Nintendo's Origins

Transcript from https://podmenti.com/t/ac3a765e6a11cbf0

Oh, have I ever done my Mario impression for you?
No, I would not expect you to have a Mario impression. I don't know where this came from. Maybe all the super smash I was playing in college on N sixty four, but here it goes.

Mm.
Mm.
Ha.
That is amazing. Wow. I had no idea you had that in you. I'm very impressed.
Uh
See I I've been storing that up for this episode. Wow.
When Charles Martin moves on from this mortal coil, I think Nintendo knows who the replacement is gonna be.
Yeah.
Mm.
That is so good.

I'm never gonna be able to look at you the same. Good, that was the goal.
All right, let's do it.
Let's a go.
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?
Down

Another story
No
Welcome to season twelve, episode three of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal.
And we are your hosts.
Video games are an absolutely enormous industry with a market size of over a hundred billion dollars of consumer spend.
Every year.
That makes it bigger than Hollywood and the music industry combined today in twenty twenty three.
And while we are all aware that games are a fixture of life today, from your kids playing Minecraft on an Xbox to you popping open Candy Crush on your phone for a flight.
This phenomenon of humans spending all this time playing video games is
Actually pretty new.
Once upon a time, video games were a tiny niche market aimed at just teenage boys as a subset of the toys category.
that had fits and starts. It was not all up and to the right.
And in the early nineteen eighties, the video game industry in the US
Had some dire straits and nearly evaporated.
Entirely.
Until Nintendo made a huge bet.
and changed history forever.
Oh man.
I've been
a gamer all my life. I love video game history. I was so looking forward to doing
This episode and covering Nintendo.
And
I had no idea what an incredible
story it is of how Nintendo
Single handedly resuscitated this industry.
and achieved ninety five percent global market share and dominated this multi billion dollar industry that was left for dead.
That is the story we're gonna tell today. Like we're not gonna get
to the Switch, we're not gonna get to the Wii. We're barely even gonna get to the Super Nintendo.
Yes, on this episode we'll be covering Nintendo's early years, or at least the first hundred years of the company. Up until about nineteen ninety. And then uh I think we have a part two in the works because the
story of Nintendo after 1990 is like a completely different company and a completely different set of analyses to do. So consider this a part one and
Truly a story all to its own.
Well, listeners, we have a big announcement.
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The deuce.
Yes.
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All right listeners.
Now is a great time to talk about a new partner of ours here on Acquired, Lagora.
The agentic operating system that is redefining how the world's best legal teams work.
Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Ligora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?
So the founders did exactly what great founders do.
operate with obsessive customer focus.
They embedded inside a massive law firm.
For months.
They sat with the lawyers just watching how the work really gets done.
And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legor's Bethere is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work.
And do higher value work. And this means that the pie can grow even as each individual task takes less time. And they recently launched Lagora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product.
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And crazily, they went from one million
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In about
Eighteen months.

truly insane numbers. And that is the real test.
Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client.
If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at Lagora.com/slash acquired.
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And this show is for informational and entertainment purposes only.
So there are
quite a lot of books written about the history of Nintendo.
Some of which are very good. And we've read
Basically all of them at this point.
In particular.
I would highly recommend game over.
And power up.
Yep, and I read Super Mario also great.
But the thing that we realized, and Ben and I were texting about this as we were doing the research.
All these books.
Either focus on the Nintendo
Japan story or the Nintendo
America story.
Or the video games in America story or the video games in Japan story. And they keep them separate.
And it's super weird to us.
I think that kinda misses the point of the story here, which is that the rise of video games and the rise of Nintendo
Is this
Incredible interwoven global tale.
Nintendo of America wouldn't have happened without Nintendo of Japan and Nintendo of Japan would not at all be what it is without
Nintendo America. So what we're gonna try to do here
is unite these stories and tell them together as one canonical Nintendo story.
I think maybe for
The first time. I don't know, at least that we've found. So this is gonna be fun.
So
Speaking of this, we start
Our story.
Appropriately enough, not
In Japan, in the late eighteen hundreds, when Nintendo was founded,
But
In California.
In the nineteen seventies.
With
Friend of the show.
And one of if not maybe the
original father of
Silicon Valley.
Nolan Bushnell.
of Atari.
And certainly the father of the video games industry.
We had a chance to interview Nolan back in twenty nineteen on the show. You can find that episode in our back catalog.
He is such a character. You can't understand him without listening to him, and he is
One of a kind.
So Nolan.
Grows up.
In
Utah.
Of all places in the nineteen fifties. And he's just from birth this incredible hustler and entrepreneur. And one of the jobs that he gets growing up
Is
Working at carnivals.
He's
literally a carny and he keeps referring to himself as a carny in our uh interview with him, which is fun.
Arcade games back then in the fifties and sixties.
We're not.
What we think of arcade games today.
They were what's called electromechanical games. So these are things like
Everything from you shoot the water gun to like make the balloons pop to little lights and stuff going on. You swing the hammer to hit the bell.
They were games and they might have involved some
Circuitry components, lights and sounds.
But they were not.
Video games.
And lots of bars had games like this. They were something to do.
At bars.
In fact, one of the leading companies that made these electromechanical games
Back in the day was a little company called Sega, which will come up later.
Is there Nolan?
In addition to
having this incredible entrepreneurial streak in
background in arcades.
He does something.
pretty unique. He goes to college at the University of Utah.
and majors in electrical engineering. And this was a
Pretty special.
place and department to be in at that time.
Folks who came out of
The University of Utah.
engineering school around this time.
Alan K
Jim Clark of Silicon Graphics and Netscape Ed Catmull of Pixar.
All of which have been protagonists of acquired episodes. I know, I know. It's just incredible.
Silicon Valley DNA that comes out of that time. And specifically
Focused on
Graphics.
Innovating there. Which of course Nolan
becomes part of this tradition. So while he's there.
He
programs on a deck.
PDP one.
This is one of the original old school computers from the fifties and sixties.
They, MIT, and several others.
had one of these devices and folks at MIT
Had
In their spare time.
Created.
A game for it.
The very first
video game played on a programmable computer, which was called Space War. And it was a very, very
early rudimentary, you know, kinda like asteroids. Not quite space invaders. Or Gallaga or
It's funny how many early video games were space games because of space war. They were inspired by and derivatives of space war.
And of course, what's like a really easy graphical game that you could put on a black screen that you had green little lines that you can manipulate on. Well, space. There's a lot of black in space.
Yep.
So
When Nolan sees this, he's like
Whoa, holy crap. You know, and nobody else who is playing space war in the entire world or using a PDP one has also
Worked at Carnival Arcades.
And Nolan's like, man.
This would kill it if I could bring it back.
To the arcades.
But of course, at the time, uh I think a deck PDP one cost over a hundred thousand dollars, which is over a million dollars today. So like
The idea that you could domesticate this animal, not even bring it into homes, but
get the price point down to a point where bars or arcades or carnivals could afford to buy these things, like no way.
Totally. I mean that it just literally never pays back when you're thinking about I don't know if it was nickels or quarters, but whatever you're putting in the arcade machines, it's just never gonna pencil.
So
When Nolan graduates
He comes out to Proto Silicon Valley.
And he gets a job as an engineer at one of the leading companies there at the time, a company called Ampex.
Their main market was making tape recorders.
That were used for
movies, television, music, recording industries.
But all the time that no one's working there, you can't really get
both his entrepreneurial and carnival master DNA and this idea out of his head of like if you could domesticate video games
and bring them to the consumer market, they would do really well.
So finally after a couple of years, by nineteen sixty nine, he thinks, you know
Thanks Fairchild and
National semiconductor and now Intel at this point.
Silicon has gotten cheap enough.
That maybe you could do this.
And basically take space war.
And build a machine cheap enough that you could sell it into arcades and carnivals.
It's total Moore's Law story. It's like exactly the way that we opened our NVIDIA episode with
Maybe not yet, but I can see it in the next year that it'll get cheap enough to make this new business viable.
Yep.
So
He
Packs up and leaves Ampex.
goes to start a company with fellow AMPEX employee Ted Dabney.
And
Their business plan is they're gonna do exactly this.
They initially call the company Sissorgy, but it turns out that name is already taken by a candle maker in Mendocino, I think Nola told us.
I was gonna say the problem with that name is that it's terrible, not that someone else also decided it was a good name. Thank God it was terrible. So uh
Nolan raks his brain and

He's become a big go player.
And he takes the term Atari.
From


Check.
The equivalent of check and chess in go.
They build a game.
Called computer space.
That's
Based on Spacewar. This is the first commercialized
programmed video arcade game.
In history.
They
Put it together, they contract with a
arcade distribution firm called Nutting Associates.
To distribute it.
Um
It's okay. It's not really a profitable enterprise yet. One because
The amount of silicon required to run the game. Remember, this is coming from cutting edge scientific, military use computers.
is still enough that it costs too much to make these machines. It's not really economically viable yet.
It has another more important problem though.
Which is that
Consumers in America aren't
really ready for space games.
They haven't yet made the leap to we're gonna live in fantasy worlds and we could pretend we're piloting a spaceship out in space and blasting
Enemies.
That doesn't compute yet with audiences. Right. It's escapism at its finest, and now we take it for granted that whenever you play a video game, you're entering some escapist fantasy, but that
was a brand new novel idea.
So
They get this feedback.
Nolan and Ted.
And they think, all right, well one
We need to make this technology simpler so that it's more
affordable and cost effective.
So they hire
One of the co-workers from Ampex, a guy named Al Alcorn, who's an amazing engineer. One of the themes that's gonna come up a bunch in this episode is
the mythical ten X, hundred X engineer or game designer, somebody who can do things that other people
Can't.
And specifically what was really valued.
In
Silicon Valley in technology engineering at this time.
was the ability to design systems with the highest amount of functionality with the fewest number of chips, because every chip that you put in there
added a whole lot of cost to the bill of materials.
Yeah.
And not just on the raw costs.
But on the assembly time.
Soldering takes time.
And
At this point, there's very little software involved in these games. You're mostly
hard coding the functionality onto the motherboard itself depending on what chips you put in.
Yeah.
To put a finer point on that, I don't think there's any software involved. Like I think everything is hard coded in these chips at this point in time.
Right. This is managing to create games using just electrical engineering. Right. And something I hadn't even thought about till now.
All of the applications of silicon
To this point in time.
They were mostly for military use cases.
Somewhat for industrial and commercial use cases.
But the end products, like the physical devices that were being produced by all these companies, were not meant to be distributed in large numbers to consumers.
If you're making systems for the government, you're not making a high number of machines.
Right.
We were in the like hundreds, maybe low thousands of devices when you're considering military communications equipment. Now with arcades, you're into the thousands and potentially tens of thousands, which is a huge leap.
So all this kind of value engineering, you can see why it's super, super important.
So huge win. They bring
Al Al Cornover. He is
the engineer that can make this happen.
And

Nolan decides that he's gonna
Give Al'cause Al's never made a game before.
He's gonna give him like a training project to get started.
And he's thinking about what sort of like small toy game
Could I

And it just so happens.
That Nolan had recently
been to a demonstration.
by the consumer electronics company Magnavox.
And Magnamox, which
At this point in time.
They were one of the companies riding the wave of
televisions across America, as we talked about it in the NFL and plenty of other episodes.
They were looking for
Ways to market their televisions as
superior to other manufacturers out there like RCA or what have you.
And they had come up with this.
Little device.
that plugged into their televisions called the Odyssey.
And they called this thing a closed circuit electronic
Playground.
What it actually was was the very first home video game console. They just didn't think about it that way.
This just goes to show too a lot of the times before a category is created, you don't know how to describe the job to be done of the very first
product in the category. And so you come up with some really esoteric name like that.
And it's only when five other competitors come in after you does the category sort of get a name, like video game consoles or home video games.
And
I think this came up way back when we interviewed Vlad from Webflow on one of the earliest
acquired LP now A C Q two episodes.
He brought up the fact that he's like, Oh, people started calling us no code. And he was like, We've been going for five years. We had no idea we were a no code company, but now apparently that's a thing. And that's exactly what happened with the Magnavox Odyssey. Yeah. It's even more extreme than that. Not only did they not know what to call it.
They had no idea what this market was.
They thought this thing was a G Wiz device that they could have their sales reps in their stores around the country demonstrate to consumers to help them sell TVs. That's all that they thought about. They didn't think that this would be a market or a product line in and of its own.
But they had created this.
Machine.
in a partnership with guy named Ralph Bear, who really created it. They licensed it from him and he's known as the father of home video games.
So they had game cards that you would plug into
The Odyssey and depending on which game cards you had plugged in, you could play different games.
We'll see as we go along here, but it wouldn't be for several more years until that idea would come back and people would realize
Oh hey, there's actually value to selling
not dedicated hardware into the home of like this console only plays this game.
But you want interchangeable software here.
So
This Odyssey, like we said, Magnavox
Has no idea what they're doing with it here. And you can't blame them. There's no roadmap for this.
But in what should have been a sign.
to them, and certainly was assigned to Nolan,
Even though
They were not marketing this as a standalone device or anything like that.
It becomes a pretty big success.
Anyway, despite Magnavox,
They end up selling a couple hundred thousand units of this thing.
The Magnavox Odyssey was invented to solve a problem that Magnavox had, and what they sort of failed to realize is that it
had a tremendous job to be done for consumers, where they sort of accidentally fell backwards into a gold mine, but did not feel around enough to sort of grab the gold.
Yes.
Nolan, though, when he sees a demonstration of this.
Probably the most compelling game on the Odyssey was
What's called table tennis.
And it was like
a very, very rudimentary approximation of either
tennis or ping pong, you know, table tennis that you could play with the Odyssey.
on your computer. So he brings this back.
To Atari and to Al and says.
Make something like this.
As you're
Test project here.
Al of course does, does it brilliantly.
And they start playing around with it at the office and they're like
Dang, this thing's kinda fun.
And wasn't it like a proof of concept game?
It was basically a demo to show off.
the potential of what they could do as Atari, and they didn't realize in creating Pong
right there on the spot, they invented a mega hit as the proof of concept. Yes, that was the thing.
So famously.
They take the first cabinet to Andy Caps.
Tavern.
In Sunnyvale, California.
And they convinced the owner there to
Set up.
This pong machine, as they start calling it.
At Andy Caps.
And
It just becomes like a quarter vacuum, like a magnet.
Literally.
All of the
Pieces of coin.
in customers' pockets just get sucked right into pond. It's
Incredibly compelling.
And
The thing that makes it
So accessible.
To just average people who are going to the bar.
Is
It's relatable. You don't have to make the leap that you're a pilot of a spaceship out in space.
Everybody knows what table tennis is.
You know how to play this game, you know what you're doing, and that gets you in to try it. And once you start playing this thing and you get engrossed in it.
And Pung at this point in time is only two player. There's no AI here. You have to play against somebody else. You get the competitive factor going, especially in a bar. And they're like, Oh
We got something good here.
Yep.
So they start.
Producing these cabinets.
Selling them to bars and arcades around the country.
It's going.
Really well.
So well.
That
A certain
Newly minted venture capitalist.

