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We feel an equal commitment toward our employees. We want to maintain an atmosphere in which talented individuals can work together as a team. Commitment and enthusiasm are crucial to the high quality of our products and support services. We believe in treating our employees with the same consideration and respect that we, as a company, show our customers.
Nintendo Co., Ltd. is a toy and home entertainment concern that is famous worldwide for its popular home video games. Nintendo's products arose in the mid-1980s from the relative obscurity of the amusement arcade to change the concept of home entertainment in both Japan and the United States. Nintendo's main U.S. product, the Nintendo Entertainment System (NES), and its Japanese counterpart, the Family Computer (Famicom), were embraced by consumers of both nations, but increased competition in the early 1990s from a new generation of video machine competitors loosened Nintendo's commanding hold on the market. The company's commitment to quality and innovation, as represented by its Nintendo 64 machine and software, kept Nintendo in the game as it advanced through the increasingly competitive environment. In the late 1990s, the revitalization of its hand-held, portable Game Boy system by way of the Pokemon game concept proved to be one of the company's--and the $15 billion industry's--biggest successes of the period.
Playing Card Company: 1880s-Early 1960s
Nintendo was founded as Marufuku Company, Ltd., in Kyoto, Japan, in 1889 by Fusajiro Yamauchi, the great grandfather of the current president of Nintendo. Marufuku made playing cards for the Japanese game of Hanafuda, which is said to have had its origin in Tarot cards. In 1907 Marufuku introduced the first Western-style playing cards in Japan. Marufuku initially made the cards for Russian prisoners of war during the Russo-Japanese War of 1904-05 when the soldiers wore out the decks they had brought from Russia.
Between 1907 and World War II Marufuku solidified its status in the playing-card business. World War I, in which Japan fought on the side of the Allies, did not affect business in any remarkable way. In 1925, however, Marufuku began exporting Hanafuda cards to Japanese emigré communities in South America, Korea, and Australia. The years 1925 to 1928 also saw Marufuku developing a new, more effective marketing strategy that placed its products in tobacco shops. These marketing moves were complemented by Marufuku's aggressive advertising, as Japan's business practices became more Westernized.
World War II devastated the Japanese economy and delivered a hard blow even to the previously modest but stable home amusement market. The playing card industry and Marufuku, though, fared far better than most. In the austere postwar climate, when entertainment had to be cheap and simple, the demand for playing cards only decreased slightly. Marufuku, whose physical plant had not been damaged much in the war, thrived in the years following the war.
Hiroshi Yamauchi became Marufuku's president in 1949, embarking on a wide-ranging program to modernize and rationalize the way his family's company was run. In 1952 Marufuku consolidated its factories, which had been scattered throughout Kyoto. In 1951 Yamauchi changed the company name to one more appropriate to the leisure industry; he called it the Nintendo Playing Card Company, Ltd. In Japanese, the word "Nintendo" has a proverbial meaning that loosely translates as, "You work hard but, in the end, it's in heaven's hands."
Business boomed in the postwar era. In 1953 Yamauchi responded to a shortage in playing-card-quality paper by challenging his company to develop plastic playing cards. After initial difficulties in printing and coating the plastic cards, Nintendo started mass-production. In 1959 Nintendo first showed its sharp eye for the children's market when it released playing cards in Japan that were printed with Walt Disney cartoon characters. By 1962 business was so good that Nintendo decided to go public, listing stock on the Osaka and Kyoto stock exchanges.
Diversification: 1960s-Early 1980s
A year later Nintendo began the drive towards diversification and innovation that eventually led it to the late 1980s boom that made its name a household word. First, in 1963, Nintendo augmented its product line by marketing board games as well as playing cards. By 1969 the game department was so successful that a new game production plant was built in Uji city, a suburb of Kyoto. The year 1970 saw Nintendo introducing electronic technology for the first time in Japan with its Beam Gun Series. An especially popular example of this technology was the laser clay-pigeon shooting system, introduced in 1973, in which arcade players aimed beams of light at targets projected on a small movie screen. By 1974, Nintendo was exporting this and other projection-based games to the United States and Europe.
In the next few years, arcade game technology made remarkable strides, with Nintendo in the vanguard. In 1975, in cooperation with Mitsubishi Electric, Nintendo first developed a video game system using a video player--a technology made more complex the next year when a microprocessor was added to the system. By 1977 this technology was being marketed as part of the first, relatively unsophisticated generation of home video games.
