Nintendo: Japan’s 130 Year-Old Video Game Behemoth

On July 6th 2016 the world became witness
to a historic moment in mobile gaming. The release of Pokémon Go broke all App Store
records for popularity and perfectly demonstrated how a single product going viral can change
the entire world’s opinion of a company overnight. The company I’m talking about is Nintendo,
and this week on Behind the Business we’ll take a look at their surprisingly long history. The story of Nintendo starts in Japan at the
end of the 19th century. This was time of great socio-economic change
for the country, a period known as the Meiji Restoration. In 1868 Emperor Meiji fought and was victorious
in the Boshin War, a two-year conflict between imperial loyalists and the Tokugawa Shogunate,
which was led by the 15th Shogun Yoshinobu. The Shogunate was over two centuries old at
that point and it was desperate to maintain the isolationist feudal society of Japan. With its demise came the end of Japan’s
foreign relations policy known as Sakoku. Under this policy, foreigners who entered
Japan and locals who left would be put to death, which greatly restricted Japan’s
economic and societal progress. When the Shogunate was abolished, Emperor
Meiji began a series of radical policy changes that transformed Japan from a closed feudal
country into a modern industrial powerhouse. One of the seemingly minor laws he enacted
was the legalization of a particular form of playing cards. You see, the Shogunate was generally distrustful
of most Westerners and considered them to be a corrupting influence on Japanese society. As a result, it had outright banned all playing
cards due to their frequent use in gambling. Emperor Meiji knew that regular people enjoyed
playing card games just for fun, but he didn’t want to appear like he was promoting gambling. The best solution he came up with was to legalize
Hanafuda cards. These cards didn’t have any numbers on them,
so they weren’t very convenient for gambling, but they could still be used to play several
different card games. A deck of Hanafuda cards resembled a modern
playing deck quite a lot: they were divided by season into twelve groups,
and each group contained four different cards for a total of 48 cards per deck. You could, of course, still gamble with these
cards, and the Yakuza very much did so by assigning each card a certain amount of points. By the time Hanafuda cards were legalized,
however, the popularity of card games had decreased dramatically, and there were very
few card manufacturers left in Japan. One of the few producers left was a man named
Fusajiro Yamauchi, who had founded his humble card-making business in Kyoto in 1889. His company was called Nintendo Koppai,
and to this day the true meaning of the word Nintendo remains unclear. The generally accepted meaning is “to leave
one’s fortune in the hands of fate”, but due to the complex nature of Japanese Kanji,
there are several other plausible definitions. Fusajiro, of course, hadn’t kept any records
on what the name really meant: he was too busy trying to restore the popularity
of Hanafuda cards. At first his business wasn’t too great:
his cards were pretty expensive, since he made them out of mulberry tree bark and he
painted all of them by hand. Once the Yakuza realized how to use Hanafuda
cards for gambling, however, Fusajiro’s business flourished. By 1907 his playing cards were the most popular
ones in Kyoto. That year Nintendo became the first Japanese
business to produce regular Western-style playing cards, which were once again made
legal by the government. When Fusajiro retired in 1929, Nintendo was
selling cards across the entire country. There was one small problem for Fusajiro,
however: he didn’t have an heir to continue the family
business. Now, in Japanese culture, when a family can’t
find a suitable heir, they can legally adopt an outside person. Most often the adoptee is the husband of one
of the family’s daughters. This man becomes a mukoyōshi: a legal member
of the family who adopts their surname. Fusajiro did exactly that: he adopted his
daughter Tei’s husband, who came to be known as Sekiryo Yamauchi. Nintendo greatly prospered under his leadership:
He opened a factory with an assembly line and a dozen new offices in major Japanese
cities. He also established a distribution subsidiary
in order to insource Nintendo’s logistics. After suffering a debilitating stroke in 1949,
Sekiryo was faced with the same succession problem of having no sons. He too wanted to adopt his daughter’s husband,
