. Tom actually gets recruited.
by the chairman of Sega while he's on a family vacation in Hawaii on the beach.
The chairman of Sega walks up to him and says, Tom Kalinski?
And for as compelling as the Nintendo story is, it's
compelling because they won long term for this brief moment of time, the Genesis era.
I think Sega probably has an even more
impressive narrative and sort of hero's journey with Tom Kalinski. Oh totally. We're gonna get into what they do, this four point plan, but
It is freaking brilliant.
I think this is the best example.
we've ever seen on the show of how to compete against an entrenched incumbent. Yeah. They literally walk up to Nintendo and just punch them in the mouth. Like it's so great. So here's the plan.
Point one.
We need to preemptively start a price war.
So
We know.
That Nintendo is working on a new 16-bit system. They're just dragging their feet because they feel no sense of urgency here.
We also know
Given Nintendo's history, everything we talked about in part one.
that they like to make money on their hardware. They want high hardware margins.
So here's what we're gonna do.
We think they're probably
Gonna price.
the Super Nintendo when it comes out.
At the equivalent of two hundred and fifty dollars.
We're selling the Genesis for two hundred right now.
We're gonna preemptively cut that to a hundred and fifty dollars.
And this is perfect counter positioning. Nintendo's incumbent strategy is to make money on hardware. What are we gonna do? We're not gonna make money on hardware.
Exactly. So we're gonna preemptively
Put pressure on them to cut costs.
On the Super Nintendo.
I don't think
Tom and Sega even realized how important this would become.
Put a pin in this. We're gonna come back to this in one sec. This is a
Critical move.
Especially the preemptive.
It's not just we're gonna make it so they can't make money. It's that before they launch we have to make them cost conscious.
Number two.
We need to change the pack in game, like the bundled game that the Genesis
comes with in America. I had forgotten about this.
The original pack in game.
was a uh
Arcade port called Altered Beast, which I think it was an okay arcade game. Like it wasn't that good. Like it wasn't as good as Golden Axe and whatnot, but it maybe had the worst
American localized title.
Ever. Like who's gonna buy a game called Altered Beast? Yeah, Altered doesn't really make you feel one way or another. It's sort of a
Uninspiring word.
Yeah.
Altered beast. I don't even know what that means.
So Tom's like look, I know we know when you were recruiting me in my early time here.
You o Sega in Japan over there.
You're working on a top secret quote unquote Mario Killer game.
And I know that your plan is to sell that.
separately from the system,'cause you want to maximize revenue from this game that you know is going to be a pretty good seller.
We need to take that and we need to bundle into the system here in America. I know we're gonna lose money on this, but we gotta up our install base and we need a Mario Killer.
That is gonna be with every single Genesis.
So that's point two.
Point three.
Speaking of games, and this is also just a brilliant insight.
He's like
We need to make
American games.
For American
Audiences.
And that means two things.
One.
We need to have our own Sega development studios here in America.
Which Nintendo doesn't have.
And never went on to have, right?
I don't think there's a Nintendo game development studio in America still.
Nope. The closest that they had was their second party studio rare.
Which they stupidly let get acquired by Microsoft when Microsoft is launching the Xbox, but rare made Donkey Kong Country and Golden Eye sixty four and lots of great
games for the Super Nintendo and the N sixty four. That was in the UK.
They never had development studios in America.
So Tom says Nintendo's missing a huge opportunity and so are we.
We need to have our own studios here.
And
We need to really embrace American
third party game developers, which Nintendo, they aren't embracing any third party game developers.
Nin don't.
Nintendo, exactly. And specifically.
What this means
Sega at this point is locked in a
Heated negotiation, shall we say.
with our buddy Trip Hawkins and Electronic Arts.
As we
Talked about.
On our episode with Trip.
Back a few years ago, Chip is just awesome. He literally recounted this story for us.
Totally. So
More on that in a second.
But Tom's like, we need to settle all of that.
contentiousness. It it hadn't progressed to litigation yet, but we need to settle all that and we need to bring electronic arts into the Genesis fold and bring them into the home console market.
And then the fourth point.
As we alluded to
No more of this eighties jingles in our marketing. We're gonna go
directly straight on after Nintendo with our commercials and our advertising.
So
Naturally.
Given this brilliant plan of how to compete as an underdog.
What do you think the Sega Parent Company board says to all of this?
They reject it. As corporate boards.
Want to do.
But fortunately, then like you said,
The chairman, at the time, Hayonakiyama.
He sides with Tom.
And he pushes through this plan and says, Okay.
I hired you to make your own decisions in America. I trust you in understanding the American market.
You can go ahead and do this. We're not gonna do this in Japan.
But you can do this in America.
And this is kind of a career bet for Tom,'cause this is
Probably his last act one way or another. If he fails, he goes out in spectacular glory.
But if he succeeds, then this is probably his job for a while.
And clearly this market is
Enormous.
Being CEO of Sega of America,
Is a pretty great job if they succeed.
Yeah.
So
What happens.
Let's go through each of these points.
Point one.
The preemptive price war.
Oh boy was this important. So
Nintendo was, as everybody knew, working on the Super Famicom slash super NES.
It would come out in Japan in late nineteen ninety and in the US in late nineteen ninety one.
Two years after the Genesis.
When they launch it.
They launch at
twenty five thousand yen in Japan and one ninety nine in the US.
Which
Even that was fifty dollars more.
Then
Sega had cut the price of the Genesis too.
More importantly, though, than Sega.
being cheaper than Nintendo from day one.
Is that Nintendo was planning originally
To include backward compatibility.
in the Super Nintendo.
So that it could also play NES games. When I read about this in the research, I was just like, Oh my God, they blew it.
Which that is of course the right strategic move to leverage the fact that you already have tens of millions of people that are Nintendo customers. You want to come out with something that
make sure they remain Nintendo customers.
But
Your competitor
drop the price, so you decided to cut something, and the thing you cut is the thing that makes it so you no longer take advantage of the fact that you have this huge install base. That would have given you a stair step into the new generation. Totally. So
Nintendo estimated that including backwards compatibility in the super NES would add about seventy five dollars to the bill of materials. Whoa. And that's huge. Yeah.
And so rather than
then come out with the Super Nintendo priced at two hundred and fifty dollars or two hundred and seventy five or three hundred dollars.
Because
The genesis had already been preemptively cut to one fifty. They're like, Oh, we really can't do that.
Let's cut out this seventy five dollar cost.
And come out at two hundred.
Hard to say if this was a mistake on Nintendo's part or not.
They kinda had to do this. Certainly the mistake
was not pushing their advantage in coming out with the Super Nintendo earlier. They absolutely could have.
They let the Genesis beat them to market.
And then this preemptive price war
Forces them to take what
really would have been their best built-in advantage for the new generation of porting the existing install base over
to the super N E S.
And just kinda hit reset on the whole industry, which is crazy.
It's funny.
Strength leads to strength.
If Nintendo had just been aggressive and obsoleted themselves.
they would have probably been in a great position, but instead they sat back
they sort of tried to play defense. They tried to give enough running room to their NES to keep making good money as long as possible.
Then it left this opening for Sega to come in and pull this move. And then suddenly Nintendo no longer has an advantage to leverage.
It's like the classic football prevent defense thing. Well, prevent defense prevents you from winning. You gotta keep being aggressive and playing offense.
It reminds me of I think my favorite
company values sheet of all time, which is the legendary Nike
corporate values.
Oh, so good. I think it's number two.
Is we're on offense all the time. Yes.
Yeah. You don't win by playing the prevent defense.
Nope.
Absolutely.
And
I think we could maybe give
some leeway to Nintendo here.
And that this was all happening for the first time.
People didn't totally understand.
console business dynamics yet. I mean if you fast forward to today
Sony and Microsoft
not only always have backwards compatibility in each new console they release, they also do forwards compatibility. So like
New games for a couple of years that are coming out for
the P S five or
The Xbox Series S and Series X.
those games will also be playable on the previous generation.
Hardware. Now you couldn't do that back in the day, but
This is so important to feathering in each new console generation that literally billions of dollars of engineering across not only hardware but software titles are invested in this today.
Nintendo didn't know that, but this becomes a huge, huge mistake.
Yeah.
Okay, so that's one.
Point two.
The pack in game.
Obviously.
This is
Sonic the Hedgehog. Sonic is just the most perfect example ever of
Counter positioning in brand.
Yes, totally.
So
If you think about
What Nintendo's real strength is in games.
That we talked about so much on the last episode.
It's
These amazing
stories and not narrative, but story driven fantasy worlds that you can get lost and explore in. You know, that's what Mario is, that's what Zelda is even more. That's what Metroid is
But you know what?
That style of game is, besides being amazing.
It's also really slow.
And that is
The opposite of Sega's DNA, which is all in the arcades.
That is.
Fast.
And nothing.
Is faster.
Like I wanna know what kind of drugs the people were on that came up with Sonic the Hedgehog. I think it was an internal competition within Sega of Japan. It was. It was a employee pitch. Yeah. Yeah.
What would lead you to come up with a trash talking?
Supersonic blue
Hedgehog. That originally had fangs
And an electric guitar. That's right.
Also like a human girlfriend that was not wearing much clothing, I think originally. Yes. Scantily clad human girlfriend. Yes. And the best and the worst of the nineteen nineties. But mostly, especially with the final version of Sonic. Just freaking awesome. It doesn't get any better than that.
So
Mario is family friendly.
And kinda slow.
and open to exploration. And Sonic is not only fast
But aggressive
The whole brand of Sega kind of adopted the brand of Sonic.
on its means of competing against Nintendo.
Totally. So
Remember how
We talked about in the uh
I think it was maybe the nineteen ninety Q survey that Mario was more recognizable than Mickey Mouse.
Well
By the nineteen ninety three Q survey.
Mario is still more recognizable than Mickey Mouse.
But Sonic is even more recognizable than Mario by American consumers, which is like just ridiculous. A couple of years later, like that is
how successful Sonic was.
And this was part of Kalinsky's genius.
It was bundled in with every
Genesis console.
So Sega's giving up on the incremental fifty, sixty dollar a pop revenue that they could get.
From Sonic the Hedgehog.
But this really drives Genesis console sales.
Hm.
Okay, point three.
We need American games for American.
Audiences.
So Nintendo at this point in time is basically making
Two types of games.
They're making the timeless works of art like we were just talking about, the Mario and the Zeldas and the Metroids.
And they're also making
Super
Quirky Japanese stuff.
What they are not making
Is super quirky.
American stuff.
And specifically
They're not making
American sports games. Now
They are making sports games.
They make punch out, they make excite bike, they make a bunch of baseball games.
Third parties make games. The uh developer Tecmo famously makes Tecmo Bowl, you know, American football games. So like they're out there.
But these games don't capture
the actual American experience of these sports. They're sort of cartoon approximations of something based on a sport, but it's not like you're playing
Madden.
Exactly.
And we talked about this a lot with Trip Hawkins on our episode with him.
But that's what was so game changing about
EA's John Madden football.
It was eleven on eleven real football with real playbooks. Like if you ever played football, or if you were a student of the game, or if you watch the NFL every Sunday, you know, it was still a
rudimentary video game by today's standards, but this was actually like simulating the game of football in a way that nothing coming out of Japan really ever could.
Hm.
Now that first version.
Of Madden.
Came out in nineteen eighty eight.
For the Apple two.
'Cause Electronic Arts at this point in time was a PC game publisher. They weren't in the console business at all. They didn't want to play ball with Nintendo and the ridiculous licensing terms that Nintendo had.
And they're right in the middle.
Of these negotiations.
With
Sega.
Because Trip and EA had famously gone out and reverse engineered the genesis in a clean room.
And he had these grand plans of he was gonna make his own
Genesis cartridges.
Not pay any royalties to Sega.
And then he was gonna take his program to other third parties and like completely end around.
Sega altogether.
Which he had to sort of negotiate from that.
point, but they were ready to do. Like they actually did the unbelievable engineering feat of
in a clean room environment reverse engineering the way to make games work on this system.
Totally. So you can imagine why
Sake of the parent company.
would be and were really, really pissed at electronic arts and not want to play ball with them. But Kalinsky's like, No.
We gotta settle this.
We gotta embrace them. If we can get Madden.
On the genesis.
And not on Super Nintendo.
This is gonna be huge for us.
So
They do, and Sega basically completely bends over backwards to EA to accommodate them.
Which is the right move, by the way.
Absolutely.
The pie massively grows.
by this game seeing the light of day.
on Sega exclusively.
versus if they enter litigation, it's like, okay, let's divide up a small pie.
No, absolutely not. The answer in this
moment where this is rapidly expanding market and uh fight to the death between Nintendo is
No side quibbles. Figure it out, move forward, launch the product, everybody makes money.
Totally. So
Sega's original program and their program for other third parties was
Ten dollar licensing fee.
Hm.
Game unit.
For EA, they give them a two dollar licensing fee per game unit.
Capped at a million units.
So EA will never pay Sega more than two million dollars on any game. Very, very different. But like you said, Ben, this is just an enormous win. So that first
year that first version of Madden that comes out on the Genesis.
EA and Sega's prediction is that it'll sell seventy five thousand copies. It ends up selling four hundred thousand copies. Oh my God. And is just a huge hit for them.
And this is the exact kind of thing that is not on.
Nintendo and soon to be the Super Nintendo.
EA eventually does bring Madden to the Super Nintendo.
But they have a separate
Studio working on it.
They've got the A team working on the Genesis version and they've got the B team working on the Super Nintendo version. So the Genesis versions were always better. And I remember this as a kid. This is a big reason
I was lucky I had the Super Nintendo and the
Genesis.
Like I wanted Sonic, but even more, I wanted really good Madden games.
Oh wow. I didn't realize'cause these days, you know, the Xbox and the Playstation versions are like
I think equivalent. If there's any hardcore Madden fans out there, they're probably gonna come at me with
No, it's way better in this, that, or the other way. FIFA kinda the same thing. But I didn't realize there was such a difference then.
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 like basically it was always better on the Genesis.
And it's worth saying point one in eliminating the backwards compatibility.
Yeah.
made Nintendo have to fight Sega on an even playing field. It didn't mean Sega was gonna win. It meant even playing field that negated their advantage of large previous install base.
Point two and three are the games.
You know, you've got with point two, Sonic being faster, brighter, more exciting than Mario, when you see them head to head, which Sega was making sure that you saw them head to head.
Sonic seems like a much more interesting game that you kinda want to buy, regardless of the fact that you have loved Mario the last few years.
On the surface, it is much more compelling.
Yes.
And of course with Madden now they have even more advantage. So the scales are really starting to tip towards Sega here.
So point four.
Punching Nintendo in the mouth.
Klinsky goes out.
And brings on a guy named Steve Race.
Who had
Mastermind did rebox resurgents against Nike in the eighties with the pump sneakers. Remember that?
Oh yeah.
That was
Steve Race's grandchild.
And Kalinsky tells him to just
Go wild on the marketing.
Steve would go on

And become a
The first president of Sony Computer Entertainment America.
For the launch of the PlayStation.
But before that he would pretty much
single handedly.
Yank, Sega, and really the whole video game industry. I mean, this really sets the stage for the PlayStation.
out of the toy world and into
Full on.
media technology the MTV generation
This
is Sega and his work. So they go out.
They are the Goodbye Silverstein ad agency.
And they come up with the welcome to the next level campaign, which was just so great.
And had the trademark.
Way that all of the ad spots ended.
With the Sega Scream.
Yeah.