In the amusement arcade Nintendo's games were beginning to feature higher levels of technology. In 1978 Nintendo developed and started selling coin-operated video games using microcomputers. This innovation, which in 1981 resulted in such arcade hits as Donkey Kong, gave to arcade video games the complex graphics and stereo sound that Nintendo would later market for home use.
As the 1980s began, Nintendo started selling the Game and Watch product line--a handheld series of electronic games, such as football, with liquid crystals and digital quartz micro-hardware. By this time, Nintendo found that its export business required a firmer foothold in the United States and established Nintendo of America, Inc., a wholly owned subsidiary, in New York City. In 1982 the U.S. office was moved to Redmond, Washington, and established there with an operating capital of US$600,000. As the 1980s progressed, the company focused on the development and marketing of home video technology. A new plant was built in 1983 in Uji city to meet the production requirements of Nintendo's new flagship product, the Family Computer. Famicom, which allowed arcade-quality video games to be played at home, came to be played in more than 35 percent of Japan's households.
With Famicom swiftly selling in Japan, Nintendo began exporting it to the United States. In 1985, however, when Nintendo was ready to enter U.S. homes, the home video market there seemed all but tapped out. The United States had experienced a dramatic home video boom in the late 1970s and early 1980s, but by mid-decade this boom had ended, leaving the U.S. industry with hundreds of millions of dollars in losses. The sales of the U.S. home video industry had plummeted from a $3 billion peak in 1983 to a $100 million trough in 1985. These figures did not daunt Nintendo, which quietly test marketed its games during the darkest depths of the U.S. slump. The response was enthusiastic. Nintendo concluded that the problems in the U.S. home video market were caused by an excess of uninspiring, low-quality games with which an undisciplined industry had flooded the market, losing the trust and patience of its customers as it went after quick profits.
Seizing Opportunity: Mid-1980s
Nintendo came to the United States in full force in 1985 with its American version of the Famicom, renamed the Nintendo Entertainment System. First year profits were astounding, and the skillfully managed demand of the U.S. market showed few signs of softening from its introduction to the end of the decade. According to Yamauchi, Nintendo owed its success to its ability to control the quality and amount of game software being sold for its NES systems. The NES hardware was similar to its Japanese precursor, the Famicom, consisting of a Nintendo control deck, hand controls, and the game cartridges themselves. The control deck sported an eight-bit computer that generated stereo sound and images in 52 colors. It hooked up with the purchaser's television set to allow the viewer to play a complex video game--which could take up to 70 hours to complete--by manipulating a joystick that controlled movement in two dimensions.
The NES control deck was sold at close to cost, about US$100, to place it in as many homes as possible. Nintendo then made a profit by selling its own game cartridges at US$25 to US$45 apiece, and by arranging lucrative licensing agreements with the numerous computer software manufacturers who were eager to get a piece of Nintendo's pie by creating software for Nintendo's games.
From the very beginning of its U.S. home video foray, Nintendo gained customer loyalty and enthusiasm by producing or licensing sophisticated, challenging, and surprising software for its NES. By 1989, this practice had translated into a 75-80 percent share of a US$3.4 billion home video game market. But the business strategies that brought Nintendo to its position of dominance soon came under intense scrutiny. Stymied competitors, the U.S. government, and Nintendo's own licensees--who found that Nintendo's mode of granting licenses for game software could soak up as much as 50 percent of their profits--all came to regard Nintendo's trade practices with a suspicion that led to widely publicized litigation.
Nintendo and most industry analysts maintained that a lack of quality control killed the first home video craze in the early 1980s. To avoid making the same mistake, Nintendo erected a demanding series of market controls. Each of its licensees was limited to developing only six new game titles a year. Nintendo manufactured its own patented game cartridges and required would-be software programmers to buy the cartridges in batches of 10,000 and then to assume full responsibility for reselling the game cartridges after they had been programmed by the licensee. To make certain that hardware competitors and software licensees would not try to circumvent Nintendo's control, Nintendo included a security chip in each game cartridge. Games programmed on cartridges lacking this microchip appeared scrambled when one tried to play them. Nintendo reserved the right to modify games or to forbid a licensee's attempts to market a game that had been deemed unsatisfactory in evaluations conducted by the company. When a licensee's game gained approval, the developer had to wait two years before selling a version of its game to Nintendo's competitors. Because of these safeguards, the quality of Nintendo-compatible software remained high. Yet dissatisfaction developed in the U.S. industry with Nintendo's control.