but the guy ended up leaving her a few years earlier. This forced Sekiryo to instead give over Nintendo
to his grandson, Hiroshi Yamauchi. At the time Hiroshi was only 21 years old,
a fresh law school graduate with no managerial experience. When Sekiryo died just a few months later,
Hiroshi began a purge at Nintendo, firing any relatives he had there as well as all
senior managers. He wanted to give Nintendo a fresh start,
and although most of his grandfather’s employees hated him, the company continued to expand
under his leadership. In 1959 he successfully negotiated a partnership
with Disney to feature their characters on Nintendo’s playing cards. Prior to that Nintendo was mostly associated
with gambling, but now they could start to reliably sell cards to children. This move was extremely successful and just
one year later Nintendo had sold 600,000 of these new card packs. Hiroshi was eager to expand into other industries,
and so in 1962 he took Nintendo public with a listing on the Osaka Stock Exchange. Using this newfound capital, Hiroshi experimented
with various ideas: In just three short years he had attempted
to introduce a taxi service, a chain of love hotels, a remote-controlled vacuum cleaner,
and instant rice. All of these ventures failed, and to top things
off the popularity of playing cards had plateaued, causing sales to decline. By 1964 Nintendo’s stock price had fallen
from 900 yen to barely 60 yen. The company’s only saving grace was their
decision to enter the toy market that same year by introducing the Rabbit Coaster. It was well received, but what really kickstarted
Nintendo’s toy division was the Ultra Hand, an extending plastic arm for grasping things. It was created by Gunpei Yokoi in 1966. He had been hired as an assembly line engineer
at Nintendo just one year earlier and he had made the Ultra Hand for his personal amusement,
definitely not indenting for it to get sold. Hiroshi immediately saw the toy’s potential
though, and Nintendo released the Ultra Hand just around Christmas. It was a sensation, selling over 1.2 million
copies by 1970, and it single-handedly saved the company from bankruptcy. As a reward, Gunpei was put in charge of Nintendo’s
R&D division, and over the next decade he would invent a bunch of other toys that cemented
Nintendo’s position in the toy industry. Gunpei was a big proponent of arcade games,
and between 1974 and 1977 Nintendo would release several arcade titles. The success of these games convinced Hiroshi
that Nintendo’s future was in electronic games, and so in 1977 he hired Shigeru Miyamoto
as a concept artist. That same year, together with Gunpei they
created Nintendo’s first television game system in partnership with Mitsubishi Electric:
the Color TV-Game 6. It managed to sell over a million copies and
it was Nintendo’s first step away from arcade games and towards personal entertainment systems. In 1980 Gunpei had another stroke of genius
when he created the handheld Game & Watch console. These consoles came preloaded with a single
game that couldn’t be changed, and they were generally modelled after the Color TV-Game
series. The Game & Watch console was Nintendo’s
best-selling product at the time, eventually selling over 43 million units. Hiroshi used its popularity to launch Nintendo
of America, the company’s branch in the United States led by Hiroshi’s son-in-law. Despite the success of Game & Watch though,
Nintendo were struggling to make a name for themselves outside of Japan. This was mostly due to the fact that the majority
of their arcade games were in fact just clones of other previously released titles. One arcade game called Radar Scope was doing
so bad that it barely sold a third of its intended units, forcing Hiroshi to think of
a way to repurpose them. He tasked Gunpei and Shigeru with redesigning
the game, but the designer duo decided to make an entirely new game from scratch. One year later in 1981 they created Donkey
Kong, a title that would eventually become one of the most recognizable arcade games
in history. It featured the hero Jumpman, who had to save
his girlfriend Pauline from the clutches of the evil ape Donkey Kong. It was considered the first true platformer
game due to the addition of jumping as a game mechanic. The Nintendo of America branch was woefully
unprepared for the massive demand that Donkey Kong would receive. The company at the time had barely 5 employees,
and they were already a month behind on their office’s rent. In an effort to appease the landlord, Hiroshi’s