There's also
Some pretty amazing jujitsu here.
Around
the idea that you've graduated from
Nintendo, that's cool that you used to do that and like that was for babies, and now you're a real grown up and it's time to graduate to real grown up system.
Uh it worked on every level.
It was so great. So they premier
The campaign.
During the nineteen ninety two MTV Video Music Awards. What a perfect marriage of everything here. Literally like, you know, the same VMAs where many years later Kanye would take the mic from T Swift.
This is like not the toy aisle here. This is pop culture at its pinnacle.
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.
There was something in the development manual, like somewhere for the Genesis about
something that maybe could be translated as blast processing, but like it didn't actually do anything.
Apple's been hot on this recently. What of the A twelve Bionic
the neural engine and marketing terms for something highly technical such that it doesn't actually describe the technical thing that it's doing.
Or another Apple example is the retina display.
Once they start marketing the retina display, it doesn't matter if their competitors have something that's just as many pixels per inch.
Like it's not a retina display.
But that's completely meaningless!
It all goes back to the Genesis. It's got
Huge font on the actual console in uh I think it's gold letters in Japan and silver letters in America that say 16 bits.
On the console itself. It's amazing. I love it.
I mean, that is their competitive edge.
Totally. One of my
big takeaways from this whole series is just how much Apple
took from the video game industry in their marketing.
Steve and Tom and the team at Sega also do
Super innovative stuff.
That really just brings the industry forward into the modern era.
Before this era of Sega, the
There were
Actually.
release dates for video games.
When new Nintendo games would come out
They 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.
Tom and Steve in the marketing department at Sake of America, they're like nope.
This is the movies. We are doing worldwide release days for our games. And they're gonna be just like movie premieres. We're gonna have celebrities. We're gonna have big marketing events. The date is gonna be plastered all over everything. Totally. I mean, there's millions of people that know May twelfth, twenty twenty three is going to be Zelda Tears of the Kingdom.
This has become the way that you market video games. And that all started with Sake of America. Specifically, it started with Sonic.
Two.
Where they had Sonic Tuesday was the launch day. Oh, it was so hokey, but
This is hugely innovative.
The other thing that Sega of America does in their marketing, and uh Ben, you all love this.
Is
They literally
Do the Pepsi challenge. So they take
Trucks. Like eighteen wheels.
And they outfit them with Super Nintendo's and Sega Genesis's 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.
And then they ask them which game they prefer after like five minutes of playing. So the first five minutes of Sonic are really good.
The next couple of hours not as good.
Right.
And this is an amazing trick. It's the same thing that all the T V manufacturers do. They
gamma up and contrast up and brightness up all the T Vs when they're in the store and you get mesmerized by the one that's got the
most insane Christmas light colors on it. And then you take it home and you're like
Uh, this is kind of terrible for watching, you know, the Dark Knight Rises or whatever. And
It turns out that when you're comparing things side by side, there are things that appeal to you that are actually not the best long term option.
Totally. So they keep track of all this.
And
Lo and behold,
Seven out of ten kids in America prefer Sonic to Mario. And of course Sega trumpets that in like the Wall Street Journal and all of the investor press and like everything. It's amazing.
And so at the same time.
It's Sega's
genius and the fact that they like showed up to play, but also Nintendo keeps dropping the ball.
I mean the games that they're shipping for the Super Nintendo
Are like
Again, very conservative, very like, we're gonna try to maintain our lead. You play the Mario game for it, you're like
Okay.
Yep, it's Mario again.
And like it's nice. You know, I like Mario.
But this isn't
new. I don't really understand necessarily why this even needed to be sixteen bit.
Right.
Super Mario World is an amazing game.
But is it that much different from Super Mario Brothers three on the NES?
No. Like it's got
Yoshi.
Yoshi is no sonic.
Yeah.
So
All of these four points.
By themselves.
Would any one of them have dethrone Nintendo? Certainly not.
But
All four of them working in concert.
And Sega's just amazing execution.
By God, they do it.
So
It's tough to tell exactly.
Because
both companies, Nintendo and Sega, were uh
highly incentivized at this time to be creative in what they were reporting as their console sales data, shall we say.
Right. This is when you have to really tease out the sell into the channel numbers versus the sell through the channel numbers. Yes.
But
As best as I can tell, the
I think it is basically fair to say
that every year that they're competing head to head on the market, the Genesis and the Super Nintendo.
The Genesis outsells the Super Nintendo in America.
You can certainly quibble with that. The data is not perfect, but
Take a step back, even if it's fifty fifty.
We went from Nintendo having like
For all intents and purposes, a hundred percent of the market.
Yeah. Neck and neck with the Genesis.
Nintendo.
Basically fights to a draw. It's not like the Super Nintendo was a failure. It was a success.
But corporate wise for Nintendo.
This is a huge failure. They basically have
given up half market share to this
New entrant in one generation.
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So what exactly made it so that the Sega Genesis advantage wasn't a durable thing that they sort of kept winning with?
Yeah, it's a long and sad story, but basically
Kalinsky and Sega of America.
and the parent company and the board back in Japan.
massively disagree on how and when to launch the Sega Saturn.
The next thirty two.
Bit console generation.
That conflict and
That mismanagement.
becomes a total disaster and it starts a downward spiral.
For Sega.
With the failure of the Saturn.
And then they follow it up really quickly with the Dreamcast. That also never really gets traction.
Dreamcast was actually an awesome console and very innovative on a lot of fronts, but they just start bleeding cash.
They end up exiting the hardware business.
And the company
basically goes bankrupt and has to get acquired by a pachinko manufacturer called Sammy. It's really sad.
Brutal.
They now make games for Nintendo platforms.
Well and the great
outcome of that is that you can play
Genesis games on the virtual console on the Switch. So good for consumers. The story feels abrupt, but I remember it feeling abrupt when it happens too.
Yeah.
A story for another day, but for our purposes here in the Nintendo story
The point is that
Nintendo has now fallen and they've fallen.
Pretty hard.
There were a couple of other
Self inflicted Nintendo wounds around this time too.
Starting in nineteen eighty eight.
They actually get embroiled in two separate antitrust lawsuits with each of the successor Atari entities, both the hardware side and the game side.
They win both of these, but this really hurts Nintendo's brand image. It kinda comes out to the American public through this that
What we know from doing part one Nintendo.
Corporate wise is not really this family friendly, gentle kind company.
There's a great quote from Howard Licken in Game Over about this lawsuit.
He says, I thought to myself, You have no idea what you've taken on, Atari.
We are a tiger who will skin you piece by piece.
Obviously he doesn't say that publicly, but
This isn't really good for Nintendo's image.
Fun side note on this, the Atari Games case is

of the video game's career for the then baby lawyer Mitch Laskey.
Of
Benchmark and GameCraft Podcast Fame.
Oh no way.
Yeah.
Super fun. Mitts talks about that on Gamecraft.
They're just so arrogant at this point in time.
They're arrogant and they're getting beat up. Yep. And then they do even more dumb stuff. So
Nintendo sues Blockbuster during this time for renting their games, which is just really dumb. Like
What's a really good marketing for, you know, games is renting them and letting people try them. And what are American consumers really gonna hate you suing them to stop that?
They also sue the maker of the game genie, which is one of my uh
favorite video game artifacts from this period. And the game genie was the thing that let you like enter weird cheat codes the games and stuff. This just shows another example of
Nintendo's belief that they know better than anyone else what makes a game fun and you are not to modify their game rules at all because
Miyamoto will come down from the mountain and tell you what is fun or not. So true, so true.
It's also we would be remiss, I think, if we didn't point out two
That all this was happening.
During the like
incredibly ugly and sad era of Japan bashing in the US that
We talked about a little bit on the Sony episode.
You and I were kids, so thankfully didn't really experience this. But I remember
People in my parents' generation just saying like really
Awful things about
Japan and Japanese companies at this time. And there was this real worry in the US.
Especially in the business community that as Japan's economy was ascending so rapidly
the Japanese companies would come take over all of American media and movie studios and stuff like that.
Yep, we talked about this a lot on the Sony episode.
And this culminates for Nintendo in another
Well intentioned, but really self inflicted wound debacle where they buy the Seattle Mariners.
Which really was well intentioned. The
Owner at the time.
was gonna move them to Florida.
And Nintendo kinda as a goodwill gesture for how good the people of Seattle and Washington State had been to Nintendo of America.
steps in as like a white knight savior to
buy the Mariners and keep them in Seattle.
Major League Baseball tries to blackball them from buy the team because they're like a, you know, weird foreign company. It's also a company buying a team. I mean, that's not really sports team ownership in the US is owned by individuals.
So kind of again, well intentioned, but probably ill advised move on Nintendo's part at this point in time.
And uh
Don't win a World Series despite having
Ken Griffey Jr.
Alex Rodriguez, Randy Johnson. But they do make a Super Nintendo game out of it. That's pretty damn good.
There you go.
So anyway.
By the end of the sixteen bit generation.
Nintendo's fall is pretty precipitous here.
And
The magnitude of it is actually kind of hidden initially because of Sega's subsequent
Total implosion and even bigger fall with the Saturn and then the dream cast.
But
Nintendo is really irreversibly weakened from this era. So we talked about the numbers, how in a single generation they go from ninety percent global market share to basically fifty.
But more importantly, strategically, like
The
Net result of this is that a lot of the things
that made the NES so
powerful in the market.
are completely negated by the end of this.
So first and most importantly
The whole years ahead of the competition hardware advantage.
That's gone. They're now behind the competition.
Two.
They lost control of the third party developers. They had this incredible lock on the third party ecosystem with the NES.
Now developers like Electronic Arts and others are saying
Well look at Sega and look at
These other new folks like Sony who are gonna enter the ecosystem.
I can make more money with less drama on their platforms. Screw you, Nintendo. And less drama and often better economics. They're willing to cut special deals with me that you're not.
Exactly.
And in many cases they have more advanced capability, so it's an easier platform to program for.
And then maybe worst of all
Nintendo's brand value just takes a huge hit in this generation. And we've talked about this, you know, as we've gone along here, but
To put a fine point on it.
Older kids in
Teenagers.
no longer play Mario. Or at least they don't want to admit that they do. Sonic doesn't become the long term replacement, but
Tomb Raider does, Halo does, Grand Theft Auto does, Call of Duty does.
Nintendo.
Ironically, gets kinda trapped in the toy aisle ghetto for the next twenty years.
All right, so we're through the Genesis era.
We've unfortunately seen basically the end of Sega.
But there's another sort of
Adult
oriented gaming firm that's gear up in the shadows right now to come
aggressively at Nintendo and expand the gaming market.
Even further.
And that is Sony.
So take us.
to the PlayStation.
So
The whole sixteen bit.
generation story for Nintendo that we just told was
Really one of
Arrogance.
Bordering on stupidity.
And self inflicted wounds for Nintendo.
But
Ultimately.
They were competing against
at best a roughly equal footed competitor in Sega. And really an underdog. Sega did not have the financial firepower, the technological firepower
that Nintendo did. It was like amazing that they came from out of where they did.
And battled Nintendo to a draw.
That's not gonna happen in this generation. Cause now
The big boys are coming.
And
We talk about these often unacquired of self inflicted wounds. This may be the worst self inflicted wound of all time, what Nintendo does here.
Because
As we talked about.
On
The Sony episode.
The PlayStation
Was supposed to be
The Nintendo PlayStation.
Yes. And somehow.
This partnership
That Nintendo had been working on
With their fellow
Japanese technology and consumer electronics.
Giant.
Sony.
To enter.
The C D medium.
And the thirty two bit era. Somehow.
That went.
From being a beautiful partnership.
Two.
Basically
Almost signing their own death warrant.
So at the June nineteen ninety one consumer electronics show.

Big expectations. Nintendo and Sony are all set to announce the CD ROM add-on for the Super Nintendo system.
To bring the CD format to Nintendo.
Powered by Sony.
The Sony and Nintendo PlayStation.
They're all set to announce it.
And in fact.
Sony.
Does.
Announce it at their press conference.
And then the very next day.
Nintendo turns around.
And in their press conference doesn't mention it at all.
And instead trumpets their major
CD ROM technology partnership with Sony's Arch.
Rival.
Phillips.
They betray Sony.
They stabbed them in the back. So much hubris.
So much hubris. Like dumb decision to do this period.
even dumber decision to do it this way.
To let them whip in the wind publicly like that?
And they just
light a fire under exactly the company that you do not want to light a fire under at this point to come and destroy you.
And to illustrate how much bigger Sony is, I mean, in ninety four is when the Sony PlayStation would launch.
They were doing
thirty eight billion in revenue.
And at that point in time Nintendo was a four billion dollar revenue company. So
Sony is the much bigger beast here.
Yeah.
No.
Look.
This partnership that they were working on with Sony.
It's unlikely that it ever actually would have worked out. Because there's just like too much money at stake. The video game market is too attractive.
Despite the fact that Sony didn't enter the portable market with
The game man and Nintendo stuck it to them with the game boy. Like the bad blood goes way back here.
And
The reason that Nintendo pulls out of the partnership is they couldn't come to terms on how they were going to split the royalties on software revenue.
Which as we talked about in part one, like that's where all the economics are in the business. It's a razor and blades.
Right. Which is actually quite rational.
There is not really a viable alternative history where
The Nintendo PlayStation came out.
There is a viable alternative history where like
Sony waited a little longer to enter the market and they didn't have as much burning hatred for Nintendo as Nintendo.
Generated here.
So that happened at the nineteen ninety one
C E S
Ken Kudaragi goes off and within Sony Music builds the PlayStation franchise and Steve Race comes over from Sega and gets involved on the American side.
The PlayStation finally comes to market.
At the end of nineteen ninety four in Japan and nineteen ninety five.
In America.
And
It's an amazing console.
It's
CD based.
It's
Got incredible power. It's much easier to develop for
They've got all of
Sony's
Both technological
And financial firepower.
behind it.
And it's a thirty two bit system on par with the Sega Saturn?
Yes, it's a thirty two bit system.
So
Just blow away the Super Nintendo on
every dimension here. Much more storage availability for games and game developers by using the C D format.
Much more powerful processor.
It's clear that
This is
Gonna be a big investment from Sony here and they're gonna be a big player.
In
The industry.
Nintendo
Again, probably in
Hubris.
tries to compete directly with Sony here in response.
So they go off.
And they partner up
With legendary
Silicon Valley company.
Silicon Graphics SGI. As we talked about on the Andreessen series.
Back in the acquired canon.

The N sixty four. They're gonna leapfrog the thirty-two bit generation and go right to sixty four bits.
With the N sixty four.
But
One.
It comes out too late.
So the sixty four doesn't come out until nineteen ninety six, after the PlayStation has already had a year plus to be on the market.
And establish.
Both the install base lead
And the third party.
Developer network.
Two
The N sixty four famously.
Uses cartridges again instead of C Ds.
They have a very particular way they love doing things. They do. They do. Which I think was partially an anti piracy thing. They cared so much about stopping piracy that they were willing to hamstring developers into needing to use a much more constrained format in the cartridge than CDs because they thought
Ah, well CDs are just gonna get pirated and we don't have as many mechanisms to prevent that.
Yep. And then the
Third part of this.
Yes, the N64 was a very powerful 64 bit system.
But it required very expensive silicon graphics.
hardware to develop for that the PlayStation did not. So like really the whole thing is just a giant F you to third party developers.
Who already hate Nintendo. So at this point
Everybody pretty much abandons Nintendo for
The Sony platform.