Nolan.
And Atari.
The legendary Don Valentine.
When you say newly minted, you know, it's funny, in today's terms, he'd be like an emerging manager. I think he had raised what five million dollar fund. And this is effectively like Sequoia fund one looking to make its first investment.
Yes. And Atari becomes Sequoia Capital's very
First investment. And it goes even deeper than that. With the money.
Nolan and the team in Atari start bringing on
additional folks to
build and engineer games that they can sell. You know, this pond thing worked out pretty well.
They hire a young kid named Steve Jobs.
Amazing.
To come in and design a one player solo version.
of pong that you can play, which ends up being called Breakout.
That he does with his buddy Steve Wozniak. This is like my favorite
hidden Atari story is that freaking Steve Jobs was the designer and the creator with Steve Wozniak of Breakout.
So just like that.
Not one, not two.
But three industries.
Are born. You've got the home video game console business with Magnavox and the Odyssey that Atari copied with Pong.
You've got the arcade video game business.
That's
Atari is really
Entering here, it starts to take off faster than anything.
And then you've got the personal home computer business that Steve and Waz start with Apple.
And it all comes out of this.
One moment, which is incredible.
So unlike
Today.
With
Games or any type of software.
There's no app store out there. Turns out that
Distribution.
is a critical element to building.
a technology company.
So the arcade.
Business.
With the tar he starts to really take off.
Companies both existing electromecanical
games companies like Sega and others get into the video game business. Atari's out there, obviously the leader.
By the mid to late seventies.
The top arcade.
Games out there.
We're making billions of dollars in annual revenue. Like Space Invaders, which was launched by the Japanese company Taito.
In nineteen seventy eight.
It does.
Two billion dollars in annual revenue in the US alone. Whoa, what year is this?
This is in nineteen seventy eight.
I don't think I realized how big the arcade market got before there were even video game consoles in the home. I've done all this research and I did not realize how big the arcade market was. Yeah.
This industry not only was it did it dwarf the home console industry that the Odyssey started
It dwarfed the personal computer industry. This was the main application of silicon for the 1970s for consumer markets.
By the end of the seventies, the total
Video game arcade market.
is five billion dollars a year.
Which is already by then you said in the intro, you know, today video games are bigger than movies and music.
It was already bigger than movies and music by the end of the seventies.
Huh, that's a narrative violation.
I thought this notion of
Eclipsing Hollywood in music was the recent phenomenon to show how much time people spend in games.
But what you're pointing out is that it was a different form factor and it was a physical location at arcades, but like that's basically always been true.
Well it was this.
Ultimate hack to get
distribution of this new
technology and business.
into the mass consumer market.
People already went.
Yeah.
And this was a better product of what they already did.
So the industry just took off like wildfire.
The fascinating thing about this pre home console era is
Is that
There's basically no intellectual property yet,'cause there's no stories yet.
These video games are so basic with Pong, with Breakout.
It feels silly to compare it to Hollywood because there's not real franchises and characters and stories and anything you can repurpose.
You're not gonna figure out how to make Pong into a movie or a T V show. There's nothing there.
Right. You could, but it would probably be pretty bad.
Right. It's a false comparison at this point in history. Yep. But again, it makes total sense. This came out of arcades, carnivals. You don't need a story here. This is about
Competition in a public environment.
Right.
So
As
Atari really starts to take off through the early and mid-70s. Nolan decides that
Hey, they should probably get into the home
video game business too.
Moore's Law keeps happening. We can now create what used to take a whole cabinet into
a small box that you plug into your TV that's purchasable by a consumer rather than costing tens or hundreds of thousands of dollars.
It's finally happening.
Yep. So they start working on a
programmable machine.
That can play
versions of popular arcade hits at the time.
And they codename it the VCS, the video computer system.
Now as they start working on this
He and
the board of Atari realize.
This is gonna be a very different business with different dynamics than the arcade business.
And the first and most visceral thing they realize is
This is very capital intensive. It takes a lot of firepower.
to bring a home console to market.
In the right way.
With arcade games.
You make the game.
You work with a distributor like Midway or Bally or something like that. You get it into arcades and bars and the money comes in. Like the cash flow cycle is very quick.
And you make one of the machines and like a thousand people can play it. The way to address a thousand consumers is make a machine and let'em flock to the bar to drop quarters in. Yeah.
But in the consumer market.
Things are very different.
You need to get
machines into retail and then you need to get retailers
and marketers behind what you're doing and build demand amongst consumers.
for people to, you know, have a reason to go to the store and buy your thing and bring it home.
And you need to build a hundred, a thousand times more machines to address that same set of consumers in their home.
Right. Toys are us.
isn't gonna buy your product for their stores if you only have ten of them. They're gonna buy your product if you have at least a million of them.
Yep.
So
Silicon Valley has not evolved to the point yet where there are like
big growth funds out there that could come in and give Atari a couple hundred million dollars to build up this inventory.
So they decide
The right thing to do is sell the company.
They end up selling it to Warner Brothers.
In
Nineteen seventy six for twenty eight million dollars.
And this becomes one of the greatest acquisitions of all time for a very brief period, but during that brief period, the payback on Warner Brothers twenty eight million dollar investment.
is pretty incredible.
Yeah, that ubiquitous Atari twenty six hundred system that everybody sort of has a fond memory for and recognizes pretty instantly.
Basically all the value of that accrued to Warner Brothers, not the founders and investors in Atari, the independent company.
Yes.
So
They acquired the company in nineteen seventy six. Nineteen seventy seven, they release the VCS, which gets renamed as the Twenty Six Hundred.
It's a smash hit. It sells a million units in the first year.
And then sales double every single year for the next
Three.
Years.
It's so huge that by nineteen eighty, just like three years.
After
The twenty six hundred launches.
The Atari Division of Warner Brothers does four hundred
And fifteen million dollars in revenue.
all of the revenue that Warner Brothers does. Basically Warner Brothers, the publicly traded, you know, Hollywood studio.
becomes a video game company for a couple of years.
That's insane.
I had no idea it was that meaningful to Warner.
This is the thing that has just gotten lost to history is that the video game industry
took off like almost nothing we've ever even seen to this day.
Right. I mean we're building up to this impending crash here, but boy, those first five years were incredible.
Yeah, it is a
Total gold rush.
So much so that Atari's not the only ones making money here.
lots of other toy companies
other media companies decide, hey, they want to get in on this home console video game business too.
So Mattel enters the market.
A toy company called Coleco enters the market, which
Actually had its roots in the uh leather business. It's the Connecticut Leather Company. Oh wow. Yeah. So everybody's coming into market here.
And it
quickly
a subcategory of toys.
in the sort of American consumer psyche.
the way that people thought to spend on this is
Oh, my eight to eighteen year old son needs a toy.
And
It's a big birthday or something, so I'm gonna get him a really nice toy, which is gonna be one of these video game things. Yep.
And
specifically the magic to this and why these became so popular.
As toys.
And what informs the whole business model for decades to come.
Is
The swappable game cartridges.
So if you buy an Atari twenty six hundred
You're not just buying a toy for this year or this birthday or this holiday.
You're buying toys for the next
Several years to come.
And this is like a full lean in on the razor blades razors model.
Where I'm pretty sure Warner's wasn't actually
generating gross margin on the Atari twenty six hundreds they were selling. They would make all the money on the games, which
has been true even in the modern gaming era. I mean you look at
the incredible amount of firepower in the PlayStations and Xboxes of the last ten years.
those things sell for the very cheapest they possibly can in order to get an install base so that they can make money on the games. That's what was happening with Atari here, too.
Totally.
Everybody's figuring this out all at once.
So much so that
A few
Engineers.
At Atari after the acquisition, they start to realize this and they think
Man, all the money, all the profits.
Are in the software here.
What if we leave Atari and we set up a new company?
That's just gonna make games. We're not gonna make hardware. We're gonna make games for
The twenty six hundred.
So
They leave they actually don't set up a deal with Atari these guys. They start publishing their own games. They make the cartridges, they sell them on the market themselves.
Because Atari didn't require you to do a deal with them.
Nobody was thinking about third party developers yet. These guys who left, they knew how to do it because they were Atari employees. So the company they start is a little company called Activision.
Which is now in the process of being acquired by Microsoft for uh just about eighty billion dollars.
Just as a third party publisher.
So
Atari ends up suing this new Activision. They're like, hey, you can't do this. Uh you know, they're like fighting it out in court. And by the way, the reason they name it Activision is so it comes before Atari in the phone book. I'm pretty sure Accolade, there were a handful of
A publishers at the time that uh all had the same idea.
Yeah.
While they're fighting it out in court, which is just so funny.
Somebody must have taken a step back at some point and realized, Hey, wait a minute.
What are we fighting about? There is so much money to be made here.
What if we Activision
Just
pay you guys, Atari, like a royalty fee for every cartridge that we sell. You get 10, 20, 30 percent of what it doesn't even matter. We're all making so much money. Uh Atari's like
Oh yeah, you mean
You make the games.
You sell them.
And we just get money? Okay, cool.
Oh, and we have to take no capital risk on you developing that game. We just make money only if it works. Got it. Got it. Yes, please.
Yes, please, indeed.
And obviously that works out very, very well.
Fair.
All involved.
For a time, for Atari.
Yes. For a time.
So you've got this rush of competition coming in for the video game consoles.
Yes. And
The problem was
It worked.
Too well.
Got the parallels to like web three and crypto here are just all over this episode, but there was so much money to be made
Everybody rushed in with
A game.
Game quote unquote here. Like people were just
shoveling any kind of software that they could.
Both the first parties like Atari, like Mattel.
And third parties like Activision.
They were just trying to get games into stores because people
Parents.
would buy them without knowing what they were.
And like it didn't matter if they were crap. There was just a license to print money.
And it wasn't just the games.
Once people realize the power of this royalty model
they wanted to come out with systems too. And so you had 15 different companies rush to market in the US with consoles. And so suddenly these toy stores
got flooded both with games and consoles.
And as you would imagine.
There's
intense concentration in the consoles that got selected. There's a real ecosystem effect and network effects that need to be developed for these things to work. And so
For a console to be successful, you need
a bunch of people buying the console. And once you have a reason for people to develop for your thing,
then suddenly you actually get the good games, not all the shovelware crap that's hitting the shelves. And so
You kinda needed the market to suss out.
Hey you
Can we consolidate down to just a few
game devices, a few consoles.
Because otherwise nobody knows what to buy, nobody knows what to develop for.
And it's just a big mess and the whole thing's gonna be a failure as a category.
Yeah.
The problem was
It was so overcrowded and so overfunded.
Just like
Things in recent history here in twenty twenty three.
That didn't happen.
Nobody could figure out what was the crap. There was just too much out there.
Right. The laws of economic physics were broken and instead of free market dynamics playing out
There was just tons of incentive to just go make more stuff and get it out there, even if it may or may not work.
Yep.
So
Remember I said by nineteen eighty
The arcade video game business.
Was a five.
billion dollar annual industry in the United States.
By the end of nineteen eighty two.
Just two years later.
The home video game business.
is a three point two billion dollar industry.
Almost as big and combined, you've got
A ten billion dollar industry that just
Sprung up overnight.
Incredible.
And just to paint where we're going here, that three point two billion dollar video game
market, that home video game console market in nineteen eighty two.
By nineteen eighty five would be worth one hundred million dollars.
A reduction of thirty two X in the market size.
Because the entire category just went away.
Just disappeared.
To put that differently, a ninety seven percent drop.
In market size.
Within two years.
So
Everybody who came into this industry, the third party independent software
Game developers.
The hardware guys.
Atari, Warner Brothers, Mattel.
They just
Lose their shirts.
Because remember
This is still the nineteen eighties.
Software has real cogs to it.
These are
physical packaged goods. These are cartridges and systems with silicon and chips in them.
And supply chains and labor.
There's billions of dollars of inventory.
tied up in these companies in all these systems and games.
That all of a sudden now is sitting on shelves.
And
Can't.
Sell.
So
All these companies have huge losses. Warner Brothers publicly traded Warner Brothers company like has to report
Massive losses.
So much so that to appease Wall Street
They have to
Break up Atari and sell it off.
They sell the console.
Business.
And the games business separately.
And
Coleco and Mattel completely exit the video game business.
the whole industry, the home video game industry is just
Decimated gets
Yeah.
The famous E T
Atari game, the cartridge burial happens in New Mexico.
Atari made so many of these E.T. games that they jointly developed with Universal, and in fact Steven Spielberg himself was involved in approving
the concept of yes, let's turn E T into a game. The game was so poorly made.
And the actual game mechanics were so not fun, much like basically every other game at the time, because you're trying to figure out
what console to make it for, you make it for like five consoles, you're rushing to market with this and sixteen other games at the same time.
Eventually the quality of
Every single thing that's hitting the market is so low.
Because all the incentives were to just get crap out there. The consumers just stop buying. And so stores just stop.
buying upstream, specifically consoles. They kinda stopped buying games, but they really stopped buying consoles except for the one or two or three that are the leading consoles, but even then they're not placing big orders anymore. And that's sort of how you have this
Whole whip crack effect.
all the way back upstream to the game makers and the newfound publishers, these third party developers, that the whole thing kind of collapses.
The interesting thing with E T is
To your point, they didn't want people discovering the burmes and then reselling them for cheap and compounding the problem even worse. So they like literally took wrecking balls and they're like smashing the cartridges and they bury them in a landfill and they pour concrete on top.
And people have gone and like excavated this and looked, and this is a real thing that they had to bury all this inventory.
Point is
It was brutal. Now
Like you said, Ben. This was
The way this
Industry
went to market was as part of the toy.
industry.
So
This is actually not anything new for the toy industry. Toys are so cyclical. They're fads.
And so the mental model that everybody here in America has for what just happened is
Oh, the home video game console.
It was like the hula hoop.
Specifically, you know, I mentioned Coleco, which entered the industry.
When they get out of the video game industry, the next thing they do is cabbage patch kids dolls. This is just how the toy industry works. You move on to the next thing, you make as much money out of it as you can before the fad the kids move on and the generation changes. It's fad based and it's super seasonal. Basically, like Q three, Q four matters and you're not selling anything Q three, Q one.
It's like just the rush up to Christmas. And so everyone's sort of viewing it as oh, nineteen eighty two's Christmas special
Toy.
was the video game console.
And oh yeah, it didn't really pan out that people would want those in more future years, but I'm sure we'll find something else.
So
Who's this?
Opportunity of a lifetime.
Sitting.
right there in plain sight for anybody who has the foresight to actually realize this, which is
the video game industry, specifically the home video game industry
Is not.
Like toys.
They're actually
was incredible product market fit.
And demand.
For good games out there.
There's a reason why kids wanted this stuff.
And
The
Business.
Of a home video game system.
Is one of the best of all time.
We talk on this show about how the software business model is the best business model of all time.
And the media business model is the second best business model of all time.
Video games.
Our software
That is media. It doesn't get any better than that. You sell a console, whatever, you lose money on the console, who cares?
You sell games.
into homes across America and across the world at fifty bucks a pop.
that even with all the manufacturing costs, you're still making eighty percent gross margin on this stuff.
That's pretty incredible. And you can sell three, four, five, ten of them a year.
Especially once you flash way forward to games today.
There's zero marginal costs to make another copy of the game. There's zero distribution cost because you just ship bits over the internet.
And to your point on top, it's media that is software.
It's also IP. We're about to tell the Nintendo story here as we transition to Nintendo and how they really find story and characters.
in an industry that just had, you know, non human characters, spaceships and sort of inanimate objects.
you have a whole new level on top, which is the durability of IP franchises.
Yeah.
is about to come into view for the first time. So you're right.
unbelievable business model to produce these games.
And if you can be sort of the platform maker and get all of the platform network effects that accrue when you are the game console manufacturer.
God, you put those two things together. That is a pretty great combo.
So
Enter.
Nintendo.
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Okay, David.
As we get into the Nintendo story here, there is one thing I think that's important listeners to know before we flash back and tell Nintendo from
Day one, which is
The US video game market is decimated.
But in Japan, for home game consoles that were just starting to really
find their footing around nineteen eighty three.
They kind of resisted the urge to
To import all of these American consoles.
That's
were flying off shelves.
And so in Japan
you had a completely different dynamic, which was
There were only a few consoles.
But they were selling quite well.
And they didn't have a ton of competition.
So there actually was a moment in the Japanese market to look around and observe
When we make
high quality games.
People totally want to buy them and pay for them.
And knowing that might give us an advantage in entering other markets too.
Totally.
So
Nintendo.
We go back to
Eighteen.
Eighty nine.
A hundred years earlier.
In Kyoto, Japan.
when one Fusa Jiro Yamauchi
Who
was the head of a
Cement.
Company.
At the time, in Kyoto.
Yamuchi was actually not his
original family name. He had become the head of the cement company because he had worked in it.
And the person who
ran and owned the cement company.
was ready to retire. He didn't have any male heirs to take over the company, which is how companies
transitioned in.
Japan. And so what you did in that case was
You adopted.
A male air.
to take over the company. So Fusagiro was actually born Fusagiro Fuki.
But he took on the Yamauchi.
Family name.

Cement company.
Now
Similar to Nolan.
many, many years later in America.
Fuisagero was looking around for interesting new technologies and how he might apply it to a market that he knew had universal appeal.
Which was playing games.
And specifically playing games for
Money.
He saw that there was an opportunity
To get out of the cement business, the boring cement business.
And enter.
The playing card business.
So he sets up a new company.
He names it Nintendo.
And the name of Nintendo is actually a multiple on Tandra, so the kanji characters
Nin Ten and Do
can be interpreted as leave luck to heaven.
Which of course references luck in playing cards, you know, also maybe the entrepreneurial spirit of a new venture.
But definitely plays on the fact that they're a gambling company. Well, that's what I was gonna say. Specifically the character Ten.
at the time was a clear reference to the uh sort of mythical spirit Tengu.
Which was a coded reference for
Gambling and casinos.
Which were very, very, very much still illegal at the time. Now why
Did Fusajero see the opportunity here?
Playing cards and card games had originally entered Japan from the West
In the fifteen hundreds.
But then they'd been banned for
hundreds of years.
When Japan's rulers
Followed a strict.
isolationist policy and basically kicked all Western influence.
I think I knew this, but I had
Forgotten till doing the research.
Do you know how they did that? The rulers of Japan for this multiple hundred year period from the fifteen hundreds to the eighteen hundreds? No.
They institute the death penalty.
For any foreigners who enter Japan
And any Japanese who leave the country.
Whoa So like they meant it. All Western influence.
out of Japan.
This goes on for hundreds of years.
Wait, if you entered the country it was just so illegal that they would kill you?
Yes. Oh my God. Yeah.
I feel like I missed this part of world history.
Yeah.
But human nature is
Human nature.
And
Even despite this very strict.
effort to eliminate Western influence from Japanese society, the allure of
playing games and gambling.
For money.
is too strong to resist. And so during that time
The
Playing card.
System.
developed a kind of substitute parallel track in Japan.
called instead of the Western deck the Hanafuda cards.
And instead of
Four suits.
These cards had four seasons.
And instead of
thirteen numbers and faces on the cards. They had twelve months of the year.
But used for.
Basically the same purpose, which is games of gambling.
So
By the late eighteen eighties after the Meiji.
Restoration. The government

the official ban on playing cards. So Hanafuda cards
Existed for hundreds of years, but even they were like underground.
Finally now you could legally produce these things.
And so that's why Yamahauchi.
Starts.
Nintendo.
So
Nintendo.
becomes quite successful in this new industry. So successful, in fact, that they become
The largest.
playing card manufacturer in Japan.
You think like cool, that's great.
Interesting.
Business, you know, playing cards.
Fun games. I can see maybe how that leads to uh
You know what Nintendo becomes?
If you think about it a little more though.
Playing cards are now legal in Japan.
Gambling is not.
Though. And what is the main use of playing cards?
Well, it's gambling.
Who are the primary customers for playing cards?
It's not households.
Okay, so anybody who's operating an illegal casino, basically.
It's organized crime.
It's the Yakuza in Japan, the Japanese mafia.
Whoa.
I had heard whispers that there was some Yakuza involvement in Nintendo's history, but I
Didn't find anything about it. What do you got?
Well
So the Yakuza operated gambling parlors and casinos all throughout
The country.
And
There just like at casinos in America.
When
They play games with cards. They use a fresh pack of cards for every game because you don't want to have cheating. This is an incredible business. What an incredible customer for Nintendo. These gaming parlors run by the Yakuza who need thousands and thousands of packs of cards. Wow.
Very
Very successful business and a quite interesting distribution capability.
that Nintendo builds up over these fifty plus years that they're
Just a playing cards company.
Wow.
So on this show we talk a lot about
value chain and where power accrues in a value chain and how you get
Power as a company.
It doesn't feel like you want your biggest customer to be the Yakuza. And it doesn't feel like you want them controlling your destiny.
Maybe, maybe not. I mean, if you can navigate that successfully.
You can really develop
Quite a lot of power.
Within a market.
It's so interesting'cause in the US
the early arcade games
industry was sort of the same way. It was also a mafia thing. We talked about this with Nolan, yeah.
And
That is a hundred percent the roots of Nintendo. So
Fusajiro.
Yamayuji.
runs this business for a number of decades quite successfully.
He ends up having
The same problem.
That his adopted father, the
Original cement entrepreneur.
Had.
before him, which is when it comes time for him to retire.
He doesn't have a male heir.
So he arranges.
For his daughter to marry a promising local young man
Name Sekiro.
Canada.
And Sekiro also.
Changes his name to Yamauchi.
He becomes the at this point now third coming of
The mythical Yama Uchi.
And the second president.
Of
actual Nintendo itself.
Sekiro.
Also.
Doesn't have any mail errors.
So for the third time.
The Yamauchi Patriarch.
Arranges to adopt an heir.
to run the business in the future.
And specifically, Sekiro arranges for his eldest daughter to
Kimi.
To marry another promising young local man.
Shikanojo Inaba.
Uh, Chico Nojo also adopts the Yamauchi name.
He starts being groomed to take over the business.
And then finally in nineteen twenty seven, he and Kimi have
A sand.
The first Yamauchi son in three generations.
And they name him Hiroshi.
Yama Uchi.
Unfortunately, here's where things start to go.
Pretty terribly wrong for Nintendo.
And what year are we in?
We're in nineteen thirty two, so this is before the war.
Hiroshi is five years old.
Shikanojo.
Walks out.
on the family.
And abandons.
The business, the family.
Sun.
And leaves. Nobody knows exactly why. This has kinda lost a history, but I gotta imagine between all the pressure, the family, the business, the Yakuza connections, there's
A lot going on here.
His mother, Kimi,
also kinda never recovers from this incident.
She basically also leaves the family.
So
Hiroshi Yamuchi, the first actual Yamuchi born in generations.
is pretty much orphaned at this point. His grandparents, Sekiro and his wife
Adopt him.
Parenting him.
Not to mention that World War Two happens when he's g an early teenager.
The life that he grows up in is
Quite, quite, quite difficult.
Finally when he's eighteen,
The war is over.
He makes what I assume must have maybe been like
A deal with his family and his grandfather.
He escapes Kyoto and goes to Tokyo to study law.
uh Wasada University.
But in exchange for being able to do that
The
family and his grandfather arranges a marriage for him.

