Nintendo’s Revolution Guide

Nintendo’s “Revolution” Satoru Iwata, president of Nintendo Corporation (Nintendo), strode from the conference room with a smile on his face. It was late 2004, and — Not only did it enable the creation of games that mimicked real-world movements like throwing, hitting, or aiming, Iwata believed it could help open up video games to a vastly different audience than the boys and young men who traditionally bought video game consoles. Expanding the gaming industry’s customer base was key to Iwata’s vision of a next-generation console codenamed “Revolution.” The idea was to bring tens of millions of new customers into the gaming realm, people who had never played video games before or saw them as mere toys. Iwata believed that a new take on gaming might even attract mothers — an influential household constituency, thanks to their influence over household spending1 — through a combination of hardware design, game-play, and price. What better way to attract them than through a controller that had a form factor similar to a TV remote control? But Iwata’s enthusiasm for the controller prototype was tempered by a number of real-world considerations. First, no other company had ever released such a controller. How would the marketplace react to such a vastly different model? Second, many of the technologies that were required to make the rod controller work — such as wireless positioning — might never operate perfectly outside of the lab, in people’s apartments and homes. Third, any new Nintendo controller 1 American Express Everyday Spending Index, via Ashish Rajan, “Convenience Drives Cards,” CardTrak.com, March 13, 2000. Accessed via http://www.cardtrak.com/news/2000/03/13/convenience_drives_cards in June 2011. NINTENDO’S “REVOLUTION” Sangbeom Kim, Ian Lamont, Hiroshi Ogasawara, Mansoo Park, Hiroaki Takaoka had to be backwards compatible with games made for older Nintendo consoles like the GameCube, which used traditional two-handed controllers. Additionally, Iwata was very sensitive to the reaction of the gaming industry and the existing gaming population to a non-traditional product aimed at a non-traditional audience. Nintendo had a long history of video game success, epitomized by the popular Mario Bros. franchise invented by Nintendo’s game design guru Shigeru Miyamoto in the 1980s. However, the company’s last console, the GameCube, was unable to get sufficient traction after it was launched in 2001. In 2002, sales forecasts for the GameCube had been off by 44% and the company had been forced to cut revenue targets by ¥100 billion.2 Gamers much preferred Sony’s PlayStation 2 console and Microsoft’s Xbox console,3 which were characterized by flashy graphics and hardcore fighting and sports titles. Iwata needed a home run to put Nintendo back on its feet. Could the Revolution’s radical hardware design help turn the company’s fortunes around? History of Video Games 1960s-1970s Video games have been around since the early 1960s. In 1962 MIT students Steve Russell, Martin Graetz and Wayne Witaenem developed Spacewars, the first video game. Spacewars marked the first time that computer graphics were used in a game. It quickly gained popularity among hackers and computer geeks,4 but never had a mainstream audience, owing to the fact that most people did not have computer access. In the late 1960s, Alan Kay developed the Dynabook, an early personal computer, which was targeted at children. The Dynabook concept set the stage for both the PC and computer game revolutions in the 1970s.5 The first game console was the Magnavox Odyssey, developed by engineer Ralph Baer as a side project in 1972.6 The following year, U.S.-based Atari launched a simple table tennis game called Pong in the United States, which could be hooked up to a TV set.7 It was a hit. In 1977, the company released a more sophisticated game console, the Atari 2600, which let users load different games into the system using rectangular cartridges. It was an even bigger hit, selling more than 30 million units.8 2 David Teather, “Nintendo in Sales,” The Guardian, March 8, 2003. Accessed from http://www.guardian.co.uk/technology/2003/apr/08/business.onlinesupplement in December 2010. Ibid. 3 4 MIT 150 Exhibition “Spacewar! Steve Russell, Martin Graetz, and Wayne Witaenem, 1961–1962.” Accessed from http://museum.mit.edu/150/25 in May 2011. 