The N sixty four would sell thirty three million units in its lifetime. That's about half of what the NES sold.
versus the PS one's hundred and two million units. So
Nintendo just gets the floor wiped with them by Sony here, which was obviously predictable.
And the N sixty four ended up being a fantastic
console to play Nintendo first party games on. Yes.
And they even more than ever before entrenched.
that that is what our company is all about.
I mean Super Mario sixty four.
Mario Kart sixty four, Super Smash Brothers.
Star Fox.
Goldeneye
mean these are all first party titles. The only one that wasn't is Goldeneye and that was rare, which was a very close relationship with Nintendo. Yep. That was a second party title Nintendo owned at that point in time.
Something like twenty five, thirty percent of rare and rare developed exclusively for Nintendo platforms.
So that's the N sixty four.
Play station.
And then in the next generation.
The wheels just totally come off the bus.
Sony.
And the PlayStation Two.
goes on to become
the best selling console of all time.
Still, to this day.
The PS two has sold more units than any other console, including the Game Boy, including the Nintendo Switch.
Everything.
They sell.
A hundred and fifty five million.
PlayStation Two's.
My God, did I love my PS2. I mean, remember Pimp My Ride? People were putting PS2s in cars. That was the ultimate wrapper status symbol.
This was the console that I got.
after my bar mitzvah when I was finally allowed to have like a real console, not just a game boy.
And it is the last console I owned until I bought a switch a month ago.
And I've had an N sixty four that I bought as sort of like a novelty thing to play Smash after I graduated college, but like that
not a real thing. The PS two is totally the workhorse system that I grew up on as a teenager.
I mean this is
Sony at its absolute
Pinnacle in the like
Pre
Internet era.
It was their consumer electronics expertise. It was bringing DVD players to the living room of homes around the world for the first time.
Right. It was a DVD player and
A game system in one for the price of just a game system.
I mean, for God's sakes, there was all this FUD I remember in the media at the time when it was launched in the American media about
Should we allow Japan to export these things? Because what if adversarial nations to the US get a hold of these and use them to build missile guidance systems? I mean, the PS2 was a literal supercomputer at the time.
And
This is the other huge advantage that Sony had over Nintendo and anybody else except Microsoft, that we'll talk about in a second.
Which was they could afford to subsidize the crap out of this thing.
So
The
PlayStation two launched for two ninety nine in the US.
I don't actually know what the bill of materials was, but it cost way more than two ninety nine for Sony to make every one of those, but they had so much capital.
That they could
take that loss and then make it up on the software library over time. For the high end consoles, this is how the business works to this day between Sony and Microsoft.
Yep.
For Nintendo.
Oh God, it's such a sad story.
Their answer is the frickin' game cube. The game cube. The poor game cube.
Uh I actually have like really fond memories of the GameCube.
First.
This was just the epitome of
Nintendo was like a kid that was really cool in middle school and then got awkward in puberty and in high school gets stuffed in a locker. They had no idea who it was for.
They made it and it was more competitive on a specs perspective than the PS one.
And they did try to market it like it was for everyone, like it was a game system for kids, for adults.
Yeah.
Except it looked like a lunchbox.
Totally.
And it also was competing against the supercomputer PS2.
Yeah. Literally people are worried about
This thing guiding nuclear missiles. Like what do you think the American teenager is gonna want to buy? The thing that their parents are freaking out about, nuclear war, or a thing that looks like their little brother's lunchbox. And the PS2, you know, it's black and it's sleek and it's the same playbook that the Sega Genesis ran.
in terms of we're like the grown up gaming machine.
On top of all of this
Microsoft enters the market. Yes. Another company. So suddenly you have a two horse race, both of which have infinite treasuries and are subsidizing this market they really want to get into, and neither of the two horses is Nintendo.
Yeah. So Microsoft with the Xbox
Microsoft takes at least a five billion dollar loss on the first generation of the Xbox.
And they are thrilled about that because this is their entry.
into the long term strategy of getting into the video game market.
And owning the living room. It was their how do we get Microsoft in the living room?
Even though
They took that
loss on the whole generation. Like I think that's hardware and software included. I don't think Xbox as a franchise was profitable
at all for Microsoft on that first generation, they're willing to take that enormous capital loss, which is basically all of Nintendo's treasury to compete against them, and they've got Sony.
Nintendo just gets rocked.
And on top of all of this
There was a bill coming due that Nintendo had to pay eventually.
And this is where they had to pay it.
they finally leave cartridges. So they have zero backwards compatibility with the GameCube because they were too stubborn.
to adopt discs sooner.
And on top of the fact that they're moving away from
The cartridges.
They go with mini CDs?
Mini DVDs. What on
Earth. It's like, did you learn nothing?
It's not backwards compatible with any of the stuff that they've had before. Which the N sixty four wasn't either another dumb move, but that had to happen because of the silicon graphics technology.
Which was dumb in the first place.
Yeah, it is truly hard to believe that
Nintendo would come roaring back from this moment.
So this is Nintendo at their ultimate low.
Yeah. So
Put some numbers on that.
The GameCube sells barely over twenty million units.
For the generation versus the hundred and fifty five million that the PlayStation Two sells.
Even the Xbox beats the GameCube. The Xbox sells twenty four million units with that.
five billion dollar plus loss that Microsoft's taking.
So
any other company. Like this is Sega's failure with the Saturn and the Dreamcast that basically bankrupt the company. This is that times ten. Like this is a smoking, smoking crater.
Fr.
Nintendo.
Except unlike Sega.
All the way back to the beginning of this episode.
Very small.
But very big thing.
That kept them alive.
Through all of this.
The gift that kept on giving.
The game boy.
Yep.
Before doing the research for this part two, like I didn't realize the Game Boy and its successors
saved Nintendo's skin for like twenty years.
So that's Game Boy, which includes the Game Boy Pocket, it's Game Boy Color.
It's Game Boy Advance, and then of course they would launch the DS, which we'll chat about in a minute here. But it is amazing that Nintendo basically had a monopoly on portable gaming this entire time. There's the home console wars that are playing out, and there's this whole side thing that's happening where Nintendo is telling
millions of units as the only credible player in handheld.
Literally.
Everybody's regging all their hands about the home console business, and that's all that anybody who's serious pays attention to.
But over in the handheld market, Nintendo is just continuing to crush it like it's like nineteen eighty nine here.
So remember how we said all the way back in the beginning of the episode that the Game Boy is the fourth best
Selling.
console of all time.
And then we just said that PlayStation Two is the first best.
selling console of all time.
Numbers two and three.
Or the D S
And the switch. And then the Game Boy Advance isn't far behind.
So
Everything and we're gonna talk about the switch at the end of the episode, obviously, but everything that Nintendo gets wrong.
In the home console market.
They get right.
In the handheld market.
We could have retitled this episode as
Nintendo, the handheld gaming company. And that wouldn't have been far from the truth.
That is a hundred percent the truth. So
Let's go down the checklist. Global monopoly.
Yes.
Sony does launch the PlayStation Portable.
I had one.
Oh, you have one. Oh, that's awesome. I never had one. Got stolen out of my locker in high school. Oh no.
Uh.
Brutal. Which is a great device.
But it was for a different market segment than the Game Boy. It never competed head to head with the Game Boy. It had a really fancy screen, so it was like pretty good for watching movies.
It was more like a small computer. It was kinda like an iPad as probably the precursor to an iPad type device.
Totally. Very Sony device.
Yes. All the way to the proprietary memory sticks. Very Sony.
Yes.
So global monopoly check.
Most innovative technology.
Ironically, also Czech.
Thanks to Gumpeiu Koi's maxim of lateral thinking with withered technology.
A huge and dominant third party developer platform.
Check.
locked in consumer software libraries with perfect backwards compatibility.
Check literally everything that they got wrong in the home business.
They get right.
In the handheld business.
So
Game Boy and Game Boy Color sell a hundred and eighteen million units.
over a twelve year run.
That is the more impressive headline number.
But the Game Boy Advance
Which comes out in two thousand one.
Only ends up having about a three to four year lifespan before the DS
comes out in two thousand four.
During that time, the Game Boy Advance sells eighty-one million units.
making it the tenth best selling console of all time, despite having this incredibly short
Primary
Lifespan.
So
Average selling price for the Game Boy Advance is about a hundred dollars a pop.
That is eight billion dollars.
Just in hardware revenue. And remember, Nintendo's making margin on this hardware revenue during those years.
It also does three hundred and seventy five million units.
In
Software sales.
Which is almost double what the GameCube did. So like literally, you're right. Like this episode should be titled Nintendo the Handheld Gaming Company.
It's crazy. I mean, it just gives them so much margin of safety.
To screw up.
generation after generation over in the home console market.
And then
The D S
I was
Perfectly within
the generational window where I missed the DS.
So I didn't realize what a monster this was.
And what I mean in the window, I was too old
To buy it as a kid.
And too young to buy it as a
Old Fuddy Duddy. We'll get into that in a minute.
The DS was a monster.
Remember we just said the PS two sold a hundred and fifty five million units.
And the DS is the second best selling console of all time.
It sold a hundred and fifty four million units. So basically neck and neck with the PS2.
Let's be conservative.
And say that the average selling price for the DS was a hundred dollars. It was actually more, but we'll be conservative. We'll say it's a hundred dollars. That is fifteen billion dollars in hardware revenue for Nintendo.
And that's just the hardware.
The DS sells almost a billion
Game units.
At an average selling price of like thirty dollars. So that's thirty billion dollars in high margin software revenue.
And at this point, Nintendo is still dramatically a first party publisher for their own platforms. And so
That
Billion units sold?
Also most of that, or at least half of that, is them.
It's Nintendo. Yeah. It's incredible. I mean, the D S franchise
generated almost fifty billion in revenue for Nintendo.
Wow, that's wild.
How is it possible that this same company
is failing so spectacularly.
On the home console side.
While simultaneously succeeding so spectacularly on the hardware side.
And I'll say the portable side is the side that's paving the future for what Nintendo would become for better or for worse. They're the ones who are having this very strong opinion of
Let's innovate.
on a gaming device and what a gaming device is.
And to this point.
That hasn't really been Nintendo's MO. I mean, you look at the NES, the controller is kind of what you would expect.
The S N E S, okay, cool. They came out with the shoulder buttons on top. The L and R okay, that's a small step forward.
You know, at the N sixty four I think does deserve credit, particularly Mario sixty four.
That
was the first game and game system that
showed how to do three D games. Like it was incredibly innovative.
Totally agree.
And then the GameCube is a very Me Too console. You know, everything about it is like we wish we had done some of this on the N sixty four, but it's too little, too late now.
But what you're seeing in the handheld
Especially in the DS is okay, this is super innovative to have two screens.
One of them is a touch screen.
The three DS that would come later, one of them is a three D screen. Nintendo is starting to, at least a hand help group figure out
The way forward for us is we design innovative hardware.
that can inspire new types of games to be played and new types of games to be designed, especially by our first party team in house.
And that does all kinds of amazing things for them. Think about the Wii, think about the switch switching, literally, and the Joy-Cons and how popular that is. It also does terrible things for them, which we'll talk about for the Wii U, but this is when they really discover they are unapologetically.
Innovating on
the hardware to play games.
And that
is what defines them.
This is so much the future direction for Nintendo that in 2002, when Hiroshi Yamauchi is leaving the company and transitioning to the next CEO, Sitaru Uwada, and leaving it in his hands,
His final request is quote
That Nintendo give birth to wholly new ideas.
and create hardware which reflects that ideal and makes software.
that adheres to that same standard.
Yes.
And
It's
Not just new types of games to be made on new types of hardware.
It's serving the end goal of enabling new types of people.
To play.
Games.
So
What's going on here and why the handheld business becomes such a juggernaut for Nintendo
is I think as we alluded to earlier.
It starts serving.
Two
completely different markets.
Then
The PlayStation and the Xbox.
And both of those other markets
Are A completely ignored by Sony and Microsoft and B very, very large.
So the first
Is the kids' market.
This is the bread and butter all the way back to the NES and the toy aisle.
As
Sony and Microsoft moved into the Grand Theft Auto era and the Call of Duty era and the Halo era. Right. Core gamers.
And
More mature content.
The Game Boy became the new home for kids.
It's
cheaper, A. So like if you're a parent of a four or a five year old
You're not gonna worry about
buying a hundred dollar piece of plastic for them.
It's less immersive, which is actually a feature for kids because it's easier to play.
And then
back to the Nintendo kind of guarantee seal of quality brand, you can be pretty sure that little Susie and Little Jimmy isn't going to be playing really violent or adult content games on your
Game Boy Advance or DS or what have you.
So it's really compelling for little kids and their parents
And
As we

embodies this more.
Than Pokemon.
We talked about Pokemon on the NFL episode where Pokemon is, I think, in my opinion, wrongly listed as the highest grossing media franchise of all time.
Because the NFL
really should be a single media franchise and is bigger.
But it doesn't matter.
Pokemon is number

Lifetime Pokemon franchise revenues are just under a hundred billion.
dollars and the primary medium for it is the freaking game boy
Yeah.
So
Let's take a little detour and tell the Pokemon story here because it is incredible. I think this is not a super deep story.
But
so cool. So many little aspects of this are
Like one in a million chances.
So y you mentioned a hundred billion dollar lifetime franchise since nineteen ninety six when it came out.
Sixty billion dollars of that is merch.
Merch like video games is only thirty five ish billion of the hundred billion. So people became such big fans of this.
That
they tripled, quadrupled the actual video game sales
In merch revenue.
And that sixty billion dollars.
If you compare it to say
I don't know, the Marvel Cinematic Universe, which people think of as a big media property.
The MCU is thirty billion dollars lifetime, which is half
Of Pokemon's merch revenue.
Yes. Now Pokemon is a master flea.
Managed.
Business franchise IP.
I don't
No, for sure the breakouts, but I believe
a large portion, if not maybe even the majority of that merch segment.
is the trade in card game. Yes. All the way back to Hanafuda cards in Nintendo.
Almost fifty billion cards have been sold. That's five zero billion Pokemon cards exist in the world.
Wild.
All right.
So Pokemon, nineteen ninety, Game Boy comes out.
And
Satoshi Tajiri had started this thing called Game Freak like a decade before with some of his friends. It's a fan magazine for video games. They eventually get into making their own video games.
None of them really necessarily take off. Certainly not to the extent of Pokemon.
So at Game Freak, Satoshi Tajiri

pitching internally, hey, we should make something for the game boy.
I saw the functionality with the link connector.
And I loved collecting bugs as a kid, and it sort of made me think about bugs going back and forth.
on the link cable between these two game boys
I wonder if there's something we can do around
Kids and bug collections.
And
trade them or battling them or something. And so he comes up with this concept and he pitches it internally. Now internally what is it? It's four programmers.
That started life as a video game magazine. Yes.
Riled up about this concept.
And he goes and pitches it to Nintendo. Nintendo's not excited about it, but there's one person who sees promise and says
I think we should green light this and I will mentor Satoshi Tajiri.
That person.
Is Miyamoto.
And so suddenly you have the very best game designer in the world seeing promise in your harebrained concept.
Literally bug collecting. Which if you know anything about Miyamoto personally, like
Obviously that would resonate with him.
Yes.
Game Freak raises money from Creatures Inc., who I think the right way to kind of think about it is Creatures Inc. is the publisher and Game Freak is the developer.
Yeah, I think Creatures also manages the trading card game.
Okay, makes sense.
So they then spend six years developing the game. Four people over six years with a whole bunch of setbacks.