son-in-law renamed the game’s protagonist after him, thus transforming Jumpman into
Mario. Just two years later in 1983 Nintendo would
release another hit arcade game, Mario Brothers. It was a spinoff of Donkey Kong, and in addition
to Mario it also featured his brother, Luigi. The game greatly expanded upon the Mario franchise
and it eventually led to the creation of over a dozen different sequels. That same year Nintendo outdid themselves
again by releasing the Famicom system, their first cartridge-based game console. Hiroshi had managed to negotiate favorable
deals with his suppliers, which allowed him to sell the Famicom system for barely ¥14,800,
greatly undercutting his competitors. The console was very well received, selling
500,000 units in its first two months, but soon it became apparent that one of its cheap
components was in fact faulty. This caused a large number of Famicoms to
freeze consistently, making them totally unplayable. Hiroshi made the tough decision of ordering
a total recall, a move that cost him over half a million dollars, but nevertheless saved
the company’s reputation. This act of good will was soon rewarded when
a great opportunity opened up for Nintendo of America. The rise of the personal computer, led by
the IBM PC from 1981, caused a massive slump in the video game industry between 1983 and
1985. From a high of 3.2 billion dollars, the industry’s
revenue had declined to barely 100 million over the course of two years, bankrupting
several major video game publishers. This was exactly the opening Nintendo needed,
and in 1985 they rebranded the Famicom console and released it in the United States as the
Nintendo Entertainment System. To accompany the new system Nintendo also
released Super Mario Brothers. The game built upon its predecessor by introducing
the Mushroom Kingdom and Mario’s arch nemesis, Bowser. It was the first title of the wildly popular
Super Mario franchise, which has to-date sold over 310 million copies. The very next year in 1986, Nintendo released
another iconic video game: the Legend of Zelda. It was a pioneering game in many regards:
it was one of the first games to feature an open-world environment and it laid the groundwork
for the development of the RPG genre. That year also saw the release of the first
Metroid game, a mix between an action adventure and a platform-shooter. It is notable for its non-linear open-world
gameplay and for the fact that it features the first female protagonist in any mainstream
video game. In 1989 Nintendo released the Game Boy, a
hybrid combining the portability of the Game & Watch console and the cartridge system of
the NES. It too was developed by Gunpei, who is also
responsible for the console’s iconic directional pad, the cross which functions as the Game
Boy’s main navigational tool. The flagship game of the console was Tetris,
which up until that point couldn’t be played on a portable gaming system. As you can imagine it became an instant seller
and spawned an entire series of consoles that lasted all the way up until 2006. In 1990 Nintendo replaced the NES with the
Super Nintendo Entertainment System, which became the best-selling console of the fourth
generation. In 1992 they released Super Mario Kart, the
first go-kart racing game in the 11-title series that has sold over 100 million copies. Nintendo made their first big mistake in 1995
by selling the Virtual Boy, a virtual reality console developed by Gunpei. You can probably imagine how absurd it was
to try to make a virtual reality headset with 1990s technology, but Hiroshi was convinced
the Virtual Boy would work. It was a total flop, selling barely 140,000
units in North America despite Nintendo spending over 25 million dollars on marketing. One year later in 1996 Gunpei left Nintendo,
for “personal reasons”, and then in 1997 he got hit by car. Despite his departure though, 1996 wasn’t
a bad year for Nintendo: in fact, it can be considered one of their
best years, because on February 27th 1996, they released the first Pokémon games: Pokémon
Red and Green. From its humble start with 151 Pokémon, the
franchise has since expanded to feature seven generations of games, 19 TV-show seasons,
and 19 anime movies. The initial release of Pokémon was very spectacular,
but by that point Nintendo’s competitors were already catching up. During the fifth generation of gaming consoles,
the Nintendo 64 from 1996 fell behind Sony’s PlayStation from 1994. The huge success of the fighting game Super