In December 1988 Tengen Incorporated, a subsidiary of Nintendo's archrival Atari and a Nintendo software licensee, filed an antitrust suit. Tengen wished to make games that would run on Nintendo's NES without having to go through Nintendo's series of quality-control measures. Having cracked the code programmed into the microchip in Nintendo's cartridges, Tengen released a game without Nintendo's approval. Nintendo filed a countersuit in February 1989 claiming patent infringement. By then Tengen's parent company, Atari, had jumped into the fray, filing a separate US$100 million antitrust suit against Nintendo. As the litigation piled up, it became apparent that cultural differences in business practices were near the heart of the conflict.
Playing the Market: Late 1980s
The 1980s were otherwise a successful decade for Nintendo. The company concentrated on popularizing its existing products and developing new ones. In Japan Nintendo developed and started to sell a Family Computer Disk Drive System, which hit the mature Japanese market in 1986. The way this new product expanded communications capabilities of the Famicom was dramatically showcased in 1987, when Nintendo in Japan organized a nationwide Family Computer Golf Tournament. Players throughout Japan used modems, public telephone lines, and disc facsimile technology to compete against each other from their own living rooms in Nintendo's home video game version of golf. Nintendo looked to the day when nationwide tournaments could be conducted with contestants comfortably ensconced in their living rooms. The network, which Nintendo soon hoped to duplicate in the United States, allowed people throughout Japan not only to play Nintendo games against each other but enabled people to download information from stock companies and trade in stocks, shop, or make ticket reservations.
In 1989 Nintendo announced a deal with Fidelity Investment Services, Boston, to bring this technology to the United States. For about US$200, American owners of Nintendo's NES could buy a modem, a controller/joy stick, and a Fidelity-designed software cartridge that would allow the use of their home entertainment hardware for a more serious purpose: managing stock portfolios. A US$3 million grant in 1990 to MIT's Media Lab was earmarked for researching the possibility of making video games more educational.
Despite such serious uses of its equipment, Nintendo remained synonymous with high-technology home fun, largely due to its expert marketing techniques and customer support. In 1988 Nintendo began publishing Nintendo Power magazine for its U.S. customers. This magazine, aimed at adolescents, was filled with game-playing tips and announcements concerning recently developed games and hardware. For those times when Nintendo Power could not help a frustrated game player, Nintendo introduced a 20-hour telephone bank with advice from 300 game counselors.
Further public relations efforts included a deal with Ralston Purina Company in May 1989 to market a citrus-flavored Nintendo Cereal System, featuring edible versions of the heroes from Nintendo's video games. In 1989 Nintendo also teamed up with PepsiCo and the nationwide toy retailer Toys 'R' Us for special joint promotions and in-store displays. Nintendo spent $60 million on U.S. advertising that year.
In 1989 Nintendo also returned to the handheld electronic game market it had created a decade earlier. The battery-operated Game Boy, about the size of a paperback book, featured interchangeable game cartridges, stereo sound, and complex dot-matrix graphics. In Japan Nintendo unveiled a new 16-bit advanced version of the Famicom, dubbed the Super Family Computer. Its more complex electronics meant more challenging games, more interesting graphics, and more realistic sound. Nintendo waited to release the U.S. version of the 16-bit machine until it felt the market was ready.
The company's leader, Yamauchi, one of the richest men in Japan, did not own a car or a television. He professed a disinterest in electronic games, saying he preferred chesslike board games. A frugal and cautious businessman, Yamauchi had a reputation for a reserved demeanor. His personality was compared to the minimalist architecture of the company's headquarters in Kyoto. Despite Yamauchi's disciplined management style, the company was still able to create an environment in the research and development division that was conducive to creativity.
In reality, only ten percent of Nintendo's games originated under Nintendo's roof. The bulk of the company's products were created by independent designers, some of whom became millionaires in their own right in spite of Nintendo's strict guidelines. Designers built games on speculation, paid Nintendo to produce the game cartridge, and then paid for the necessary marketing and advertising. These rules and Nintendo's near-monopoly of the video game market led many in the industry to characterize Yamauchi as a tyrant.
