Nintendo: The Console Wars

I feel like I gotta warm up physically before I acquired episodes these days. It's like a marathon. My back does start to hurt by the end from just standing still the whole time. Oh, me too.

Me too. I've actually stopped working out mornings before we record because I don't want to be too tired. Like I need my stamina. Yeah.

We should figure out like recording on the peloton or something. That'd be a breathy. Oh, yeah. Who got the truth?

Is it you? Is it you? Is it you? Is it you?

Is it you? Is it you? Is it you? Is it you?

Sitting down, staying straight, another story on the moon. Welcome to season 12 episode 4 of acquired the podcast about great technology, companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal.

And we are your hosts. We last left our Nintendo heroes in 1990 when they single-handedly revived the video game industry and captured 95% of the market share globally. We did our seven powers analysis and determined the company had a better competitive position than basically any company in history and the game was theirs to lose. But somehow they did just that.

Indeed they did. And then they won and then they lost and then they won and then they lost and then they won again. Exactly. Today's story will be about the fall and how Nintendo managed to blow a 10 run lead in the bottom of the ninth but like all great heroes when faced with foes like Sega, Sony, Microsoft and eventually even Apple, Nintendo's creativity and cleverness has kept them a major player and certainly the most unique player in the video game landscape today.

So David as you mentioned this is a weird story for us. Usually the narrative on acquired goes something like revenues kept climbing every year and now they're making more money than they ever had before. But with Nintendo it's been a very cyclical road and they actually lost money in long periods of time like 2011 to 2018 and their greatest strengths are their greatest weaknesses all the way through. So on the eve of the release of the Chris Pratt movie Super Mario Brothers we tell Nintendo's part two story today from the console wars of the 90s forward.

Well before we get into it we want to let you know about the latest over at ACQ 2 which you can search in any podcast player. It's got some great episodes the next one to drop will be with the CEO of Retool David shoe. He's a super contrarian founder and really interesting to just hear his take on startup wisdom generally. We've also gotten lots of emails from folks saying you really love the stats of episode with Vijay Raji.

So that is a great one to check out too. There's also the slack. The slack community has become a critical research tool for David and I since so many of you have insights and real work experience in the areas that we are covering. If you are not in the slack yet that is definitely where the best discussion is happening on top of what we were able to learn before we recorded an episode kind of about it all afterwards.

So that is acquired dot fm slash slack and David without further ado please take us in and listeners as always this is not investment advice David and I may have investments in the companies we discuss and the show is for informational and entertainment purposes only. It'll be very fun at the end of the episode to talk about whether we think Nintendo is a good stock donut this morning time or not here in 2023. But before we talk about all that we first need to talk about one more giant success from Nintendo in the 1980s. A very small giant success that we intentionally left off in the last episode because it's going to be very very important here in part two and that is of course the Game Boy.

Yes. So we talked last time all about Gunpei Yukoi, Nintendo's effectively chief engineer and his genius behind building everything from the ultra hand to the light gun shooting range to mentoring Shigeru Miyamoto and everything he did for Nintendo. One of his first early successes that we kind of glossed over last time was the game and watch business. Now these were portable dedicated handheld video game systems meaning by dedicated each piece of hardware only played one game.

There was a Donkey Kong game and watch, there was a Mario game and watch, there was a Zelda game and watch even of course Mickey Mouse game and watch but each piece of hardware only played that one game. It was also actually on the Game and Watch where Gunpei invented the D-pad that is you know unlike every single trailer. Oh I realize that. Yeah that is where the D-pad was invented with the Game and Watch.

Huh. Pretty pretty freaking awesome. And the Game and Watch actually sold a ton of units I think 43 million units got sold before it end of life. Yes and this is the thing western audiences don't know that much about it because it was never that popular in the west.

It was huge in Asia though. Like you said 43 million units over a billion dollars in lifetime revenue from this product line which back then in the 80s and kind of pre NES that was super super significant for Nintendo. Now if you're thinking about this given everything we talked about last time about technological and video game innovation and marvels that Donkey Kong and Mario were and the NES and how advanced it was. How the hell did Gunpei and Nintendo get Donkey Kong running on a portable piece of hardware in 1982?