To the daughter of a formerly high ranking Samurai family.
And then
Pretty much right after this happens, a couple years later in nineteen forty eight.
Sekiro suddenly has
A massive stroke.
And is completely incapacitated. This is Hiroshi's grandfather. This is Hiroshi's grandfather.
And can no longer run the business.
And so he summons.
Hiroshi back from Tokyo from law school to Kyoto.
And commands him to take over.
The family business.
To become the next one.
Yamuchi.
Running Nintendo.
Wow.
And this is pretty young to take over the family business. He's twenty one years old.
Because his
Father had walked out.
On him and the family.
There was this missing generation here. And then his grandfather, who he has this very complicated relationship with
has this sudden stroke and all of a sudden Hiroshi has to come back and take over the business.
Now, listeners, the crazy thing is you might be thinking, wow
So this guy probably
has no idea how to run this business.
It's unlikely that it would be successful.
Interestingly, he develops into a leader who has a
An unbelievable eye.
This killer taste.
We're gonna flash way forward like what games are fun and what games are not fun.
by not even playing them, like observing them for like a half hour, and he's like, This is gonna be a winner.
It's amazing that out of basically no training and no real apprenticeship in the business turns into this.
Oracle.
Of fun.
He comes back to Kyoto, he takes over the family business.
He waits until Sekiro finally.
dies, which the writing was on the wall, happens in nineteen forty nine.
As soon as that happens.
Hey.
Institutes a massive purge. He fires
Not just anyone who was loyal to Sekiro in the company.
Fires every single manager in Nintendo.
Just
decapitates everybody.
He doesn't literally burn the company to the ground, but he just about burns the company to the ground.
So there's basically like no more institutional memory of a leader other than him in the entire organization.
Yes, and there is no question
Who the new Yamauchi is going forward and who is in charge here.
Wow.
Yeah.
Totally crazy.
And so
We're in what, nineteen fifty ish when he takes over?
Nineteen forty eight, nineteen forty nine.
When this happens.
So
Hiroshi, though, like you said, for the first time, he's twenty one years old. Like he's a young man. He doesn't want his life to be shackled by like what
Nintendo and the Yamauchi family has always been historically. So he's
Looking around for
Ways to make Nintendo.
His own.
And finally in nineteen fifty nine.
The perfect opportunity arises.
The Walt Disney Company.
Is looking to enter.
Japan.
It's crazy that Disney comes into this story. Especially because there's so many parallels between Nintendo's
identity as a business and the thing that makes them great and
Disney. It's crazy that what lands on his doorstep.

Walt Disney Calling. Also given what Nintendo's business is. What we just spent twenty minutes describing.
Disney's like Oh yeah.
These are the guys we're gonna work with in Japan.
Right. Oh yeah. We're a family friendly brand that has to protect our brand safety above all else.
How about these guys that do business with the mob?
But the reason they do it
Is the way that they want to enter Japan.
Is with.
Playing cards.
So
Nintendo licenses Walt Disney characters.
And puts them on
Playing cards.
And they sell playing cards to kids in Japan.
I gotta buy some of these. If these still exist somewhere on eBay, I gotta go find some. Oh, I bet they do. Some of the documentaries I watched, there's you know photos and video footage of them. So you can probably find them somewhere. We gotta put these in the acquired museum.
Wow Nintendo branded.
Japanese Disney cards.
So this is what
Yamuchi the I guess fourth at this point in time. Hiroshi.
Is looking for.
This is the opportunity.
Not only does this open up a new market and a new
Distribution channel.
The kids market, the toys market.
the legitimate retail for
Nintendo.
There's just an incredible opportunity to draft off the Disney brand.
So they start with playing cards.
Then they start licensing from Disney other kids' toys.
To sell in Japan.
Um
Then they go to
The retailers and they say
Hey, you like carrying these Disney toys. If you're gonna carry the Disney toys
You need to carry some Nintendo branded toys along with them.
It is amazing. It's this story that we tell over and over and over again on Acquired, where you acquire something, some asset that then
Gives you a leg up in a different part of your business, and now it's a self fulfilling prophecy where that other part of your business is made better. And so by having
A scarce commodity, Disney branded cards.
They get
Power
distributors, so now you actually have a reason to be in stores. And now that you're in stores, doesn't matter how you got there, you have that channel, you have those relationships. And especially if you can hold them captive and say you have to distribute our stuff with Disney stuff.
Then uh that's a pretty good bargaining position.
So
During the nineteen sixties.
Nintendo transforms itself into a
Japanese toy company.
They are making things like the ultra hand, which is like a extended grab. I know you did some research on this.
This is awesome. So this guy Gunpei Yokoi in nineteen seventy comes up with an idea and we're like
breeze in through history here, but we kinda have to. It's a hundred years. So you know, we went from nineteen forty nine with
Hiroshi taking over to nineteen fifty-nine when the Disney comes in. Flash forward now to nineteen seventy, Yakoi
comes up with this telescoping fake hand basically as a gag.
And
Hiroshi Yamauchi looks at it and he goes.
That looks like a winner. Cause this guy, he's just so good at identify things that consumers are gonna love. And so they mark it as the ultra hand.
I mean truly he made it as like a gag around the office. They sell one point two million
Products.
Of this ultra hand.
Of course, then they're all looking around, they're like, Oh, we should become a novelty toy company
all out. Like that's what we should do. So they come up with I think the
Ten billion barrel maze.
They have a love tester device that they market. They have a remote control vacuum like 30 years before Roomba.
And so they're just coming up with crazy toys in the lab.
And bring it into market.
All these zanic entities. And because they have this
Disney sort of Damocles that they can hang over retailers' heads. They know they're gonna get the retailers to carry all this stuff. It's amazing.
So you mentioned Gunpei Yokoe.
He was a tech on the playing card assembly line.
maintaining the machines within Nintendo.
And to your point about Yamauti just has this sixth sense for products and for talent.
He plucks him off the assembly line and says, You are now
The chief designer, the chief engineer for Nintendo.
That's crazy. Gunpei would go on to uh design the game boy and the virtual boy.
He would run the Metroid series.
And he would be the uh first
boss and mentor of one Shigeru
Miyamoto.
Ooh.
So amazingly now, by the late sixties, early seventies,
Nintendo has become a
Toy Company.
And a very profitable one at that.
So
Yamauchi.
Starts investing in
A whole bunch of other stuff.
And one of the things he invests in
is failed bowling alleys.
What?
Bowling was this incredible fad that had taken
Japan by hold in the late sixties. And so all these bowling alleys got built.
But then
society lost interest in them and still they're all these empty bowling alleys.
Yamauchi goes and buys up these bowling alleys and he directs Gunpei
To say like, hey, come up with some gadgets that we can put in here and we can attract people to these bowling alleys.
And they decide that they can use some of the technology that Goonpei is building for toys.
To make indoor shooting ranges. Light gun shooting ranges. Like d not laser tag, more like
Clay Pigeons, but like simulating shooting ranges.
Indoor in these former bowling alleys.
They do this this goes pretty well. This becomes another
Big thing.
So
This is kinda random, Nintendo getting into
indoor light gun shooting ranges.
But actually this becomes
the critical thing that pushes them into the video game market for a bunch of reasons.
One.
This gets Nintendo.
into the arcade business.
Because what else do you put in bowling alleys?
And indo shooting ranges.
But arcade machines.
So
Gunpei and Yamauchi and the rest of the company.
start making their own
Arcade games.
That they can put into their
Shooting ranges and bowling alleys.
At first these are electromechanical games like Sega.
But once Pong becomes a thing and comes over to Japan and
Arcade video games.
They get into it too, and Nintendo starts making their own
Arcade.
Video games.
Two for Nintendo.
These are the
Light gun.
ranges that they start building, they become pretty good at it.
And they decide that they can export the technology
to North America and Europe. So this is actually the first product.
That
Nintendo starts exporting out of Japan is this technology. And they do it using trading companies to start. So they're not setting up their own distribution internationally yet.
But
They start building relationships.
With American companies.
And three and this is
Kinda just unbelievable here.
The light gun business
Gets them into a relationship.
With Magnavox. Remember Magnavox from the beginning of the episode? Oh yeah, the Odyssey.
Specifically
For the launch.
Of the Odyssey.
In America.
So
The Odyssey
Came with a bunch of peripherals.
For use in
The games.
On the console.
One of the peripherals.
was a light gun.
Whoa.
And who made the light gun?
For the Magnavox Odyssey.
Nintendo.
That is the most circuitous path.
To finding their way into American home video consoles, but it makes sense. Right. You cannot script this any better. Nintendo.
Who
single handedly in a minute comes in and
dominates not just the American, but the worldwide market for home video game consoles and builds this incredible juggernaut around the world.
They were right there, part of the very first home video game console.
Launched in America by Magnavox. Wow. But in a way that sort of lets them observe this market without having to push their chips in on this market.
Well.
Let's take the story from there. So they build this relationship with Magnavox.
They see that the Odyssey despite Magnavox's having no idea how to market this thing.
is succeeding despite itself in America. They're like
Well, we're in the toy business in Japan.
This thing might actually do.
Decently here in Japan.
So they
license the Odyssey from Magnavox. And Nintendo
rebrands and starts distributing the Magnavox Odyssey.
Through its toy retailer channels.
In Japan.
Oh, I had no idea that before the NES they had their own Japanese
Distribution.
distribution of a home video console. This
All from these crazy light gun ranges, this is what gets Nintendo
Into the video game business.
So they
Start selling the Odyssey in Japan.
And then
Pretty quickly.
They actually just license a bunch of the tech from Magnavox and start making their own
modified consoles. So in nineteen seventy five is when they
License the Odyssey.
The next year in nineteen seventy six, they take a bunch of that tech.
And they make their
Own.
Nintendo
Home video game console.
The very first one that they make, the color TV Game Six.
And it's just kind of a Odyssey knockoff, just more localized for Japan and maybe a little better.
Tack, but the same thing. It only plays a couple of simplistic games, one of which is
Table tennis.
It becomes a huge hit just like the Odyssey that
Color TV game six sells a million units.
In Japan. Oh wow. This is like transformative for Nintendo. And what year is this?
Ninete six.
Okay, so this is
Kind of before the success of the US based home console rush.
A hundred percent.
Nintendo is
very early to the market, just in their own unique way.
Isolated to Japan.
But they're learning everything along the way.
The next year they follow the color TV game six up with a new model, the color TV game fifteen.
plays fifteen games instead of six games. I was like, why are they calling it the six? Okay. Yeah. Because remember, these are not cartridge based consoles yet.
Oh you're not selling programmable software for them.
Huh.
So
That sells another one million units.
And together.
these consoles, like I said, totally transform the company. They're making much better margins on these things. They can sell them for a higher stair price than the ultra hand and the other toys that they're selling.
Right. The shooting gun ranges, that's a fad that goes the way of the bowling alley in Japan. So this is what Nintendo becomes.
Kind of inadvertently.
They come aro
Japanese video game.
Business. Pseudo importer reseller. Yep. That's crazy. By the way, do you know how the light gun works?
And
why that was such a leap forward.
No.
So this was a very clever invention by Nintendo's engineers.
you could imagine that the way a light gun, the most intuitive way for it to work would be well, you take a regular gun that shoots bullets out of it, and instead you make it shoot some kind of laser out of it.
But what that would require is for the TV, the target, to have a detector on it.
Which
You really don't want to
have to force that constraint. That sounds really hard, especially when you're trying to work with a lot of different TVs. Ironic that
Later.
Nintendo would voice that constraint with the week.
Right, right. Isn't that funny? So they flipped it on its head. They figured out that actually what we should be doing is we should make the gun the detector.
And we should specialize what's coming on the screen.
Oh that's super cool.
There's like a one frame
thing that happens. And I think that you can still see this in the early duck hunt games, but basically the screen
flashes one frame where only the target is lit up and the gun is the detector. And if in the gun's
Sight.
it sees the set of pixels that are lit on the one frame, then it knows it got a hit. And if it doesn't detect those pixels, then it's a miss.
No way. I always wondered how duck hunt
Works. I had no idea. Yeah.
Pretty cool. That's amazing.
So Nintendo.
Thanks to this relationship with Magnavox.
Is in this incredibly privileged
Position.
In this new industry.
They have a bird's eye view into the American home video game industry and they're learning all the lessons from what's happening there.
Mm-hmm.
They're also
Pioneering
And establishing themselves as the leader.
In the Japanese
video game industry.
So they're in
A great spot.
Through all this.
They see
Come nineteen seventy seven.
When
Atari and Warner Brothers releases the VCS twenty six hundred in America.
Yeah.
Yamauchi, even despite not being an engineer, is like
Clearly this is the future.
Yeah.
This
Piece of hardware.
Not only is so much better.
than all this dedicated stuff that's like the Odyssey and like what we've been doing that came before.
But the business model implications of this. The razor and blades model, the interchangeable cartridges.
Selling software.
We gotta get into this game.
Yeah.
But they also see
Things are crazy over in America. Everybody's rushing into this industry. Yeah, they gotta be very judicious here. It's a very attractive market to enter, but they have to figure out a way to differentiate and not make all the same exact mistakes that everyone else is making.
And rush in with
crap products that
eventually people are gonna stop buying. They have to figure out how to sell something interesting, durable, and unique.
So Yama Uti makes
An incredibly four sighted decision here.
He says
We Nintendo need to build
A programmable home video game console.
Like the Atari twenty six hundred.
But
Whereas Atari and all these other American companies, they're rushing their consoles to market.
This is if not shoddy hardware, like
The
development cycles for these consoles are like maybe a year, a year and a half.
Mm-hmm. We have the luxury here in Japan because there's not direct competition.
Let's take our time.
And let's make something.
Really amazing.
Yep.
Not to mention that by
taking a long cycle development time, they actually get the benefit of Moore's Law.
they get to come out with something a few years later that is much, much better.
Exactly. So he starts a project.
In the late seventies.
Within Nintendo.

Their first programmable
ROM cartridge swappable software.
Home video game console.
But he's willing to take a very long view. And he instructs
The team.
I want this device that we produce
to be at least one year.
ahead of any competitors on the market.
Anywhere in the world.
And
I want us to be able to sell this thing.
For the equivalent of seventy five dollars.
And on top of that, I want us to be
unit economic positive
on these machines. I want every
game system that we sell to be profitable for us. And this is completely contrary to the rest of the industry who's like, Oh yeah, this is a razors and blades thing. We're happy to subsidize so that we can sell more games.
He's like
We're gonna do it all on hard mode and we're just gonna take years to do it. Cause this is 77 when he's saying this.
The NES won't debut in the US until nineteen eighty five.
And not in Japan until nineteen eighty three.
So it kinda reminds me of the old saying
You can have high quality
You can have
Cheap and good prices.
And you can have something done quickly.
But you can only choose two out of three. And so Yamauchi says the constraint I'm gonna relax here is time.
Which is what nobody else in the video game market is doing.
So it's nineteen seventy seven, what are they gonna do in the meantime? Well, R and D is super, you know, heads down.
And secretive on
building what becomes the Famicom and the NES.
Yep.
Yamauchi splits Nintendo's
R and D teams.
From one
singular team that's working on all of their video game business into multiple teams.
And
He takes the new team, the R and D two team, and
And he dedicates them.
to this home console project.
You don't have unlimited budget. You have a lot of constraints.
But make this thing amazing.
The original R and D team, the R and D one team, he says you guys keep working
on the line of tech that we already have
The dedicated home consoles.
And let's explore some other ways to use this technology to make money.
That leads to the game and watch business.
Which is this total
Dead end in
video games and technology, but was insanely profitable for Nintendo for a couple years.
I played one dedicated
game per machine. It actually comes from the calculator industry. It's where they take this tech
It becomes the spiritual forerunner of the game boy.
But this type of product is particularly suited to the
Japanese and broader Asian markets. Like it's portable. You can play it anywhere. You can play it on the go.
It does really well for Nintendo.
Much lower price point. Much lower price point. They sell millions of these things in the late seventies and early eighties in Japan.
Which keeps financing the other R and D team.
Yeah.
Also, they haven't forgotten about
The arcade side of the business, too.
Yamauchi spins up a third R D team.
Just to focus.
On making arcade titles.
'Cause he also knows that software is gonna be really important for this eventual home console.
Yeah.
They're basically saying
We wanna learn
What
games are great and once we have a stable of those great games
then we can unleash'em on whatever our next generation console ends up being.
But for now, we kinda need to like
create a bunch of games in the arcades in cabinets so we can know what the hits are gonna be.
And I will say to know what the hits are gonna be.
Basically none of them were at first. So I imagine there was like a year
at Nintendo over in Japan where they're hitting the oh crap button where they're like, uh we may not have any good games to put on this thing.
Fortunately the console wasn't ready yet.
There's one more piece of the puzzle though.
And that's the
He needs to get a foothold.
in the American market.
So that they can get distribution relationships there and actually be able to
To enter it.
And ideally in his mind to be their own distributor.
Nintendo is really obsessed, especially at this point in history, with
Not getting commoditized and not
having to fork over
fifty percent to this middleman and then another fifty percent to that middleman. It's like no no no we need to get directly to customers. Right. They've been using trading companies to export the light gun tech and other things.
They want to set up their own distribution.
Begrudging
The Yamauchi family cycle.
It's gonna repeat itself.
As much as Hiroshi hates it, he knows
The perfect person.
To set up Nintendo of America.
His son in law.
Who does not want to work in Nintendo. Who definitely doesn't want to do it.
And whose wave?
Hiroshi's daughter.
absolutely does not want him to do it.
Minoru Arakawa.
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All right.
We're heading into the eighties. It's gonna be Nintendo's decade.
Over there they have a four prong strategy
Bring me to radar scope, David. I'm Jones in for it.
And listeners, unless you're like Nintendo history buffs, you're like radar scope.
But radar scope.
would be the
Ashes from which
All of the Phoenixes you know about rise.
So Arakawa.
Yamauchi's chosen
Son in law.
Begrudgingly.
Who he sends over to set up.
Nintendo of America.
Unlike other son in laws in the
Nintendo family history.
Has a bit of a different
Background.
So he's also from a very
Prominent.
high society, well respected family in Kyoto.
But he left Japan.
And went to America.
For his education.
Where he was educated.
As an engineer.
And he fell in love with
America.
And he may have fallen in love with the distance from his father in law, too. The whole ocean in the in the way is pretty nice. Well, this is before he met Yoko, his wife. Oh, okay.
When he comes back
To Japan.
He meets Yoko at a Christmas ball.
Well, Yoko's in college.
And
Yoko wants nothing to do, just like Hiroshi before her, wants nothing to do with Nintendo, nothing to do with her father, nothing to do with the family business.
And she's kinda taken by
Arakawa, in part because he loves America. He's so different. Like there's no way
That history's gonna repeat itself here. Right. If I don't wanna be involved with Nintendo, then this guy's probably that ticket. He's my ticket.
So they get married and they move to
Vancouver.
In Canada.
where Arakawa becomes
A very successful real estate developer.
Yoga loves it there.
They come back.
Home to Kyoto to visit family.
And Yamauchi makes his pitch.
So
Arakawa's
Intrigued?
But
Yeah, he's got a successful business of his own, right?
And uh he loves his wife. His marriage is very important to him.
And he knows that if he accepts here.
He's gonna be in a real tough spot.
But Yamauchi says
Hey, I'm not asking here.
You kinda need to do this.
And there's a little negotiation. I think they strike an economic deal that makes it very much worth
Arakawa's time and Arakawa's
Strong belief is
I have to
be in America and do it my own way, rather than me sort of starting to take over the company in Japan. This is part of the deal.
That
Convinces.
Both Yoko and Minoru.
Yeah.
Yamauchi says, I'll let you run things your way.
In America.
Hm.
Big concession.
But
I know you live in Vancouver.
I want you to move to New York City.
Because New York City is where the toy industry is headquartered in America.
And you gotta go build relationships there.
So
They have a mandate.
Set up Nintendo America.
In New York.
Which they do.
And at first, you know, there's no console yet. They're not ready to enter the home video game market, but they've got these arcade machines. And so the way that they're gonna build up Nintendo of America
is through the arcade business.
They do the obvious
First thing that makes sense.
They hire the guys who had been running the trading company that was importing Nintendo's arcade machines in the past.
And I think they were importing
Used.
Nintendo Arcade games from Japan and like refurbishing them.
And then selling them into US
Bars and arcades.
Almost like gray market way to acquire Nintendo's cabinets.
That was run by two young guys at the time who were
From Seattle.
University of Washington alums.
Al Stone and Ron Judy.
That becomes the initial
Seattle Link.
For Nintendo of America.
So they hire Stone and Judy.
To sell.
Nintendo's arcade games that they're producing back in Japan.
And to no one's surprise.
They don't sell very well.
The games just weren't very good.
Yeah.
And there was pretty robust competition, of course, as we talked about in the American
Mark it.
So Araka was like
Guys, why are these not selling?
Ron and Allike
They're not selling'cause the games suck.
You need to call up Yamu Tisan and be like, Hey
Send us some better product.
They say.
You know, what is selling here, we're now in
Nineteen seventy eight, nineteen seventy nine.
In America.
What is selling?
Space invaders.
That's made by a Japanese arcade company, Taido.
Why don't you get the guys back in Japan to make something like Space Invaders and send it over to us?
So Minaru calls up Yamuchi and just like
Hey
Can you send us something like Space Invaders?
Yamauchi.
Doesn't really want to do it.
'Cause he's like
Like you're just supposed to be building relationships over there.
Can't you just use our games?
And uh
Arco is like
No no, I really think this is gonna sell.
I'm gonna
Place a really, really big order.
I want you to send me three thousand
Cabinets.
of a space invaders knockoff. Like I really know that this is gonna work.
Yep, we are your boots on the ground. We know this market. It has to work. Yep. I'm putting my reputation with you on the line. I know you don't know me that well as, you know
A business partner yet, but
I really think this is gonna work.
Yamuchi says, Okay.
He directs the R and D three team.