Living off of
Basically Satoshi's dad's money because they're living in his basement and trying to survive off of
Him having a real job.
And in nineteen ninety six it's finally ready.
And they launch it.
Yep.
I believe it was red and green in Japan initially, and then it was red and blue in the US.
Oh, you're right.
And the whole thing is so unbelievably frail that when they go to translate it and make an American version, they actually need to recode the whole thing from scratch, because it's like spaghetti code everywhere.
So it does well.
But unlike every other Game Boy game that peaked and started
Trailing off.
This thing just accelerates.
And it just goes and goes and goes.
And
Everyone at Nintendo is shocked. Everyone at Game Freak is shocked. Everyone at Creatures is shocked. No one expected this thing to be this successful, especially
After taking six years to bring it to market with basically four crazy people.
Yeah, it's just wild and
Yeah, obviously fast forward today and
Pokemon is
Enormous on just about every dimension.
But it goes from that to selling just on
Core video game consoles, Nintendo consoles, over half a billion lifetime units.
Of console.
Software sales.
It's incredible.
Do you know the trivia with the names?
Of the Pokemon characters? Ooh, no, I don't.
So Cash Catch'em.
in the Japanese version is named Satoshi after Satoshi Tajiri. Uh the creator.
So Satoshi's nemesis, uh you know, Gary Oak, the sort of rival of Ash Ketchum.
In the Japanese version is named Shigeru after Shigeru Miyamoto.
Ha.
That's awesome. Yeah.
But this would evolve eventually into and we'll come back when we talk about Pokemon Go later, but it would evolve into the Pokemon Company, which is sort of the licensing body that is thirty two percent owned by Nintendo and the other thirds are owned by
Game Freak and Creatures.
And
I think the way they basically operate is as if they're a studio of Nintendo at this point.
It's the most successful second party business of all time.
Wow.
I don't know that for a fact, but I assume it is a fact. I can't think of anything else that is a second party business that would be as big as Pokemon.
Yeah.
So obviously
The kids market.
Is
Cute.
I mean, I remember this is all I did all day at recess. And then any time I could bust out my Game Boy at school, like this is what we were doing. And it spans generations. Like I think it's all
kids are doing today all day at recess. And we're old now. Like I have kids. Not yet at Pokemon age, sadly.
Okay, so that's the kids market. Obviously huge.
Yeah.
Other market that the game boy slash
D S
franchise serves for Nintendo and
This is perhaps not surprising, given if you think back to the original
History with Gunpei observing the businessman on the train playing with the calculator.
But
It's what eventually becomes the casual gaming market.
Now people aren't thinking about it quite as that at this point in time. Nintendo totally discovers slash invents casual gaming.
They one hundred percent do. I mean, this is
my dad and millions of dad around the world playing Tetris in the eighties and nineties.
It really like Nintendo codifies this and embraces it.
Best with the DS.
This is Brain Age. Brain Age were these like mind training games that were targeted at older people and like grandparents.
It's Nintendo, which is Miyamoto's dog raising simulator. That's like really popular with women and older women as opposed to most
Video games.
And it turns out that
This
Category.
Which
Nobody knew existed until Nintendo accidentally found it. And then they didn't even like truly embrace it until
The mid two thousands
This is actually the biggest
Gaming category of them all. By far. And it's incredible because the modern instantiation of casual gaming, certainly the largest.
is mobile free to play casual gaming. And Nintendo sort of invented it before mobile
And before free to play.
Totally.
So bring age
One and two combined.
sell thirty-four million copies on the DS. Nintendo's sells almost twenty-five
Million copies.
Tetris all the way back on the Game Boy sold thirty-five million copies. Now most of those are bundled in the US.
These are billion dollar franchises within Nintendo that nobody thought about for decades. It's kind of crazy.
Yeah.
So we asked the question.
How is Nintendo screwing up so royally on the home console side while they're succeeding so spectacularly on
The handheld side.
I think it's one that the kids and the casual segments were viewed as these kind of ghettos for a long time, that no serious company and certainly nobody like Sony or Microsoft would go
after and go compete with.
Wrongly so, by the way.
And the people who would have competed with them were Atari and Sega, and both were basically defunct by this point. So 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 sixty dollar DVD discs to play.
And so
You know, then to the other side of how are they allowed to screw up so badly in the home side.
I don't want to say it doesn't matter.
But
It kinda doesn't matter. So Nintendo's
Revenue.

more or less stay flat from the NES era all the way through to the mid two thousands.
Even though
The home.
Console business basically just gets like doused in gasoline and lit on fire. But the handheld side completely replaces it.
Nintendo's kind of always doing a solid four to five 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.
Yeah, so handheld.
Very good business for Nintendo.
And
When you coup that
With
a generation of home console that is also a good business for Nintendo when they absolutely knock it out of the park and define a brand new form factor and a brand new way to play games that has mass, mass audience.
then they do the most revenue in the company's history.
And that's gonna be the we.
And we're gonna get to that.
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All right, so
The we
There's a little bit of a lead up to the Wii, which is some leadership changes.
Satoru Uwada comes in and succeeds Hiroshi Yamauchi.
As
President of Nintendo LTD, the parent Japanese company.
And right around this same time
In two thousand three ish.
Reggie Feeza May works his way up the ranks and comes in as the president of Nintendo of America. And so you've got this.
Pretty awesome tag team of leadership.
that is ready to do something very different.
And
The GameCube comes out, they sort of know right away this is a miss.
they're still doing everything that you sort of think they would do to try to
occupy the time until they have something really great, but they're already foreshadowing very early that yep, yep, yep, we hear you developers and gamers, like we need to be doing something different.
And they're learning from the DS, which they just launched and became this enormous success. They're like
Oh.
Maybe these people want to play games at home, too.
Totally.
So there's this great keynote in two thousand four where Reggie comes out on stage
He's introducing himself and he says
I'm Reggie.
I'm about kicking ass.
Taken names.
And we're about playing games.
And then they have this whole keynote.
of kind of the most hardcore
Nintendo I've ever seen.
It's almost like a dark in your face.
they don't know who they are as a company. It kind of reminds me of of Luke Skywalker at the beginning of Return of the Jedi. Like you're really not sure which way it's gonna go. Could be dark, could be light.
But
what you do see is them starting to really embrace some things. So they start talking about the DS and they're showing off the backwards compatibility. It looks kinda funny, but you can put in a game boy game
And it kinda sticks out in a a way that is clearly awkward.
But they know that this is an important thing'cause they have this massive install base of people that had all these game boys and Game Boy Advance and everything over the years. So okay, we're embracing that check.
You also see them talk about
everything they sort of can in the GameCube, but then Regie invites Satoru Iwata out on stage in from Japan to talk about
this revolution that is coming for home gaming. That's right. The code name for the Wii was Project Revolution. Yes.
And they really start sort of just foreshadowing how they really want to change everything again.
and how it's an exciting time to be working with Nintendo as developers because everything is just about to be so different and truly a revolution. They lay this groundwork a whole year before they even announce the name Wii.
Yeah.
And I
I think almost two years before the Wii actually comes out.
I think that's right.
Yeah.
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 Gumpei Yakoi.
Lateral thinking with withered technology maxim.
Infrared motion sensing, which is what the Wiimo uses.
is an incredibly novel technology to bring to video games.
But it's a well understood quote unquote withered technology. Like T V remotes have been using this for decades. It's a World War Two technology. Yeah.
But it works just
Unbelievably.
Well.
The we
goes on to be incredibly counter positioned to the PS3 and the Xbox three sixty. Again, we talked on the Sony episode about all their problems with the PS3.
There was this like cell based supercomputer that was a total beast to program for
And here's the Wii that's underpowered and using this old technology, but
opening up brand new markets. It sells over a hundred million.
Consoles.
Coming back from barely twenty that the GameCube sold. What a turnaround. It beats the PS3, it beats the Xbox three sixty.
It becomes the seventh best selling console of all time and the fourth best
Selling.
Home console.
And the games they make for it.
We sports and they bundle in with the we they make we fit. They make we play. This completely revolutionizes the market. My favorite sidebar story on this is uh
Remember how Travis Kallanick was like
A world champion, we tennis player. Right, second best in the world or something.
Which later got debugged because
Turns out there were no global leaderboards. I think he was just really obsessed with Wii tennis or something like that. He was probably really good at it and just told people he was second best in the world. Totally, but this is part of the market that the Wii
Enables, which is like
Travis Kalanick doesn't have time to go spend, you know, thousands of hours playing Call of Duty, but he will go play Wii tennis and he'll get like really into it.
Totally. And they intentionally make the controller look like a TV remote because they just want people to call it the remote.
They don't want people to be intimidated by it. It's like look if you can use a T V, you can use a Wii.
Totally. The Wiimote.
They also made it smaller. I think the mandate was that it's the size of three DVD boxes so that it's not this big intimidating Oh yes, the console itself. Yes.
Exactly.
And this is where
we should talk a little bit about the different
segments of games because it's it's starting to become
important.
And I think this will help us understand Nintendo today. The Wii really starts to lay the groundwork for understanding where their position today. We have three people to thank for conversations that we had leading up to this. Nick Fight from Rec Room, long time friend of the show.
And some games industry veterans, the creators of Xbox Live Arcade, John David and Greg Knesset, for kind of going down memory lane with us and helping us to understand the way that this landscape looks.
So
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.
And so casual games are what we've been talking about that have sort of broad appeal that you can kinda pick it up and play. It's a quick in and out. It takes you minutes to understand, but hours to master.
It's Tetris, it's Brain Age, it's We Tennis.
Exactly.
And in the modern casual world, the most common type of monetization model is free to play.
And this is the thing that's really taken off on mobile. You know, you see Candy Crush that's sort of
almost brainless thing that you could listen to a podcast while you're playing this type of game.
And the revenue per user per day
If you're really good in this sort of thing is like twenty to forty cents. That's the way to sort of think about the monetization potential. If you're not good at it, it can be like one to five cents.
Then there's mid core games, which it's like games where you pick up where you left off. That's sort of how I think about it. Like not
Core games like World of Warcraft.
But
A version of that where they're taking these core game mechanics
And you're making them more approachable.
And so they take some time to learn, but once you learn them, you really love the game. Zelda Breath of the Wild is a really good example of this.
And when we are talking about ARPDAO, the average revenue per daily active user, that metric we mentioned before.
It's more like a dollar in terms of monetization potential. Smaller market than casual gaming, but a dollar per person, like that's definitely a market worth going after, a dollar per person per day.
Once you get into the core gaming segment, I mentioned the world of warcraft, but this is really anything where you're like training yourself even to play it at all.
And your grandma can't pick it up and start playing. League of legends. Right.
the revenue per user on that is through the roof, but it's a much smaller audience.
And so I wanted to sort of paint this picture to try to help us understand where Nintendo decides to start playing from here.
They've
Typically
been kind of a mid core.
Company.
with their titles. You think of the Zelda's the Super Mario Odyssey
And with some casual games, you think about Super Smash Brothers or Mario Kart, you know, you're kind of button mashers.
Those games lean more casual.
What they did with the Wii, which
in some ways was shooting themselves in the foot.
And David, you can push back on this if you disagree.
Is that
They started walking away from their mid core characters.
that really defined who Nintendo is.
and launched a casual gaming home console.
the thing that was a hit for the Wii was Wii sports. It's these sort of lifestyle games.
And
The things that we're gonna do.
I don't even ever remember playing on the Wii.
Are Mario and Zelda.
That's not what that platform was for.
Yes, I would ag
agree with exactly how you characterize that
And I also agree that by doing this Nintendo shot themselves in the foot, but I don't know that you can blame them necessarily.
I think it actually was completely brilliant at the time.
And it
completely revitalizes the company. So
With the we and its success.
Nintendo's revenue almost quadrupled from the five billion dollar ish range to just under twenty billion in two thousand nine. All time high.
Even to date, even including all the switch success, that was still the all time high.
And operating income goes through the roof to over five billion dollars.
They're killing it. This is like
An unbelievable
Revolution, as they would have said.
Unfortunately though, you know, and this is where you can debate whether it was possible to see this coming or not.
Right.
After
the Wii launches and brings this revolution. So that's two thousand six, two thousand seven time frame.
The app stores launch on mobile.
Late two thousand eight into two thousand nine.
And that just sucks.
all of this away. And this is the problem about shooting themselves in the foot.
They were so vulnerable to this in a way that Microsoft and Sony weren't because the core gaming market
And the hardware and the platforms that Microsoft and Sony were putting out, they weren't threatened by mobile.
Mobile didn't take share from them, but it took like
All of Nintendo's share. Right. Cause the Wii was not the Mario console. The Wii was the casual gaming console.
And the greatest casual gaming experience in the world launched and fell right into everybody's pocket a few years later, that swept out their entire current market away from them.
And then
It took'em
a decade to basically go back to their roots with the switch and figure out how to like revitalize all the
mid core Nintendo IP
onto a platform that
was dedicated and best in class for that use.
This is like the really sad part of the story. They just get rugged here.
And you can see it in the stock price. It is nuts when you look at
When Iwada came in and took over in two thousand and two.
And we talked about the Wii was released in 2005. In the four years from October of two thousand three to October of two thousand and seven, Nintendo's market cap nearly eight X.
From 9 billion to 70 billion. They were a 70 billion market cap company, but very briefly. I think their market cap was even bigger than Sony's.
for that year.
But by twenty twelve it was all the way back down below where it even started to eight billion dollars.
Yeah. The impact of mobile.
Gets felt.
Pretty much immediately.
In two thousand nine, which is just the third full year that the Wii is on the market and when it should be hitting like the fat part of its life cycle at its prime.
That's when
The app stores really hit.
And we sales declined twenty percent that year, when they should be accelerating.
And then they fall roughly another thirty percent.
each of the next two years and software sales, which are more important, decline.
Even more.
That's on the home console side and the Wii, which is like
maybe a little more insulated from mobile. Meanwhile, the DS, which was this juggernaut, is just getting
Rocked.
Yeah, it's weird. In some ways Nintendo called it because they realize that
casual gaming was gonna be a huge market, and they realized that portable gaming was gonna be a huge market.
But they did not have
Any strategy around mobile. Yes.
It was the perfect marriage.
So
Nintendo launches the three D S to try and differentiate in versus smartphones and having the three D screen.
They launched that in twenty eleven.
But sales stall out pretty much immediately. I'd forgotten this about the
three DS and they have to do a major price cut on it within six months of launch. So they drop the price thirty percent.
less than six months after the console launches. Like that is
Bad. So that does
stem the tide for a bit and three D S sales
do grow for the next couple of years, but then
The smartphone juggernaut is just too big. Twenty thirteen, fourteen, fifteen.
Three D S sales just fall off a cliff.
The saving grace that they had their entire life or from nineteen ninety onward of no matter how much we screw up.
our handheld gaming's system will sort of protect us.
Shields are gone.
Totally. And so now
Nintendo is in a
Sega post Saturn and Dreamcast type situation.
There is an
existential crisis happening.
So in Nintendo's fiscal year twenty twelve, they report
The first
Every yeah.
Annual loss. So this was a company that even during
the crappy years was making half a billion to a billion dollars in operating income
is just coming off the Wii Year bonanzas where they're making five billion dollars in operating income.
All of a sudden they're bleeding cash.
And it gets doubly bad.
Because the only way out of this for them if they're gonna keep their hardware strategy
is to rush out a new console.
Which means they have to invest capital in R and D and in marketing for launch a new
console to try and stem the losses, both on handheld and mobile.