Pre NES. How did this come about? It would be through Gunpei's philosophy which really becomes sort of the second core piece of Nintendo philosophy beyond the name of the game as the game and Gunpei's technology philosophy is lateral thinking with withered technology. Because the NES still was cutting edge hardware in many ways.

Absolutely it was years ahead of the competition it had the first GPU architecture and a consumer focused device it was not withered technology it was the opposite of that. So sitting next to all of this silicon and PC and computing and graphics innovation that happening in the 1980s that the NES took part in was another adjacent market and silicon ecosystem which was calculators. So we've talked a little bit about the calculator industry on the show in the past on like our TSMC episode specifically the history of Morse Chang and Texas Instruments we got a cover TI at some point in the future. I think that was on our voting for LPs for next potential episode but by the early 80s the calculator industry was kind of like the PC industry is today other than the Mac and Apple Silicon.

It was total commodity very mature cheap completely understood technology and you can make it for very very low cost. It was also specifically dominated by Japanese semiconductor companies very convenient for Nintendo. So Gunpei just expanded his mind a little bit in what could be silicon technology powering video games and he reached over and grabbed a bunch of mature technology from the calculator industry and voila portable Donkey Kong. And you know what the LCD screen is basically the same type of screen it's no more advanced of a processor it's doing simple math to decide whether the character moves left or right and summing points and things like that it's a calculator.

Nobody would mistake this for an arcade quality port of Donkey Kong but it doesn't matter. People now can play Donkey Kong on the go. This is amazing. People love it.

Huge deal. Legend has it that the way Gunpei came up with the idea for doing the Game and Watch in the first place was he was on the train in Tokyo and he observed a businessman who was also on the train who was just killing time by pressing buttons on his calculator and doing random things on his computer calculator. And I think that tells you a ton about the potential demand for on the go video entertainment in the 1980s. Man I'd say that was apocryphal but that has literally happened to me where I pull out my phone and I'm up to date on my email.

I'm up to date on Twitter. I pull down no new tweets are coming in so I'm like scrolling around on the home screen doing nothing opening and closing the same apps over again just because it's entrancing. Now imagine no smartphone no Twitter no Instagram seriously. What else are you gonna do like how did people even live back then barbaric newspapers man newspapers right.