Space Invaders knock off.
Which they do, they make
radar scope. It's innovative. It has a different perspective. It's not the top down space invaders. It's got like a three quarters view, quasi 3D
Twist on the space invaders mechanic.
They start producing them in Japan.
Unfortunately.
To
make the games from scratch, build them in Japan, and then ship them over to New York, which takes a long time.
on the water to ship them.
It takes four months.
During this time.
The American Space Invaders Mania peaks.
And starts to die.
Off.
And this is pretty much the last time
that Nintendo will pursue the strategy of
Something is hot.
Every single success that Nintendo has from here on out.
is from their own discovery of something fun.
from being inventive and from taking risk. And that means it will come with failures too.
But from this point forward, they never try the fast follow clone copy thing again.
Totally.
So when the cabinets show up.
Nintendo of America.
Can't.
Sell them.
And they've got all this capital tied up in this inventory. They only managed to sell about one thousand of the three thousand cabinets. So they got two thousand radar scope cabinets sitting in a warehouse in New Jersey at the current headquarters of uh Nintendo of America collecting dust.
So Minaroo now

You were right.
So about, you know, when I kinda put my neck on the line with these uh radar scope cabinets.
I was wrong.
You can only imagine how this conversation went.
And he's like, Well, we gotta do something. Like we can't
You know, Nintendo of America's gonna go bankrupt with all this inventory and these cabinets just sitting here.
Can you get somebody
To reprogram some new chips.
that we can insert into these cabinets and just try and move this inventory.
Right.
So radar scope is this game that has
I think one joystick and maybe two buttons.
And like can somebody come up with a game that leverages that and like
Most of the same chips.
that are on the motherboard
And leverage basically the assets we've got.
to create a new game out of this thing.
Yep. And things are so bad.
Yoko at this point.
Is so pissed.
She takes
the kids and basically moves back to Japan. She's like, I can't believe this has happened, like
We're out of here.
This is a pretty constrained problem, too, because
you basically are saying, hey, create a different shooting game. Cause when you only have the joystick and a couple of buttons, basically every game at the time is
Okay, use that to sort of move the gun to where you're gonna shoot it and then press shoot and then maybe you have a different button.
And so
You're giving a pretty prescriptive order.
And you're giving a pretty narrow set of
Things you could turn this into.
Yep.
And less.
So
Yamuchi is so pissed.
He can't take anybody off the console project.
Those are his best engineers who could maybe pull some rabbit out of the hat here.
He goes to Gunpei and he's like
My dumbass son in law over in America.
I gotta give him something. Can you give me like a janitor or somebody to like make a game here?
Goupe's like I literally can't take any engineers at the time.
Only engineers made games. Like there was no game designer role. It was just the engineers who made the games.
I can't give you engineers.
We do have this young kid.
Who I brought onto the team.
Who uh
is our design guy.
He's here to help with the hardware design. He'd worked on the color TV game designs of the hardware and some of the user interface.
He's pretty talented. He's not an engineer, but
He's been wanting to make a game.
I can give you that guy.
Yamuchi's like fine.
Whatever.
And importantly, this isn't the B team, this is the unknown.
Right. This is literally like the janitor.
Right.
And that guy's name.
It's Shegaru.
Mia Mano.
And this is how he comes to make his first video game.
Yes. And if you
Don't know that name, which I suspect ninety percent of you don't. Oh, I suspect ninety percent of people do know that name.
That's the thing. I'm really curious if people are like, This is Miyamoto? Or if people are like, What the hell are you talking about? And I think like for those of you who know your Nintendo history, David just said
And this is how God is discovered.
But for those of you who don't, this is how God is discovered. The tablets come down from the mount. Moses brings them down.
Uh beymocks.
Well,
The game.
That
Young
Shigeru Miyamoto makes.
To replace.
the radar scope software in these cabinets.
It's called Donkey Kong.
And
Donkey Kong.
Would itself go on turn.
hundreds millions of dollars immediately in
North America alone.
It totally saves Nintendo for America skin.
Earns a hundred and eighty million dollars the first year.
Another hundred million dollars the second year in arcades.
it becomes such an incredible franchise and IP, which we'll get into in a second.
Yeah.
Just this game, the original Donkey Kong, has grossed over five billion dollars alone in the decades since on all the platforms.