5 Pete Markiewicz, “Plyojump - Computer History.” Accessed from http://www.plyojump.com/classes/microcomputer_era.html in May 2011. 6 Philip Likens, “Ralph Baer: The Magnavox Odyssey.” Accessed from http://deptof.com/?p=185 in May 2011. 7 Pete Markiewicz, “Plyojump - Computer History - Computer and Console Games (1952-Present).” Accessed from http://www.plyojump.com/classes/computer_games.html in May 2011. 8 Geoff Edgers, “Q&A: A Talk with Nick Montfort: Atari and the Deep History of Video Games,” Boston Globe, March 8, 2009. Accessed from http://www.boston.com/bostonglobe/ideas/articles/2009/03/08/a_talk_with_nick_montfort/ in December 2010. 2 NINTENDO’S “REVOLUTION” Sangbeom Kim, Ian Lamont, Hiroshi Ogasawara, Mansoo Park, Hiroaki Takaoka Japanese companies took notice. In 1977, Nintendo released a Pong knockoff called Color TV Game 6 (“6” referred to the number of variations of the game that players could select). It sold more than 1 million units.9 In 1978, Taito launched an arcade game called Space Invaders. The game, designed by Tomohiro Nishikado, was one of the first video games to feature shooting, and helped expand the video game industry from a novelty to a global industry.10 In 1980, Atari licensed the game from Taito, which greatly boosted the 2600 console’s sales and audience size. Global Expansion Atari’s business model — licensing titles, commissioning developers to write games, and developing other titles in-house — was not sustainable, especially as the 2600 console’s 1977-era technology became dated. As it faded in the early 1980s, Japanese companies took the lead in developing gaming hardware and software for both mobile and console systems. In 1980, Nintendo launched “Game and Watch,” which was the first handheld game device inspired by an LCD calculator and digital watch.11 Later in the decade, the company would release the Game Boy, which dominated the hand-held gaming market for years. Nintendo’s console foray was even more successful. It developed the Famicom (short for “Family Computer”) in Japan in 1983. Titles such as Mario Bros. and a console version of the arcade hit Donkey Kong made the Famicom hugely popular in Japan. In 1985, Nintendo released the Famicom worldwide as the Nintendo Entertainment System, or NES.12 (See Exhibit 1.) The NES console had a different exterior casing than the Famicom’s, but the components inside were nearly identical. It was a runaway success, selling 62 million units worldwide. 13 Key to Nintendo’s success was the company’s control over third-party software developers. Nintendo encouraged third-party developers to create games for the wildly popular NES, as long as they agreed to produce no more than five games per year, and not produce titles for any other console system for two years.14 Nintendo would manufacture approved titles on NES-compatible game cartridges and sell them back to developers, who would then market and distribute the games. The system encouraged the development of innovative new titles and more NES sales. By 1989, video games were a $3.4 billion market in the United States, and Nintendo claimed a 79% market share.15 9 Wikia Gaming, “Nintendo: Color TV Game 6.” Accessed from http://nintendo.wikia.com/wiki/Color_TV_Game_6 in June 2011. 10 Tony Gray, “Hooked on Space Invaders,” The Sydney Morning Herald, September 9, 1980. 11 Sally Solo, “The Best Toys Come in Square Packages,” United Press International/Times Daily, November 27, 1983. 12 “Top 25 Video Game Consoles of All Time,.” IGN.com. Accessed from http://www.ign.com/top-25-consoles/ in December 2010. 13 Ibid; Nintendo Co., Ltd.: Consolidated Sales Transition by Region. Accessed from http://www.nintendo.co.jp/ir/en/library/historical_data/index.html in June 2011. 14 J. Rader, “Background: Atari Games Corp. v. Nintendo of America Inc. U.S. Court of Appeals, Federal Circuit, September 10, 1992.” Accessed via http://digital-law-online.info/cases/24PQ2D1015.htm in June 2011. 15 George Tibbets, “Nintendo Has Strategy to Keep its Lead in Toy Industry,” Associated Press/Pittsburgh Post-Gazette, December 25, 1989, page C18. 