It's rough. So they rush out the three D S.
They rush out the Wii U as the successor to the Wii.
Oh, the Wii U is a piece of garbage.
The thing sucked.
And there's so many insights with the Wii U that are correct.
Directionally correct, let's put it that way.
People want touch screens.
Okay.
You're right.
phones and iPads are really starting to take the market by storm. So having a controller for your home console that has a little touch screen on it.
Okay, I can see that, but God is this convoluted. You basically handed people what looks like a portable console, this controller with a screen on it. But it's gotta be in range of the console.
Right. They can't actually use it as that. They have to use it as a controller for the console. And there's all sorts of innovative things they can do.
that this is sort of where the maxim of Nintendo really comes into play, where they're obsessed with designing hardware that enables and then designing games to work with that hardware.
They still to this point in time have never shipped a game.
on any hardware where they did not design the controller. And so they're starting to make all these like very clever use case games for this very strange piece of hardware where like
There's accelerometers in the controller, so you can tilt it back and forth, or you can put it down on the table and you can write on it, or you can be like playing chess and you can flip it sideways. It's weird watching the commercials for this because you're like, wow, this could do everything. This is like a
very innovative console.
But a bunch of things were wrong with it, including the fact that it was rushed to market, wildly misnamed. It sounds like it's an accessory for the Wii, which it wasn't. It was a full new generation.
Yeah.
It was bad, so
The Wii U just really
compounds the gravity of the situation for Nintendo. It only sells thirteen million units in its entire lifetime. Remember the GameCube was bad selling over twenty.
It's Nintendo's worst selling console ever. Save
for the virtual boy, which was worse. And these losses continue year after year after year. I think most of the years from twenty eleven to twenty seventeen, eighteen were in the red.
Yeah. And so as that happens, shareholders and shareholder activists
start demanding that
Nintendo
go the way of Zega and
Get out of the hardware business.
There's this really, really obvious
value maximizing at least in the short term move that Nintendo could do.
Which is take their IP.
And publish it.
On
Smartphones.
And this argument makes a lot of sense.
What does this company have anymore? They do have IP that is super valuable that you should put everywhere, but nobody likes their last console. They can't prove that they've been able to do two consoles in a row. They can't prove that they've been able to leverage their user base into buying the next console literally ever.
They can't prove that
there's any purpose to everything they learn from the we because all that great casual stuff that they learned for the we
is now happening on smartphones, which they have no play in. So it would be very reasonable to be like, you really need to stop making hardware and you have this unbelievable asset, which is some of the world's most valuable IP.
Yes. So there's a legendary story which
Maybe apocryphal and after some more research I think actually is apocryphal, but
The spirit of it is absolutely on point.
Mitch and Blake tell this over on the GameCraft podcast, where at the twenty thirteen shareholder meeting, Iwada's up on stage, he's taking questions from the audience.
he gets in an argument with a shareholder, not even an institutional shareholder, just like an individual shareholder who's there who says like, Hey
My daughter loves playing games on her smartphone and she loves playing Nintendo games. Why are there no Nintendo games on smartphones?
And that
I wana's like
Mortal Honor is offended and he jumps off stage and punches the shareholder in the face. Really? So I don't think this really actually happened. I think it's a
Urban legend
Very well could've because
Nintendo and Iwata were just so stubborn through all of this. They're like, No, the Wii U, it's the future. Like, please buy our console.
And they're philosophically opposed to mobile in a number of ways. One, they like controlling the whole experience. They did not design the smartphone controller, therefore they don't feel that they can make great games for it, which is pretty stupid, but it's how they feel.
They also philosophically hate the business model that's doing well on mobile, which is free to play. They think it's like the devil. They think it is an immoral thing to do.
So ironic given Nintendo's history. Right.
You talk to video game veterans and they do say like
We are very grateful that Nintendo exists in the industry because otherwise it would literally just

Detritus of capitalism. I totally
sympathize with this point of view. And
You know, Iwada says this is an actual quote from him around the time. He says, Making smartphone games is absolutely not under consideration. If we did this, Nintendo would cease to be Nintendo.
Having a hardware development team in-house is a major strength.
It's the duty of management to make use of those strengths.
It probably would be the correct decision in the sense that the moment we started to release games on smartphones, we'd make profits.
Remember, they're not making profits at this point in time. However
I believe my responsibility is not to short term profits, but to Nintendo's mid and long term competitive strength. Now, he's absolutely right, and history proves him right here, but
From a shareholder perspective at the time, people are like
You gotta go. We've had enough.
Well, the funny thing about this survivorship bias is if history didn't prove him right in the long term, we also wouldn't be doing this episode. Somebody could have had that same opinion and then gone the way of Sega, and today we would be talking to you about the Xbox or some other episode. Totally.
Nintendo stock price from the highs after the Wii declines over eighty percent.
So like, oh it's brutal. And I think there's probably a decent chance that Iwada would have been forced out.
Unfortunately and completely tragically
He
dies way, way, way too young and unexpectedly of cancer in twenty fifteen.
Hify five. Hify five. It's just terrible.
It's also really sad because
He and Miyamoto and other Nintendo executives.
Finally do
realize that they have to change things.
And they come up just like Tom and Sega had the four point plan.
They come up secretly and internally around this time in twenty thirteen.
With an
internal three point plan for Nintendo, and it is everything that they need to do. And it starts with point one.
We need to stop fighting this smartphone battle.
And embrace it.
But we're gonna embrace it in a Nintendo way. And this is super smart.
We're gonna build a new standalone business unit.
And we're gonna do it in partnership with the Japanese mobile company DNA.
To co develop
Smartphone games.
Using
Nintendo IP.
But
We're not gonna fully transition the business to smartphone games like the investors want us to. We're gonna use this as a way to unlock our IP.
And spread it out.
more broadly to the rest of the world, kinda like we've seen Pokemon has done.
The Pokemon IP
Is applicable so
far beyond the Game Boy games.
And
All of the revenue and activity from that.
It drives sales back.
to the Game Boy games and to the Game Boy platform. We can and should be doing that same thing with all of our IP with Mario, with Zelda, et cetera.
Speaking of
If we want to do that right, just like we see Pokemon doing it.
It's not just that we wanna do mobile games, we also wanna do theme parks, we wanna do movies.
We wanna capitalize on nostalgia,'cause now, just like you and me, Ben, the core Nintendo customers from the old days have gotten old enough that we have nostalgia for
The N E S, the S N E S, the N sixty four.
They start
Releasing
NES SNES classic editions like re-releasing the home consoles with HDMI ports. This is genius. They make tons of money from this. So
They sign a partnership with Universal Studios.
To start building.
Super Nintendo worlds.
First in Japan and then in Hollywood, which just opened, it's coming to Florida, it's coming to Singapore.
And then really these points one and two.
Embracing smartphones.
Embracing the IP strategy.
is really to buy time.
So that they can rethink the hardware strategy and reimagine what the future of Nintendo is gonna be. Because
I think Iwada is totally right. For better or worse, Nintendo is not Nintendo if they exit the hardware business.
Sega is a
shell of its former self. And
Nintendo probably would ultimately have gone the same way if they had ex did the hardware business at this point in time.
Alright, so in twenty thirteen they start laying the groundwork for the switch for leveraging the IP to
You know, the movie coming out right now and theme parks.
And of course mobile.
So that takes us
To the summer of twenty
Sixteen.
And a
Big
Surprise announcement.
The very
First smartphone game.
With
Quasi Nintendo?
I P It's not.
Through their partnership with DNA.
It's not Mario.
It's not Zelda.
It's
Pokemon and Pokemon go. And this is like the perfect
Everything. Mobile game, way for Nintendo to dip its foot in the water.
Oh, it's just amazing.
Pokemon Go is
One of those things that you just cannot make up what happens here.
The craziest thing is I had been playing
Ingress for the previous eighteen months. And so when Pokemon Go came out You and all the nerds out there. Yeah. I was like, wait, this is just Ingress with Pokemon
In it.
This is very strange. Do you know how
The Nintendo Pokemon Google relationship starts.
No.
So
Nyantic, which developed Pokemon Go in collaboration with
The Pokemon company and Nintendo is one of the main shareholders of
The Pokemon Company.
was a spin out from Google and Niantic.
was the team that within Google had made the
mobile location based game ingress that Ben was just talking about, which was super geeky and like really fun, but it was basically Pokemon Go.
Without the Pokemon. Yeah, it was like a test of the infrastructure and to develop the right game mechanics.
And uh
IP that it was using was sort of an old sci fi novel, but it wasn't like exactly one to one.
That's right.
But the
Spark of this relationship actually goes back to 2014.
And the twenty fourteen April Fool's joke. Google loves April Fool's jokes.
And I had forgotten about this until I read about it in the research and then I was like, Oh yeah.
Which was
The
Google Maps Pokemon Challenge.
So on April Fool's Day, twenty fourteen
Google released a video saying they were recruiting for a new position within Google.
That was like the
I think they called it like Pokemaster or something like that. Like the Google Pokemaster.
And that it was a competition to get this job. And the way you could compete was by capturing
On
Google Maps. And they had like a video for it and all this stuff and it was hilarious.
Now what I don't know and wasn't able to find was
Were they already starting to think about
Pokemon go and building a game together.
Because very clearly the work that went into
Putting Pokemon
Showing up on random spots on Google Maps.
was exactly the work that needed to go into
Building Pokemon go.
But this was a total like underwraps surprise. Nobody outside of Google and Pokemon Company and Nintendo knew that this was coming.
Then one day in the summer of twenty sixteen it hits and it's just
A cultural
Touchstone. I mean I'm sure almost everybody listening to this episode remembers this.
I was convinced AR had arrived. I was like, Oh we found the AR use case, the world will never be the same.
Every venture capitalist was
Running around trying to find AR and VR companies. Nyantic spins out and then does raise a boatload of venture capital from
You know, all the big VCs.
Pokemon Go itself gets over five hundred million downloads just in twenty sixteen, which is
Mind boggling. Now a lot of those folks churn.
But it becomes a real viable ongoing smartphone game. But the ones who don't churn spend. They love it. So it has well over a hundred million ongoing monthly active users. It now earns about a billion dollars every year.
It's one of the top
Mobile games out there.
Period.
Investors in Nintendo get so excited about this, and in particular what this means as a harbinger for other Nintendo IP.
Coming to mobile.
That within two weeks.
of Pokemon Go's release, the Nintendo stock price doubles from call it a fifteen billion dollar is to a thirty billion dollar market cap.
And everybody's just going wild like this is it. Nintendo is finally gonna embrace smartphones.
The reality is maybe perhaps in part because of Pokemon Go's success and the breathing room that it buys them.
They don't.
The funny thing is that this game is not released by the Pokemon company that Nintendo has thirty-two percent ownership in. This game is released by Niantic, who has secured a license to the IP from the Pokemon company.
And
To your point around the stock spiking, Nintendo has to issue a press release.
Telling investors mid quarter, hey
Y'all are real excited.
We do not expect this to impact our revenue meaningfully for the quarter. This was a license.
What's interesting is I think the stock does drop back a little bit when they issue that press release, but not that much. People are still really excited. They're like, This is the great unlocking of value. It's happening.
But to like really underscore this, I mean
There's a few interesting nuances here. One
To this day, only three percent of Nintendo's revenue is the entire basket of mobile and licensing and theme parks and movies. They clump mobile in with all that. They don't look at
Games like
Pokemon Go or what we'll talk about in a minute, Super Mario Run
As a Nintendo game.
they look at this as, oh, we've licensed RIP for someone else to do something with, and the fact that it's a game
even though that sounds like what we do as a company in our core business, oh no, no, no, this is different. This is a license.
It's actually part of the IP strategy and it's actually marketing.
Right, it is only three percent of their revenue. So all of this Pokemon Go stuff that happened.
It's like
Okay, like a lot of people got reminded what Pokemon is again, but
But Niantic makes a bunch of money from that. Nintendo doesn't make a bunch of money from that.
Yeah.
Now
I suspect the Pokemon company.
made and continues to make a bunch of money from Pokemon Go. Not quite as much as Niantic. But a bunch is relative. Like it's not
impactful to Nintendo's business. It's not transformative. Certainly not to Nintendo.
Also
It's worth pointing out.
If the Pokemon company
were the developer of this game, there's no way it would have the attractive business model that it has.
It is a whale driven microtransaction game that Nintendo is philosophic opposed to. And so in the same way that Apple gets to claim um, you know, we're the privacy company, but then get paid tens of billions of dollars by Google.
Nintendo gets to claim like, Oh, we don't touch these dirty microtransactions.
And yet we're selling a license to a company that is making billions of dollars from doing that.
So Pokemon Go is the first.
quasi Nintendo IP to hit smartphones.
Later that year in the fall of twenty sixteen, they do come out with the first game in the DNA partnership.
Super Mario run.
And a whole bunch of people download it.
It doesn't end up becoming a big ongoing game like Pokemon Go.
So Miyamoto gets up on stage in an Apple keynote, which was really cool to see'cause it you know, these companies are like sort of spiritually aligned, although
one sort of ate the other's lunch.
you know, Nintendo's throwing stones at Apple saying that their business model is a moral evil.
So you've got Miyamoto announcing on stage that they're gonna bring Mario to the iPhone, which to me, watching it, I remember thinking like
Okay, so they have no strategy. This is like him waving their arms around and being like, Oh my god, the Wii U is so bad.
We don't know what to do.
Don't look over here, look over there.
And I think even in the keynote they say
We don't know what the price is gonna be yet.
But
It's not gonna be in at purchases. You're gonna buy it once up front because that's how we believe games should be bought, which of course is him saying we're just not gonna make any money on this, because you're not gonna sell a sixty, seventy, eighty dollar skew on the iPhone. You're gonna sell a five dollar skew on the iPhone.
And so the game itself is effectively the original Super Mario, but since Nintendo doesn't own the controller, it's sort of a a little bit of a weird mechanic. You're like tapping on the screen to make him jump and you're holding it to make him jump higher. Yeah, it's like a really weird.
Baby between
The original Super Mario and
A runner game, which runner games are a somewhat
popular niche genre on mobile.
Right,'cause you're not controlling the speed at which you're running. You're just going. The funniest thing about it is
It's so Nintendo in all these different ways. They're super, super anti piracy. So even though they're making basically no money on this thing.
They won't let you play it without an internet connection.
Because they're so afraid of people jailbreaking the iPhone that like you can't play it on a plane or in the subway. It's so That's so Nintendo. Sometimes they like cut off their entire body to spite their face. I had forgotten that. That's ridiculous.
Matthew Ball puts it the very best. He has a great piece written in twenty twenty.
We'll link to it in the show notes, which is basically here's why Nintendo looks a lot like Apple and Disney, but isn't actually as attractive of a business as Apple and Disney is kind of the crux of the piece.
And there's this paragraph that says twenty sixteen Super Mario Run is one of the ten most downloaded mobile games of all time with over seven hundred million installs. However, it has achieved only seventy five million in gross revenue after four years, according to Sensor Tower. These downloads are a testament to the power of Nintendo's IP, but eleven cents per
per user and less than a hundred million in total top line likely makes Super Mario Run the worst performing
game with nine figure installs by far.
Which, you know, on the one hand
Point taken.
On the other hand, the
This is explicitly not Nintendo strategy. Right. Which
Brings us
to
The announcement at the end of twenty sixteen and then the launch in March of twenty seventeen.
Of
The switch.
No.
The switch is
So
Interesting.