David, the year that it was released in nineteen eighty two
It made more money than
any film release that year except for E. T.
Even more importantly though.
I'm so curious what percentage of our audience knows this and what percentage doesn't.
the playable character that the game, Donkey Kong, is actually named after the villain.
the playable character in this game.
Is this
Very
Small
Big headed, wearing a hat, sort of um innocent.
Nameless.
Carpenter? Yes.
Listeners, you might have thought that I was going for Italian plumber named Mario.
But here.
We have
Proto Mario. We have Jumpman.
Jumpman the carpenter.
So
What's going on here?
Like I said, up until this point.
Everywhere.
In America, in Japan.
The only people who made games were engineers.
And Miyamoto has this incredible quote about this.
He says, until Donkey Kong.
Programmers and engineers were responsible for game design.
These were the days when engineers were even drawing the pictures and composing the music themselves. They were pretty terrible, weren't they?
And specifically like we've been talking about all episode.
There was no story. The whole point of making the game was to make it technically competent.
and something competitive that would have enjoyable gameplay for
Mostly
To suck up quarters in our case.
It's also a frickin' miracle that they work at all.
You think about the very early technology involved.
to like layer on more hard things on top of make this thing work, like make it.
make people enter a flow state when they're playing it and make it repeatable over and over again and add story like no no no
Arrange the chips in a way that it works and doesn't break quickly.
Right.
Miyamono, on the other hand, he's not an engineer.
He's a designer.
And he
thinks games can be an art form.
So when Yamauchi gives him the chance to make a game, he's like, Finally
I can bring my genius to bear. He's not a v a self conceited man, I'm sure he didn't think of it that way.
But he has a very different vision for what a game can be. Here's what
David Shaff, he writes game over.
Which is a great book writes about the conversation.
That's
Miyamoto and Yamauchi have when he gets assigned to make the game.
Miyamoto.
boldly told the Nintendo chairman that he would enjoy creating a game.
However, he said the shoot'em up and tennis like games that were in the arcades at the time were unimaginative, simply uninteresting to many people. He had always wondered why video games were not treated more like books or movies.
Why couldn't they draw on the great stories?
Some of his favorite legends, fairy tales and fiction, King Kong, Jason and the Argonauts.
Even Macbeth.
And this is
Exactly what Miyamoto does.
He makes the first narrative driven.
Video game.
Now it's a super simple narrative and a very thin character.
I mean this notion of jump man running around at the bottom trying to save this nameless princess from an ape that's throwing barrels, like it's not
A lot of story. It's his girlfriend.
Oh really? Yeah. Originally it was not a princess?
Well, so here's the story that Miyamoto comes up with for the video game.
A regular every man.
Jump man.
has a pet gorilla.
Who he keeps in his house.
He's not very nice to this pet gorilla. Uh he doesn't treat him very well. So one day the gorilla escapes and kidnaps
our protagonist's girlfriend as revenge for not being treated well.
It's important.
The gorilla does not want to hurt the girl. Oh, that's right.
Her name is just like Lady, right? Yeah. Like they don't even name her.
She was Pauline in the American version. Uh okay. Yeah.
The
Gorilla, this is important, does not want to hurt the girlfriend.
He actually likes her quite a bit.
He just wants to stick it.
To the protagonist.
So he runs with the girlfriend.
Into a
Skyscraper construction site.
climbs up to the top of this half constructed skyscraper and starts throwing barrels and construction equipment down at the protagonist.
As he tries to chase them up.
And your goal as the player.
is to reach the top of the construction site.
Defeat the gorilla.
And save.
The girlfriend.
Which is incredibly simplistic.
Today, but nothing like this had ever existed before.
And so like wonderfully innocent and kind of convoluted too. Like everything about that, you're like, what?
That worked.
That was the best story you could come up with. Yep. But
Despite its kind of wackiness and simplicity,
It's a classic three act story. Totally. There's a beginning, dramatic tension is introduced, there's a middle and a struggle, and then there's an end and a victory and a resolution.
Yep.
It's also worth saying
Miyamoto came up with all this within the constraints of what radar scope's hardware was. Right so he managed to figure out a way to retrofit this hardware to create a non-shooting game.
And come up with a completely new game mechanic of climbing these ladders and avoiding the barrels, using the same controls originally intended for radar scope.
So
Well Miyamoto.
Like you said, not even the B team or the C team, just the unknown team is working on this
Game back in Japan. Team Wild Card. Team Wild Card.
Arakawa is totally freaking out.
Back in New York.
His wife has gone back to Japan, taken their kids.
He's like, All right, I don't know if this is gonna pan out here.
But I know one thing.
If we're gonna save both the business for Nintendo in America and my marriage.
We gotta leave New York.
We gotta go to the West Coast of America.
Because the shipping times that's what
the fatal mistake that we made with radar scope is we place this huge order
With a four month lag time. We couldn't get any feedback. We couldn't get any test machines into the market. I assume they had to go through the Panama Canal. I assume so, right? You can't just put all this stuff on an airplane and send it there.
So
He says.
We gotta leave New York for business reasons.
We loved being in Vancouver. We don't like New York.
We can't move to Vancouver'cause we gotta be in the United States for what we're trying to do here.
But we can move.
To Seattle.
Yep.
Nice and close to Japan, easy shipping times. Easy drive to Vancouver. Yoko can hang out with all our old friends back there. This will be great.
And Microsoft was seven, eight years old at this point, and so, you know, there's starting to be some tech talent.
Just the former Boeing engineers. Absolutely.
And
It's even more perfect.
Our distribution guys who we hired and brought in house
They're from Seattle.
It's
Perfect.
We need to move there.
So while
All this is going on back in Japan.
They move the company.
To Seattle.
They lease a warehouse space in Tequila.
For folks who don't know Seattle real estate, Tequila is just south of the city, kinda by the airport. It's very like industrial. It's a great place for your video game warehouse. Great place for your video game warehouse. Exactly.
They
Ship.
The cabinets across the country by railroad from
New Jersey to Tequilla.
They're all hanging out there.
Yoko when the kids come back, they're like, Okay, great.
And then
The Roms show up.
With the replacement game for radar scope.
With Donkey Kong.
They plug'em in.
They all huddle around, they start playing.
And they're like
WTF.
is this Works career.
They weren't really told what to expect. They basically get these conversion kits.
you know, that show up via freight over the ocean that's got instructions of here's all the ways to replace all the components with these other components. Here's the way to load the new music on.
In fact, there were rumors that
this was gonna be some like really great recognizable IP to help with sales that Nintendo actually had some pre-existing relationship with the owners of the Popeye IP.
Yes.
They were working on a Popeye license with King features.
Yes.
This wasn't gonna be like
Jumpman and Lady
And Donkey Kong Is a nonsensical name for a gorilla. Right.
This was gonna be Popeye, and that was gonna be olive oil instead of Lady, and that was gonna be Brutus, the kidnapping character.
That would sell well to an American audience.
And this thing arrives with these brand new characters that no one's ever heard of and they're like crap.
We are totally screwed. So uh Stone and Judy
Threaten to quit. They're like, Well this is
Not gonna go anywhere.
But they've got this
Kid. They've got to hire a couple of kids in Seattle to
Work in the warehouse.
You know, move stuff around, get it chipped out.
And there's this one kid.
Named Howard Phillips.
Working there.
Who's just a total arcade nut.
Loves video games.
He plays it in the warehouse and he's like
Guys.
This is the greatest game I've ever played.
This is a work of genius.
And the game mechanics are a work of genius, even though at first blush you're like, this is not the type of thing that is selling well.
Once you start playing it, you're like
Oh, everything about it is thoughtful.
It doesn't get boring right away. The music is
continuous and recognizable without getting repetitive.
there's random variables, so you can't just beat it the exact same way every single time if you memorize all the right things to press.
It actually has a lot of art to it, exactly what Miyamoto set out to do.
Yep. And not only does it have the narrative and art, it's exactly what you're describing. This thing is really fun. If you pick up and play it, you can intuit really quickly.
How it works.
How to play it and you can just start having fun.
There's a maxim in the video game industry that a great game is easy to play, but hard to master.
And that is exactly what this is. Yep.
So Phillips
The warehouse is like really pleasantly like guys like this is really good.
And they're like, Okay, well, let's take it to a couple of bars around Seattle and just
Set it up and
See what happens.
And just like Pong back in the day, this thing becomes a quarter.
magnet. Phillips' intuition was right. None of the senior guys, none of the older guys
Are Kawa.
Stone and Judy. They didn't get it.
But the kids did.
And on the back of that, Phillips ends up becoming
Arc How was
kind of most trusted advisor about
games and he becomes Nintendo's game master. He becomes a hero in Nintendo power, all of this, like a national celebrity.
It's incredible.
The Nintendo of America.
Management though does decide one thing. They're like
We get okay that there's this narrative revolution here with this game.
I don't think it's gonna work here if we call the protagonist jump man.
We need to give him a little more of an identity than that.
Yeah, so there.
Casting it about trying to
decide what to name this character. And by the way, I should say I was shocked that Donkey Kong pre-dated Mario.
His name is not on the cover art in the very first game he appears in. Of course he doesn't have a name, but yeah.
So the legend goes that as they're debating this
The landlord of their warehouse in Tequila.
Either shows up or sends a letter, it's unclear. Shows up because they were way behind on rent because this freaking company didn't make any money. Demands the rent. Uh because they're late. And the way I know he shows up is because he starts jumping around and ranting and raving and waving his arms in the air and he's like super animated.
And they can see him there and he's got this big bushy mustache.
He's this Italian guy named
Mario.
And this is how
Super Mario gets his name.
Amazing.
Totally amazing.
They named the girlfriend Pauline, I think was the either wife or girlfriend or of one of the guys working at the company at Nintendo of America at the time.
Yeah, so they name her Pauline because the warehouse manager who was taking a lot of the heat from Mario Segale and directing it away from the Nintendo guys and sort of like taking the hits for them.
His
Wife.
was named Polly, so they named the character Pauline after her as a thank you to him.
Nice.
Nintendo has a history of doing this with their characters. Well, uh one more thank you naming of a character is gonna come up in just a second here.
So
The game.
Sounds like wildfire. Like we said, all the two thousand, you know, former radar scope machines fly out of the warehouse.
They order more, like they end up selling thousands and thousands of this. It expands the TAM of who plays video games, too. That's the other thing. It's like it's not just for boys anymore. It's not just teenage boys anymore.
Or people in bars.
Irony of ironies.
Tito.
The
Japanese company that made space invaders.
They call up Yamauchi and they're like
Hey, we're like the really good Japanese arcade game manufacturer now. You've made this hit arcade game. Can we buy the rights to it?
From you.
to distribute it for Nintendo around the world, we'll pay you a ton of money for it.
Yamauchi's kinda inclined to sell, because remember, he doesn't really care about the arcade business. He really just wants to set up Nintendo of America to get the distribution arm.
For the console that's coming.
But he lets Harkawa make the final call.
Arcana says nope.
We're gonna keep it.
We're going to distribute it in house at Nintendo America. Of course, that ends up being totally the right decision and kind of re earns Yamauchi's trust from him. It's like a multi billion dollar correct decision. Multi billion dollar correct decision.
The other hilarious thing that happens is
Is
M C A Universal.
And the legendary
Sid Scheinberg, who we talked about.
With Michael Lovitz. With Michael Ovitz.
over at M C Universal.
Of course he's what's going on with Donkey Kong and he's like
I'm gonna make some money on this. He's like way, wait, wait, wait, wait. Big gorilla thing all the way at the top of a building named Kong.
It sounds like King Kong, which I think I own the rights to. This is my circus and this is my monkey.
I think we talked about this with Michael, but
This is where it comes out in the court case.
Sid would refer to
The legal arm of MCA Universal.
And their legal suit activities as a profit center for the company. God. He files suit.
against Nintendo America for infringing on
His
King Kong trademark.
Nintendo.
Led by
Seattle lawyer Howard Lincoln, who would go on to succeed Arakawa as the president of Nintendo America. And I think Howard Lincoln was the personal lawyer first
of the two guys who ran the import distribution business. That's right.
So
Lincoln sets Nintendo of America up.
With a great antitrust.
Lawyer.
To fight.
Off.
MCA, which is a crazy decision. Like they should have just settled with MCA. Right? Tiny companies that are not doing well getting sued by very dominant global entities like MCA Universal. You roll over.
Yeah.
Lincoln.
Sets up Nintendo.
With
A great antitrust lawyer, John Kirby.
And he and Lincoln together
Team up and they fight
Off.
Sid Scheinberg and MCA Universal and they end up winning in court the case. And it hinges on
They discover
that Universal doesn't actually have the trademark for King Kong.
Because it was public domain. Exactly.
And they knew it too. Sheinberg knew it.
Yeah, that's the thing.
And the judge
slaps him across the face. He's like, You guys knew you were in the wrong here. You've been suing this company and all their partners just to try to be extractive, even though you know you don't have a case. I can't believe you followed up with this. This is where the profit center language comes out.
Yep. They're wrong on a bunch of vectors too. They're like wait, wait, wait, one's a gorilla, one's an ape.
And then the other argument that John Kirby finds because John Kirby flies to Japan and starts interviewing a bunch of people at Nintendo to try and like mount the argument of like they didn't know, of course they didn't reference King Kong IP. And
he's in Japan and he's looking around and he's like, wait, in Japan they use Kong to describe big monkeys generally. That's like a word that's commonly used. And so he uses that too. He's like this thing was invented very quickly by this small team in Japan using common parlance. And so the judge just serves MCA Universal. He's like you guys are
dicks and you knew it and you were wrong and you owe all their legal fees.
Uh amazing. Which
Is not normally what happens when MCA Universal goes to court.
No. And so as a thank you
Nintendo goes to John Kirby a few years later and says, We've got this great game in development.
And we're gonna name the protagonist after you.
And that is how Kirby
Got his name.
Smash character.
Yes.
Oh yeah, a lot of jumps.
Okay, so we're at this point in time.
Where
Donkey Kong sold like gangbusters.
They know they've got a hit on their hands.
There's potential
for these characters to really embrace their own storylines
And
there's strong incentive by Nintendo, the parent company in Japan, to really flesh this all out.
because they've got the Famicom nearing release. And so they're trying to figure out
Is this thing that Miyamoto came up with on a lark?
Can he keep doing it? Should we turn the keys over to him creatively?
And say hey
See if there's a there there for this to be like
The centerpiece.
Of our launch of our console.
Which
They do. So Miyamoto makes a couple more games. He makes the sequel, Donkey Kong Jr., that also does really well.
He makes an actual Popeye game, they finally get the license. Kinda in the same vein. That's a footnote in history.
And then in nineteen eighty three
He makes the first dedicated
Mario game.
Mario Brothers.
As an arcade game. Super Mario Brothers, right? Well no they're different games.
Mario Brothers was an arcade game that Miyamoto made, and that's what introduced Luigi, and you had two plumbers. This is what canonically made them plumbers. The setting was underground and they had green pipes.
And uh that's how they became plumbers.
Side note, when they came out with this game, the Moreo brothers
people were like, Oh wait, the Mario brothers, so Mario is the last name?
And Nintendo confirmed it.
And so they were like, Wait, so that guy's name is Luigi Mario and that guy's name is Mario Mario? And Nintendo was like, Correct. And I think they've maybe changed their stance on that over time, but Amazon.
What I
Nintendo of Japan thing to do. I love it. Exactly.
Mm.
But yes, it's clear that
Meam about us
Got the golden touch here. Yes. And has created this whole new discipline of
Game design.
Where the same principles as engineering
apply. And Yamauchi completely understands this, just like he understood with Kumpayokoi, that there are these certain engineers out there
Who are
so talented and so creative that they can do things and enable things with technology that nobody else can do.
The same dynamics apply to game designers.
That's it.
There are very few Shigeru Miyamoto's out there.
And the
value of what they make is worth many, many multiples of what every other game designer out there makes.
Yeah.
So after Miyamoto proves that
He wasn't just a flash in the pan.
Yamaiuchi
Creates a fourth.
R D division within Nintendo.
Puts Miyamoto in charge.
And the soul purpose
Of this new R and D four unit.
Which would later become.
the legendary entertainment analysis and development.
Group within Nintendo.
Sole goal is to make
games and to make the very best games in the world.
And
Their manifesto.
really ends up becoming
Fun first.
And
That sounds obvious.
But
In a way, they're sort of zigging where everyone else is zagging, where a lot of other game designers at this point in history are starting from a place of
We need to make a game that's in this category.
Or other people have made this game and it is successful.
Or
Games that are great today involve
this set of things that everybody thinks you need for a game. And what the team that Miyamoto is leading is saying
We are on a quest to be inspired.
And find fun.
And then we will build exactly the right
window dressing around that fun, that real kernel, that core mechanic that we love.
And no more.
We don't need to do any of the other stuff on top of that. If it's fun.
And if it continues to be fun and it's super replayable, then
Our mission is accomplished.
And it it is.
a very, very, very different approach to how other people were designing games.
Yes, exactly. Yamu T has this great quote about
Miyamoto and
the Nintendo philosophy of
What makes for a great game designer. He says
An ordinary man cannot develop good games no matter how hard he tries.
A handful of people in this world can develop games that everybody wants.
Those are the people we want at Nintendo. It's just so wild that Yamauchi he's never played a game in his life.
And that is actually true. We haven't really harped on this yet, but like
This guy led Nintendo through its heyday.
invented the modern Nintendo.
Found
to design and market all these games and never played any of them.
Yes. But he totally intuitively grasped
All these principles that would just come to define
Not just the video game industry, but all technology industries.
Yeah.
Amazing.
And that's funny. That quote is less about fun and what defines fun and their philosophy on building and more about like
Most people don't have what it takes and Miyamoto has what it takes, and we've got Miyamoto, so good luck.
Well it's true. I mean I think
Fun.
And that brand of fun.
is the Miyamoto and Nintendo
style.
Of game design.
There are other.
Brands of game design. I mean, I'm going to do it.
folks like over at uh Square and Enix in Japan with the Dragon Quest series and the Final Fantasy series.
Hiro no bo Satuchi, who was the father of the Final Fantasy series.
Would probably have a very different take on that.
But he's equally a genius. Like there are these few people
Who are just
the very best in the world at what they do and nobody else can match them.
Yeah.
So
We're now in
Nineteen eighty three.
And all the pieces are coming together.
Nintendo's
Got it.
The games.
Got the IP. They've got the creative genius.
in Miyamoto running R and D four.
They've got the distribution network that they've always had in Japan.
