Nintendo: the Road to Heaven
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Nintendo is well-known worldwide for its endearing video games and most especially for their iconic characters, Mario, Zelda, Pikachu, to name only a few: these games have, without a doubt, had a surprisingly strong cultural impact all over the world, bringing gamers together from continent to continent. Nintendo's success throughout the years, however, is not limited to its software industry: in that respect, this paper follows a chronological structure to analyze the story of the company, in order to identify the key factors that can explain its successful internationalization.
Nowadays, Nintendo is the leading company of the videogame industry. By 2011, Nintendo Wii sold 87 million units worldwide, while its competitors, Xbox360 and Playstation3, sold only 55 million and 51 million respectively[1]. Besides, in 2009, Nintendo was chosen by “Business week” as the best company in the world[2], leaving behind Google and Apple. This was due, among other things, to its high profitability, with offices, factories and distribution channels in almost every continent and 81% of its production exported. However, despite its outstanding contemporary performance and international dominance, Nintendo’s beginnings were far less glamorous. The Big N started as a very small local business in a modest corner of Kyoto.
In 1889, Fusajiro Yamauchi founded Nintendo Koppai, which means “leave luck to heaven”. At this stage, Nintendo was fully devoted to the production and distribution of the colorful-hand-made hanafuda decks (SLOAN, 2011, 2). Due to its remarkable artwork, Fusajiro’s cards outsold its rivals and eventually became very popular among the landed elite, students, laborers and especially in the gambling circles. With the introduction of mass production, Nintendo quickly became a medium-sized company, eager to test new horizons beyond Kyoto’s boundaries (SHEFF, 1999, 15).
In 1907, Nintendo started manufacturing Western-style playing cards, becoming a pioneer in that enterprise. However, in order to sell them throughout Japan[3], Nintendo had to develop its distribution channels. Consequently, it made a historical agreement with Japan Tobacco and Salt Public Corporation to sell the cards in their cigarette shops that were scattered all over Japan. Thereby, the company became the biggest playing-card company in Japan by 1929.
To cope with the increasing demand, Nintendo decided to abandon the old headquarters in Kyoto and move Nintendo to a bigger building just next door by 1933. Besides, it started to buy paper from outside suppliers and developed a Ford-like assembly line of workers, which helped boost it, both in quantity and quality[4]. (SHEFF, 1999, 16) Most importantly, however, Nintendo created its first distribution company, called “Marukufu”, which would be in charge of selling all varieties of Western-style playing cards in 1947.
Hiroshi Yamauchi became the head of Nintendo in 1949. Back then, Nintendo had to face the rising competition of the imported modern Western-style cards: the company decided to develop the unprecedented technology of plastic-coated cards manufacturing. Due to its advanced technology, its quality and its consolidated distribution channels, Nintendo achieved to dominate the domestic market by the early fifties.
Once entrenched in the Japanese market, Nintendo was ready to go abroad. Its first move was the signature of a licensing agreement with Walt Disney in 1959. The landmark deal, allowed Nintendo to stamp Walt Disney’s animated characters, like Mickey Mouse, on the playing cards and to sell them either in Japan or in the USA. As a result, Nintendo’s engrossed its pockets by selling the astronomic number of 600,000 decks per year.
However, the contract proved to serve more than mere lucrative interests: it was going to be decisive in the long run for Nintendo. Not only did it launch the Kyoto-based company to the world for the first time but it also opened it to the child entertainment market. Moreover, and since it had to bring the cards into larger departments and toy stores, the Walt Disney contract obliged Nintendo to mount a new distribution system, which would be one of Nintendo’s most important organizational assets later on.
After its first international expansion, Nintendo saw that the card business was by nature too small for the company's ambitions, therefore tried to explore new markets (SHEFF, 1999, 20). The new spirit of the company was reflected in a new name, Nintendo Company, Ltd. In order to finance new ventures, the company was turned public in 1962. After a few failures[5], Nintendo realized that it should exploit its best organizational capability, direct heritage of the Walt Disney contract: its distribution system. Since it was basically made to reach toy stores, it was clear that Nintendo had to stay within the entertainment business. Consequently, in 1964, the company created a new research department called “Games” (SLOAN, 2011, 5).
In the toy market, Nintendo had to struggle with affirmed competitors, such as Bandai and Tomy, therefore it kept striving for innovation. After a deal with Sharp Electronics, Nintendo developed the first electronic toy in Japan: the “Beam Gun”. Although important in Nintendo’s history, the toy business was nonetheless just a transitory stage.