So time marches forward everything that we talked about in episode one on Nintendo comes to pass the NES launches achieves 95% global market shared and tendos on top of the world etc etc. While this is all happening Gunpei who remember was not involved with the development of the NES Gunpei goes over to Yamuchi and says hey I think we can basically combine the NES and this old game and watch technology and make a similarly awesome portable cartridge based console and Yamuchi and the rest of Nintendo are like well yes of course if you could do that that would be amazing who wouldn't want to buy one of those things but part of what made the NES so great was it was years ahead of all the competition and technology like how are we gonna do that in the portable era. So Gunpei is like don't worry Mr Yamuchi I've got I can make it all work this device that I have in mind it'll play awesome games you'll have great battery life we can get it to market super fast and get this I'm pretty sure we can sell this thing even cheaper than the NES everybody's like this is too good to be true how are we gonna do this it's quite the promise he's like here's the big reveal it's gonna be black and white and not even black and white but black and green yeah so god bless Yamuchi that man was a visionary and he completely got it and for a non-technologist he understood technology better than anybody because he gives him pay to go ahead on this everybody else at Nintendo is like this is not gonna work you know I know we're still in the 1980s here but the 1980s are more advanced than you might think like black and white is like the 1960s nobody wants black and white especially in the video game market which is supposed to be this advanced technology graphical market and to play games that they're accustomed to seeing in color you're gonna go downgrade mario like that's a terrible experience right terrible terrible yeah so internally this project gets the nickname I'm not exactly sure how to pronounce this but it's either down the game or game game d-a-m-e-g-a-m-e which basically means hopeless game but nevertheless they push ahead and in april 1989 they released this device in japan followed shortly in the us for 89.95 and this device of course is named the game boy we talk about this all the time on acquired things that are in technology in our industry in the past that just seem so natural we don't even think about them why did they call it the game boy they called it the game boy to dig it sony who if they made it would have called it the game man why because they had the walk man oh no way that's really why isn't this hilarious it's so obvious when you think about it but the game boy it's like a clean exit it's like oh portable handheld gaming system it's a game boy this is nintendo on the rise looking over at their kind of like big brother in japanese technology corporations at sony and be like we are beating you to the punch here on technology oh I love it I had no idea so freaking awesome it obviously becomes a huge success so the first japanese production run of the game boy sells 300 000 units almost immediately and the first us shipment of 1.1 million units also sells out immediately and the killer app especially in the us driving sales is not a kid's game but tetris and we won't tell the whole story it's pretty amazing of how tetris the game comes out of the communist soviet union and makes it on to the game boy in the us and becomes the most popular game of all time but go watch the movie I've heard that it's great it is yeah I watched it this week it's obviously a little overdramatized but it is pretty crazy that you know talk about the name of the game is the game 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 there was this massive geopolitical mini war over who could get the rights to this thing and all these different countries on all these different consoles and nintendo we think of them as this very sort of nice and shiny company making stuff for kids but executing the steps they needed to take to obtain the license for tetris is a wild story the movie is awesome the important thing that the movie does a good job of underscoring is menoru arakawa deeply understood once he saw a demo of tetris for game boy that this could expand the market beyond just games for little boys and teenage boys this is not a kid's game this is an adult's game yes and now we can sell game boys to everyone of all ages everywhere and not just as a toy totally it's what i was laughing as you were saying all that bad about image of nintendo is this friendly you know cuddly company i think we debunked that in part one pretty well right there's plenty of corporate espionage behind the mario smile oh yeah flimsy flimsy flimsy but yes a the tetris story is amazing on its own but be like for our purposes here and it really was arakawa in the u.s who saw this at nintendo america the opportunity just like unpe saw with the business man playing with his calculator on the train back in tokyo everybody loves games it's not just kids and if they can get this device that is easily adoptable and at a low enough price point by a broader market nintendo is just going to crush it so in tenno america in their tradition as we talked about in part one they just have the most amazing advertising campaigns around the launch of the game boy at father's day i don't know if it was nineteen ninety or nineteen eighty nine must have been nineteen ninety they come out with a campaign called punish your father and the whole thing is like your dad has been stealing like the kid's game boy and so for father's day this year punish him by buying his own and stopping up from stealing the kid's game boy this is so brilliant they start buying ads in airplane magazines and the ads say like if you're reading this you're obviously bored you need a game boy and you need tetris oh that's awesome they're literally marketing at business travelers which makes sense seriously you walk in airplane today and who's playing gandy crush it's a lot of business travelers exactly so in the u.s. forty six percent of game boy players are adults this is so different from the nes market it becomes this business man status symbol and like i remember this in my own like everything in these nintendo ads actually happened in my family like my dad used to steal my game boy all the time we had to go get him his own did you