3 NINTENDO’S “REVOLUTION” Sangbeom Kim, Ian Lamont, Hiroshi Ogasawara, Mansoo Park, Hiroaki Takaoka Nintendo wasn’t the only company to profit. Several American game studios grew very successful businesses creating games using the Nintendo model until lawsuits from shut out developers and an antitrust investigation forced Nintendo to discontinue exclusivity requirements.16 Nevertheless, the third-party developer model was established as an extremely profitable and effective way to sell games — and consoles. A Technological Arms Race Nintendo began to face strong competition from Tokyo-based Sega, which released a 16-bit console called Genesis in 1989. There was also growing competition from PC games, including new roleplaying titles such as Ultima, which took advantage of rapid advances in semiconductor technology as well as the huge distributed base of PCs running on Microsoft Windows. Additional PC technology enablers included 256-color VGA graphics cards and “Sound Blaster” cards for audio. Increasingly, games and game consoles began to compete on underlying technological advancements, enabled by exponential advances in computing technology. Blocky 2D graphics and limited sound effects had been replaced by slick 3D environments, stereo audio, and even high-quality CGI “cutscenes” that featured the voices of actors recorded in professional sound studios. Even though the modern consoles were roughly the same size as their late-1970s counterparts, the hardware inside the machines had drastically changed. A video game console was essentially a computer with a niche purpose: letting users play games. Just like PCs and all other computers, video game consoles had a central processing unit (CPU), which carried out the various processing functions necessary to play games, including starting a new game, loading a new level, calculating scores, processing inputs from the controllers, and displaying the results on the screen. The power of early console processors was measured in “bits,” or a binary digit (one or zero). The Atari 2600 had a 4-bit CPU, while the consoles of the late 1990s used faster 64-bit CPUs. Modern consoles had an additional component, as well: graphics processing units (GPU), also known as graphics accelerators. A GPU was an extra processor that allowed the CPU to offload calculations and instructions required to render graphics on the screen. With powerful CPUs, GPUs, and sound cards, consoles could deliver more intense gaming experiences, including more realistic textures, weapons, backgrounds, characters, and monsters in 3D worlds. Diversification in the 1990s As the hardware race heated up, Nintendo and Sega continued developing consoles. A second Nintendo console, the Super Famicom, or Super NES, was launched in the early 1990s and sold 49 16 L. Gordon Crovitz, “Rule of Congress Zaps Mario and Luigi With Killer Lawyers,” The Wall Street Journal, January 17, 1990. 4 NINTENDO’S “REVOLUTION” Sangbeom Kim, Ian Lamont, Hiroshi Ogasawara, Mansoo Park, Hiroaki Takaoka million units globally.17 Starting in 1989, the company released a series of innovative and ultimately successful handheld gaming products. The Super Game Boy even had an adapter for earlier NES and Super NES cartridges. But not all of Nintendo’s gaming efforts were successful. In 1995, Nintendo attempted to capitalize on a craze for early virtual reality technologies. It announced the first 3D graphic video game console, called Virtual Boy (Exhibit 2). The Virtual Boy used a head-mounted display to give users an illusion of depth in a simple monochrome virtual world. It was an ambitious project, but met with lukewarm reception in the market.18 Sega launched its 32-bit Saturn console in 1995,19 but it did not fare well against the crop of graphically superior systems that were entering the market around the same time.20 In 1996, Nintendo announced the Nintendo 64, the company’s last home console to use cartridges (Exhibit 3). Later, Nintendo switched to a MiniDVD-based format for the GameCube. The Nintendo 64 sold about 5.5 million units in Japan and 33 million units worldwide21 — an impressive feat, but not nearly as powerful an impact as Sony’s PlayStation. Sony entered the market on the software side with its Famicom game called Captain ED in 1989.22 Initially, there was strong internal resistance to entering the video game business. Some in the company assumed that being associated with a toy would ruin the Sony brand. But an insightful Sony