Meanwhile, in America, a new industry was emerging: video games. Atari and Magnavox were selling consoles to play videogames on televisions. Immediately, Nintendo recognized tremendous opportunities in that industry.
As it did before with Walt Disney, Nintendo negotiated a license to manufacture and sell Magnavox’s video game system in Japan in 1974 (SHEFF, 1999, 20): again, the company was moving international with the help of a foreign partner. However, Nintendo soon decided that it deserved to develop its own machine. Thus, after partnering with Mitsubishi Electric, the company created in 1977 its first video game system, called “TV Game 6” and “TV Game 15”, which were quite successful in Japan, selling 1 million units each during that year (SLOAN, 2011, 6).
At the time, the electronic-calculator was booming. In an attempt to adapt the new technology to gaming, Nintendo came up with the innovative “Game and Watch”. From 1980 to 1991, this portable game unit was shipped all around the world, marking the first international experience for Nintendo in the video game industry. Overall, 43.4 million copies of the 60 games from the “Game and Watch” series were sold worldwide[6].
Continuing with the internationalization impulse, by the 1979, Nintendo inaugurated it first international branch in New York, “Nintendo of America”, which started to build coin-operated game machines or arcade.
After its early success in the video game industry, Nintendo wanted to develop a new video game machine. The average price of its competitors was around U$S250. But Nintendo wanted its machine to be cheaper, around U$S75. The fact that Nintendo made orders on a large scale[7] gave the company enough bargaining power to negotiate the price of the parts used to build the new machine with the suppliers. Although Nintendo required high production standards – that means flexibility, speed and low prices - large suppliers, like Ricoh, Sharp, Mitsumi, Fushi and Hoshi, worked with the company anyway since it was very lucrative.
Soon the new Nintendo’s machine was ready: the Family Computer (Famicom). Although it ended up being more expensive than expected, the set price –U$S100- was still so low that wholesalers could not make much profit of it. Nintendo convinced the retailers that profits were no to be obtained in hardware but rather in software. Indeed, the whole strategy of company was to focus on developing exactly what competition lacked: good video games.
In that respect, Shigeru Miyamoto played a key role. Hired by Nintendo in 1977, Miyamoto was appointed as an apprentice in the planning department “Games”. Bent on the idea that videogames must be more like books and movies, Miyamoto created “Donkey Kong”, one of the strong titles that would accompany the Famicom at its launch (SHEFF, 1999, 46).
With an attractive line of videogames and an equally attractive price, the Famicom was finally released in 1983. Throughout Japan retailers were desperate to get more Famicoms as kids camped out in toy shops to buy more systems and games. Having achieved to reduce costs and to innovate at the same time along with its long-lasting strong distribution channels, Nintendo easily outsold the others fourteen competitors, who ultimately retired. By the end of 1984, over 2.5 million of Famicom were sold in the Japanese market: 35% of Japanese households eventually owned a Famicom. Again, after conquering home, Nintendo felt confident to go abroad.
By 1984, Nintendo proposed to bring its Famicom to the US market. However, there was a major problem: there was virtually no console videogame market in the US after the famous American video game console crash, also known as “Atari crash”, in 1983: being saturated with an excessive amount of consoles – two from Atari – and, most especially, low-quality video games, the market's reputation was seriously harmed and suffered from numerous bankruptcies: the sales of the U.S. video game industry had plummeted from a US$3 billion peak in 1983 up to a $100 million in 1985.
The first move was to make the Famicom more “American friendly”, replacing the white-and-red color scheme of the Japanese version with a futuristic grey design. As the retailers were reluctant to accept another video game console, because of their bad experience with previous ones, Nintendo tried to position its own console as an Entertainment System rather than just a video game machine. They added a Zapper light gun, a robotic-like character called R.O.B and changed the console’s name to “Nintendo Entertainment System” (NES). Besides, Nintendo offered the retailers not to pay until the end of the year and to buy back any unsold console.
To cope with its anonymity in the US market, Nintendo offered Atari to produce and distribute the NES in exchange for a royalty. However, Atari declined. After finally convincing the retailers, Nintendo went on its own by testing the product in New York City. Although Nintendo did not sell as many units as expected, it nonetheless decided to go nation-wide.
Nintendo diagnosed that one of the major causes of the video game market collapse in the USA was software saturation. This means that there were a lot of games available but were rather similar content-wise, thus monotonous. Trying to avoid that problem, Nintendo set a licensing system to control the quality of third-party games. In addition, Nintendo would retain the right to manufacture all the cartridges games for its console. On top of that, in 1985 Miyamoto came up with another creation that not only redefined the way video games were played but also became a symbol of the whole industry: “Super Mario Bros”.
