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11 April 2023

Nintendo: The Console Wars

4Frameworks
15Insights

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Frameworks in this episode

Strategy4 steps

Jobs-to-Be-Done for Overlooked Segments

Win a hyper-competitive market by serving a job nobody else is serving well.

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Innovation4 steps

Lateral Thinking with Withered Technology

Win by creatively repurposing cheap, mature tech instead of chasing the cutting edge.

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Mindset4 steps

The Delayed-Good, Bad-Forever Quality Rule

A delayed game is eventually good; a bad game is bad forever.

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Strategy4 steps

The Four-Point Challenger Playbook

How an underdog dethroned a monopolist by attacking every pillar of its moat at once.

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Insights & moments

The myth-busts, hot takes, explainers, and tools worth keeping.

Myth Buster· 1

Myth Buster

Sega's 'Blast Processing' Was Marketing Fiction

The term that convinced a generation the Genesis was technically superior was essentially made up for advertising purposes.

  • 'Blast processing' loosely referenced something in a Genesis dev manual but didn't describe a real technical advantage
  • The tactic parallels later vague marketing terms like Apple's 'Retina Display' or 'Bionic' chips
  • Console branding used bold '16 BITS' lettering directly on the hardware as a competitive signal

“It's a completely made-up marketing term.”

#marketing#Sega Genesis#myth

Hot Take· 1

Hot Take

Iwata's Refusal to Chase Mobile Free-to-Play Profits

Even while bleeding cash and facing shareholder revolt, Nintendo's president refused to abandon hardware or fully embrace free-to-play mobile monetization on principle.

  • Nintendo posted losses for years while shareholders demanded a pivot to mobile-only publishing
  • Iwata argued abandoning hardware would mean Nintendo 'ceasing to be Nintendo'
  • Nintendo's eventual pivot (Switch) proved the bet correct, though it could easily have gone the other way

“Making smartphone games is absolutely not under consideration. If we did this, Nintendo would cease to be Nintendo.”

#Iwata#mobile gaming#corporate philosophy#shareholder pressure

Explainer· 3

Explainer

Why 16-bit Blew Away 8-bit: The Bit Depth Explainer

A plain-language breakdown of what 'bits' actually mean for console processors and why the jump to 16-bit felt so dramatic to 1990s gamers.

  • Bit depth determines how much data a CPU can process concurrently
  • 8-bit allows 256 possible values; 16-bit allows over 65,000
  • This directly impacted color palettes, sound, and graphical complexity

“It basically means that the CPU for the machine can process 8 bits at a time.”

“going from 8-bit to 16-bit, which takes you from 256 different possible values to 65,536 different values. It is a sort of enormous leap forward.”

#technology#processors#console generations
Explainer

N64 vs PlayStation: Cartridges, CDs, and Losing Developers

Nintendo's insistence on cartridges and expensive SGI development hardware for the N64 pushed third-party developers to Sony's cheaper, easier PlayStation.

  • N64 launched a year after PS1, already behind on install base and developer support
  • Cartridges limited storage and were chosen partly to fight piracy, unlike Sony's CDs
  • Expensive SGI development kits made building for N64 harder than for PlayStation

“the N64 famously uses cartridges again instead of CDs.”

#N64#PlayStation#developer relations#hardware format
Explainer

Applying the Seven Powers Framework to Nintendo's Rise and Fall

The hosts revisit the Seven Powers competitive strategy framework to explain which sources of durable advantage Nintendo has lost and which it still holds today.

  • Nintendo's original scale/network/switching-cost combo from the NES era no longer exists in the same dominant form
  • Nintendo's strongest remaining power today is its cornered IP resource (Mario, Zelda, Pokemon)
  • Nintendo Switch Online introduces a new switching-cost dynamic via digital purchases and save data

“So what of the seven powers?”

“I think they absolutely have a cornered resource in their IP.”

#seven powers#competitive strategy#IP#switching costs

Story· 7

Story

How the Game Boy Got Its Name: A Jab at Sony's Walkman

Nintendo named the handheld the 'Game Boy' as a pointed reference to Sony's Walkman, foreshadowing decades of rivalry between the two companies.

  • Nintendo believed if Sony made a handheld game device it would be called the 'Game Man' after the Walkman
  • The name became a generic term for portable handheld gaming systems
  • Sets up the deep, long-running rivalry between Nintendo and Sony

“They called it the Game Boy to dig at Sony, who, if they've made it, would have called it the game man.”

#Game Boy#Sony#branding#rivalry
Story

The Wild True Story Behind Tetris and the Game Boy

A Soviet-invented game sparked an international licensing battle, and Nintendo of America's Minoru Arakawa saw it as the key to selling Game Boys to adults, not just kids.

  • Tetris came out of the Soviet Union and triggered a multi-country licensing fight
  • Arakawa recognized Tetris could expand the Game Boy market beyond children
  • Tetris became the killer app driving US Game Boy sales

“A Soviet programmer invented this game that was then so obvious to everybody who looked at it that this thing was the perfect game, that…”

#Tetris#Game Boy#licensing#Arakawa
Story

Nintendo's Self-Inflicted Wounds: Lawsuits, Blockbuster, and the Mariners

During the height of its power, Nintendo damaged its own brand through aggressive antitrust litigation, suing Blockbuster and Game Genie, and a well-intentioned but awkward purchase of the Seattle Mariners.