A New Game Forming: Early 1990s
Developments in the early 1990s appeared foreboding to Nintendo's hold on the market. Several antitrust cases, including one brought by a U.S. Senate subcommittee and one brought by Time Warner's Atari Games, threatened to change the look of the video game industry. Moreover, the continued success of Sega Enterprises, Ltd. gave Nintendo its first real competitor. It was Sega's 16-bit Genesis System that led Nintendo to upgrade its eight-bit machinery. Sega's growing product line and state-of-the art programs rivaled those of Nintendo and offered buyers an alternative video game system.
Nintendo was not to be easily vanquished, however. Indeed, many industry observers saw Nintendo as the "next Disney,' and a survey of school children found that the Mario character was more popular than Mickey Mouse. Although video game sales slowed in 1990, growing less than half as fast as they had the previous year, Nintendo's sales increased by 63 percent. When U.S. videogame sales reached $4.2 billion by 1991, Nintendo products accounted for $3.2 billion.
In the summer of 1992 Japan's Capcom Co. released Street Fighter II for Nintendo, and the game met with immediate success. Also in 1992, Nintendo produced Super Mario Paint, a drawing program featuring the company's star character, a game based on the Road Runner cartoon character, and the long-awaited "Zelda' sequel, The Legend of Zelda: A Link to the Past. Nintendo hoped eventually to raise its U.S. household penetration rate from 17 percent to the 35 percent it had achieved in Japan and mirror in the United States the profit-producing ten-to-one software-to-hardware ratio that Nintendo had achieved in its home country.
Nintendo's exports to the United States had grown eightfold from 1987 to 1991, and the company held 60 percent of the 16-bit U.S. market at the end of 1992. Yet Sega's comparative advertising, begun in 1990, pried open Nintendo's grip on consumers. Sega branded Nintendo's games as children's toys, and Nintendo of America failed to respond to the ploy. Nintendo's U.S. market share fell to 37 percent by the end of 1993. Jeopardy continued into 1994 when a new generation of machines hit the market.
Sega's and Sony's new game consoles were 32-bit systems utilizing CD-ROM disk drives. Sega's Saturn and Sony's PlayStation had inherently large storage capacities, thanks to the CD-ROMs, but were considered sluggish. Nintendo, on the other hand used much faster but more expensive silicon storage cartridges. Instead of matching the moves of its competitors, Nintendo concentrated on developing, in partnership with California-based Silicon Graphics, Inc., a 64-bit processor with superior capabilities.
Faced with consumer desertions to the 32-bit machines, Nintendo tried to extend the life of its 16-bit Super Nintendo System by bringing out hot games. Donkey Kong Country, which had been designed for the 64-bit system, was released in a 16-bit format and became the bestselling game of 1994.
The video game machine makers spent millions each year on software development. Independently produced games continued to generate the bulk of Nintendo's revenue in this important area: in-house software brought in around 35 percent of sales. In 1995, pressed by the need to produce software for its new machine, Nintendo purchased 25 percent of Rare Ltd., a U.K.-based developer. This was Nintendo's first investment in a software maker outside of Japan.
Nintendo's promise of a cheaper and more exciting video system by early 1996 dampened Saturn and PlayStation sales somewhat during the 1995 Christmas season. Nevertheless, Sega passed Nintendo in terms of total sales for the first time in the fiscal year ending March 1996. Nintendo's consolidated sales fell 15 percent and operating profits fell 24 percent. The 32-bit machines, the economic recession in the important Japanese market, and the defection of independent software producers to the competition contributed to Nintendo's downward spiral.
Nintendo 64 (N64) finally hit the market in 1996. Japanese consumers were eager to check out the new system. "With preordering rampant and queues outside the stores, some 300,000 Nintendo 64 machines were snapped up by eager addicts on the first day,' according to an August 1996 article in the Economist. Anticipating the U.S. release, Sega and Sony cut the prices on their 32-bit units.
The N64 Japanese launch got off to a fast start but stalled just as quickly: only a few games were ready for the format. Nintendo had backpedaled on the N64 release date a number of times, a situation that served to frustrate many independent software makers and led to the defection of some important developers to Sony.
Further complicating matters was the complexity of programming required for the N64 software and programmers' frustration with the limited storage capacity of the cartridges as compared to the CD-ROMs used by the competition. Another factor in the mix, one which was not there during Nintendo's glory days, was the personal computer (PC). PC makers were fabricating increasingly sophisticated games, drawing talent from the software developer pool and eating into the market.