executive, a former engineer named Ken Kutaragi, had another idea. In 1990, Kutaragi proposed that Nintendo partner with Sony to co-develop a CD-ROM-based console that leveraged Sony’s CDpressing technology. Nintendo and Sony started work on the console, but Nintendo later backed out, fearing it was too risky to work with a potential competitor. Sony started to develop its own CDROM-based console, and in 1994 released the 32-bit PlayStation. Sony engineers managed to overcome the limitations of earlier systems by pricing the PlayStation lower than the previous CDROM-based game consoles like the NEC PC Engine.23 The PlayStation’s superior system performance, affordable price, and wide array of games were enough to turn the market upside down. It was the prelude of a new era in the console industry.24 Not all new competitors fared so well. In the mid-1990s, 3DO, an American company, developed a 32-bit console called the 3DO Interactive Multiplayer, and licensed the technology to three 17 “Top 25 Video Game Consoles of All Time,” IGN.com. Accessed from http://www.ign.com/top-25-consoles/ in December 2010. Nintendo Co., Ltd.: Consolidated Sales Transition by Region. Accessed from http://www.nintendo.co.jp/ir/en/library/historical_data/index.html in June 2011. Mike Cameron, “Virtual Boy Is a Virtual Snore,” The Spectator, September 21, 1995, page 11. 18 19 “Top 25 Video Game Consoles of All Time,” IGN.com. Accessed from http://www.ign.com/top-25-consoles/ in December 2010. 20 Ibid. 21 Nintendo Co., Ltd.: Consolidated Sales Transition by Region. Accessed from http://www.nintendo.co.jp/ir/en/library/historical_data/index.html in June 2011. 22 “Captain Ed,” Gamespot GameFAQs. Accessed from http://www.gamefaqs.com/nes/579469-captain-ed in May 2011. 23 “SNES CD-ROM Console Information,” Console Database. Accessed from http://www.consoledatabase.com/consoleinfo/snescdrom/ in May 2011. 24 Lev Grossman, “Ken Kutaragi: Gutenberg of Video Games,” Time, September 27, 1993. Accessed from http://www.time.com/time/subscriber/2004/time100/artists/100kutagari.html in December 2010. 5 NINTENDO’S “REVOLUTION” Sangbeom Kim, Ian Lamont, Hiroshi Ogasawara, Mansoo Park, Hiroaki Takaoka manufacturers: Panasonic, Goldstar, and Sanyo. It initially received strong reviews, but the $699 price was too high and there weren’t enough games. The effort failed.25 Another American company that attempted to follow the licensing route was Apple, which partnered with Japanese manufacturer Bandai on the Pippin. The Pippin console, which launched in 1996 in Japan, North America, and Europe, ran on an Apple operating system but was an utter failure. It was later rated by PC World magazine as one of the “worst tech products of all time,” owing to its high price ($600) and limited game selection. The product was withdrawn from the market in 1997.26 Besides the console wars, several technological trends also shaped PC gaming during the 1990s, including the introduction of faster processors and graphics cards as well as the spread of network connections via the Internet and local-area networks (LAN). First-person shooter titles such as Doom and Quake could be played over a LAN or Internet connection, and featured sophisticated 3D graphics. Another genre that began to gain steam was online role-playing games, such as Starcraft and the continuation of the Ultima series from the 1980s. By the late 1990s, sales of video games rivaled movie ticket sales.27 Market Dynamics Competitive Trends in the Early 2000s By the early part of the 2000s, video games were firmly entrenched in youth culture. A report published by the Pew Internet and American Life Project noted that in 2002, 60% of U.S. residents aged six and older played video games and more than 221 million games were sold.28 Clearly, games were a big business. Nintendo had fared well, outliving all of its early console competitors (Sega’s last console was the Dreamcast, released in 199929). But, Sony and Microsoft, two relative newcomers, threatened Nintendo’s future in console gaming. By this time, Sony dominated with its PlayStation 2 (which could play DVDs as well as game titles). Launched in 2000, it was designed to be backwards-compatible with all games from the original PlayStation console.30 This meant it launched with a massive base of players, which expanded to 24 25 “Top 25 Video Game Consoles of All Time,” IGN.com. Accessed from http://www.ign.com/top-25-consoles/ in December 2010. 