And now they've got it set up in North America as well.
And the technology.
It's just about ready.
So the R and D two team.
Has
accomplished something.
Nobody else.
Can or
Wood for
Years.
in the industry.
Yep.
They've created a home video game console.
That is
Not just a year, many years ahead of the competition.
And
We'll sell for cheaper.
And profitably.
There's so many of these.
Unbelievable moments in the Nintendo story.
The way they do it, it takes them years to come up with.
is they realize that the brute force way
of accomplishing the year plus ahead of the competition directive that Yamauchi gave them.
would be to get the fanciest, fastest, most Mooreslaw enabled
Ahead of the curve processor out there.
But that would kill the bill of materials. That would make it way too expensive.
Yep.
So they come up with this incredible innovation.
They realize
Okay, we're constrained on cost. We can only use
Cheap.
off the shelf, you know, at this point, dated technology.
For the CPU.
Of this machine.
And up until now, the CPU is everything. The CPU is the brain of the computer. You know, we're in the eighties, even through to the nineties, remember
Intel's marketing and like the PC industry and the CPU was so important.
What the Nintendo team realizes
Because
Even though this is a programmable console.
We're doing specialized applications for gaming. This doesn't have to be a machine that can also do your spreadsheets.
We can pair a cheap CPU.
with a secondary processing unit.
Within the machine.
That they
Dub.
The PPU.
The picture.
Processing unit.
And I think
Maybe I'm wrong and this is why nobody talks about this.
Or maybe like we've stumbled onto something like incredible in history that just everybody overlooked.
I think this might be the first
Example.
GPU.
In a piece of hardware.
Oh, interesting.
I wonder if that's right. A programmable GPU.
So let's unpack this a little bit.
The Atari twenty six hundred.
Had a CPU.
That did most of the work.
And then it also did have another chip.
that interface with the television.
And Atari called this the TIA, the television interface adapter.
But
There was no memory on this TIA chip. It was literally just there to like draw the graphics that the CPU was outputting.
to put on the television screen.
The PPU
that Nintendo designs and develops
is its own programmable chip that sits next to the CPU.
Within
The N E S
And it has eight bytes of memory.
And it's dedicated to processing the graphics.
They get output.
On the television.
So that has specialized circuitry both for doing the backgrounds of the games
And for processing the sprites. So which are the like characters, the movable items.
On the screen.
Wow.
And I think this was the first example of a machine and an architecture in history where like
the workload was split up like this'cause it was a decade later when NVIDIA came around and invented the GPU.
Which is farcical.
Yeah, of course they didn't.
But you know, it would be until that time.
when people would think about using this architecture in
Computers in PCs. Right.
But in this subset of the computing market, it was Nintendo. I think you're right. I mean, I can't think of a counterexample off the top of my head or where a counterexample would even exist. Right. That's what I thought about too. I'm like
I can't think of anything else.
And again, like it is technically true that the Atari and other consoles had
Chip.
that handled the graphics output from the CPU.
But they weren't programmable. They didn't have onboard memory and they weren't doing any of the
Processing of the graphics.
The PPU at the NES is actually doing a lot of work.
And it all came about as this necessitated by this constraint that Yamauchi put on the team of like this has gotta sell for
Less than a hundred bucks.
Super clever. I mean
the famous thing that Nintendo also went on to do, and I'm very curious if you know sort of how this came to be
Is that
their games are optimized for fun, not to show off the hardware.
And so they're always able to do what
translates very poorly to the US as
lateral thinking of seasoned technology that it's about inventiveness. I think the literal translation is withered technology. Withered technology.
You know, it's not about using the state of the art chips. It's not about using the most expensive hardware. It's about how clever and inventive and fun can you be with it.
It sounds like the first example of cost savings was around this PPU.
Well, it actually was the game and watch. Gunpei Yokoi's work on the game and watch, which he's the uh
author of this philosophy within Nintendo. Oh. And that's what led him to that. He's like, Oh, we'll take this calculator technology.
And apply it to games and we can
use this kind of lateral technology to make something fun while keeping the cost down.
But it's the same thought here. I mean the CPU
That they end up using in the NES.
is a slightly customized, but basically off the shelf.
Moss technology sixty five oh two.
Which
by this point in time is like a very standard off the shelf CPU used in
thousands of applications around the world. It's like how the switch processor is like a circa twenty fourteen Android phone chip. And a crappy one at that.
Huh. Okay, so they already were fully embracing the idea that
we actually don't need the most expensive hardware to create the most fun experiences. Yeah.
And in this case it was really interesting in that
The N E S
Had
Graphical capability.
literally years beyond any of it's
Competitors. Hm.
But it did it with cheaper technology.
Mm. And that was the amazing innovation.
And that enabled a bunch of things.
Most importantly at the outset for the Famicom.
And N E S.
It meant that
This new console would be able
To
Have
Totally one hundred percent.
Accurate ports of arcade games.
When arcade games would come to other home consoles like
The Atari twenty six hundred.
They had to be dumbed down a little bit.
because the hardware like couldn't handle it. When you're making an arcade cabinet, you can have
Dedicated, customized.
Chips.
And systems and circuit boards for that game.
Which would allow you to do better graphics, more fancier stuff. Right. That if you're then trying to bring it to something like the twenty six hundred.
You're gonna have to make a bunch of compromises.
The NES was able to have
the best ports of Donkey Kong.
Mario Brothers, you know the Nintendo titles, but then the third party titles too.
Right.
So interesting. I mean it makes a lot of sense with the way that cartridges work too, because unlike CDs
where you know in the modern era you're reading a game off of some media, loading it into memory and then executing it on the hardware of the actual platform of the console.
In the cartridge era.
the circuitry was in the console and so everything kind of like loads instantly because you are literally playing the game.
on the hardware within the cartridge and it's this perfect marriage of
the circuitry in the cartridge.
and the circuitry in the console itself that creates
Exactly enough resources to play that game and nothing more.
Yep.
The
Wild innovation.
technology wise, that comes out of Nintendo in this time is just incredible. They do stuff like um
Later in the
Famicom and NES's life cycle. I think with
Super Mario.
Three.
The NES is kinda like old in the tooth, the Genesis is out at this point and like the graphics aren't industry leading like they used to be.
They start putting
Computing chips.
On the cartridges.
To help the console. Because it like marries together in the same system when the cartridge is in the console.
They do some similar stuff with Zelda.
Okay, so take us to nineteen eighty three, take us to launching the Famicom in Japan.
So on july fifteenth, nineteen eighty three.
After years of work.
Nintendo finally launches.
The Famicom.
The family computer.
Famicom for short.
In Japan. Because they had broader ambitions than gaming. Right. They had zany stuff they thought like, Oh, this is so powerful, what we can do with these two chips.
We're gonna give it a keyboard, we're gonna like be a Trojan horse into the home, like all the stuff that Sony would do.
Sort of stupidly later.
Nintendo originally wanted uh
do that. They ended up cutting all of it.
to save costs. They still don't get the machine under
a hundred dollars in Japan. It retails for
Fourteen thousand eight hundred yen, which is like
A hundred and ten, hundred and twenty bucks at the time.
But still
Way below any of the competitors on the market in.
Way, way, way better.
The first
Shipments in Japan.
immediately sell out they sell five hundred thousand units.
When they launch.
Then there's actually
They have to do a recall. There's a fault in the
motherboard'cause it's such a like complex system and they hadn't worked out all the kinks when they launched it.
It's kinda like the famous Tylenol case. They do a nationwide recall. They recall every Famicom system.
In Japan.
And they don't just replace the one broken chip, they strip out the entire motherboard and replace every motherboard on every single unit to show people like we're really serious about quality.
Yep.
And so
Starting from the summer of nineteen eighty three in Japan, right as the video game industry is
Dying in America.
this rocket ship of Nintendo and the Famicom just takes off in Japan.
They sell.
over the next two years, every single unit they can make. They had placed a three million unit order
with Rico, the Japanese semiconductor manufacturer. Rico manufacture them?
Oh my god.
And Nintendo became by far their biggest custom.
I used to have a Rico camera.
That's right.
So they did a deal with Rico.
to manufacture the CPU and PPU
Tandem.
Yeah.
And the only way they could get
the price down far enough to hit the price point they wanted at retail.
was to place a three million unit order up front, which was like crazy at the time. Totally.
they couldn't make'em fast enough, they sold out the whole thing.
It was incredible.
God, Nintendo got so lucky that the Japanese market wasn't saturated the same way that the US market was. They launched into like
the very best conditions in Japan they could of
Frankly, not a lot of competitive consoles at that moment.
Yep.
So
Over the
Next few years.
The Famicom would go on to sell.
Almost twenty milliets in Japan.
In Japan in the eighties, there were only thirty eight million households. So they get an almost fifty percent
Penetration.
Into the Japanese
Market.
Whoa
Isn't that wild?
Wow, that is crazy.
It just becomes this enormous juggernaut.
In Japan.
But
Meanwhile, of course.
The big
Kahuna market is.
The US.
There's ninety million households in the US.
At the time in the eighties.
And not just
Ninety million households. There are plenty of other countries that have ninety million households.
There are ninety million US households that
Mostly a hundred percent of them have a television.
We're
Used to playing arcade games.
knew about the home video game market from everything that had just happened.
has the highest GDP per capita in the world.
And could afford
To buy.
a console, especially a relatively cheap console.
Like
The NES.
You know, not a hundred percent, but
Seventy percent, eighty percent of the US market.
Could afford this.
Yep.
Wow, that's crazy.
So
By nineteen eighty three, like
Everything's all set up, ready to go in America.
Yeah, Mauchi's like
All right, let's go.
And like you gotta be wondering, like, should we pull the trigger? This is like a crazy moment to decide, like, yes, let's launch.
Let's flash back two hours before the Nintendo story.
And remember the state that
the United States was in, they just went from$1.2 billion being the home gaming market size to$100 million.
And they're burying
Games in
Concrete.
in landfills and smashing them up.
And throwing away consoles.
And
This is nineteen eighty three, so it's the exact same moment in Japan.
That
Somebody I don't know exactly who and exactly what the story is, but somebody is deciding to pull the trigger
And saying.
Take
The Famicom.
And
Make an American version of it.
Yes.
So
All right, how is like
I hear you.
I don't think this is the right time.
So that's the crazy thing. This is the thing that I think I couldn't tell between reading
stories from the US perspective, stories from the Japanese perspective.
Do you have a sense of how that dynamic went?
I read so many versions of this, so a lot of this is my speculation.
I can't a hundred percent say for sure that this is exactly what happened, but this is
Kind of how I imagine based on everything I read.
I think Yamauchi wanted to do it.
I think Arakawa did not.
And I think Yamauchi overruled.
And said,
Fine.
If you're not gonna do it.
We're gonna partner with somebody who will.
Even though you set up
Everything to be in house.
With Nintendo, set up this whole Nintendo America, this distribution around, we went through all this.
You proved yourself with Donkey Kong even though I saved you, but
I wanted to sell to Taito and you said that was wrong.
I wanna get this in the US so badly, I'm gonna go around you.
Nintendo goes.
To Atari. Remember this. We talked about this with Nolan Bush now and he was like, Yeah, I wasn't involved. That was really dumb.
'Cause he had already left Atari at this point. And it was owned by Warners.
Yamuti.
Goes to Atari.
And
says
Nintendo America's not gonna launch the Famicom. I want you to launch the Famicom.
Now.
In the US. Wow. And
They basically have a deal done. They
negotiate it. This is gonna be
Atari.
you know, Underwaners knows that their hardware of the twenty six hundred at this point is like
Dead. It can't compete with the NES.
They also know the market is totally going sideways.
So they're like, Sure, you know, worst case scenario
We can just sit on a competitor and
tie up Nintendo and not launch this. Best case scenario.
This is the Atari Nintendo Entertainment System.
Wow.
So what happened?
They basically have a deal done.
They
Are all set to sign it.
Uh the summer
CS
Conference in June of nineteen eighty three.
So Yamauchi directs Arakawa and Howard Lincoln.
To go
Down to LA.
And meet with Atari and Warner Brothers.
start the initial negotiations. They do that.
It goes well enough. I'm sure Arkow is like I can't believe this is happening.
Then the Atari folks
Fly out to Japan.
And meet with Yamauchi.
Well,
A deal basically agreed to in principle.
Where Atari
Is gonna distribute
The Famicom.
Not just in North America, but everywhere in the world except for Japan.
And they're gonna pay Nintendo a per unit royalty fee.
Nintendo would still get to sell the game cartridges.
So it actually wouldn't have been like a terrible deal because all the money and all the profits are in
The game cartridges. Right. But still, like talk about history changing on a knife point. This would have been
Atari's business.
Yeah, and Nintendo wouldn't have had the direct relationship with certainly not customers, but not even retailers. Retailers it wouldn't have built the brand, you know, all the IP we're gonna get into
All the amazing stuff that really Nintendo of America drives. Oh, it would have been an Atari branded Famicom.
Yep. Whoa.
So they're all set to sign this.
Uh
The June CES show in Chicago in nineteen eighty three. So summer nineteen eighty three.
But
By this point in time, the crash has already
Underway.
And
Atari and Warners are keeping these negotiations going just to keep Nintendo tied up.
But they know that they can't
actually follow through and like
Oh deliver on this partnership because
In the second quarter of nineteen eighty three,
Atari reports a two hundred and eighty three million dollar loss.
As part of Foreigners' earnings in two Q.
Ninete three, in the third quarter, so after CES.
That goes up to a five hundred and thirty six million dollar quarterly loss at the Atari division.
A year before, I think like we said at the top of the episode,
Atari
Had been half
Of Warner Brothers entire revenue.
And sixty percent of its operating income.
And now it's reporting a five hundred and thirty six million dollar quarterly loss.
So like
The other shoes about to drop. They have no power. They can't do anything at this point. It's just a charade.
So this probably would have happened. This definitely would've happened if the timing were different. Wow.
But well, maybe it would've, maybe it wouldn't have, you know, I think.
I don't know a hundred percent for sure, but I I think Arakawa was like
Yo, the reason I don't want to launch now is like now is not the time to launch this in America. I can see what's gonna happen here. So maybe it wouldn't have, like if things were different, maybe he and Nintendo of America
Would have let it from the beginning.
And in a sense Arakawa is right, the fact that they didn't release
what became the NES, the US version, which is a little bit of modified from the the Japanese one.
For another two years.
In one very key way it's modified, which we'll get into in a sec.
Two years later is a much better time to launch this system. Much better.
And
In the intervening two years, all the revenue and profits that
Nintendo
Japan, Nintendo.
Co L T.
The parent company was making allowed
the whole company to be in a much better position.
to whether the investment they're gonna have to make to re educate the American market when they do launch.
And just a
Put some numbers on that for the first couple of years.
of the Famicom.
In
Japan.
Not only are they selling every piece of hardware that they can make
Every
console that they sell has a what comes to be known in the industry as an attach rate, the number of games that are sold with it.
Going up to like eleven or twelve games.
Hm.
Console. Not per year, but for the life of the console.
And I couldn't actually find what the retail price of
Famicom cartridges were in Japan at that time.
But let's assume they were comparable to the US.
Which would be kind of seven to ten thousand yen, kinda like half ish of the price of the console.
If you're
Selling twelve games at half the price of the console.
You're making another six X.
The console revenue.
At like
Eighty percent gross margins. God, that's crazy. It's just a cash flow spigot.
And that attach rate is high even relative to like the big consoles today. Like I think PlayStation and Xbox, it's different with the subscription stuff today, but target like a seven or eight game attach rate. What did you say an eleven game attach rate?
Eleven to twelve. Yep. Yeah, it's nuts.
Totally nuts.
Even more importantly, though,
Building up to an eventual US launch.
It's during those couple years from nineteen eighty three to nineteen eighty five
That Miyamoto
An R and D for
start churning out an existing library of just amazing games. So
Duck hunt.
Super Mario Brothers, which is the first, you know
Mario game like we know it today.
Absolute smash hit side scroller platformer.
Yes. You know what it is.
The Legend of Zelda, which actually was the launch game for the Famicom disc system in Japan, which is we won't get into it here, but uh
The legend of Zelda was the best thing to come out of it, let's put it that way.
So Super Mario Brothers for a long time was
The top
Selling.
video game in history.
Over the lifetime.
Of that title, it sold over sixty million copies, obviously across multiple platforms, not just the NES.
Of just Super Mario Brothers one.
Super Mario Brothers won sixty million copies.
Duck Hunt sells twenty eight million copies.
Later Super Mario
Brothers three.
Would sell twenty four million copies.
Keep in mind, listeners, there are ninety million households in the US.
Right. So these individual games
This is the point we were making earlier that Yamamuchi understood.
They're making billions, billions of dollars.
Per game.
You know, that takes
Miyamoto and a small team at this point in time
Somewhere between six months and a year.
To make these games.
Well, there are some games that take four or five years. Right, right, right. But even in just those two years from nineteen eighty three to nineteen eighty five, Duck Hunt, Super Mario Brothers, Legend of Zelda
launch during those two years.
Actually Zelda might have been a little bit later, but like
That's billions and billions of dollars. Like incredible.
So when
They're finally ready to launch in the US in nineteen eighty five.
They've got so much firepower to bring to bear here.
Yeah.
So
They do a few things differently when they're developing the NES.
They take away the word computer.
Which is sort of an important nod to, you know, we wanted this thing to do all sorts of stuff to t have
Check stocks and weather and I even think it did some of that in Japan by this point. I think they did have the ability to
Connect to your phone line.
in sort of like a pre internet way and get some of these services, but they launch in the US and they're like
This is an entertainment system.
Congratulations, you've just bought the very best way in the world to play video games.
And
For the US version, the NES also had removable controllers. They were hardwired in on the Famicom in Japan.
And in the US.
An important difference.
The cartridges had a lockout chip. Ah yes.
The critical difference.
That brings up the next pillar.
Of the
Unbelievable Nintendo business model that we need to talk about.
Third party licensing.
And this is probably like a place to talk generally about
the role of Nintendo of America versus
the Japanese parent company.
'Cause to this point what we've basically talked about for Nintendo of America is they were a distributor.
They were a regulatory arm, they had to pay payroll and they had to do that in US dollars for US employees.
And also they set up the distribution network.
and had some opinions on a go no go decision of whether to launch in the US. But like
They aren't doing a lot of product specific work.