Difficulties aside, Nintendo continued to live up to its reputation for quality software and produced another blockbuster game. "This is probably the most perfectly crafted video game ever,' wrote Neil Gross in Business Week. Shigeru Miyamoto, the designer of the original 8-bit Mario game, scored big with Super Mario 64.
Mario's fluid movements through dazzling three-dimensional graphics set the game apart from earlier versions and from competitor's 32-bit games. Sony and Sega, on the other hand, were not just waiting for Nintendo to rack up points. Sega was the first to release a web-browsing device, and Sony was way ahead of the pack in number of games available. Nintendo continued to feel the pinch and recorded its third straight year of declining financial results in the fiscal year ending March 1996.
In the first half of 1996, sales of the 16-bit Super Nintendo machines and related software plummeted. Sales generated by the new system, due in part to the lack of software, did not pick up all the slack. In September 1996 N64, with eight titles on hand, hit North American shelves; by June 1997, 2.6 million machines had been sold, capturing 50 percent of the market. An additional 2.7 million had been sold elsewhere in the world. Revenue for fiscal 1997 were up 18 percent to $3.5 billion. Earnings increased nine percent to $54 million.
Sony, the market leader, had more than 11 million PlayStations in the hands of consumers worldwide and carried 150 game titles. Nintendo 64 offered just 17 titles for play. The importance of the software lay most clearly in its profitability. Nintendo's margins for hardware were one to five percent while software yielded margins of nearly 45 percent. Software produced more than 50 percent of the company's profits. Aware of the dilemma it faced, Nintendo of America's chairman personally solicited the services U.S. software developers.
In an effort to boost capacity, a sticking point with the game makers, Nintendo put an N64 peripheral in the pipeline. The DD64, a magnetic disk drive, was to also contain a communications device. "Still,' wrote Seanna Browder in Business Week, "there are risks even to this. Historically, add-on devices don't go over big with gamers, who make one initial hardware investment and call it a day. There's also the chance that Nintendo could split its market into two camps--N64 and DD64. Then, game developers will be scratching their heads, wondering which to support.'
Nintendo was headed in the right direction, but the progress was not entirely smooth. Sales and profits were boosted in 1997 by Pokemon or Pocket Monsters, a new game played on Nintendo's handheld Game Boy machines, but the year was marked by a delay in the launch of the new hardware platform, DD64, and the botched delivery of Yoshi's Story, a much ballyhooed software title.
Nintendo came back in early 1998 with the introduction of the Game Boy Camera, a digital offering that sold for $50 and attached to the Game Boy machine. Nintendo sold more than 700,000 of the units in its first five weeks on the Japanese market.
Solidifying its dominance in the handheld market, Nintendo also released Game Boy Color and Pokemon Pikacu, a virtual pet. (The Pokemon game had spawned a multibillion-dollar industry of related merchandise.) In late 1998, Nintendo spent millions on the rollout of The Legend of Zelda: Ocarina of Time and achieved record pre-sales on the game.
The Future Is Now: 1999, 2000, and Beyond
The next generation of video game machines appeared on the horizon late in 1998, when Sega introduced its 128-bit Dreamcast machine to Japan. The system processed data more quickly than both PlayStation and Nintendo 64 and thus was capable of producing more lifelike graphics. Dreamcast was scheduled to hit the United States in the fall of 1999.
Not to be outdone for long, both Sony and Nintendo planned for a year 2000 release of their new machines. Sony said its PlayStation II, which it categorized as a home entertainment system, was even faster than Dreamcast and would produce images with graphic quality similar to animated movies. No longer just a game machine, PlayStation II would accommodate movies and games recorded on digital video disks (DVD). Breaking with industry convention, the machine would also play games produced for the original PlayStation. Nintendo, in a $1 billion partnership with IBM, said its next generation console, code named Dolphin, would also use DVD and exceed the speed of even Sony's offering. Hype aside, Nintendo faced another unsettled transition period as it again maneuvered from one generation of game systems to the next.
Principal Subsidiaries: Nintendo of America, Inc. (U.S.A.); Nintendo of Australia Pty, Ltd.; Nintendo of Canada, Ltd.; Nintendo Espana, S.A.; Nintendo of Europe GmbH (Germany); Nintendo France S.A.R.L.; Nintendo Hong Kong Limited; Nintendo Netherlands B.V.
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