It obviously goes on to become this enormous success. I love mine. I've played the hell out of it. Hundred and twenty three million sold in the first six years. Yep, it's the first console you bought since
The PS two, is that right? Yeah.
Yeah. Well I guess I had a PSP, but I didn't consider that a console. Exactly.
It is this amazing success, but when it's announced
So many people, certainly the investor community, and I raise my hand and count myself among this.
I thought it was a terrible idea.
It was not obvious, at least to Wall Street.
That this was
The savior that it ended up being.
When they announce it.
Nintendo's stock drops seven percent.
And then it keeps falling until lunch. Remember, everybody's all excited about like oh Nintendo's finally coming to mobile and like there's a great bull case narrative for Nintendo out there.
And then they drop the switch and people are like
What the hell is this?
We're making a thing that's like a phone but bigger, and you need to also carry it with you. So now you need a second device.
It's an underpowered home console combined with a big portable console that doesn't fit in your pocket. Even though you do have a console that does fit in your pocket. Right. You have better versions of like both of those out there on the market.
Now, this will be really fun for us to talk about'cause I think there's two things going on here. And
I think Nintendo saw both of them.
The one that they certainly saw was
Ben is what you're talking about earlier.
Of
The
mid core market being underserved at that point in time.
And in particular, the mid core market for Nintendo IP.
There wasn't a really good platform to play.
Nintendo or otherwise mid core type games out there, and the Switch was the perfect platform to do it.
That certainly was one thing that the market didn't appreciate.
That Nintendo saw.
I think there was also another dynamic here, or at least this is my experience with the switch.
While the dynamics in the mobile gaming industry
On the one hand, we're very different than the Atari nineteen eighty three video game crash in that
Obviously.
That industry still makes tons of money. It's by far the biggest segment of the gaming industry. I think it's a hundred and twenty billion dollar annual revenue industry in and of itself now, mobile gaming.
On the other hand, some of the same problems are definitely there.
It's filled with shovelware crap.
Even the games that make the most money.
Our crap.
This is why Nintendo is philosophically opposed to it and so many people
appreciate their point of view.
And so when the switch launches
It's actually kind of a throwback to the NES seal of quality.
A lot of people, certainly myself included.
I would play.
more casual, like certainly mid core, but also more casual mobile games.
If I had a seal of quality knowing that this wasn't crap, this wasn't gonna try and drain my credit card of hundreds, if not thousands of dollars and treat me like a whale.
And that's what the switch
becomes. Even despite all the success of mobile, there was this room for like
Quality.
You're right that quality
is the way to describe it. It's not first party. It's not third party. It's quality.
And Nintendo.
is gonna basically have a pretty low volume throughput.
of third party games.
And the way that they design the device
kind of forces you to custom make games for it.
Because it's not great for
supporting other games.
So it sort of flies in the face of everything else happening in the industry, which is
We want our game available on the most endpoints.
Because it's gonna be some kind of
Open world services oriented
events based game.
And you wanna be able to play that with all your friends no matter what devices they're on. And what Nintendo's saying is
We're gonna make a device so weird.
That's
It's basically a smartphone, but without Bluetooth. Uh it does have Bluetooth. It's just
Neutered and you can't use headphones.
Yeah, right. What the heck? I can't use my Bluetooth headphones with it. It's weird.
And
Also, it is gonna have like a two thousand thirteen, fourteen era Tegra chip. The NVIDIA Tegra finally finds its use case.
It's so strange. And so what it means is it's a great first party device because Nintendo is not making their games for any other platform. So they're happy to custom write for this weird
Yeah.
And
Indie developers.
At first probably won't
write games for it because there isn't an audience. But over time if it gets an install base.
It's great as an iD developer to develop a really high quality game purpose driven for it.
But if you're developing
Call of Duty.
Yeah, it's pretty unclear that this is a great device for you.
Yeah, I think we need to separate out
two different parts of the market. Cause on the one hand, when you're talking about Call of Duty, when you're talking about fittingly Madden, like Madden football is not on the switch still to this day.
stuff like that, the very, very high end the core gaming market, what you're saying is absolutely correct.
There is no call of duty for Switch, right? Pretty sure. It actually is gonna be part of
the divestiture. Oh I love it. I love it. Microsoft has announced that Activision will do it if they're acquired.
Right, but only as like a concession to the DOJ. And no consumers actually want.
So I think that's a hundred percent right.
On
Core.
Games.
But indie games.
The switch becomes this very vibrant, flourishing platform. And like, yes, you have to do some work to port it over, but
It's actually not quite as hard as your
making it out to be. Especially if you originally developed the game.
In
Unreal or in Unity.
Or for the PC.
Or for steam.
Because
The switch runs.
on the Tegra on NVIDIA system on a chip. Like you gotta do some stuff with the controls to make it work.
But you can port these games over. And so games like
Hades is a great example. Or Undertale.
or Celeste, like
These
indie games that I've played and I loved on my Switch. Like the Switch is by far the best platform for games like this, because they kind of harken back to the old 16 bit Nintendo era.
For the first time in generations.
Nintendo has actually become a really viable
third party platform for the right type of developer.
And it tends to skew more indie. We talked to folks in preparation for this episode who have games
Yeah.
even tend to be kind of more mobile smartphone based games.
They're actively working trying to get them onto the switch.
Because of this quality dynamic and that players on the switch are much more likely to monetize, even though it's a smaller audience base. I mean, people on the switch will buy like
Twenty plus
sixty dollar games.
over the life of owning their switch.
This is not a casual
ARP Dow type.
audience. This is a high monetizing, high intent audience.
Yeah.
And then finally I think there
Is another element that we really gotta give Nintendo credit for with the Switch.

I and very few other people
saw the potential and when they announced it.
Which is that
The use case that they marketed, the primary use case of
Seamless playing between on the go and at home.
Is actually pretty compelling. Totally.
Legendary game director and designer Hideo Kojima of the Metal Gear Solid franchise, he was one of the few people pre-launch that like publicly really recognized this. He has a quote, he says, The fact that you can play something at home and take it outside is
This is the gamer's dream.
The switch is an evolution of that. And before the switch, you really couldn't do this.
Your same save state, your same progress, your same everything.
Yep, exactly right.
The other thing they got right with the Switch, which has been huge for them, both as a business and as an unlock for player dynamics, is they finally, finally got online.
Yes.
This is a thing where people have been saying, Oh, Nintendo's always five years behind. I think Nintendo was like ten years behind in online play.
This was literally their third attempt. They now finally have this thing called Nintendo Switch Online.
And there's
Two versions of it. There's a twenty dollar and a sixty dollar.
But
They finally have
some semblance of like an Xbox Live type service.
That
Works.
And before
I think they had the Nintendo Wi-Fi connection and the DS and Wii era.
And that had some really weird sub things inside of it, the Wii Shop channel and DSI shop.
And they had this whole like friend codes thing. And then they deprecated all of that and they launched the Nintendo network.
And inside of that they had the Nintendo eShop, and the eShop eventually got
folded into Nintendo Switch Online when that launched, but it has taken a long time.
And some
pretty like half toe in the water technology bets to get here.
famously they launched switch online and they said it's great because it's peer to peer.
And everyone was like
That's terrible for us. That's good for you, because you don't have to build data centers, but it's slow and buggy. What do you mean it's peer to peer?
Xbox Live has existed for like eight years.
I Space Live has existed for like eighteen years. Yeah.
It is wild. So they finally kind of have their act together with that. I have never bought a physical game for my Switch. I've only bought them digitally.
the difference between the twenty dollar and the sixty dollar is
There's a bunch of differences, but one of them is like you can get access to the N sixty four emulator if you do the sixty dollar online instead of the twenty dollar a year online. And I think you get the uh
Mario Kart.
DLC uh courses if you buy the uh sixty dollar version. Yes, you do.
The functionality is good and now there's compelling reasons to subscribe to Nintendo.
which is a pretty big unlock in their business. And if you had told me
in twenty sixteen, before they launched the switch, that at some point I'd be paying an auto recurring subscription

for services I may or may not be using at any given time.
To play on a dedicated Nintendo device at that point in history, I would have told you you were completely insane.
The switch really is
Just an incredible
Come back.
For Nintendo.
And
While the we
was also an incredible comeback. It was kinda one that they
Had
clear line of sight into from their experience in the handheld business.
And they sort of knew
Of course creativity was involved in making it, but
If we can build this, we're pretty sure they will come.
The switch I don't know if it was luck or genius or just what, but
This was the first time they were the true underdogs and they had all the deck stacked against them.
And they proved everybody wrong.
Right. And the big question is
Do they have to keep doing this?
And
betting the farm on inventing a brand new form factor half the time they fail on
Or
Have they now discovered something that is a durable platform for the future?
That they can
keep building on top of, leverage the existing base. I mean, how frickin' attractive is it now that they have 123 million people who have bought these things for developers?
Developers finally want to be in business with Nintendo again. Especially Indies, but the major third parties too. Okay. We're going to have a very robust analysis discussion of this because Nintendo is literally right at the crossroads again of what to do about the next generation.
The Harvard Business School should be like surrounding Nintendo and doing a seance to like it is like the most incredible business strategy microcosm to learn how they're going to handle this unique position that they're in right now. Forget Harvard Business School. This is why we're here. Acquired is on the scene.
All right, so let's finish out the story and then we'll go into analysis.
So
Once they launch the switch.
It is.
An immediate hit.
Nintendo plans an initial two million unit worldwide production run. Remember, the Wii U was such a flop. They only sold thirteen million units in the whole lifetime. So like two million units.
It sells out immediately. They have to airship.
more units from their production lines to retailers across the world.
at a cost of forty five dollars 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. Like it's worth eating that cost.
to serve demand and build out the installed base. What a difference.
Yep.
Although I wonder if they still have some of that in them. I mean it's the sixth year of the Switch.
And
I was like backed up.
to like a month to get one online and I drove to a target and got the last one in person. Like I think there's still some games going on over there for limiting supply. Yeah.
No, and they can probably use the excuse of Oh chip shortage, but like there's no chip shortage on the Tegra from twenty fourteen. Like
Anyway, it's a huge success.
To your point about the mid core market, it launches with Zelda Breath of the Wild, which originally was supposed to be a Wii U game.
It launches also on the Wii U. It's forward and backward compatible to the switch.
And
Switch copies of Breath of the Wild.
Sell at literally a one to one.
Great.
as the console itself for a hundred percent attach rate. This has never before happened in history of a non-bundled game.
You can't separate out
Breath of the Wild from the Switch's initial success in that first year or two.
It was a generational
Game.
That
Deserves its own episode on a different podcast. And I'm sure it has many out there.
And this is one where like when you talk to game industry insiders, a hundred percent of people are like
This game is just so beautifully designed.
The quote that I got from someone I was chatting with is
When Breath of the Wild Two comes out next month, the whole industry will stop, will not go to work, and will just
play Tears of the Kingdom.
Similarly though to the switch, I think there's some questions of like
What could Tears of the Kingdom do to top Breath of the Wild, but
We'll see.
The switch sells over fifteen million units in the first year. So like
More than the Wii U, just in the first year.
goes on, as you say, to sell a hundred and twenty three million units. So far it's still on the market.
We'll see. I think it's unlikely it will pass the DS and the PS2.
But it depends how long Nintendo waits.
To launch the successor and what
Form the successor takes.
My money's on switch two in the next
Six months.
I think that is where the betting line is, but we will discuss.
On the back of all this.
Nintendo revenue just explodes from less than five billion at the end of the Wii U era.
immediately in the next year to ten billion after the switch launches, then twelve up to sixteen billion during twenty twenty one and the pandemic.
The stock goes up another fifty percent.
As switch sales now have started to slow that we're in the sixth year of the console lifecycle.
The stock has fallen.
Again, a little bit, but they're still doing five to six billion dollars in annual operating income. It's still a fifty billion dollar market cap.
Nintendo today is
So far removed from Nintendo of the Wii U.
Yeah.
And then there's
The IP.
We are literally recording this the day before the Super Mario Brothers movie comes out. Which is supposed to actually be pretty good.
It's supposed to be pretty good. I want to go see it. I mean, they've got Chris Pratt, they've got huge stars.
This is a departure for Nintendo. Now they did do
A Super Mario Brothers movie. Fool me once, Nintendo.
We won't talk about that one. That was a disaster back in the day. Matthew Ball points out that the nineteen ninety three, I think that's when it was, movie was so bad that it set
the whole industry back by a decade.
for licensing
Video game IP for movies.
I totally believe that because
Obviously, as we see here now in the mid twenty twenties.
Video game IP is fantastic for movies and TV shows.
But yeah, it was because of that movie, I think in large part that people shied away from it.
The first
Super Nintendo World opened at Universal Studios Japan in twenty twenty one.
And
The first American one opened.
at Universal Studios Hollywood just a couple months ago.
By all accounts, they're both pretty awesome.
Two more are opening in twenty twenty five in Singapore and Orlando.
Pokemon Go continues to crush it on the IP strategy? You're talking about a lot of things right now that don't seem to make much money for Nintendo. I just want to point out
It is getting their characters out there, that's all well and good. Maybe they'll start making a bunch of money in the future, but like so far
non material to the top line.
I think that's the point.
Well, all right, let's transition to analysis and talk about this first.
Yeah, so what is the end game? Is the end game to get people to fall in love with the characters all over again on a continuous basis so that then they go buy more Switch games and switch to stuff?
I think yes, with the additional nuance that
I'm no
Brand IP strategist here.
But 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.
And Pokemon has done this so well. You and I played it growing up, and kids today play it growing up, equally, if not more passionately.
And I think once you start moving into like
Across generations like that.
You really do need
A broad multimedia IP strategy.
To make sure that you're engaging and bringing
The new generations into the fold. I think that's right. The better comp is probably the NFL than Disney.
Originally I was like, Oh, they're running the Disney playbook, but
Disney takes on
all of the in-house work of operating their own theme parks and having all their own employees and needing to like have that core competency.
Also, Disney has hundreds of stores.
Nintendo has like I think two stores.
They don't have like physical
Touch points.
with consumers. As much as in part one we talked about world of Nintendo
in the stores to sell the games, it's so different than the actual
Boots on the ground.
Stuff that
Disney has
that sort of makes up the Disney flywheel.
And so
You know, in our old uh Disney Plus episode, we talked about how a dollar on a Disney m movie in revenue equals two dollars in parks and merch.
The way that Nintendo is sort of structured where they've decided
They want to make
Great.
hardware to play games and they want to make games and they don't wanna
Not do anything else because that's all not very Nintendo.
That's a different strategy where all of this other stuff is brand building and it might make some money. I mean, NFL Films was like break even, so it's probably one click away from NFL Films, but it's certainly not the Disney flywheel.
I think the NFL and NFL films is the exact analogy. I think
the mobile games strategy within Nintendo is don't lose money.
But extend the IP.
They're not trying to build it into a revenue driver. In other words, they're willing to give away margin dollars to not have to be in those businesses, but accomplish the same touch points with customers.
Yeah.
Okay, so that's the IP.
Let's talk about the big question. What is switch two?
Yes.
Okay, so here's an interesting way to tee it up.
Let's work backwards from Nintendo Switch online.
So that launched in December twenty eighteen. So the switch didn't have it at first, which I think is interesting.
It grew very quickly. Three months after launch it had eight million subscribers. By January of twenty twenty, it had twenty six million, September of twenty twenty-one, thirty-two.
Today a reasonable estimate based on everything they've sort of disclosed is somewhere between thirty five and forty million subscribers.