Yeah. Yama Uti.
Definitely.
Thought of
Rakawa and
Nintendo of America, despite him being his son in law.
Or maybe because he was his son in law.
Just thought of them as like
My American distribution network.
Yes.
But here's where things are.
Start to change.
So
Yamuchi did know.
And had learned from
The Atari
Third party.
licensing business model that we talked about with Activision and all that.
That that was an incredible
Cash flow stream and point of power. You know, he knew
That even he wasn't gonna be able to get
All of
the elite game designers in the world to come work for Miyamoto and Nintendo.
But he did know that he could get
all of the elite game designers in the world to publish on
The Fame Comm.

third party licensing in Japan. The first two licensees

Yeah.
Japanese arcade game company that made Pac Man.
And Hudson.
the first games that those companies they were established companies, especially Namco, like we're big existing companies, video game companies in Japan.
Before
Publishing on the Famicom.
It transforms their business.
when they publish their first titles.
has third party licensees with Nintendo.
Konami, which is another Japanese game developer that listeners might recognize.
Once they start publishing
In Japan on the Famicom.
Their revenue goes from ten million dollars a year to three hundred million dollars a year. Oh my god. This is how powerful what they've built is. All right. So this is how consumers want to play video games.
So
If you h make a video game, you should probably figure out a way to go to market on that. This is the power of a platform and a network effect in the
Video game console business. Yamauti gets all this.
The terms that he sets up for the initial licensees in Japan are
Key just copies the Atari business model. They pay Nintendo a twenty percent royalty on their revenues from the games.
And that's it.
I mean great cash flow stream for Nintendo, wonderful, all that.
But they could be doing so much more.
And indeed the next set of licensees in Japan
Nintendo ups the cut to thirty percent.
That they take.
And
says, Oh, by the way, only we can manufacture the cartridges. You gotta buy the cartridges from us. You can't make them yourself too, and we're gonna make a profit on that too. So like
Good, which at this point is just contractual. It's not a
Technical limitation.
Yes, exactly.
And
There's also no legal structure.
That they've set up in Japan.
That prevents
Anyone else from sort of unofficially
making and publishing games for Nintendo. And so a gray market emerges
Of developers who say we're gonna make
Famicom games.
But not work with Nintendo.
And sell them ourselves.
And famously.
one specific company from Taiwan called Hacker International
starts making both pornographic games and gambling games super ironic given Nintendo's origins. And Nintendo, meanwhile, has drifted like very Disney, very Apple and their family friendliness. And so this is so like antithetical
Strict censorship, like all of this stuff that we think of Nintendo today has
Yeah, they've been in the toy business for decades at this point. By the way, this sounds hard to do. Like you have to figure out how to manufacture the like correct sized plastic and the correct motherboard with all the correct pin connectors. Like if you don't have a factory set up to make
Famicom cartridges.
Creating that sounds really hard.
But the economic incentive to do so is worth it.
This market is so big. So companies like Hacker International
Are making tons of money.
selling their own cartridges directly and not paying a dime to Nintendo. And meanwhile they've got this brand problem that's emerged and all this stuff. And like if they're not careful
Even though the FameCom is so advanced and so superior.
You're not gonna end up with the same thing as happened in America in nineteen eighty three with a video game crash, but you're gonna have some of the same problems.
If you don't control the ecosystem
of publishing around your platform.
So Nintendo of America.
When it comes time to launch
What would become the NES.
In the US.
They come up.
With
Maybe the most genius
Inversion of all time.
One.
They say we should.
Engineer a lock out chip.
that you were referring to into the hardware and the software. It's actually unclear to me if that idea came from Japan or from America, but the Japanese engineers implemented it.
This is a specific chip.
in the console that needs to handshake with specific chips in the cartridges.
For the new systems in America.
That will block out any
not official Nintendo approved cartridges from playing in the console. I don't know if it's actually how it works, but
It's effectively a
Nintendo signed
Cryptographic.
Thing.
So it's like unless you actually go through Nintendo to make sure you get the
specific chip with the specific cryptography and put it in the
Cartridge is not gonna run on them.
Yeah.
Totally.
And actually
later versions of the Famicom in Japan would also include a lockout chip on them. So they try and retroactively also bring this to the Japanese market.
But Nintendo of America is like
Obviously a lot of people in the ecosystem are gonna hate this.
What if we market it though?
To consumers.
As this is a good thing.
We know that you consumers got burned by the glut
of mediocre software in the last video game bubble.
We Nintendo
Are on your side.
We're gonna make sure that doesn't happen here.
This
Is our
Seal of quality.
The Nintendo seal of quality that we are promising
To you our customers.
That only the very best, highest quality.
Software and hardware peripherals.
are gonna come out for your system. This is absolute genius.
And this is the exact thing that Apple
steals from. This is the exact party line. This is the exact strategy. When they launch the app store,
To this day, this is the exact reason that they have to justify it. Oh my gosh, for privacy, for security, this is for the benefit of our users. Side loading is the worst thing ever. I watched Craig Federiki give a talk on stage in Lisbon two years ago, talking about how side loading or external app stores would be the worst possible thing. And Apple generates
Tens of billions of dollars a year from the thirty percent of everything that runs through their app store. And they stole it.
All from Nintendo of America.
It is to the number.
The same thing that Nintendo was getting with that thirty percent. So, so so good. And they don't
Nintendo America doesn't stop there. They're so audacious with what they do. But they could get away with it because
Nobody cared in America. It was a dead industry.
And also they had
A great device. Like again, the iPhone parallel here.
Steve Jobs always said this is five years ahead of the competition.
I think that ended up being around it maybe a year or two, but like basically right. The Famicom was
five years ahead of the competition in consoles. So they go and they have the very best device on the market that everyone wants. You aggregate all the users, you can do whatever the hell you want to your developers. Oh my gosh. And they just make money six ways from Sunday on this.
So it continues.
D.
Legal innovations of Nintendo of America here.
And really I I think Howard Lincoln is behind a lot of this.
They say we're gonna go further.
Any third party.
That makes
Games.
For the NES in America.
We're gonna limit the number of games that you can make per year.
We're only gonna allow you to release a maximum of five games per year on the platform. They're just like
flagrant here. They're just like, Oh the DOJ's never gonna come for us. Which they didn't, I don't think. No, th I they did in Europe, I think they got in trouble for this, but uh somehow they escape in the US.
There is truth to the promise that Nintendo is making to consumers.
If you do this.
It does mean that anybody who publishes for
The NES can't just offload a ton of crap on the system. They have to pick their five best games, and that's all they can do any year.
And Nintendo is gonna just like if they feel like someone's game is crap, they're just not gonna prove it.
Yep.
No chips for you. Exactly.
And then the third thing that they
built into the Nintendo American licensing program.
Your games.
That you publish on the NES.
Have to be exclusive.
to the NES for at least two years.
Which doesn't matter right now because there's no viable competition, but will become the Sega would come out. Very important very soon.
Yeah.
Dirty.
Or clean. Nintendo would say clean.
Yes, they would. We are keeping our platform clean.
So
Nintendo
Of America.
and Nintendo Japan finally align that they're gonna launch in North America
For the nineteen eighty five holiday season.
And they're gonna launch in a test market to start.
the New York City
Metro Market. Super important because this is the epicenter of the toy industry.
So
They managed to get
relationships with both FAO Schwartz
And Toys R Us and Toys R Us would become huge. Of course, it's already national at this point, the biggest
Toy Chain in America. It's based in New Jersey.
So it's very strategic to launch.
Yeah.
New York.
They convince the retailers to carry them.
And this is where the next
Set of innovations. Come.
From Nintendo of America.
Partially I think this was necessity, because the retailers, even though they know this is an incredible product,
They're skeptical. Like it's not obvious that this is gonna work. The consumers are
way, way, way down on home video games at this point, even still in nineteen eighty five.
Nintendo says
We will come merchandise this within your stores for you.
We'll make it so easy.
For you to do this test with us.
You don't have to take your staff off of other things. If you can give us space in your stores. How very Louis Vuitton. Yeah, exactly. This is the I think the first store within a store in America. Literally.
They come in and they set up
The Nintendo displays.
And they do everything.
Eventually this would evolve and become
the world of Nintendo.
That is the way that you know if you were
A kid or parents in the eighties and nineties and you bought Nintendo products in a toy store.
You bought them at the world of Nintendo store.
Within
the toys are us or, you know, the Target or the Babitas or whatever.
And all of that, that experience was controlled by
Nintendo of America.
Fascinating.
And of course they could put all sorts of other ancillary merchandise in there, Mario backpacks, T shirts, you know, blah blah blah, what have you. Oh boy, did they ever.
So they managed to sell
Fifty thousand units during the Christmas season.
In New York.
Which is not a
Grand Slam success by any means, but like
That they even sold
That much.
That'd be about five million dollars in
Total sales. Again, like not a lot, but given that the whole industry had shrunk to a hundred million dollars in sales that they could sell.
Five million in one metro market in one holiday. To take five percent of the US's market share.
Just in that one holiday season, that one metro. Not bad. Not bad.
It's funny, when you said fifty thousand, I was like, So it flopped when it launched, but actually when you think about it relative to how terrible the market was. No, like everybody was like
Look, do we wish we sold more? Sure, but like this is actually a success. Yeah.
So throughout nineteen eighty six they start rolling out more metros throughout the US.
They take a kind of rolling thunder approach, which
we're gonna get to in a minute, also becomes the next innovation from Nintendo of America.
Can you imagine this today if they rolled out the switch like city by city? Right. So antiquated. So antiquated, but so brilliant, which we'll get into in a sec.
They sell a million units throughout
All of nineteen eighty six. So like okay, we're now like
In real business.
Nineteen eighty seven, it's officially available nationwide. They sell three million units in nineteen eighty seven.
And ten million.
Game packs. So like
At this point they're already basically coming close to parity with Japan.
Which is
Incredible.
The whole industry was dead two years ago in America.
Yep.
But the strategy and how they
Roll.
out to retail.
It's brilliant.
Remember, it was oversupply that killed the market.
before and you're trying to bring a market back.
from the dead. Like what will kill a market is when you have supply and demand
out of whack where there's way more supply than demand.
Even though there's just a trickle of demand for video games at this point in America.
Nintendo of America leans into it.
And they say to
retailers after that first New York City test launch.
We only have a very small amount of product available. They ration the product.
I think they fill fifty percent of every order. And this is an unofficial
Never written down anywhere for fear of the D O J, but like uh
Unofficial policy of Nintendo America for years and years and years.
Retailers only get half their orders.
Wow.
And it works like a charm. All of a sudden.
The N E S
And a video game console goes from being like
on the markdown collecting dust in a bin somewhere to
The hot thing.
You better show up at six AM to get it on the shelf.
You gotta stand in line, like it becomes this super hard to get. It's everything we talked about in the L VMH episode.
This object of desire that is very difficult to get.
They also take a page out of Disney's book and they keep most of their game
Catalog.
out of production most of the time. Yes. And so it's also hard to get a game unless it's new or one of the few that they've brought back into production.
Yeah.
So
Yamauchi actually brings a lot of these innovations from Nintendo of America back.
To Japan.
Mm.
The terms of the licensing agreements with third parties.
They go even further in Japan in true Yamayuchi style.
They can only make three games a year in Japan instead of five games in the US.
They add the exclusivity clause.
Like we said, they changed the hardware on future Famicom models to add a lockout chip.
They have so much control over every player in the ecosystem. It's so Disney like.
And then finally in nineteen eighty eight.
Nintendo of America still has their
Retail strategy, shall we say.
But
It blows through the roof. They sell seven million NES units in nineteen eighty eight.
Which is way more than Japan.
And thirty three million game packs in America in nineteen eighty eight.
So that's just in America.
A billion dollars in console revenue and another one and a half billion dollars in software revenue. A billion dollars in console revenue in nineteen eighty eight is ten times the entire market size for home video game consoles four years before.
nineteen eighty nine and nineteen ninety they sell about another ten million units of the hardware each year.
Such that by the end of nineteen ninety
one third of American households, thirty million American households have an NES.
And in the um
annual Q ratings in America, which
Aren't as much of a thing anymore, but I had to be reminded of it. It's uh
measure of recognizability of celebrities and
Brands in America.
In nineteen ninety.
Mario.
has a higher Q rating.
Among American kids than Mickey Mouse.
Whoa Isn't that wild? That is wild. And this is where
They just start
running away with it. And nineteen ninety, this is when they have ninety five percent of the video game market, right?
In the US.
Yes, this is like
the peak. This is Nintendo at the peak of their power.
Sega Genesis.
The mega drive in Japan had launched in nineteen eighty eight in Japan.
And eighty nine in America.
But it's a flop at first. It takes them a couple of years to figure out the marketing and how to compete against Nintendo. So Nintendo's just
An unabated path. Unabated path.
Firing on all cylinders. They do things, just these incredibly innovative things.
They launch a one eight hundred toll free line.
For game counselors. This is incredible.
Do you know my personal story with this? No.
So my wife's mom worked in Redmond.
in the correspondence department for Nintendo. And they had two groups. One is the game counselors.
And this is like super hardcore. Like you take a test.
There's a great Netflix documentary that describes it called High Score and it interviews it's got footage of a bunch of people in the game counselor group right after they take their test and like they are on the phone talking people through levels and kids are calling up.
And um yeah, my mother in law worked in the correspondence department. Uh the letters.
Letters.
She was saying that they would get hundreds and hundreds of letters. They would answer every single one.
And they were almost always like to illustrate and validate the point that like this was a
little boy thing for a long time and and teenage boy thing. She's like basically all the letters are from little kids, mostly little boys, and they're just like asking for help and like thanking Nintendo for making great games.
And it's just this unbelievably heartwarming thing, but it also gave Nintendo such a direct relationship with customers.
They eventually do make
The phone line.
I think it's the Nintendo power line.
Paid.
But in the beginning, it's free.
Think this is crazy. They are offering game
Counseling, advice, like help with games. For free. For free. This is an eleven star experience. Not only are we gonna sell you
the most powerful hardware on the market by years for a really cheap price.
We are then going to give you a toll free number that you can call for free.
And we will help you play the games.
'Cause they wanted to answer every single one. So they had eighty people regularly on staff, but during the holiday season it would be like three, four hundred people that they would staff up to to handle all the calls. Yeah. This also tells you about the margins that they were making on the software.
I asked my mother in law about it last night and was I were as I was getting ready for the episode and she said it was like a pretty amazing place to work because as you can imagine, like
I don't think
her logic was because it was so profitable, but the fact that it was so profitable and it was such a like central part of the country's zeitgeist trickles into the culture where like
Everyone's doing well.
Everyone's having fun at work. The work itself is fun. It's such a like family safe, clean brand that like
There's only like upside to every interaction that you're having
So it's funny, right? Like this is a subsidiary of a Japanese company.
So it's not like anybody working there has equity in what's happening. Right. And in fact they were all paid
At or below market.
But as one example of the money floating around.
At one point Nintendo of America.
buys a bunch of properties in Hawaii.
And basically like creates their own internal, like
resort for Nintendo of America employees.
That you could like
Book.
To go take your family to Hawaii and stay in the Nintendo owned properties. And then
We'll talk about a l this a little bit more next time, but um
They buy the Seattle Mariners. Can we talk about that? Like Yep. Uh This is a very profitable enterprise. Pretty amazing perks to get to work there. You end up with free game systems and free games and like you are a cool parent.
So this is one half of the
Amazingly innovative direct relationship with customers.
that Nintendo of America comes up with.
The other half.
Is Nintendo power.
N.
It's crazy. I mean like
doing the research for this, there are issues of Nintendo power.
That sell on eBay today for thousands of dollars.
The amount of brand affinity that this creates. Well, I used to buy so much of next episode's gonna be about Pokemon, but I used to buy Nintendo Power for the maps the Pokemon levels.
to be able to like show you where you need to go walk to unlock something and where different Pokemon are found. And
the idea that like you're taking
a pretty small screen. I mean, in my case it was the Game Boy color, but back in the Famicom days it was, you know, still a pretty small snapshot of the world on the screen. And to be able to lay it out in a magazine format to really show you the whole thing
it helps you understand how to play the game so much better. And of course there's editorial and of course there's like secrets that they divulge, but
I think this thing built up
A pretty significant
Readership. Six million circulation.
Crazy, right?
So here's what they do. Everybody who mails in the warranty card for an NES automatically gets added to
The Nintendo Fun Club. Fan Club.
So they're getting all the addresses and names of every single one of their customers directly.
Nintendo's head of marketing Peter Main.
And then Gail Tilden, who worked in the marketing department, came up with all this stuff and Gail ended up running Nintendo Power.
So for the first kind of year of the NES in the US
They send out the Fun Club newsletter for free once a quarter.
to everybody who registers.
And then they realized like what this could be so much more.
So Gail.
Starts.
um actual magazine, Nintendo Power.
They send.
In the next mailing to everybody they say
Hey, you can subscribe for fifteen dollars a year to a monthly magazine.
They instantly
Get a million and a half subscriptions. It's the fastest
magazine to reach a million subscription circulation in the US in history.
And becomes one of the largest magazines in the country.
Wow.
And so all this is amazing. So they I think they eventually raise the cost of twenty dollars a year. They get six million subscribers, so that's a hundred and twenty million a year and
high margin subscription revenue coming to
Nintendo.
Drop in the bucket.
What it's
way, way, way more valuable for though.
Not just the relationship with the customers.
It's for selling games.
Oh amazing. So the game previews, they use Nintendo power to just juice
all of the Nintendo first party and some third party games. They control the entire ecosystem now. Like
The
Marketing channel to the customers.
The retail experience within the stores.
The hardware, the software.
Everything.
It's one of the greatest businesses that's created of all time.
The Nintendo Power Strategy reminds me so much of the NFL with NFL films and the NFL print division.
Absolutely.
Not only
Are you doing what the NFL did, which is
building hype around your media properties and around all of your intellectual property, you are
Going one level further, as we just talked about, with you were you actually have a direct relationship with the customer. I mean, they built
A
Six million plus
CRM of people who bought Nintendo that they otherwise wouldn't have had their contact information, but now they have a new way to market stuff to them.
Yeah.
It's just this incredible story.
So here's the craziest thing that I was trying to like contextualize some numbers. Remember how I said in nineteen eighty nine Nintendo's sales were
Ten times the market bottom.
Yep.
that a billion dollars of revenue relative to the hundred million low point.
Well,
Two years later in nineteen ninety, Nintendo did almost three billion in revenue.
Which
Was the entire
industry market size.
At its peak.
Before the fall.
Nintendo's revenue alone in nineteen ninety is the same as the entire industry in nineteen eighty three at the height of the mania.
Yeah, just incredible.
I don't know if it first happened that year in nineteen ninety. It may have the only thing I read and that I know for sure is that
By nineteen ninety two.
Nintendo's profits. So not their revenue, but their profits.
Surpassed
Oh
Of the
Major movie studios.
and television networks combined.
Isn't that wild.
It's so insane.
So the NES and I think it's probably about time to start tying a bow on the NES story here.
would eventually sell sixty two million consoles worldwide.
I think we should save the
Super Nintendo
Game Boy and the whole battle with Sega.
As the beginning for part two, what do you think?
Yes.
That was my intention all along. There's plenty of analysis to do just on part one here.
This is the perfect place to leave it because
Here we are by the end of the
N E S Famicom.
Generation.
Nintendo.
Has
Revived, rescued.
This.
industry from
Death's door.
Built
One of the most impressive monopolies of all time.
in business anywhere in the world.
And a global monopoly too.
They can basically do no wrong.
And
What happens next is the fall from grace.
And I think that's gonna be the perfect place to start the next episode.
is how they fall and then how they come back.
Yeah.
Agree.
It's also worth pointing out a little bit at this point. So
For fiscal eighty nine, just to put some numbers around this, they did 1.84 billion in revenue and 217 million in earnings.
So they're doing twelve percent ish net income.
Margin.
Which is like
Good, but not as good as big tech companies today.
We were talking about how amazing the business model is, but like it is
worth pointing out like just how much R D they had.
Just how hard it was to manufacture a lot of this physical stuff.
at this point in eighty nine, they were heads down on two future generations of console. Actually three, including the virtual boy. So there's a lot of like real expense in the business.
even though they're blowing the doors off sales. I think that's true. I think that
net income was probably
suppressed and artificially
Low.
Perhaps in part because of all the cash sloshing around that they were using, but also all the international entities
I
believe I don't have the stat at my fingertips, but I believe operating margins were more in the thirty ish percent range. Okay. So still not like tech companies today, but good.
Right.
S spinning off hundreds of millions of dollars in cash is nice. Yes. There are a lot of ways that you can find uh tax efficient ways to uh
hide those hundreds of millions of dollars.
That's a good point.
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Before we get to analysis, I have two
very fun asides for you that are little branches off this tree of story. And I'm curious if you found them because one is like incredibly up your alley.
This is my favorite part of every episode when you try and stump me. I think so too.
So we talked about nineteen eighty three being a really crazy year for gaming.
There was
A company
started in nineteen eighty three
That
was supposed to be a gaming company.
that became very large that was not a gaming company.
Do you know what that is? Well, obviously it's not Slack.'Cause that happened later. Obviously it's not Slack.
Uh let's see.
Electronic Arts was started in nineteen eighty two by Trip Hawkins and is a gaming company, so you're not talking about that. Yep.
And it might be more fair to call it a game distribution company.
Than a game.
Developer.
Again, it didn't really happen, so it's hard to
say what it exactly would have been. You're also not talking about Netscape.
Which started
Uh
obviously Mark Andreessen and Jim Clark of Silicon Graphics and University of Utah fame, which started with the initial business plan of
Building software for the N sixty four.
But you're getting
Much warmer.
Okay, okay.
Nineteen eighty three.
The original company name was Control Video Corporation.
It's probably not helpful, but I know this.
This is the problem when you become a parent is like
Your mental acuity just like
If I were
a couple years younger, I we wouldn't be having this stage of the conversation. I already would be but I g I got it.
I gotta cry, Uncle.
I'm gonna keep giving you hints because you like you're gonna get this.
It's like the Netscape story in every single way. They wanted to develop
A way to internet connect.
A game console.
And instead became something like Netscape.
Have we covered it on the show?
We have extremely early on.
And we did not paint it in a great light.
And it is not Silicon Valley based. It's East Coast.
Virginia based.
Wow, I I can't believe I'm still blanking on this. I'm hoping there's listeners like screaming into their airpods right now.
Yeah.
Here's the question is how much of this are we gonna cut in postproduction?
It is AOL. Oh my goodness.
So it started as control video corporation in nineteen eighty three. There was one product, an online game service called Game Line for the Atari twenty six hundred.
And it had an amazing amount of very prescient technology.
the ability to temporarily download a game, cache it locally on device.
And keep track of high scores.
It would work by connecting a telephone line and game line would eventually go through some corporate restructuring and eventually emerge six years later as America Online.
Wow.
I can't believe I missed that. Here's a
Crazy total aside.
When I was in business school in Stanford.
The years twenty twelve to twenty fourteen.
The AOL building in Palo Alto.
was still
A central hub of things. So Stardex
the Stanford, you know, incubator that I was part of when I was there.
was actually based out of the AOL building at that point in time. Like isn't that wild, like
Even at that point in time, AOL still had its, you know
Tendrals in Silicon Valley.
Wow.
Okay, I've got another one.
And I'm just gonna start telling the story.
Score so far.
Ben one, David Zero. Well, I don't know. I have the all the stats in front of me. I don't know if there's me one. No, no. This is a this is a game. We're doing the Nintendo episode. We've got to keep score.
All right, so hit your buzzer when you have a guess. Okay.
So in nineteen ninety, right where we ended our story,
A small game developer approaches Nintendo
to show off that they had ported the first level of Super Mario Brothers three. Come on. That's too easy. Carmack and Romero. This is a crazy story.
Do you know what ID's first name was before they shortened it to ID Software? I mean, you just read the book, so this isn't fair. No, I actually got this.
I'm sure it's in the book, but
From research for this episode that I had completely forgotten.
Uh I do not know. When I looked at video of what you were talking about. What is it like SMB three DOS? No, no, no, it's related to it. It's ideas from the deep.
Oh, cool.
So what happened was John Carmack
one of these geniuses that Yamuchi
What it's identified and talking about.
Had
Engineered and I s understand this so much better now, having done the NES episode.
This is why what Carmac did at Id was so incredible.
He had
developed in software a way for generic PCs.
to do side scrolling graphics like the NES.
This was incredible because the reason the NES could do this was because of the picture processing unit, the PPU that we talked all about.
regular PCs only had a CPU. They couldn't do this.
Car Mac wrote software that enabled it and then they
famously made a demo version of Super Mario Brothers three.
For the PC and showed it to Nintendo.
And we didn't talk about Super Mario Brothers three, but like that is widely held to be the best Super Mario Brothers. One was the original, two was too hard, three was like widely anticipated, and then it came out and just was like even better than everybody thought it could be. Yeah, three was amazing.
But
So you can find video we'll link to it in the show notes.
You can find video that came out.
decades after the fact of
the actual it demo.
that CarMac coded up, like it was lost. I think somebody found it on an old machine at some point in time.
recently.
And so there's like YouTube, like you can go get video of watching it play. It's amazing.
Uh it's so incredible what Carmac did.
But the background of it, so they have the background of the desktop. They have it in a window playing on a PC. Huh.
Which you still can't do unless you're running a a Nintendo emulator on your computer. An emulator, yeah, yeah. I guess it was three point one, maybe at that point in time.
Um Windows two point one.
Uh it was DOS based.
Oh, it's Dow Space. Yes. Well there was
Whatever the GUI was that they had on top of it, because they'd have a GUI to play that game. So the background wallpaper of the GUI
Just said it.
IFD, IFD, IF D, IF D rose across the screen. I'm like, what the hell is IF D?
Then I figured out it was ideas from the deep.
That's awesome.
So here's how the story goes. So he
invents in a unbelievably genius way on this architecture a way to do the side scrolling Mario thing.
And they approach Nintendo and he's like, Look at this market opportunity I've discovered for you.
Can we be the developer of
Nintendo's
entry onto the PC, uh you know, Marion PC.
And Nintendo thinks it and they say no, because we only want Mario to be available on the NES to promote console sales, which of course is the right decision. Of course. So they they turn down the short term money to promote long term stability.
But
Id would then go on to rip Mario out of that.
P C side scroller.
And
Turn that into Commander Keene.
So
Carmack and Romero would then of course go on to create Wolfenstein 3D, Doom, Quake.
There is some alternate world where Nintendo could have said yes, and those could have been Nintendo games.
The alternate worlds in this episode are wild. Like the Atari N E S
Doom by Nintendo.
The
Internet being
AOL on Atari devices. Right.
We're not gonna talk about it on this episode, but
Netscape being an N sixty four information super highway based technology platform.
Crazy.
All right, well let's get into analysis here.
Let's do it.
Should we start with
Powers?
As usual. Yeah, let's do it.
So for folks who are new to the show, as always
We run each company we analyze through Hamilton Helmer's wonderful seven powers framework.
Where he identifies seven ways by which a company can earn persistent
differential profit margins versus its competitors in any given industry, aka have power.
in its industry.
The seven powers are counter positioning, scale economies, switching costs.
Network economies, process power.
Branding.