Smash Brothers from 1999 helped Nintendo stay ahead, but they once again failed to improve
in the sixth generation. Nintendo’s GameCube from 2001 barely sold
22 million units, compared to Sony’s 153 million PlayStation 2s. The introduction of Microsoft’s Xbox console
also hurt Nintendo’s market share. In 2002 Hiroshi finally stepped down as president
of Nintendo and he was succeeded by Satoru Iwata. Satoru was the former president of HAL Laboratory,
the company which had produced the Kirby and Super Smash Brothers series. He realized that the competition between Nintendo
and Sony had become so stiff that it was no longer worthwhile to compete. Instead Satoru followed a Blue Ocean strategy,
wherein Nintendo would reclaim their lost market share through differentiation and low
pricing. The culmination of his efforts came in 2004
with the release of the Nintendo DS console, which replaced the Game Boy series introduced
in 1989. The Nintendo DS was in many ways a design
masterpiece, featuring two separate screens, the bottom one being a touchscreen, and built-in
wireless connectivity. In its first month alone the Nintendo DS sold
1.2 million units, and it has since become the second best-selling console of all time
with over 150 million sales. The Nintendo DS was exactly what the company
needed to restore its financial situation. Satoru then focused on producing Nintendo’s
next home console. In line with his Blue Ocean philosophy, he
wanted to avoid direct competition with Sony and Microsoft, who were knee-deep in trying
to one-up each other with expensive hardware. Instead of catering to hardcore gamers, Satoru
envisioned a console that would be appropriate to everyone, and in 2006 he fulfilled his
idea by releasing the Nintendo Wii. It’s unique remote controller set it apart
from its competitors and the casual crowd really liked it. Although there were few games available for
it initially, game developers eventually caught on and in the end the Wii sold over 100 million
units. Combined with the Nintendo DS, Nintendo had
produced the most sold consoles of the seventh generation, both for the home and handheld
categories. In the current eighth generation though, the
situation for Nintendo is mostly a mixed bag: In 2011 they released the Nintendo 3DS, whose
most prominent feature is its autostereoscopy: the ability to display 3D images without the
user wearing glasses. It has totally trumped its biggest competitor,
Sony’s PlayStation Vita, whose high price was unjustifiable to most people. In the home console market, however, Nintendo
have recently fallen behind. The PlayStation 4 is way ahead of the Wii
U in terms of sales, and although Nintendo have reinvented their main game controller,
they have failed to deliver on a lot of crucial features. So far it seems that this generation’s crown
will go to Sony, and it’s up to Nintendo to figure out how to overtake them in the
next round. Perhaps Nintendo’s most famous recent achievement
has been the success of Pokémon Go, the augmented reality mobile game that has taken the world
by storm. It was produced by the American developer
Niantic, who was in 2015 spun off from Google during their restructuring into Alphabet. Following the spin off Niantic announced they
would be receiving a 30 million dollar investment from Google, Nintendo and the Pokémon Company,
in which Nintendo owns a 32% stake. Although Pokémon Go has earned a record-breaking
35 million dollars in its first two weeks alone, a large part of that money won’t
be going to Nintendo. Apple alone get to keep 30% of the revenue
generated on iOS devices, and about 65% of what’s left will be going to Pokémon Go’s
other stakeholders. Any rational investor wouldn’t really think
Nintendo would benefit all that much, and the company announced exactly this in a recent
public statement. And yet, over the two weeks since Pokémon
Go was released, the value of Nintendo’s stock more than doubled. That’s right, Nintendo’s market capitalization
increased by 17 billion dollars over two weeks based solely on the expectations for Pokémon
Go, in which they only have around a 30% stake. It’s pretty crazy, and it pretty much confirms
that the stock market is anything but rational. I hope you enjoyed the story of Nintendo. If you did hit that like button, subscribe
and check out my other videos for the stories of more cool companies. Tell me in the comments which company you’d
like me to feature next, and as always, stay smart.

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