There's about a hundred million active switch players per month.
when you sort of think about the churn and people buying multiple devices and devices breaking and stuff like that.
So you have an attach rate of like thirty five to forty percent.
on a recurring revenue software business.
That's pretty good.
It's pretty good.
It's not something you would want to just throw away.
Like Nintendo did with the NES install base. And with the NES install base, it was theoretical.
Right. It was like well
These people who we have relationships with should stay our customers, but our customers
The hour is doing a lot of heavy lifting.
in that sentence because they were your customers when they bought a game last time. You hope they will be your customers
When
they buy a game in the future.
Flash forward to today with the Nintendo Switch Online, there are forty million people who are your current
customers who are paying you money.
Their credit cards are automatically being charged every month. Yes.
And when you do some quick math, there's two price points. There's the twenty dollar and the fifty dollar. Assume the average revenue per customers.
I don't know, thirty bucks, maybe thirty five bucks.
Depending on the mix between those two SKUs.
That's a billion dollar, maybe a billion and a half dollar recurring revenue super high margin software business.
And that is before you even factor in
the digital games.
It's probably a three billion dollar business when you think about the one off digital purchases people are making.
So there's like
A company called Nintendo that does all the stuff they used to do.
but also makes a billion dollars of recurring revenue and another two billion on top of that.
of super high margin software revenue.
This is so funny.
Unaquired, we always talk about how software is the best business model of all time and media is the second best business model of all time. And video games are truly the best because they are software that is media.
And
Nintendo.
with help from studying Atari figured that out before anybody with the NES and built this incredible juggernaut.
But then they like forgot it for a very long time.
Everything you just described.
Is not new innovative business models. Well, SAS is new.
Right. But Microsoft figured this out twenty years ago.
And this was the whole point of the Xbox and why they were willing to lose
Five billion dollars up front on it.
Because they knew.
That if they can get those Xbox Live subscribers and now the Game Pass subscribers.
That's a really
Really.
Really good business model. And Nintendo has only just figured it out.
So funny.
Yeah. So they basically make ten billion dollars a year selling physical things on a non recurring basis, and they make three billion dollars a year selling digital things that have super high margin revenue and a billion of that is recurring.
So
I think that's the framing that you sort of have to go into when you think about what their next move should be. Now they're Nintendo, so they're gonna do whatever their next move, whatever they want it to be.
But if it's what should it be, the answer is
Figure out how to launch a next generation piece of hardware that makes people upgrade very similar to the way that people do with their iPhones, that has backward compatibility to every other thing that they've purchased in your ecosystem before. So preserve, you know, make it so that
You're growing your monthly active customer base. If they're thinking like this, we might see them do the thing that Apple shifted to, which is
instead of reporting total devices sold, reporting their monthly active
participants in their ecosystem.
And
Make it so that the Switch 2 has all these cool capabilities that make people want to upgrade, but the same great games work everywhere.
This is the forward compatibility piece that Microsoft and Sony and Apple too have figured out of like make sure the software for a certain period of time
keeps working with the old switch consoles. And they've already done this for a half generation. Like you have the switch light, and when you were at my house and you were playing with the switch OLED that I went and bought a couple of months ago
I could see a glimmer in your eye. I could see you saying, Boy, if they don't release a switch too soon, I might be buying this OLED thing,'cause boys is nice.
If I didn't know that we were gonna have this robust discussion about the Switch two, I would have already bought a Switch OLED.
It's so funny, because I went out and bought it and I was like, I can't believe I'm buying a thing that's a six year old piece of hardware. Like, how is this thing not outdated? And then as I started to do the research
It seems like what happened was
They were planning a switch pro
that was gonna release sometime during COVID, but then when demand popped right around the time of Animal Crossing and twenty twenty hit and they sold a whole bunch of them and they were supply constrained.
I think the plan for Switch Pro sort of went out the window and they were like, let's just extend the life of the Switch.
And some of the features they were planning for the pro, like the OLED screen, sort of went into this mini step of the switch OLED before they
Do the switch too.
Which kind of presages like I think it's unlikely Nintendo will do this because
Their Nintendo, but
If you really want to take the logical conclusion of this business model to the extreme,
You turn the switch hardware line into the iPhone hardware line. Totally. Where it's not
Switch one two three, blah, blah, blah. I'm gonna guess iPhone is
thirteen, fourteen, fifteen. But like
You might upgrade
Every now and then and there's plus models and like incremental S models, but
You enter the ecosystem at whatever point feels right to you and you're part of the ecosystem. Yes. And we shouldn't take credit for this. This is the exact thesis popularized by Crossroads Capital, who's a
a Nintendo long and writes awesome letters that we'll link to on the sort of bullcase for Nintendo, but
If you are a buy on Nintendo right now, this is the sort of thing that you believe they should do.
And there's sort of this question of like, okay, but what will Nintendo do? What do the close insiders at Nintendo who don't care about the stock price, who don't really care about their revenue, who don't really care? I mean, they care enough about shareholders.
I think they care about the spirit of Nintendo, as we just discussed for several hours. Make
really fun games.
On
hardware that pushes the envelope on what types of experiences are possible for people. So
I think if they get a B in their bonnet about a new hardware idea that they think is groundbreaking and will enable a whole bunch of new game experiences.
They're gonna do that and then they will figure out the business model implications later.
I think the thing that is a little scary.
And we'll see.
How much this is imprinted on Nintendo.
The Wii U debacle and when smartphones came out.
really existentially challenged Nintendo for the first time ever. Like they could afford
to have that philosophy
during the nineties and the two thousands when they had the handheld business to save them every time.
They could kinda do whatever the hell they wanted and it was fine. There was no existential risk.
We've seen now, even with all the incredible success from the Switch and the five billion dollars of annual operating income that they're generating right now.
They're in a much more precarious position. Like if they don't get things right.
Consumers will just
Leave and go back to mobile.
They can't do another Wii U.
Now we're full on and bull and bear, so let's just pull that forward and do it now.
This is one of Matthew Ball's point on the bear case, which is everyone's all hot on the Switch as the best selling console Nintendo's ever done, blah, blah, blah.
But really it's not one console, it's two, because it cannibalized their other business line.
So you kind of have to look at not how is it doing against the we, how is it doing against the we plus the DS.
Or the NES plus the game boy.
And that really kind of puts it in a different perspective where like they have no backup plan. They can't, you know, move forward in one while keeping the other one stable. They now have one platform, for better or for worse.
And they really can't screw it up.
Which
is a great thing. As a consumer, that's awesome.
It's just like please don't screw it up.
So here's all the other angles on the bear case. Nintendo missed mobile and they'll never have a business on mobile and all the future growth is in mobile gaming and they just
Are not there.
Disagree. I hate mobile gaming and I love my switch. Okay, but let's talk about the business. So Nintendo is cute, doing thirteen billion of revenue a year, five billion of operating income.
But let's look over at mobile. Let's see how Apple and Google are doing.
Who by the way
Make no games.
Just operate stores and sell devices.
They're getting away with murder.
On mobile games.
Sixty-one percent of app store purchases are games.
Turns out that the killer app is mobile games.
Casual free to play mobile games turns out to be the killer app for the iPhone.
ninety billion dollars in total revenue per year, which means almost thirty
billion dollars for Apple and Google.
That is nearly three X Nintendo's very impressive revenue from the Switch this year.
That is the pot of gold in gaming.
Yes.
Totally true.
I think
One of the things that this episode has really crystallized for me, though, is that
It's kinda wrong to think about gaming as one market,'cause it's not. I think that's right.
Especially as we're entering these sort of
era of people hanging out in video games. I mean the metaverse is here. It's just in people spending time in a digital environment that isn't necessarily VR, isn't necessarily immersive. It's like, you know, hanging out on Discord while you're playing games together or whatever. To the extent that
video games are where you hang out with your friends.
That's like a super different use case than
me playing Mario Kart to pass the time in my living room, and also a super different use case than someone who wants to basically play a slot machine on their phile on a flight.
These are all
Such different
human
experiences and like jobs to be done that it is
Totally crazy to call them all gaming, and to your point,
I w bet if you talk to a Nintendo executive, you know, th they look over at mobile and they're like
Okay, sure. Apple is making twenty seven billion dollars a year, Apple and Google.
on people playing what you're calling mobile games, but if I look at that
I think only two billion of those are games, and the rest of that is something that's not games. It's some kind of like statistical uh
Extraction of people's money through digital marketing. Yes. And I think the reality is even more fine-grained than that.
For example.
I love the new Halo Infinite. It's had a lot of problems as a live service, but it's finally getting ironed out.
And
Having
spent a large portion of my teenage years on Halo.
I just love playing it.
If you were an alien
Or let's see. If you were a sixty year old person observing me playing Halo Infinite
Versus observing somebody else playing Fortnite.
On the surface it looks pretty similar.
You're
in a live service environment with other people and you are shooting at them.
But the job to be done of those two experiences is completely different. Yeah.
And those are very different markets.
Yeah.
You said live service, which is another Nintendo Bear case.
Nintendo is not a good live services company. So even if you're writing off the whole mobile market,
Fortnite on Xbox and Fortnite on PlayStation.
People
Play those games.
as forever games because they're live services.
You need
to have fresh content introduced. You need to be able to sort of have events
The way you monetize those games
Is with
this live orientation, which Nintendo has none of in their DNA. So that's sort of like a second market.
that is not particularly addressable to Nintendo, or at least they don't seem to want to address.
Well, I think they're building into it.
Mario Kart eight.
Deluxe has certainly become that.
Especially with the new waves that they're building into, which is their version of seasons. Like a Mario Kart eight wave is the same as a League of Legends season.
Well, it's the same concept. Whether Nintendo is as good at seasons as Riot is
They're absolutely not.
But they are building towards it, clearly.
As you sort of look around it, I'm not sure it's a bear case, but it is interesting to just note where everyone else has sort of ended up in this market, where
Microsoft is trying to do the Netflix of gaming. They're really pushing into this predictable revenue subscription. You pay us, we give you all you can eat.
We don't even care if you play on Xboxes. We want this to be available anywhere and you should use our app that you pay a subscription for to play games on all devices.
That's a very different strategy than
What Sony has
done at least for the last five years. They might be changing right now, but
We're sort of in the middle of a potential pivot for them. They're basically playing the same old console game, and they're playing it with the highest monetizing audience.
of people who want to pay a whole bunch of money for a game and get the
unbelievable graphics experience out of it and play it.
On that device.
It's interesting how all three of these companies, Nintendo, Sony, and Microsoft.
after competing for a while, have now all chosen completely different lanes.
to occupy in terms of what they're marketing to consumers and what the business model around that is.
And I think the big question for Nintendo is do they care about the strategic position and picking a lane and deciding to be Microsoft E in this way with the subscription?
Or is it really just like
Do they pay attention to their shareholders?
I don't know. It is a legitimate question. We don't know.
But thank God that someone is a Nintendo in the world and gets to like
Innovate and drive things forward because everybody else is just kind of copying each other and figuring out is there a cash grab to be had.
Or are we gonna miss out on some big thing? We need to hurry up and go chase it. Nintendo is really not doing that.
Yeah.
I think that is
What is clearly different about Nintendo now
than the past twenty years.
Which is they're no longer stupid. They may not be as commercial as shareholders would like them to be.
But they're no longer stupid.
And
I think you probably gotta have some faith.
That they're
Gonna figure it out.
On the other hand.
relative to a Sony or a Microsoft, where you can be pretty sure
that they're not gonna screw up the next generation. There is still that wildcard risk with Nintendo. Totally. Which is the bare case is games are hit driven, consoles are even more hit driven, and they take six to eight years to recover from a mistake, and now they have all their eggs in one basket.
Just to close out the bear case, even with the switch's success, revenue still hasn't matched the two thousand and eight peak.
Sure they're doing more with like this licensing, movie theme parks, other mobile apps, but it's not
clear how they will make a material amount of revenue from all of that relative to their core business.
We've talked a lot about the bear case. The bull case
I mean
If they actually transition to this durable platform business.
They have a billion plus dollar subscription business on their hands. They have a three billion dollar digital high margin direct to consumer business on their hands.
They also, on top of all of this, to your like video games are the best business model of all time, they also have durable IP, perhaps the most valuable IP in all of video games.
On top of the subscription business, creating the additional stickiness.
And as we get into the crossroads capital viewpoint here, there's a valuation bull case.
Because
You have this company that if they're actually set up in this way and they do actually execute the platform playbook.
Their price to sales
Is that a measly three and a half X?
Where are they trading right now?
You compare that to Apple, that's half of Apple. If they're actually gonna go execute Apple strategy and they actually have the ability to have the margin structure and the growth rate.
and the durability that Apple has with the iPhone business with the App Store on top of it.
You can make a case that you should value those companies the same based on their multiple of revenue.
But then let's get to profits. They're price to earning.
is only thirteen X. For comparison, frickin' Sony.
is at sixteen X, Apple's at twenty eight X, Disney's at fifty four X earnings.
So
Nintendo's got a three billion dollar digital business. If you value that
comparable to other SaaS businesses.
That's like a twenty one billion dollar business. You add in their cash.
So that gets you to
Thirty four billion.
If you look at Nintendo's actual market cap where they're trading today, it's forty seven billion.
So that means
the difference between those two is thirteen billion. Would you value
their entire hardware business, hardware switches.
And hardware.
cartridges, games for the Switch.
And all the future licensing revenue.
at just thirteen billion dollars? That's a freaking steal.
That's like the whole AWS narrative around you buy uh AWS and you get the retail business for free.
If everything goes right and if you believe the whole platform thesis, that's the like valuation bull case that Crossroads has sort of astutely pointed out.
What's really interesting.
Is that
Crossroads and others.
Have been talking about this narrative.
For a long time. And at the same time, it's funny, a video games executive told me last week
We've all thought Nintendo was gonna go out of business for the last twenty years.
Right, right, right, right.
I suspect there are a lot of people listening right now.
At the end of our
Two par call it seven, eight hour series on Nintendo.
That have learned a lot and are surprised about a lot of things.
However
I think people that actively follow the stock and either are long or short in it.
Are not surprised. This is not new information, per se.
There's just so much uncertainty.
And I do think I mean we're in a very fun period here,'cause we will get to learn what their strategy is. I think
In the next six months around the next generation console.
Yes.
And that will be amazing.
I guess though there is sort of a third option.
Which you never know with Nintendo.
Which is that we don't. And they just do nothing.
I don't think they will do this.
But they could.
Right.
Is there a really compelling reason right now to
release.
another hardware generation.
Is the switch under attack from any angle? Right. Why release another the switch OLED's a grevice.
Right.
It's awesome. I was playing it at your house. I'm tempted to buy one. The only reason I'm not is'cause I think there might be a switch two coming soon. And I'm actually not sure what the switch two would have.
Maybe it would solve a developer problem where there's certain developers that are frustrated right now by the processor and
There's a bunch of games that can't get created that consumers might want.
Certainly that is a big thing. The processor is woefully, woefully underpowered at this point.
But
Processors are so good and particularly in the gaming world that
Can a mobile processor from twenty fourteen that NVIDIA made.
Run the latest games? Sure it can.
Will it run them with ray tracing? No. Do most consumers care?
No.
That's a good question.
There's also some weird way left field thing that they could do is they could actually decide we wanna be the next Disney, and they could do theme parks in-house and movies in-house and
merch in house and design all the toys themselves and sell them in stores that they own.