26 Dan Tynan, “The 25 Worst Tech Products of All Time,” PCWorld, May 26, 2006. Accessed from http://www.pcworld.com/article/1257726/the_25_worst_tech_products_of_all_time.html#pippin in December 2010. 27 P.J. Huffstutter, “Now Video Games Are as Big as the Movies,” Los Angeles Times, May 10, 1999. Accessed from http://articles.latimes.com/1999/may/10/news/mn-35703 in June 2011. 28 Steve Jones, “Let the Games Begin: Gaming Technology and College Students,” Pew Internet & American Life Project, July 6, 2003. 29 “Top 25 Video Game Consoles of All Time,” IGN.com. Accessed from http://www.ign.com/top-25-consoles/ in December 2010. 30 Richard Stenger and Daniel Sieberg, “PlayStation 2 Makes Its North American Debut,” CNN.com, October 26, 2000. Accessed from http://edition.cnn.com/2000/TECH/computing/10/26/ps2.main.story/ in July 2011. 6 NINTENDO’S “REVOLUTION” Sangbeom Kim, Ian Lamont, Hiroshi Ogasawara, Mansoo Park, Hiroaki Takaoka million within three years as new titles were built for the PlayStation 2’s superior graphics.31 Sony was also battling Nintendo in mobile gaming. In 2004 the two companies released new handheld gaming systems. The Sony PSP was a portable device that had the most advanced graphics available for a portable gaming device. However, the Nintendo DS took a different approach to gaming, featuring two screens with more cartoon-like effects and simple game scenarios. While the PSP attracted attention from hardcore gamers, the DS was a hit with children, thanks to its easy-to-learn game-play and popular titles such as New Super Mario Bros. Meanwhile, Microsoft was attempting its own aggressive push into gaming. In the 1980s and 1990s, Microsoft’s gaming efforts centered on support for PC game publishers and its own Flight Simulator franchise. That changed with the launch of the original Xbox in 2001. The Xbox went head-to-head with Sony’s PlayStation 2. Both consoles competed for hard-core gamers on hardware performance and graphics — popular titles like Madden and Half-Life 2 tried to immerse players in realistic 3D environments, and depended on heavy-duty processing power and a constant stream of new titles to keep players hooked. In-game scenarios were getting longer and more sophisticated and, like their PC counterparts, they let players perform a wide range of functions using various combinations of input buttons on the controller. The games were clearly aimed at a hard-core audience of regular players. Although Microsoft had never disclosed how much it spent developing the Xbox, analysts estimated it lost $2 billion to establish the console in the market.32 In terms of the two consoles’ installed bases, Sony had a market share of 66% while Microsoft had just 22%.33 Squeezed in-between these two aggressive competitors, Nintendo had to think through how to fight back. In 2001, Nintendo released the GameCube console (Exhibit 4). It was housed in a plastic cube about the size of a lunchbox. Inside, it featured an IBM-designed “Gekko” processor and ATI “Flipper” GPU, and had an optical disc drive.34 While adequate for basic 3D games and Mario Bros., the hardware failed to measure up to the PlayStation 2 or the Xbox. Nintendo dismissed the criticism, saying that the simple design and emphasis on fun-to-play software like Metroid Prime and Legend of Zelda was an asset, and would help attract new gamers who were turned off by long, complex console games. Indeed, the GameCube’s software, toy-like feel, low-powered hardware, and cheap price ($200 at launch) appealed to families with younger children. However, many serious gamers derided it for its poor hardware specs and lack of compelling software.35 It sold nearly 22 million units 31 Davide Dukcevich, “Monday Matchup: PlayStation 2 Vs. Xbox,” Forbes, December 22, 2003. Accessed via http://www.forbes.com/2003/12/22/cx_dd_1222mondaymatchup.html in June 2011. 32 David Becker and Joe Wilcox, “Will Xbox Drain Microsoft?” CNet News, March 6, 2001. Accessed from http://news.cnet.com/Will-Xbox-drainMicrosoft/2100-1040_3-253654.html in June 2011. 33 Davide Dukcevich, “Monday Matchup: PlayStation 2 Vs. Xbox,” Forbes, December 22, 2003. Accessed via http://www.forbes.com/2003/12/22/cx_dd_1222mondaymatchup.html in June 2011. 