  • Nintendo won antitrust suits against Atari entities but damaged its family-friendly image
  • Suing Blockbuster over rentals and Game Genie over cheat codes alienated consumers and developers
  • Buying the Seattle Mariners was well-intentioned but drew MLB and public suspicion amid US-Japan tensions

“We are a tiger who will skin you piece by piece.”

#Nintendo history#brand damage#litigation#Seattle Mariners
Story

How Nintendo Torpedoed Its Own PlayStation Partnership with Sony

Nintendo publicly abandoned a joint CD-ROM project with Sony in favor of Philips, humiliating Sony and igniting the creation of a rival console giant.

  • The PlayStation began life as a Nintendo/Sony collaboration
  • Nintendo announced a competing deal with Philips the day after Sony unveiled the partnership at CES
  • The betrayal helped spur Sony to build the PlayStation as a direct competitor

“the PlayStation was supposed to be the Nintendo PlayStation.”

“They betray Sony, they stab them in the back.”

#Sony#PlayStation#corporate betrayal#CES 1991
Story

The GameCube and Wii U: Nintendo's Home Console Low Points

Facing well-funded rivals Sony and Microsoft, Nintendo's GameCube and later Wii U struggled with unclear positioning, culminating in Nintendo's first-ever annual loss.

  • GameCube looked like a toy and lost badly to the PS2 and even the Xbox
  • Wii U's confusing name and convoluted controller concept doomed a directionally correct idea
  • Nintendo posted its first annual operating loss in fiscal year 2012

“The GameCube. The poor GameCube.”

“this was just the epitome of Nintendo was like a kid that was really cool in middle school and then got awkward in puberty and…”

#GameCube#Wii U#Nintendo decline
Story

The Wii's Meteoric Rise and the Smartphone Ambush

The Wii quadrupled Nintendo's revenue by inventing mainstream casual gaming at home, only for smartphones to steal that exact audience just a few years later.

  • The Wii used infrared motion sensing, a mature technology, to attract non-gamers
  • Nintendo's revenue nearly quadrupled to almost $20 billion by 2009 on the Wii's success
  • The launch of app stores in 2008-2009 pulled the casual audience the Wii had created onto smartphones

“Nintendo's revenue almost quadruples from the $5 billion-ish range to just under 20 billion in 2009.”

“the greatest casual gaming experience in the world launched and fell right into everybody's pocket a few years later, that swept out their entire current…”

#Wii#casual gaming#smartphones#disruption
Story

Pokemon: From Four-Person Startup to $100 Billion Franchise

A tiny four-person studio spent six years building a bug-collecting game pitch that Miyamoto championed, eventually becoming the highest-grossing media franchise ever.

  • Satoshi Tajiri's Game Freak spent six years developing Pokemon on almost no budget
  • Miyamoto personally mentored and championed the project internally at Nintendo
  • Lifetime Pokemon franchise revenue is nearly $100 billion, with $60 billion from merchandise alone

“Lifetime Pokemon franchise revenues are just under a hundred billion dollars.”

“No one expected this thing to be this successful, especially after taking six years to bring it to market with basically four crazy people.”

#Pokemon#Game Freak#Miyamoto#franchise IP

Tool· 2

Tool

Sega's Pepsi Challenge: Comparing Consoles Side-by-Side

Sega drove trucks loaded with both consoles to malls nationwide, letting kids play Sonic vs. Mario head-to-head and publicizing the results.

  • Sega staged live side-by-side comparisons of Sonic vs. Super Mario World
  • Short, flashy first impressions favored Sonic even if long-term depth favored Mario
  • Sega publicized favorable survey results (7 of 10 kids preferring Sonic) in investor press

“they take trucks, like 18 wheelers, and they outfit them with Super Nintendo's and Sega Genesis's in the back, and they drive them around to…”

“seven out of ten kids in America prefer Sonic to Mario.”

#marketing tactics#Sega#consumer research
Tool

Nintendo Switch Online's Hidden Recurring Revenue Engine

A breakdown of how Nintendo quietly built a billion-dollar-plus subscription and digital software business on top of the Switch's hardware sales.

  • Nintendo Switch Online has an estimated 35-40 million subscribers
  • The subscription business alone is estimated at $1-1.5 billion in high-margin recurring revenue
  • Total digital revenue, including one-off purchases, is estimated around $3 billion

“That's a billion dollar, maybe a billion and a half dollar recurring revenue, super high margin software business.”

“It's probably a three billion dollar business when you think about the one-off digital purchases people are making.”

#Nintendo Switch Online#recurring revenue#subscription business

Takeaway· 1

Takeaway

Bull vs. Bear: Is Nintendo a Buy in 2023?

A closing debate weighing Nintendo's undervalued digital/subscription business and IP against the risk of a hit-driven, single-platform business with no backup plan.

  • Bull case: Nintendo's digital business alone could be worth close to its entire market cap, implying the hardware/IP business is nearly free
  • Bear case: Nintendo missed the far larger mobile gaming profit pool that Apple and Google capture
  • Bear case: unlike past eras, the Switch is now Nintendo's only platform, so a misstep has no handheld business to fall back on

“Their price to earning is only 13x.”

“the bear case is games are hit driven, consoles are even more hit-driven, and they take six to eight years to recover from a mistake,…”

#investing#valuation#Nintendo Switch#bull bear case