have one of the original fat ones oh totally i was five years old when it came out so i was exactly in the target kid demographic and i think my dad i was talking with him about this this weekend he still plays the original tetris cartridge one like an old game boy advance at this point to this day wow this is how universal the appeal of this game in this system is it's unbelievable so nintendo ends up selling 32 million game boys in the first three years which is way more than the nes that's roughly three billion dollars in hardware sales alone the game boy and then it's sort of quasi-successor but really the same platform the game boy color they would go on to sell 118 million units worldwide which is over double the nes and the fourth highest selling console of all time period wow just amazing and this was nintendo's first taste and really the whole industry's first taste of massively expanding what already was a huge gaming market yeah it also was at a completely different price point i wasn't allowed to get a console but my first video game system was a game boy color because i think it was a little over a hundred bucks or something for the color one versus around the 200 or more price point consoles it takes both the kids gaming market and the casual adults gaming market that it creates and marries those into one device and leaves the core gaming market to the home console yeah you would have been like exactly in the target demo for pokemon when it came out absolutely you bet i bought the translucent purple game boy color so that i could get pokemon blue oh my god probably like 70 percent of people listening right now regardless of their age or that bucket i mean i bought pokemon when it came out even though i was a teenager at the time yep all right listeners now is a great time to tell you about a long time friend of the show vanta ai has scrambled the whole security picture it used to be that you prove that you were secure once a year on audit or a static pdf then everyone would not and you're done but in an ai first world that doesn't hold up anymore yep your risk surface changes every week now uh vendor turns on an ai feature or someone writes in a new model without telling 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and prove trust we're huge fans of vanta over here and literally hundreds of acquired listeners have become vanta customers at their companies over the years so you can get a thousand dollars off vanta at vanta.com slash acquired that's v-a-n-t-a dot com slash acquired for a thousand dollars off and just tell them that ben and david sent you okay so we're in this era gameboy is flying off the shelves but the nes is getting a little long in the tooth and so how does the whole super nintendo thing work yeah here's where we're going to change gears so gameboy another incredible smash success for nintendo but back on the home console side of the things we're entering some choppy waters here so where we ended last episode one third of us households have an nes nintendo has roughly 90 percent global market share they've got this amazing combination scale economy network economy distribution power by the midpoint of the eight-bit generation in the nes you know it looks like nintendo's moat is impenetrable and the reality was for the eight-bit generation it was there were other competitors on the market the hardware side of the former atari remember atari got split into two companies when one of brothers sold it off the hardware side of atari releases a new console the 7800 it sells about a million units like okay you know also ran and the nes lifetime sold 62 million just put that in context sega in response to the nes in japan they release a home video game console called the sg one thousand it does okay but also only sells about a million units they take a third revision of that console called the mark three and they export it to the rest of the world as a system called the master system it flops in the u.s where they sell off the distribution rights to it to tanka like the tanka truck toy company no way tanka has no idea what to do with this thing and also this underscores how much people thought of this as kids toys the pure set is matel and tikoe and tanka hasbro exactly this is the toy aisle nobody understands this stuff in the u.s but importantly this quote unquote master system console from sega does fairly well in europe and in brazil and so it ends up selling between 10 and 15 million units worldwide again no nes but this is enough of a success from sega to give them some hope that like well maybe we should continue investing in the home console business and as we mentioned in part one sega this point was primarily an arcade company did you know this sega was actually founded by americans yes even though it's a japanese company it was originally an american company involved in like world war two military service in hawaii is that right exactly so sega is a portmanteau of service games and the company was started to make kind of like a dental like gambling games or thinly disguised gambling games and that morphs into arcade games for u.s military services around the world crazy i love how these companies evolve to sort of morph and survive over time they know that they're not going to dethrone the nes and gait bit generation but they think maybe we can try and do what nintendo did to get this huge advantage with the nes which remember was just like steve jobs in the iphone we want to produce something that is years ahead of the competition we might actually be able to leapfrog nintendo here and do the same thing to them and sega actually has two advantages at this point in time that nintendo does not have one more's law has continued to progress since 1983 when the famicom came out in japan and more advanced and cheaper processors are now available to everybody specifically 16-bit processors are now cheap enough that you can put these in a living room quasi-kids toy home console nintendo obviously also had access to this technology but sort of in a innovators dilemma type situation they don't really have the motivation to pursue it because the nes is the gift that keeps on giving for them like they want to keep that console generation going as long as possible right it's like they do have to come out with something eventually but if they can delay that eventually another year and no one forces their