34 “Nintendo’s GameCube Technical Overview,” Dreamcast Technical Pages. Accessed from http://www.segatech.com/gamecube/overview/index.html in June 2011. 35 “Top 25 Video Game Consoles of All Time,” IGN.com. Accessed from http://www.ign.com/top-25-consoles/16.html in December 2010. 7 NINTENDO’S “REVOLUTION” Sangbeom Kim, Ian Lamont, Hiroshi Ogasawara, Mansoo Park, Hiroaki Takaoka worldwide before being discontinued.36 By comparison, the PlayStation 2 sold an estimated 130 million units.37 Two-Sided Networks The video game industry was a classic example of a business based on network externalities. The more consoles that were sold, the more independent gaming studios were incented to develop new titles. This in turn increased console sales. Console makers could also sell their own titles, a tactic that had worked very well for Nintendo and its Mario Bros. and Pokémon franchises. As the video game market was growing, hardware was typically sold at a loss right after launch in order to build a customer base. Once the customer base was established, software could be sold at a higher price and/or volume to make a profit. Average console costs dropped over time, as manufacturing scaled up, component costs declined, and the learning curve kicked in. Sony lost an estimated $100-$160 per PlayStation 2 when it was first launched, but reportedly made up for the loss with profits generated by selling game titles and accessories.38 Microsoft also sold consoles at a loss, in order to establish a presence in the new industry.39 But the positive feedback loops required to make a successful console were hard to maintain.40 First, a constant stream of new game titles was required to preserve the value of the console hardware, and convince gamers not to switch. If a platform failed to preserve a steady stream of new titles, negative feedback loops would kick in as gamers and developers abandoned the platform. Second, game development had become far more complicated in terms of game-play scenarios and technology requirements. In 1996, a typical PlayStation game cost $1 million to develop and sold for $49. By 2003, PlayStation 2 and Xbox games still cost $49, but development costs had risen to between $5 million and $7 million per game. The high costs meant console companies, major game publishers and independent studios had to rely on a high degree of collaboration. These requirements dissuaded smaller studios from producing lots of titles, which created an additional drag on the network externalities that powered successful platforms. Third, independent game studios did not want the console market dominated by only Sony and Microsoft, as it reduced their bargaining power in profitsharing negotiations. This dynamic was actually a boon to Nintendo — many third-party publishers wanted to help Nintendo with its next console effort, which served as an additional positive network effect for Nintendo. 36 Nintendo Co., Ltd.: Consolidated Sales Transition by Region. Accessed from http://www.nintendo.co.jp/ir/en/library/historical_data/index.html in June 2011. 37 “Top 25 Video Game Consoles of All Time,” IGN.com. Accessed from http://www.ign.com/top-25-consoles/ in December 2010. 38 “The Game of War,” Red Herring, October 14, 2001. Accessed from http://www.redherring.com/Home/2699 in June 2011. 39 David Becker and Joe Wilcox, “Will Xbox Drain Microsoft?” CNet News, March 6, 2001. Accessed from http://news.cnet.com/Will-Xbox-drainMicrosoft/2100-1040_3-253654.html in June 2011. 40 Tom Loftus, “Top Video Games May Soon Cost More,” MSNBC, June 17, 2003. Accessed from http://www.msnbc.msn.com/id/3078404/ns/technology_and_science-games/ in December 2010. 