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Why Nintendo keeps winning.

Back in 1991, Apple's then-president Michael Spindler was asked which hardware company Apple feared the most in the '90s. "Nintendo," he answered. Spindler had good reason for his answer, it turns out. We've just finished author David Sheff's new book on Nintendo, Game Over, and we're reminded once more of why it's risky to bet against (or worse, ignore) the Nintendo phenomenon.

By almost any measure, Shelf points out, Nintendo has emerged as an immense force in the computer marketplace. More than a third of all U.S. households currently own a Nintendo machine, while Nintendo's worldwide installed base (some 50 to 60 million units) is roughly equal to the total of all Intel-based PCs. Nintendo's own sales in 1992 topped $4.5 billion, plus another $6-$7 billion in cartridge sales produced by more than a hundred third-party software companies.

Even by the standards of the mainstream consumer entertainment industry, Nintendo is a giant: Shelf says that in the early 1990s, Nintendo "netted as much as all the American movie studios combined and profited more than any of them, and more than the three television networks combined." The big numbers go on and on: Nintendo publishes the largest subscription magazine in the U.S. for kids; a single game (Super Mario Bros. 3) sold more than 14 million copies; and at one point Nintendo products accounted for 23% of sales for the entire toy industry.

Despite its size, however, Nintendo has kept a strikingly low profile in the mainstream PC hardware and software world (except among game developers, who very much understand Nintendo's key role in the consumer marketplace). One reason, we suspect, is a certain amount of technology snobbery: Videogame machines don't come with keyboards, disk drives, or monitors, and until recently the standard videogame processor was an underpowered 8-bit chip. Compared to Windows, 3DO, the Amiga, and other flashy multimedia platforms, Nintendo looks undeniably crude.

But Nintendo's technology (which is slicker than it seems) isn't the whole story. Sheff's 428-page history offers convincing evidence that Nintendo understands the business of consumer computing far better than almost any of its rivals:

* Iron control over third-party developers: Nintendo is the antithesis of an open development environment. With a few exceptions, Nintendo developers are allowed to produce only five new titles a year, and games that don't score high enough on a 40-point rating scale may be rejected completely. In addition, licensees must order at least 10,000 cartridges (at $9-$14 each) from Nintendo's Japanese manufacturing arm. Playing by Nintendo's rules makes life difficult for third-party developers, but the harsh rules have created an unusually orderly market. Nintendo has kept quality standards (and profits) high among game developers, and has prevented the explosion of badly produced titles that wrecked the earlier Atari videogame market.

* "The hottest game designers": Hiroshi Yamauchi, who took over the family playing-card business in 1949, spotted a hot new market when the first TV-based video devices started showing up in toy stores. But Yamauchi's real genius was his sense of the crucial role that software would play in giving Nintendo an edge over other videogame companies. Yamauchi treated Nintendo's inhouse developers as "a band of samuri," badgered them to produce truly great games, and made autocratic decisions about which games the company would back (including Donkey Kong, the first smash hit in the Super Mario family).

* Nintendo's secret communications strategy: Yamauchi also insisted that every one of his game machines should have a simple and unobtrusive communications port that, ultimately, would let Nintendo machines plug into a global on-line network. In Japan, the Nintendo Network is already a reality: Consumers can buy postage stamps, train tickets, and precious metals, pay bills, and even wager on horse races. Two years ago, Nintendo almost won a lucrative contract with the Minnesota Lottery to provide on-line betting; the deal fell through at the last minute, and Shelf says Nintendo's American subsidiary now has little interest in on-line services. But Nintendo still remains the cheapest and most widely distributed communications terminal on the market.

* Outsmarting the Kremlin: In 1989, Nintendo found itself embroiled in a multi-sided legal battle over the licensing rights to Tetris, a game developed by Soviet programmer Alexey Pajitnov. A Soviet export agency had sold off conflicting rights to several companies, including one owned by media mogul Robert Maxwell. Maxwell extracted a promise from Mikhail Gorbachev that the Soviets wouldn't give the deal to the Japanese--but in the end, Nintendo outmaneuvered (and outspent) all of its rivals. Besides forcing competing versions of Tetris off the market, Shelf points out, Nintendo's hard-ball negotiating tactics produced huge revenues for the company. Nintendo so far has sold more than three million Tetris cartridges; another 32 million copies have been bundled with Nintendo's hand-held Game Boy unit.

Game Over: How Nintendo Zapped an American Industry, Captured Your Dollars, and Enslaved Your Children, by David Shelf; Random House (NY), $25.00.
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Date:Aug 10, 1993
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