hand that is very good news exactly and sega again because they were so successful in the arcade business and the arcade business moved so much faster than the console business new technologies new games new game concepts are coming out all the time they already have a pretty robust 16-bit arcade board that they've been using on some of their arcade hits at the time like shinobi or golden axe those were 16-bit games running on advanced arcade boards that sega was producing and so what does it mean when you say the 8-bit generation the 16-bit generation eventually we'll get to 32 64 64 becomes part of the marketing in fact right don't know yes it basically means that the cpu for the machine can process 8 bits at a time and so that affects everything downstream sound graphics processing power it's basically the effectively bandwidth that the cpu has in order to process information concurrently right and specifically i remember at this time in the jump from 8-bit to 16-bit processors like the color palettes that the games could use like with 8-bit processors yeah could even fit so many colors in there but 16 bit processors you could fit hundreds more different colors that could be used in the game you know stuff like that yep and of course this stuff is exponential so 8 bits what does that mean well to to the eighth different combinations that are possible so 256 different values in each chunk of data that it's processing you can see how 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 enormously forward right at this moment in time it's this whole soup of factors that come together to really give sega an opportunity to break into the market even though the NES is so dominant older consumers especially teenagers and adults they value graphical performance and they're willing to pay for it as long as the good games actually back it up and so sega's like well we've got a bunch of really good 16-bit games that we've made for the arcades we can probably do this yeah it is interesting how much graphical capability mattered in those days and it still matters today but it kind of matters less when you go from like almost photorealistic to even more almost photorealistic it makes it more impressive and it makes it more interesting to look out on a 4k tv but does it literally make it more fun than playing something on my switch probably not but back in those days that's a huge leap forward totally i mean even like on the switch and on the virtual consoles i love going back and playing super Nintendo games and say katenna's games which you can do on the virtual console all of the switch which is so fun but going back to the NES era it's tough i grew up with those games i remember playing them and loving them but like i can go back to 16-bit games 8-bit is pretty tough yeah and i'll say like i still play my n64 super smash brothers that game is more fun than super smash on my switch so you do hit some point i think around 64-bit graphics where like more bits no longer equals more fun so back to sega here in 16-bit in 1988 they launch a new console called the mega drive in japan that was in late 88 and then they turn around in early 19-99 and launch it in the u.s and they decide of course that the mega drive is probably not a good brand name for the u.s and so they name it the sega genesis new beginning for sega in america yes surprisingly it doesn't sell well in japan either at launch or really ever it's really weird i couldn't figure out why yeah maybe just like nintendo had such a lock on distribution and develop game developers and market share in japan that even like the quality arcade games that sega was making wasn't enough for the japanese market and when it launched in japan it didn't have sonic yet exactly well we will get to that so it doesn't have sonic in the u.s either so even if you think you know the history of the console wars and the genesis in america or you lived it as i did i didn't remember this exactly as it happened so initially the genesis is also a flop in america it sells about 500 000 units in the first year which you know like again is okay but this isn't that much better than the old master system here and nintendo isn't necessarily viewing it as the competitive threat that says okay we need to release our next generation system asap they're like okay cool this one also isn't beating us so i guess let's keep riding the sails of the nes right why would we change things so the next year in 1990 sega decides like hey we need to make a change here and specifically we need to make a change in sega of america so they install a new ceo a guy named tom kalinsky now if you're looking for an executive to come in and turn around your ailing video game console business to do things differently you probably wouldn't go higher tom tom at this point is a toy executive he's in his late 40s he knows nothing about video games and his most recent job is he was the ceo of matel before being ousted by the board for underperformance and his big success was barbie right yeah this doesn't exactly scream like video games when that video games are part of the toy market but sega's trying to change this they're trying to appeal to teenagers and older adults well it turns out that actually tom had a second act in him and ends up being the very best hire that sega ever could have made because he shows up and he's like guys if our strategy is to literally do what the marketing slogan was at the time when he showed up which is genesis does what nintendo which is kind of great yeah the problem though is they were doing like a piss poor job of executing on it so even with this great tagline the actual commercials that sega was showing on tv where this really cheesy jingle i thought you were gonna try like go look at all like they're just like weenie so when tom shows up and surprisingly coming from the toy industry he's like if we're gonna do this we gotta go all out we can't still like keep one foot in the toy industry here we need to go full on punk rock mtv directly appealing to teenagers none of this like 80s jingles in our commercials anymore no it needs to be the when everyone knows sega nachine and we need to pivot the whole company sega needs to be the aggressive video game company full stop yes so he presents to the sega board back in japan to tokyo and presents a four-point plan of how exactly sega of america is going to dethrone nintendo