8 NINTENDO’S “REVOLUTION” Sangbeom Kim, Ian Lamont, Hiroshi Ogasawara, Mansoo Park, Hiroaki Takaoka Periodic Market Cycle The video game industry had a five-year hardware cycle. Once a new game console was released, new game titles would be launched on their own cycles over the five-year period. Many were one-off titles that were nominally successful or, in some cases, lost money. Others were popular and generated sequels every two or three years. Some, such as popular sports titles, had new releases or expansion packs every year. Since there were a limited number of developers or game publishers, early mover advantage existed for console manufacturers. And once software developers devoted resources to building game titles for one hardware platform, it was difficult for them to switch to another platform owing to different staffing or technical requirements. Furthermore, once gamers invested in one console, they were less likely to switch consoles owing to the additional cost.41 These factors made it difficult for new hardware manufacturers to enter the market. By the end of 2004, the competition was starting to approach the end of their respective five-year cycles. Sony and Microsoft would be launching replacements for the PlayStation 2 and Xbox in time for the 2005 holiday shopping season.42 Following this same five-year hardware cycle, Nintendo would have a new console hitting the market in 2006. A History of Nintendo Management The Playing Card Era Nintendo was established in 1889 by Fusajiro Yamauchi to produce handmade playing cards decorated with drawings of flowers, famous people, and other objects (Exhibit 5). The name of the company, when rendered in the Chinese script used in Japan, meant “luck-heaven-hall.” The company began selling ‘Hanafuda’ cards in two shops, one located in Osaka and the other in Kyoto, where Nintendo company headquarters are still located. The cards were a success, and the company rapidly expanded. It was run by Yamauchi’s extended family for more than 100 years. At first, the company concentrated on the card business. But in 1959, with a young CEO named Hiroshi Yamauchi at the helm, Nintendo cut a licensing deal with Disney to have Disney characters printed on Nintendo’s playing cards, thus giving them a brand new look.43 In 1963, Yamauchi shortened the Nintendo Playing Card Company’s name to Nintendo Company Limited,44 signaling 41 Tom Loftus, “Top Video Games May Soon Cost More,” MSNBC, June 17, 2003. Accessed from http://www.msnbc.msn.com/id/3078404/ns/technology_and_science-games/ in December 2010. Ina Fried. “Digging Profits Out of Xbox,” Cnet.com. August 10, 2005. Accessed from http://news.cnet.com/Digging-profits-out-of-Xbox/2100-1043_35827110.html in December 2010. 43 Chris Kohler, “This Day in Tech: Success Is in the Cards for Nintendo,” Wired, September 23, 2010. Accessed from http://www.wired.com/thisdayintech/2010/09/0923nintendo-founded/ in June 2011. 42 44 “Nintendo History,” Nintendo.co.uk. Accessed from http://www.nintendo.co.uk/NOE/en_GB/service/nintendo_history_9911.html in June 2011. 9 NINTENDO’S “REVOLUTION” Sangbeom Kim, Ian Lamont, Hiroshi Ogasawara, Mansoo Park, Hiroaki Takaoka that the company would not limit itself to playing cards, and that it would soon enter other business domains. And so it did. Surviving as a Toy Company In the early 1970s, Nintendo ventured into other businesses, including food and toys. One unexpected success in the late 1970s was Nintendo’s “Ultra Hand,” an extendable robotic arm designed by Gunpei Yokoi, an assembly line maintenance engineer working at Nintendo. Yamauchi saw that Yokoi had great ideas and engineering talent, and transferred him to product development where he came up with innovative products like a baseball throwing machine and a puzzle game. Eventually, Yokoi oversaw Nintendo’s early video game efforts, including the arcade version of Donkey Kong and the Game Boy.45 Nintendo Management Under Hiroshi Yamauchi Nintendo’s modern organizational structure was strongly influenced by the management style of the former president and CEO, Hiroshi Yamauchi, who led the company from 1950 to 2002. He was a member of the founding family.46 A charismatic leader with a strong vision of what the company could become, Yamauchi drove other family members from Nintendo’s board soon after he became president and CEO. Nintendo was originally a family-owned and -managed company but Yamauchi thought it was necessary to change its culture.47 Yamauchi was a hands-on leader, apt to make quick decisions according to his vision for the company. He was always thinking of ways in which the company could please its customers, and welcomed the introduction of new ideas, experimentation, novel processes and products — including food, toys, and, eventually, video games. This attitude extended to other companies in the Nintendo ecosystem, as one engineer later described: “Nintendo is