With its futuristic design, a long list of exciting games and a low price of U$S80, Nintendo released the NES in America in 1987. It became an unprecedented success. By 1987, they sold 5.4 million units, becoming the No1 toy in the USA (SLOAN, 2011, 7). In 1988, that number ascended to 9.4 million units. The main competition was Sega Master System, but it barely sold 2 million units. By 1990, Nintendo controlled 80% of market and in 1991, with the release of Super Mario Bros 3 and Shadow Gate, Nintendo gained 90% of the market[8].
Not only was Nintendo the king of hardware, it also excelled in software, as Hiroshi expected the profits would be. From 1985 to 1991, Miyamoto created eight Mario games that would sell in total more than 60 million games worldwide, being the best selling game of all time. Other Nintendo’s franchises were huge sellers too. For instance, “The Legend of Zelda” alone sold more than 6 million worldwide (SHEFF, 1999, 53).
In addition, a whole bunch of merchandising, like magazines, cereals, accessories, etc. was set around Nintendo[9]. Along with other Japanese industries, Nintendo represents an economic miracle; in the realm of entertainment, it also represents a cultural revolution. Instead of watching Nickelodeon some kids preferred to play Nintendo games. Nintendo games were so drilled into the hearts of American children that in 1990 a national survey found that Mario was more recognizable for them than Mickey Mouse.
Although on the international level, the United States remained Nintendo’s main export market, the company also expanded in other international areas, with Europe being the biggest target for international expansion. Nintendo's strategy in Europe was not as directed and definite as in the US; besides, the target market was not exactly similar as in the US: European gamers tended to be younger than Japanese and American gamers and were more likely to play on PC rather than consoles.
Distribution-wise, the company had a distributor in the Scandinavian countries and one in Germany since the introduction of the Game & Watch, which was the early 1980s. The American toy company Mattel distributed the NES in the UK and Italy – as well as in Australia and New Zealand.
Launched in 1986 throughout all Europe, the NES first struggled to penetrate the market as it had to face the technically-superior 16-bit Sega Genesis System, which had made Sega the first real competitor of Nintendo in the early 1990s in Japan: the NES was seen as a latecomer. Moreover, although its operations in Australia and New Zealand proved successful, Mattel lacked a long-term vision for Europe and failed in providing sufficient investments to launch the NES in the European countries it was in charge of. This relative failure in Europe proved how important distribution systems were for the company’s expansion.
However, the Game Boy – the second handheld video game device following the release of the Game & Watch series – had a huge success in Europe, especially in France, where sales exceeded predictions by three times: during its first year of presence in France (the year 1990), 1.4 million Game Boys were sold. Later on, in 2001, the release of the new Game Boy Advance and its later upgrades, as well as the Nintendo DS in 2004, allowed Nintendo to best all its competitors in the handheld market; Nintendo remains to this day the leader of that segment of the market, not only in Europe but internationally, despite Sony's response in 2005 with its PSP system.
It was around that time that Nintendo decided to improve its strategy regarding Europe and to open a “Nintendo of Europe” (NOE) which would allow autonomy for Nintendo's exclusive distributors in various countries while nonetheless directing and assisting them (SHEFF D., 1999, 422-426). Although the 16-bit war had spread to Europe and the Sega Mega Drive console was already implemented, Nintendo decided to sell as many NES units as possible before launching the Super NES: it wanted to create a base of gamers used to the Nintendo 8-bit system - meaning the original NES - before confusing them with a new 16-bit system that the Super NES incarnated. In short, NOE aimed for creating a strong base of potential customers for its new product before launching it right away; even if that meant losing market shares to Sega.
Nintendo eventually managed to be successful on the long term, and eventually outsold other consoles in Europe, albeit by a smaller margin than in the US and Japan. After Western Europe, the company expanded in Eastern Europe, starting with an Austrian distributor who starting selling the NES in Hungary in 1991. As for Australia and New Zealand, Mattel's operations were successful and the NES outsold its competitors just as in Europe.
Meanwhile, during the Cold War, like many other Japanese companies, Nintendo had to face another type of barriers: political ones. After World War II, every “cultural product” was banned by the government of Korea. Back then, Nintendo managed to legally sell its products there through a third-party distributor, the Comboy, until the ban was finally repelled in 1998. In the Soviet Union, the NES was never officially released, although an unlicensed third-party console “clone” named the Dendy was produced in Russia around 1990[10].