Which is what Marvel did. You know, Marvel initially didn't make their own movies and then they kinda stair stepped into it and then when they started their own studio, that's when that really took off. Right.
The tea leaves are reading against it since they're
constructing four or whatever new theme parks in partnership with NBC Universal. So I imagine they've got a pretty long dated license on that to break ground.
Yep.
Yeah, that's the bear and the bull.
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We're out of order here, but I would like to do power and playbook if your game for Oh yeah, for sure.
All right.
So what
Of the seven powers, and for listeners who are new to Acquired, go listen to our previous episode with Hamilton.
To learn what power is.
Do you think that Nintendo has in the time period from nineteen ninety to today?
Well, let's start with
What we talked about last episode and what we talked about with
Hamilton and Chen Yi about this.
Amazing magical alchemical
Blend of
Scale economies, network economies, and switching costs.
that the NES was in the nineteen nineties.
I think they basically do not have that anymore.
That has disappeared.
in all the ups and downs over the last twenty, thirty years.
I think you could maybe argue that
None of the console.
players have this anymore, at least not in the same way that the NES did.
They
do have these elements, but so do their competitors, so it's not
differentiated anymore.
Hm.
Good point.
So I think that's actually
No longer.
The case for Nintendo.
I think they
Absolutely have a cornered resource in their IP. For sure.
That's her strongest one now.
That may be the strongest one. And potentially also process power.
There's nobody else that can make Breath of the Wild.
There are other studios that can make other amazing games.
But
The core Nintendo games serving that mid core audience, nobody does it better, and I don't think anybody can.
really compete with them.
Uh I have a hard time with this. I'm sure there's indie developers. Uh okay. Fair enough. Too much nostalgia, maybe. I mean I haven't played Breath of the Wild yet. I don't know what I'm waiting for, but
I don't know. I'm not sure that they
uniquely can create that type of game if you were to pluck out all the IP.
Yeah, that's fair. You're right.
It's corneted resource, it's the IP.
I do think there's a new one that they've introduced with Nintendo Switch Online, which is no pun intended switching costs.
I
bought my games from
Nintendo. Like I don't own them.
It's a different version of switching costs. Totally.
And interestingly.
If I
Let my subscription lapse.
If I don't pick it up again.
for six months, there's like a six month grace period, then I lose all my save data.
So if I'm someone who got like super invested in all the progress I made in Breath of the Wild,
I have to keep paying Nintendo.
Assuming that I bought the game digitally instead of as a little as a cartridge. Yeah.
Which is weird that they offer both, by the way. It's a very contrived it's very Nintendo.
I think that is actually
Mm-hmm.
console games industry problem as a whole, not just Nintendo. Xbox and Sony have the same issue. Like
You look at the
P S five and the
Xbox Series X through one line, you're like, Why the hell do you have C D slots? On the other hand
Core gamers feel very strongly about this for the reason you said they really want to own their games and make sure that nobody can ever take them away from them. And resale.
I can't ever sell I just paid Nintendo a hundred and twenty dollars for two games in the last week.
That's money I'm never getting back.
You know, they still have like a weaker version of
Yeah.
scale economy, network economy, switching cost thing.
It's just not
solely theirs like Microsoft and Xbox have their version of it too. Right. If I'm an indie developer
the hundred and twenty million switches is a very attractive group to distribute it to.
And so are the Playstations, and so are the Xboxes.
I think the Switch and Nintendo is counter positioned against the smartphone gaming market right now.
In particular because of this quality concept.
I can be very sure.
That when I buy a game
For my switch.
It's gonna be quality.
Right, and Apple to adopt that stance would have to forego revenue.
So it is counter positioning.
Alright, playbook?
Playbook.
There's a great line that Shigeru Miyamoto has.
Which is
A delayed game is eventually good.
A bad game is bad forever.

So good. I think about this all the time. Ever since I r first read the quote when we were first starting researching three months ago.
It is something I think about a lot for acquired episodes.
It's like
We loosely have a schedule, you know, we do six episodes every six months.
But
You and I just keep canceling stuff when we're like, eh, quality's low.
And
I'm not sure it's the best way to run a business.
But it is the best way to create art.
Yes.
Witch to our discussion about
What is it?
That the people who work at and run Nintendo think they're doing there. Yes. It's somewhere in between.
Right. They really do value the art. And I think that's pretty rare.
When you look around at like Activision, EA the people making the big decisions do not care about the art. They are running
Spreadsheet businesses.
And Nintendo is not.
But there's a bunch of stuff to read into in this quote, which is great. A delayed game is eventually good, a bad game is forever.
Also nestled in that quote.
Is
That Nintendo
doesn't improve upon their games after releasing them.
Right.
That's so the opposite of epic games.
Such a good point.
And even my favorite example, Halo Infinite. Halo Infinite was a bad game when it launched.
It still has a lot of room for an improvement.
But it is so much better than when it launched. Fortnite didn't have Battle Royale when it launched.
Right.
That's crazy.
So that's another interesting one.
Matthew Ball points out a third thing about this quote where he looks at the word is, a delayed game is eventually good. Now we're into Bill Clinton territory. Define is.
Well, a delayed game could be
Eventually good.
But
I think there's this sort of artist polishing thing, which is like if I just take enough time
And I make it the way that I want, it will eventually be good.
Yes.
I think
Nintendo falls victim to this. We haven't really talked about the games themselves side of Nintendo, because that's
way beyond the scope of acquired as a podcast.
I think there's a
big element of this though within Nintendo. Like I think they think that every Zelda game is like amazing.
And it's not. Yes. Yeah, you can kinda feel that.
All right, I'll jump in with a couple here. One that
really popped up to me in this episode in part two.
Is the
Jobs to be done framework.
And we talk about this sometimes on acquired not a lot, certainly not as much as we talk about seven powers and other ideas.
But
The handheld market in particular
really highlights this for me and how
Everybody in the industry like basically ignored it forever.
And
I don't know if Nintendo thought about this consciously, but the Game Boy and the DS.
Were
Hyper serving.
Two jobs to be done. One was games for kids, and one was games for casual adult players.
And
Neither of those audiences were being served well at all by
All the innovation and investment going into all the other gaming platforms.
And Nintendo just got it right. And so on the surface, you look at like the game boy and you're like, What is this thing? you know.
But then like it's actually serving
These wildly diverse audiences in
Very good ways.
Yeah.
That's such a good point.
Two more that I wanna talk about. One
I don't really know what the takeaway is for this on me, but
I've really stuck on this episode of like
How stark the difference is for me.
On
Switch.
Games versus smartphone games.
I know that smartphone games
are a much bigger market and are likely to continue to be.
But the actual experience of playing them is so bad. And many people will argue with me on this.
That we're being reductionist on how bad mobile games are and we're not talking about any of the good ones. Totally. And back to what I was just saying on the jobs to be done framework. I think a lot of people that are playing those games, that game is accomplishing a job to be done for them. Yep.
Absolutely.
But what this really makes me think
And
Makes me a little bit sad for.
Is how
Badly Apple failed the consumer in gaming on iOS.
There is an alternative history.
Where
iOS and iPad OS.
is a Nintendo like gaming platform and like
game design and the art of gaming is flourishing there. And then we'll be
So compelling as a consumer that like my phone that I have with me all the time
also has these beautiful game experiences. And that is just so not the case. The ethos of what these devices were supposed to be and Steve Jobs's Apple is very Nintendo like.
And when you think about the app store and app store review and we don't need fart apps
When you have an enormous pile of money
On the scale.
It's pretty hard to let your values outweigh it.
And I think that happened to Apple.
I think they all sort of looked at it. And I'm not saying Steve Jobs would have been any different. I mean Steve probably would have let the same thing happen and the whole thing was set in motion while he was there. But
I don't think anyone had any idea.
How
much money.
Well driven.
casino mechanic type games.
Lootbox games, Candy Crush type games.
how much money those could make.
And
If you sort of could go back a priori and say, Apple, you can have a much more closed down app store that looks a lot more like Nintendo Switch online, or you can have
What it is today.
I think they wish
Maybe they wish they could have gone the Nintendo route.
But
Being the most valuable company in the world and the most profitable company the world's ever seen is also pretty attractive.
I think they wanna think that they would have gone the Nintendo route, but they for sure wouldn't have. And it's funny I was just thinking as you say that.
On the one hand, nobody could have predicted and nobody did predict.
How big.
The mobile gaming market.
With
become, but I'm thinking all the way back to bring it full circle to the origins of Nintendo.
Of course you could've. It's called gambling. It's human nature. It's been there forever. You know, like the more things change, the more they stay the same. But it's not just gambling. It's gambling combined with
social status. And sometimes it's not gambling. You know, sometimes it's literally Dude, what do you think casinos are? That's true. Gambling combined with social status. That's true.
It's just all digital now. Yep.
You can't tell.
Um
What is Nintendo? Hundred and thirty five, hundred and forty year old company
Story.
Without
It fundamentally boiling down to being like
Human nature?
is human nature. And
The Nintendo story just illustrates so much for me that the seeds of success are sown in a fall, and the seeds of a fall are sown in success.
The Nintendo story.
With the ups and downs.
The falls came from their successes.
And
The successes came from their falls. Right.
Yeah, their greatest strengths are their greatest weaknesses.
Yes.
All right, so my last one is kind of a what would have happened otherwise.
And that question is
How is this company not owned by Disney? You have to imagine Bob Iger.
Was
On a plane.
In Japan.
At some point.
Discussing this.
It's
Unimaginable that he wasn't.
They bought Lucasfilm.
They bought Marvel.
And
In twenty twelve, the year that Lucasfilm was purchased, Nintendo was only worth 12 billion dollars.
Oh man.
So
Assuming that that happened.
How did that meeting play out?
And
I think
Nothing has ever come out about this.
But either
Disney would have had to decide.
We don't want to be that in the video games business. I mean, they bought Platum and they do have games. I think they make billions of dollars from mobile games.
But maybe they decided that IP is not the type of IP that we were buying, and we think that movie IP is more repurposable into our flywheel than games IP.
I don't think that's the case.
No,'cause it would be perfect. It'd be so perfect.
Mario Zelda.
The whole cast, Donkey Kong, is first class IP, along with those three franchises they bought and the Disney Princess series.
Totally.
I'm not the first person to say this, but like
I suspect this new
Mario movie.
is gonna do really well.
You know what's gonna just freaking crush it. Absolutely. When there is a Zelda
movie, television series, whatever
People are going to go absolutely nuts.
We talked about it in part one, but like
More people like Mario than like Zelda, but people who like Zelda get freaking tattoos of Link. Like they name their daughters Zelda. It's gonna be like Lord of the Rings style.
Yeah.
So
One?
thesis I have is that
Japan?
As a nation.
would never let Nintendo be sold to a foreign buyer.
It's like the reverse of what almost happened with the Mariners.
Yeah.
I just have a hard time imagining the Japanese government allowing a deal to go through and I have to imagine
There's sort of some discussion with the state before you even try to propose it.
I mean, it's a national treasure. The Olympics opened with nods to Mario. I think when
Can't remember what year it was, but the Japanese prime minister came out of a tube. Like one of the Mario green sewer tubes. A warp tube, yes.
So
I think no matter how bad this company does, the state would nationalize it before it would ever get sold to a foreign buyer.
Yeah, I think that's right.
So man, I would kill though to hear the conversations between uh Bob Iger and There's gotta be audio tapes out there somewhere.
I know.
Somebody
recorded that meeting on their smartphone. All right. If anyone has that recording or any knowledge of any conversations, we promise we won't tell anyone. Acquired FM at gmail.com. Yeah, join the Slack.
You can DM in the Slack too. Yeah. Exactly.
Oh, that's such a good point.
Yeah, there's no way that that conversation didn't happen. Right.
No way.
No way.
Alright, carve outs.
So I have
Two.
Carve outs.
podcast and podcast related. One is
Really, really good.
Vanity Fair article with Kara Swisher that just came out. Friend of the show, former acquired guest, Kara Swisher, pioneer.
Of
our industry and our category.
So good.
When we had her on the show.
Way back when we told the story of the Recode acquisition. And she's had like six more chapters in her career since then, which is just so I hope we have six more chapters in our career at
that age. Yeah. Good for her.
You know she has
Two children that are about my daughter's age, too. Amazing.
Wow, I could not imagine being
twenty years older and
Parenting kids like I am now. Like her energy is just incredible.
While also doing all these things.
So that's car found number one.
Carve out number two is a long, long
Long time coming, but I have finally
Listeners will be like, Finally, finally.
really gotten into hardcore history.
Nice. It's always been an inspiration for us in theory and
I've never just actually spent the time to dive into it and
Dance so good. Like
Very good.
Everything we do is trying to be a shadow of him. So
So good. If you haven't listened to it, go check it out.
Yeah.
All I do is research for acquired. So I like I'll I'll come up with some other ones. But uh the Tetris movie is great. I think it's like totally worth your time. It's a fun watch.
Let's see, I should come up with one Oh, I did just listen to a great podcast episode this week.
Invest like the best with Patrick O'Shaughnessy.
Always a great show. I mean, truly like he's just one of the best interviewers alive.
And friend of the show. We've done a home and home with him. And we need to do something again.
He interviewed
Daryl Morey, the GM of the Philadelphia Seventy Sixers. I think he's the GM, right?
Oh wow, I'm not up on my MBA uh Yeah, so he left the Rockets, he was considering leaving basketball.
He thought he was out and he is now oh the president of basketball operations at the seventy sixers. Wow. I am so behind on my MBA
Drama. So he took Hinky's job.
Wow.
It is a fantastic interview.
It is really fun. It actually dovetails off this episode well.
they spend a lot of time on the topic, what makes a good game.
And they're basically for all the video game nerds out there who love thinking about balance and things that are OP or overpowered.
Or nerfing versus buffing.
And sort of trying to make a game the most competitive.
This episode spends a lot of time on that. And obviously Daryl has thought a lot about this problem. And how do you continue to tweak the rules of sports to make it A
the most competitive, like the best true game in the purest sense of the word, but also the most interesting to watch, which in some
situations mean you actually want to make it
Less?
skill driven. You want to make it more about luck because you want the any given Sunday effect. And so there's a lot of very interesting uh points that he makes and
As usual, Patrick just does a spectacular job with the interview. So
Highly recommend it. We'll blink in the show notes. I haven't listened to that one yet. I need to go add it to my queue. It's awesome.
Related to that, um.
Cautiously interested, skeptically interested.
To see how the pitch clock goes in uh baseball this season. Oh yeah.
Well I'm literally going to the Mariners game tonight, the former property of Nintendo of America.
And uh I'll have to keep you posted. It'll be fun. Yeah, you'll have to report back.
Well with that.
You should join the Slack.
It is a great way to discuss this episode, share childhood stories of playing Nintendo, hear from people who are involved in the industry, who are always dropping
great nuggets in after we record. So awesome place for post episode discussion.
That is acquired.fm slash slack.
ACQ2 is churning out bangers. So go subscribe. If you're not subscribed, you should because the next one, seriously, with uh the CEO of Retool was like one of my favorite conversations we've ever had.
On the show. Oh, David is so great.
We've also got some really great
A CQ two episodes coming up too, so stay tuned there.
Or taking the deuce to the next level.
We are
Speaking of the next level, David, that is a fancy shirt that I see you wearing. How can people

In the acquired merch store.
Acquired dot FM slash
Store.
Alright, listeners, with that
We'll see you next time.
We'll see you next time.
Who got
Is it you, is it you, is it you who got the truth now