always trying to do something new and different. This message has been spread not only within Nintendo, but to other companies as well. As a result, our development partners have naturally tended to present us with new technologies and ideas.”48 Yamauchi established a flat organizational structure at Nintendo. He wanted employees to focus on customer value, and he believed an organization free from bureaucratic rigidity was best suited to providing it. Decisions were to be made quickly. Notably, Nintendo under Yamauchi promoted a risktaking culture, which was unusual for a large Japanese company. Therefore, when Iwata became 45 Lara Crigger, “Searching for Gunpei Yokoi,” The Escapist, December 25, 2007. Accessed from http://www.escapistmagazine.com/articles/view/issues/issue_129/2744-Searching-for-Gunpei-Yokoi in December 2010. “Nintendo History,” Nintendo.co.uk. Accessed from http://www.nintendo.co.uk/NOE/en_GB/service/nintendo_history_9911.html in June 2011. 46 47 Takura Kura, “The Success and Failure of Nintendo,” Doushisya Business School, December 2006. 48 Kou Shiota, Nintendo, “Using State-Of-The-Art Technology in Unprecedented Ways,” Wii.nintendo-europe.com, December 2006. Accessed from http://wii.nintendo-europe.com/163.html in December 2010. 10 NINTENDO’S “REVOLUTION” Sangbeom Kim, Ian Lamont, Hiroshi Ogasawara, Mansoo Park, Hiroaki Takaoka president of Nintendo in 2002, the company was prepared to compete in a fast-moving, uncertain, and competitive environment.49 Iwata’s Influence Iwata, an experienced game developer and former president of game studio Hal Laboratory, became president of Nintendo in 2002. Even though he was not a member of the founding family, Yamauchi believed Iwata was the right leader to take Nintendo into the new millennium.50 After becoming CEO, Iwata pushed for several changes in Nintendo’s organizational culture. First, he asked Nintendo executives to think about what made initiatives succeed or fail. In his mind, the process was more important than the result. He pressed executives and employees over why certain business results had occurred. Even if sales were great, executives couldn’t sit back and bask in their success —Iwata would demand to know the factors that had led to the positive outcome.51 This emphasis on understanding led to improved communication across departments. The company’s strategy became better understood among the 1,300 rank-and-file employees, which resulted in more autonomy across the organization.52 Coming from outside of Nintendo, Iwata made it a rule to talk with staff and persuade them of his vision for the company. This practice created a culture of discussion in an organization that had previously been managed in a top-down way. This culture of discussion reinforced coordination among the company’s software and hardware divisions, which had been established during the development of the Nintendo DS. This culture proved beneficial as the Revolution project got underway.53 Revolution While Hiroshi Yamauchi would never have been able to participate in the highly technical discussions that took place during earlier console development projects in the 1980s and 1990s, Iwata relished rolling up his sleeves for the Revolution project and diving into the problems with his top lieutenants and engineers. (See Figure 1 for a description of the core product team.) “We brainstormed with each other from square one,” Iwata recalled. “We were all running into the same walls, and we made the critical decisions together. I talked with a lot of people, such as Takeda-san and Miyamoto-san, along the way at each juncture.”54 49 Takura Kura, “The Success and Failure of Nintendo,” Doushisya Business School, 2006. 50 “The Stars of Asia: Satoru Iwata,” BusinessWeek, July 8, 2002. Accessed from http://www.businessweek.com/magazine/content/02_27/b3790605.htm in June 2011. 51 Kouji Sasaki, “Interview with Satoru Iwata,” Nikkei Business, November 27, 2006. 52 “Turning the Tables: Asking Iwata,” Wii.nintendo-europe.com. Accessed from http://wii.nintendo-europe.com/165.html in December 2010. 53 Kouji Sasaki, “Interview with Satoru Iwata,” Nikkei Business, November 27, 2006. 54 “Turning the Tables: Asking Iwata,” Wii.nintendo-europe.com, December 2006. Accessed from http://wii.nintendo-europe.com/165.html in December 2010. 11