During the 1980, Toyota and Honda were the number-one corporations in Japan due to its stock market, money per employee and overall profits. But by 1989 Nintendo topped the list, becoming the most successful Japanese company. As a product of its internationalization, between 1988 and 1992 Nintendo paid to its stakeholders higher dividends that any other Japanese company. By 1992, Nintendo’s worldwide sales of cartridges ascended to 170 million, bringing to the company almost $7 billion dollars. Soon, Nintendo surpassed American Goliath-size corporations such as IBM, Disney and Apple Computer.
Throughout this paper we have examined the process of internationalization of Nintendo. Two phases can be clearly identified. The first one occurred between 1959 and 1964, when the company was still devoted to the card business; the second one took place in the span of 1984-1992, when Nintendo had already entered the video game industry.
Nonetheless, the pattern of internationalization seems similar in both periods: first, the company grew at home and once it dominated the domestic market, it went abroad. The establishment of effective distribution channels was a key factor in conquering the Japanese market as well as the international market. The alliance with a foreign partnership also proved important to the internationalization of the company, albeit playing a bigger role during the first period –Walt Disney licensing agreement – than during the second –Magnavox licensing agreement.
The success of the company in the U.S. market was due to several factors. First, the company counted with the advantage of an already set distribution system inherited from the card business. Second, the bargaining power of Nintendo over its suppliers allowed the NES to be cheaper than its competitors. Third, Nintendo was able to successfully adapt the NES to the American taste. Fourth, the company managed to overcome the reluctance of retailers to accept selling video games. Finally, Nintendo accomplished to develop high quality video games, which was extremely valuable after “Atari’s crash”.
When expanding to Europe, Nintendo had to face the challenges of a more sophisticated competition and a not very efficient distribution system. Nonetheless, the company was able to success by focusing on creating a broad base of gamers before releasing its SNES and by opening “Nintendo of Europe”, which would direct Nintendo’s exclusive distributors in that continent.
a) Books:
PEDERSON, Jay P., Editor. 2004. “International Directory of Company Histories”, Vol. 67, 1st ed. United States: St James Press.
DONOVAN, Tristan. 2001. “The Ultimate History of Video Games: From Pong to Pokemon”, 1st ed. United States: Three Rivers Press
GORGES, Florent. 2011. “History of Nintendo”, 1st ed. United States: Pix n Love Publishing.
HEPHESTUS BOOKS, “Nintendo Entertainment System”, (n.d.) 1st ed. United States: Hephaestus Books.
SHEFF, David. 1999. “Game Over: How Nintendo conquered the World”, 1st ed. United States: Ed. Vintage.
SLOAN, Daniel. 2011. “Playing to wiin: Nintendo and the video game industry’s greatest comeback.” 1st ed. United States: Wiley.
b) Internet:
“The History Of Nintendo” (Part 1/3), (n.d.) Retrieved October, 15, 2011, from http://www.youtube.com/watch?v=uCai4W1IAmQ
“The History Of Nintendo” (Part 2/3), (n.d.) Retrieved October, 15, 2011, from http://www.youtube.com/watch?v=G-l5b2vbeDA&feature=related
“The History Of Nintendo” (Part 3/3), (n.d.) Retrieved October, 15, 2011, from http://www.youtube.com/watch?v=er43lTLubiY&feature=related
[1].- It is important to state that although Nintendo Wii has effectively sold more than its competitors, it is also cheaper than them.
[2].- Retrieved October 30th, 2011 from: http://www.businessweek.com/interactive_reports/global_champs_2009.htm
[3].- Retrieved November 2nd, 2011 from: www.n-sider.com/contentview.php?contentid=34
[4].- Retrieved November 4nd, 2011 from: www.n-sider.com/contentview.php?contentid=34
[5].- The launch of a line of individually portioned instant rice and the opening of a love hotel, among others.
[6].- Retrieved on December 5th from http://us.wii.com/iwata_asks/mario25th/vol2_page1.jsp
[7].- At first, Nintendo wanted 3 million units of its new video game system.
[8].- Retrieved November 5nd, 2011 from http://www.youtube.com/watch?v=G-l5b2vbeDA&feature=related
[9].- Retrieved November 2nd, 2011 from http://www.youtube.com/watch?v=G-l5b2vbeDA&feature=related
[10].- The war on consoles went on during the 1990s: the Nintendo 64 was released in 1996 in Japan and the US and earned Nintendo a $54 million revenue across the world in 1997, with 2.6 machines sold in the US and 2.7 million everywhere else in the world
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