Resources.
All right, let's get into it for Nintendo.
Well said.
Far and above number one, in my opinion, is scale economies.
We have done all but name it.
Not network economies.
Well

Keep going with scale economies, I mean I agree.
The reason scale economies jump to mind is
We just keep talking about it on this episode without naming it.
And when we talk about things like
Nintendo
produced.
the most desirable console which all the consumers bought.
Which then meant that
Nintendo had power over its developers.
That is a pure play scale economy that
a game was worth way more on Nintendo for the NES's distribution than it was worth anywhere else. And so if you're a developer, it almost doesn't matter how bad the terms are with Nintendo. You have to build for Nintendo because there's more money there because it's amortized across so many different
users of the platform
that it's just always worth it.
Okay, so I totally agree with you. I think this is the number one source of power.
Isn't this network economies though?
A two sided network effect.
The more users you have on your install base.
The more attractive you are to the developers.
The more and better
Ten X, hundred X developers you have developing for your platform, the more likely you are to
Attract more users.
It's a good question. I mean I think
the scale economies when you define it is that you can make a fixed cost investment
that is more valuable to you than it is your competitors because you can spread
that cost across more
Customers.
that can sort of pay it back in a bigger way. And so because you have more customers to spread it across.
that fixed cost investment is more valuable to you, Nintendo, than it would be to your nearest competitor. Like the fact that Netflix can pay more for content because they have more people watching.
I think this might actually be a
Special case of both network and scale economies where it's both as a
Few together.
If Nintendo was acquiring the games, then it would be pure play scale economies.
But they're not. They're
convincing developers to build on their system. Yes, but there is a a strong
component of scale economies here too. I think you're onto something that these are linked because
It's all about the hardware R and D cycle.
Because you have to invest an enormous fixed cost of
both money and you know for everybody now, but at the first for Nintendo's time in developing a superior hardware platform.
That is
A scale economy advantage.
And then that
directly links to the network economy of like
because you can have that scale economy advantage on the hardware.
platform.
Then you can get the network economy
effect going of
Consumers and developers.
Yeah.
Interestingly enough.
Nintendo
historically hasn't done a great job of leveraging a large install base.
to advantage them with the next platform.
We'll talk about this next episode, but like
their success in the N sixty four
Did not carry through to
the next generation with GameCube.
They were sort of starting from zero again. It started even before then, and these were like this is we'll talk about this a lot more in the next episode, but
An incredible self inflicted wound that Nintendo is part of
Killing their dominance.
They didn't have backward compatibility at
every early generation. The Super Nintendo was not backwards compatible with the NES.
the N sixty four was not backwards compatible with the Super Nintendo, the GameCube was not backwards compatible with the N sixty four. They completely whiffed on this really important lesson.
And so console R D is actually not a scale economy because you don't have the benefit of all the people that bought your old console.
to amortize the cost of your new console across because you don't know how many people are going to buy the new console. And so I think that's something they've sort of woken up to with the switch, again foreshadowing here, but it to the extent where the next big console that Nintendo comes out with is a switch and is super switch compatible, then they actually start entering the scale economies game where
they can make the biggest best piece of hardware if they can get more people paying a sort of subscription Well that they can port their existing user base over to the uh Yes.
They first start doing it with the Wii.
Which not coincidentally is their big comeback that we could play Game Keep games. Uh but hey, we're getting ahead of ourselves. Definitely we are.
But you're right, I think there's sort of some scale economy, some network economy here, but we're both describing the same phenomenon.
You know, it's interesting. I I remember back from my
Days at T SP at Stanford.
One of my favorite professors, uh professor named Susan Aethe.
We then later would join the rover dot com board uh with me and uh get to re intersect with her.
There. A wonderful, wonderful person, incredibly smart. She was
In addition to being a professor at GSP, the chief economist at Microsoft
And a lot of her work was on
Xbox in the video game industry. That'd be such a hard spreadsheet to make to figure out. Oh, totally. Her academic specialty is network effects. Like
Everything she did was network effects.
And video game
Consoles.
And software is like
the textbook classic definition of the two sided.
Network effect. And I remember reading all about it in in her class. Like I was like, Oh, this is so cool.
Yeah. So no question to me that
Both network effects and scale economies.
R
Huge sources of power for Nintendo here.
Miyamoto definitely has process power.
Yep. And he's a cornered resource for Nintendo.
There's something that happens in his group.
where they come out with an unbelievably creative game concept that
I'm sure at first, much like Pixar movies, I'm sure the first cut isn't super fun, but they have a way of turning it into fun and weeding out things that aren't fun, that is absolutely process power,'cause I bet it would be really hard for him to write it down.
Totally. And
I'm sure a lot of people listening to this know
By heart, all of the games that Miyamoto has made, but
You know, for folks who don't you know, we mentioned a couple, but like
I mean he is the he is the Beatles of video games, like solely. Like uh He's probably the best game designer to ever live.
No doubt about it.
And in fact there's this amazing story of I think it was in the nineties.
when Paul McCartney was touring in Japan.
He's contacted Nintendo he wanted to meet Shigeru Miyamoto. Like he had such like reverence for him.
But
All the Mario games, Mario sixty four, which you know is revolutionized the industry, the first true three D game.
Legend of Zelda.
A Link to the Past on the Super Nintendo, the Ukraine of Time on
N sixty four, Breath of the Wild now for Switch. Did he design Breath of the Wild?
Well, so he's the head of Nintendo's game. So he's the producer. He's the producer now on the Zelda series and there are other directors below him. But like
It's all his process power. Yeah.
By the way, new Breath of the Wild or what do they call it, uh Tears of the Kingdom comes out next month.
Which is I I have a confession to make.
I've never been the biggest Zelda fan.
Like I like them. I I play them and I thought Breath of the Wild was great.
It's just not my total like
Style.
I mean, there are people who name their children Zelda. Totally. A lot of people who name their children Zelda after the video game.
And w you and I both talked to some games industry people preparing for this episode and from
real core gamer
Tight people.
It's amazing how
much reverence they have for Breath of the Wild where like
Everyone just looks at it like, Wow, how do they manage to pull this off?'Cause it's not for a core gaming audience.
And it was once again to the point of process power.
It was a similar situation at a smaller scale where open world games were dead.
They've been totally overdone, oversaturated. The market was sick of them.
And here along comes Nintendo and Miyamoto and
completely re envisions and
Re energizes the genre.
Yeah.
So back to the powers. Is there counter positioning
in the way that Nintendo created cabinet games, or maybe in the general concept of we're not about the fastest and newest.
Absolutely. I think there's plenty of counter positioning all throughout Nintendo history.
And I think it's a very important thing.
There's several examples here in this chapter of the story, or these chapters of the story. One
With narrative
Different games, uh and Donkey Kong.
Two though with the Famicom.
And
the NES relative to especially the rest of the American
video game industry, right? It's like we're about a small number of high quality games.
Not a large number of crappy games.
Yeah.
Again, this'll show up in the next episode, not this one, but switching costs. Hundred percent. If Nintendo had a viable competitor in the late eighties there'd be switching costs, but there weren't. And so that'll show up in the Sega battle of once you pick a side, you're sort of dug into that side, at least for the next six, seven years. And for the majority of the market.
In
Both America and Japan.
Families are only gonna buy one
console system that they're they're gonna buy all their games on. Like
There is a subset in the market that is gonna buy both the Super Nintendo and the Sega Genesis, but that's a small subset. Like today, most households are gonna choose between
The PlayStation and the Xbox and it's interesting that Nintendo is a third
Alternative thing.
But yeah, a hundred percent switching costs.
My God, I think Nintendo might have every single one of these powers of looking at this. I don't think they have branding.
Well they do now with their IP.
I don't know that that's branding though.
The definition of branding is if you receive two identical objects
You're willing to pay more money to buy from the firm with branding power.
Mm. Great point.
And IP is a cornered resource, not.
Branding.
The reason you buy something from Nintendo is all sorts of reasons, but not because it says Nintendo. Like their nearest competitor.
doesn't have any of the same features and capabilities that they have. It doesn't have the games.
It doesn't have the same form factor and
in the later years, it's like that your friends don't have it, so you can't play online. Like there's lots of differentiation. It's not like a bank or insurance company where
Everybody's competing in a commoditized way. And so brand really matters.
Two thoughts.
I think Nintendo does have
brand power, but I think it is the weakest of
The seven that it has just incredible. I think it has all seven. But the brand power, I think, is a
smaller piece of the story and its brand power around the seal of quality
And especially with parents.
And in this era, if I buy my kids
A Nintendo system
I can be very sure that there's not gonna be excessive
What and
Gets
There's not gonna be
sexual content. There's not gonna be profanity.
I think that's definitely branding because of the Genesis.
Brands against that.
Yeah, that's true. They counter positioned there.
I guess the reason I bring it up is
Because
it never actually comes down to branding because there are so few competitors.
that they differentiate in all sorts of ways that they don't actually need to rely on branding.
You could argue maybe in the modern era, the Xbox versus PlayStation War is actually more of a branding.
power for one versus the other of why you would pick since they're less differentiated. But Nintendo's wildly differentiated in the IP that is on their platforms and nowhere else. I mean at a minimum, I think they score super strong on six out of seven powers during this era.
Yeah. The coordinate resource being the IP process power we talked about with Miyamoto.
Network economies and scale economies probably being chief among these. Switching costs for sure, counter positioning, yes. Like
Wow, have we ever covered a company like this?
I don't think so.
I don't think so either.
And it reflects in what happened, like they had ninety five percent global market share in this enormous industry.
Yeah, and perfect timing.
Alright, playbook.
We've talked about a lot of these, so I don't wanna just revisit some. I wanna bring up some that I think are
kind of new.
Mario as a character
And I pulled this out of the Super Mario book from going deep on that franchise.
is so perfect because he's so universal.
It's story driven.
But there's not that much personality. So anybody can sort of see themselves in Mario. Whereas if you're playing more of a core game and you're like or or even an RPG of any sort.
Oh, RPGs. Yeah, absolutely are.
Your experience a story that's unfolding before you as an observer. It's like reading a book.
Right. But in Mario
You know, there's not enough.
depth to Mario to say like
I'm observing Mario. You just are Mario.
And that's like the perfect casual gaming character.
to just massively expand the gaming audience teenage boys and make it the most accessible ever.
Yeah.
Completely agree.
It's also interesting to note though.
During this era too.
And again, just to how powerful Nintendo was as a platform.
They also
had all of the great opposite kinds of games. The Dragon Quests
The final fantasies, you know, the hardcore R story driven RPGs.
Yeah.
Mario is also fun every time. You don't get sick of the music. The levels were easy to play but hard to master.
most of the levels only had small tweaks between that stage and the next stage, but somehow it still felt fresh and new every time.
Especially in this era where like
A lot of the competitors games
you'd quickly tire of them. Like you could play Mario for 150 hours and it would still feel fresh and new every time.
And that's a extremely difficult thing. That is why Miyamoto is such a genius. Yep.
He does this genius thing of incredible world building, especially starting with Super Mario Brothers, of like you're in the mushroom kingdom and like it's this incredible fantasy world.
But
It's story driven, not narrative driven.
So like you can create your own
Narrative within the world.
Right.
You know, it's funny that the Popeye IP stuff didn't work out,'cause
Like it was their first choice to use Popeye IP, but by not getting it, they ended up creating this unbelievably valuable franchise with Mario.
And
I pulled some numbers. You mentioned three hundred and eighty five million
Super Mario games were sold cumulatively.
And so that gets beat by
Tetris, Pokemon, Call of Duty, and GTA in terms of like
total franchise copies sold ever.
But
Mario, if you sort of
pop up a level and include Mario Kart and Mario Party.
That's eight hundred and twenty six million copies of Mario games sold, which
Definitely makes it the best selling franchise of all time. Yeah.
Wow.
It's so valuable. And in fact, Nintendo leaned into this. This is another sort of clever thing.
They
did not allow licensing of other characters. If you wanted to license a Nintendo character for a backpack or a lunchbox or one of the other 10,000 things people have licensed.
Nintendo IP for
For the longest time.
They would only grant you a Mario license.
Because they wanted to build
a mascot. They wanted to build so much IP and brand value into the Mario character that he became Mickey Mouse. Ah interesting. So they concentrated the effort
As opposed to having
Kirby licenses or Link licenses or Zelda licenses.
Right.
It's interesting what that allowed them to do,'cause it made Mario more than a plumber.
It made it so that when Mario appears in other games, it doesn't feel strange,'cause Mario just means Nintendo. It doesn't mean side scrolling plumber character.
Which was another clever creative decision where he's just like, Oh, he's the Nintendo mascot. And sure he's got a game of his own, but he shows up in all these places. And it keeps going back to like it's important for him to not have that much character depth because it makes it so that he can be super universal as the mascot. Yep.
Great point.
There's one more in this train of thought.
And this'll be, I think, a big theme of the next episode, but the fact that
Nintendo
platforms are first and foremost for Nintendo IP.
And they love making high margin revenue on other developers. And they're gonna say no to a lot of developers because they're inappropriate for the platform or they don't deem it a good game or whatever other finicky belief that they have that it's not Nintendo in some way.
But
Unlike other platforms.
Where
They have a
launch title and sort of a mascot for the platform that's just like
To juice the initial sales of the platform so that they get a network effect and then they can really make money from the third party developers. Nintendo
has such good
Owned IP.
that I think they would be delighted just making
the N E S and the S N E S and the Game Boy, and it's only ever their games on it.
And
The way that that has compounded over all these years.
is that they own some of the most differentiated IP in the entire world. And basically the only
globally recognizable video game IP in the entire world.
And
In second place is Pokemon and they own a third of that.
I think it was probably accidental at first, but then once they realized the value of what they had, they were super protective of it.
Yeah.
Well and with Pokemon too, we'll we'll again talk about this more next time, but
They only own a third of the IP.
But
They own Pokemon.
Only being on Nintendo platforms, to your point.
Correct. Yeah.
It's very Bernard Arnaud. It's control more so than economics.
All right. What do you got?
The one big
Playbook theme.
That I wanna talk about.
Peter Main, who we mentioned
was Nintendo of America's VP of marketing and
He along with Gail Tilden and others were really responsible for like the core of the innovation that came from the American side of the business.
Mm-hmm.
He
Codified what
ultimately became the company's sort of unofficial slogan.
Besides like
Do everything.
to be a monopoly without using the word monopoly, but we'll put that aside for a minute.
The phrase he comes up with is the name of the game is the game.
And
I think this is like such a key to understanding Nintendo and so applicable elsewhere.
And
Specifically, I think like all great personal and corporate uh encapsulations, it's both
A hundred percent true.
And a hundred percent ridiculous and not true.
And so what he means and what Nintendo means by it is that
The quality of
the games that we make and that others make for the platform.
is the name of the game. That is all that matters.
The quality of the product.
The quality of the games. If we make
And
Make available.
Exclusively.
the very best games out there.
On our platform we will win.
And that's a hundred truck. Like that is what matters. And that's part of Yamamuchi's
true genius was as a complete outsider recognizing that like
The Shigeru Miyamoto's
You know, the Gunpei Yokois.
are like the key.
To making all this work.
Right.
At the same time though.
The reason it's utterly ridiculous and doubly ridiculous'cause Peter Main coins it
He does everything.
besides make the games. And that is so important too. Like it really comes down to like product and distribution. Both are really important. Well also like the best CMOs
party line is our product is just so amazing it sells itself. That's exactly what you hear there. But I think Nintendo is such a perfect case study of this of like
this uh dichotomy and they're both so true.
Nintendo has the best products.
The best IP, the best games.
They also, especially in this era, had the best distribution channels, the best relationships with their customers, the best control over their ecosystem. The best strategy, generally. The best strategy, right.
And man, when you can marry
Both of those.
That's when you get ninety five percent global market share.
This was my sort of final question in my
the playbook themes that I had written down that I wanted to pose to you.
What other businesses
ever have had ninety five percent market share.
Or maybe uh the interesting one might be like what businesses today. Cause this isn't like a narrowly scoped market. This ninety five percent represents global video games.
You know, it's not like uh
browser market share on iOS devices or something like that. It's like
Global video games.
The only one that immediately comes to mind is um
I think
Apple and iOS.
Not of revenue, but of profits.
Apple and iOS.
have something, you know, on the order of that of global market share of smartphone profits. Smartphone profits. Yep.
The other one that's like close, but I think is
More around eighty five to ninety percent is search.
US based search engine usage.
I mean I guess at a certain point
Facebook had
something like that of social networking across all of their family of products. The day before Instagram launched.
W the day they acquired Instagram. Yeah, that's true.
And WhatsApp. Like during that
Hey Day.
And the most interesting thing is like
All the examples we're naming.
R
Under heavy
regulatory review and pressure.
And another one that I was gonna raise is uh Microsoft's share of the
operating system market. Yep. You know that probably was something like ninety five percent also.
Or um
Microsoft Office too.
And every single one of these have gone under significant DOJ concerns.
And Nintendo never seemed to. And is it like
People viewed this as a toy market that was like not terribly important to our economy.
I mean it is a much smaller market. In nineteen ninety they were only doing three billion in revenue. It's not like these companies that are doing a hundred billion in revenue.
I think there's this really weird dynamic with Nintendo.
Which is why I'm so happy we're doing this episode.
That it's just kind of overlooked and underappreciated as a business story. Yes.
Partially for the reasons you're saying partially because it's a Japanese company and so there's this like weird bi cultural thing.
And the belief that it's so hits driven makes people think like, Oh, well, it's probably whatever
market share they've accumulated surely isn't durable.
Yeah.
But yeah, like and even there's such great books, as we said at the top of the episode out there.
and work and documentaries on Nintendo, but
There are ones from a business perspective, but they're not like
Nobody's covering Nintendo like people are covering Apple.
No, everyone's covering Nintendo for the nostalgia of the character development and the fan service.
Right. And yet the business story is just as good.
Yeah.
All right.
I, even though we killed it, want to do grading on this episode. I'm curious if your game. I think Baron Bowl's stupid, since we know the history from
nineteen ninety to twenty twenty three. So like let's actually grade. Oh man.
That would be really interesting to do if we could go back in time and not know what happened next, but obviously we can't do that.
That's true. Would we think that like Nintendo was gonna take over the world and expand beyond gaming?
Probably.
Would we think that gaming would go from a three billion dollar market to a hundred and twenty, hundred and fifty, whatever it is, billion dollar market now?
That would have been a tough prediction to make. I bet we would think what Jim Clark and Mark Andreessen thought, which is that
Nintendo
Is going to become the computer. The window to the internet.
Yeah.
And we would not at all have predicted that just gaming itself was the thing and would become a hundred and fifty billion dollar market.
We would have said it'd be a hundred fifty billion dollar market, but it's something else. Right. Oh, that's a good point.
'Cause it's you're out on a limb if you try to make the prediction in nineteen ninety that gaming becomes a hundred and fifty billion dollar market.
Totally.
But it's a nice little hedge.
to be like, oh, I totally think Nintendo could address a$150 billion opportunity, but it'll be a bunch of stuff. It's almost like all the people in
Twenty
Sixteen.
when asked about crypto, they were like, Oh, I'm not so sure about Bitcoin, but I think the blockchain is gonna be a fundamental technology. It's like it's the way to hedge
And you're like, Well, I don't know exactly what the AI use cases are yet, but I'm sure it's gonna be huge.
Yep.
Okay, that was kind of a fun like uh what would have happened otherwise. Yeah. Okay, but greeting.
Greeting. So
I suppose the interesting thing is to take it from a shareholder perspective in call it the late
sixties, early seventies through nineteen ninety. Let's just say the twenty year span from seventy to ninety. Yep.
you know, how do you feel about Nintendo relative to being a shareholder of anything else?
And it was hard, especially because of all the exchange rates and the changing inflation and
Japan and inflation in the US and all these decades that have happened since then, but it seems like
The market cap in nineteen ninety of Nintendo is in the like fifteen billion ish category, which by today's standards, of course, seems
Quite small.
And we're like fifteen billion dollar companies are inconsequential when stacked up against big tech.
Right.
But was huge back then. Especially'cause there was all this
weirdness of having to buy a Japanese listed company and whatnot and like
Most of the global capital markets are not based in Japan.
Right.
But one question I did have is in your notes, do you have any in the seventies any revenue figure?
Because we know that it was around three billion in nineteen ninety.
I do not
I gotta imagine it was
Inconsequential compared to
What it would become.
Yeah.
So the framing is it rounds to zero and then twenty years later it goes to three billion in revenue, fifteen billion in market cap.
From a market addressability perspective
It's interesting that what happened is they had literal perfect timing.
to enter a market that would
become a hundred plus billion dollar market.
And they went in and they
captured ninety five percent of it. So like what I should be saying to you is
This is an A plus, no question. They couldn't be positioned any better and they couldn't have executed it any better. Oh, and they own the customer relationships and they own all the IP and they have immaculate control over the whole thing.
But I was thinking about it and the reason I don't think it is an A plus
Is because of the fall that will happen
at the beginning of the next episode, which is like
They kinda
Blew a lead where they were
Up by ten runs in the bottom of the ninth.
And
Maybe th the technology wasn't available at the time to get
Have further lock in.
But it does feel like
If the gaming industry was gonna grow from three billion to a hundred plus billion
Over thirty years.
It's kind of amazing that Nintendo didn't manage to surf on top of that wave, but kind of ended up getting clobbered by it two or three more times before figuring out how to really find their place there. Yeah.
And
I think had some really unforced, you know.
Own goal errors there.
Along the way.
Like Nintendo very much could have
embrace backward compatibility on each of their console cycles. Nintendo very much could have embraced the C D format, you know, and
failed spectacularly at both of those.
Yeah, so I guess I'm an A and I would be an A plus
but for the fact that we do know the future and we do know that they weren't as positioned as well as the numbers would state. I think that's why it's hard to be an investor and specifically hard to be a public company investor, because
The numbers can tell you one story.
But
Then there are
either execution problems in the form of unforced errors or black swan events or
the world sort of changes in ways that you absolutely could not have predicted by just looking at
Numbers. Yep.
It's so f hard. I mean
I
Absolutely inclined to agree with you, given that we know what happens.
Next.
On the other hand, if you purely scope it to this period of time, like
These guys executed ten out of ten.
During the, you know, nineteen seventy to nineteen ninety. Complete master class in business strategy and execution.
Yeah.
But like we were saying earlier.
We've never covered a company that
Scored so high on so many of the powers.
Yeah.
All right, give me your grade, David.
I hear your argument. I love it. That's the reason we're doing it a second episode, but
I'm gonna give him an A plus for
Nineteen seventy to nineteen ninety.
There you have it.
There we are.
Carvalho.
Carve outs.
By the time this episode comes out, the Oscars will have happened, so you will know if this already is best picture or not. But even if it is not, everything everywhere all at once.
was exceptional and I highly recommend it. Oh yeah, you've told me before that that was amazing.
Really good. Have I recommended it on the show?
Am I double carve outing? I can't remember.
I know you've told me about it.
It's hard to separate like
Our conversations on the show and not on the show, you know? It's a great couples movie, but it's also
a great sort of like indie film. Like it's a feel good movie to watch together.
I also recommend watching it alone'cause I think it's just a great piece of like independent filmmaking.
It is unbelievably VFX heavy, which you don't expect from the first twenty minutes. You're gonna start watching this movie and be like, what do you mean that this is unbelievably VFX heavy? But it was done by a four person team.
And it's like a completely different take on VFX. It's not like Avatar the Way of Water, let's go spend two hundred and fifty million dollars to create a film.
I think it's like a twenty five million dollar
Total budget.
Where it's almost like let's show off
How amazing
after effects and other state of the art
software that can run on your computer have gotten.
Did they use like
Unreal engine to do some of it.
Imagine I'm not sure.
I'm not sure. I I gotta watch more YouTube videos, like behind the scenes. Which is funny, right? Like we spent a lot of time on this episode. Of course, the natural comparison is video games versus music and movies, but like
It's all converging.
Yeah.
Well, I but there is a key difference with video games, which you pointed out earlier, which is like
It is a different part of your brain in terms of am I experiencing the media? Is it coming at me passively or do I have to be active in the media? Oh yeah, totally agree. I think there will always be separate industries, but like the tools and the technology are converging.
Bye.
Carve out slash outs are two.
Related ones.
Michael Lewis interviews.
For whatever reason I got like uh on a kick of listening to Michael Lewis and I just love Michael Lewis so much.
And I went back and I listened to I think either you or I
have before had as a carve out.
his interview with Tim Ferris a couple of years ago, which is so great.
That got me on a kick of
Seeing what else is out there.
You know, he definitely has his like everybody does his uh quiver of stories that he pulls out. So you listen to a few and you're like, Okay, I've heard you talk about this like sixteen times.
But I found one.
That I'm so glad I did.
Deep cut on YouTube.
It's a three hour interview on C SPAN.
On book TV. I think it's even on C SPAN too.
I have no idea why Michael did this.
But uh it was from a couple years ago.
And uh it's by far the longest one out there and like he goes like
Three clicks deeper on everything. It was just fascinating to live.
hear all like the real deep cut Michael Lewis.
Stories.
I thought I had listened to all of his interviews, so I can't wait to listen.
I've got YouTube Premium, which is amazing.
So I've been listening to it in podcast form, like without the video while I go on runs and walks and stuff.
The only way to live.
Only way to live.
Oh, I can't believe I went so many years without YouTube Premium.
Yeah. What is it? Ten bucks a month? It's a pretty easy ten bucks a month. I mean literally you're valuing your
Time.
If you don't pay for U T premium and you watch
Any amount of YouTube, you're saying that like
My time on all these ads.
is worth like zero.
Yeah.
I mean if they were better ads I'd be more inclined to pay attention.
Right.
high quality brand, you know, acquired style like you know, ads where you want to hear about I mean YouTube ads are
You too bad. It's like oh Sprite, I guess I'd just drink Sprite.
Huh.
Never mind that I haven't drank a sugar soda in fifteen years, but sure, show me another sprite ad. Right.
All right. Anyway.
Listeners, we'll give you the rest of your fifth hour back, fourth hour back, whatever it is. Thank you for coming on the journey with us.
You can join the revamped
reinvigorated acquired LP program and become a limited partner. Oh, since we're at the end of the episode, I thought about doing this earlier, but I thought it's just get right into the
into Nintendo, but now that we're at the end.
I can say the inspiration for how we've revamped
The acquired L P program.
where one of the core things we want to do is involve LPs in the audience in helping us choose topics that we cover on the show.
Was inspired
By my favorite video game podcast, which does this. Yeah. The great folks over at Resonant Arc.
They are a video game book club podcast. So they play video games like a book club and they choose a game to cover. And they're
Patreon, the key benefit of being their Patreon is you can vote on the next game that they cover.
I was like, that's brilliant.
We should do that unacquired.
It is brilliant. So LP is I would say maybe like a week after this episode comes out. Keep an eye out for an email.
polling you on. David and I have a short list of the next episode that we will do. We're curious to hear your feedback. We'll put a
Freeform field in there too.
And also we're starting back up with the Zoom calls. So if you want to hang out with David and I on Zoom for an hour, keep an eye out for an email on that too. If you are an LP, acquire.fm slash LP to join.
Go check out ACQ two. We have The Deuce. Seriously, like
The best
content that we've had on that feed in a long time coming up. I've been really pumped with the last few episodes.
and chalk full of it even more. So search ACQ two in the podcast player of your choice.
No space. I don't we may change that, but as of right now, no space, just like ESPN two or Muse.
And um
Yeah.
We're pumped to launch that.
Join the Slack.
Almost fifteen thousand folks strong.
Uh we just passed fifteen thousand. Fifteen thousand then gotta update my script. Smart, thoughtful people.
Talk about this episode.
Get some merch, acquire.fm slash store. Wow, we have like lots of things, D we're like a small media empire. The acquired Slack is like our version of Nintendo Power and uh power line. There we go. Oh we need to produce a Nintendo Power. All right, I'm cutting this off. Listeners, thank you. We'll see you next time.
We'll see you next time.
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