and it's great the way he gets recruited for this david and i both read this book console wars which is really fun if you want the whole blow-by blow on this tom actually gets recruited by the chairman of sega while he's on a family vacation in hawaii on the beach the chairman of sega walks up to him and says tongolensky and for as compelling as the nintendo story is it's compelling because a one-long term for this brief moment of time the genesis era i think sega probably has an even more impressive narrative and sort of hero's journey with tongolensky oh totally we're gonna get into what they do with this four-point plan but it is freaking brilliant i think this is the best example we've ever seen on the show of how to compete against an entrenched incumbent yeah they literally walk up to nintendo and just punch them in the mouth like it's so great so here's the plan point one we need to preemptively start a price war so we know that nintendo is working on a new 16-bit system they're just dragging their feet because they feel no sense of urgency here we also know given nintendo's history everything we talked about in part one that they like to make money on their hardware they want high hardware margins so here's what we're going to do we think they're probably going to price the super nintendo when it comes out at the equivalent of $250 we're selling the genesis for 200 right now we're going to preemptively cut that to $150 and this is perfect counter positioning nintendo's incumbent strategy is to make money on hardware what are we going to do we're not going to make money on hardware exactly so we're going to preemptively put pressure on them to cut costs on the super nintendo i don't think tom and sega even realized how important this would become put a pin in this we're going to come back to this in one sec this is a critical move especially the preemptive it's not just we're going to make it so they can't make money it's that before they launch we have to make them cost-conscious number two we need to change the pack-in game like a bundled game that the genesis comes with in america i had forgotten about this the original pack-in game was a arcade port called altered beast which i think it was an okay arcade game like it wasn't that good like it wasn't as good as golden accent whatnot but it maybe had the worst american localized title ever like who's gonna buy a game called altered beast yeah altered doesn't really make you feel one way or another it's sort of an uninspiring word yeah altered beast i don't even know what that means so tom's like look i know you know when you were recruiting me in my early time here you over sega and japan over there you're working on a top secret quote unquote mario killer game and i know that your plan is to sell that separately from the system because you want to maximize revenue from this game that you know is going to be a pretty good seller we need to take that we need to bundle it in to the system here in america i know we're gonna lose money on this but we gotta up our install base and we need a mario killer that is going to be with every single genesis so that's point two point three speaking of games and this is also just a brilliant insight he's like we need to make american games for american audiences and that means two things one we need to have our own sega development studios here in america which nintendo doesn't have and never went on to have right i don't think there's a nintendo game development studio in america still nope the closest that they had was their second party studio rare which they stupidly let get acquired by microsoft when microsoft is launching the xbox but rare made donkey con country in gold ny 64 and lots of great games for the super nintendo and the n64 that was in the uk they never had development studios in america so tom says nintendo's missing a huge opportunity and so are we we need to have our own studios here and we need to really embrace american third party game developers which nintendo they aren't embracing any third party game developers nintendo nintendo and nintendo and specifically what this means sega at this point is locked in a heated negotiation shall we say with our buddy trip hoggins and electronic arts as we talked about on our episode with trip back a few years ago trip is just awesome he literally recounted the story for us totally so more on that in a second but tom's like we need to settle all of that contentiousness litigation yet but we need to settle all that we need to bring electronic arts into the genesis fold and bring them into the home console market and then the fourth point as we alluded to no more of this eighties jingles in our marketing we're going to go directly straight on after nintendo with our commercials and our advertising so naturally given this brilliant plan of how to compete as another dog what do you think the sega parent company board says to all of this they rejected as corporate boards want to do but fortunately then like you said the chairman at the time hyo nakiyama he sides with tom and he pushes through this plan and says okay i hired you to make your own decisions in america i trust you in understanding the american market you can go ahead and do this we're not going to do this in japan but you can do this in america and this is kind of a career bet for tom because this is probably his last act one way or another if he fails he goes out in spectacular glory but if he succeeds then this is probably his job for a while and clearly this market is enormous being sega of america is a pretty great job if they succeed yep so what happens let's go three to these points point one the preemptive price war oh boy was this important so nintendo was as everybody knew working on the super famicom slash super NES it would come out in japan in late 1990 and in the u.s in late 1991 two years after the genesis when they launched it they launched at 25 000 yen in japan and 199 in the u.s which even that was 50 more than sega had cut the price of the genesis too more importantly though than sega being cheaper than nintendo from day one is that nintendo was planning originally to include backward compatibility in the super nintendo so that it could also play any es capability in the super NES would add about 75 dollars to the bill materials whoa and that's huge yeah and so rather than come out with the super nintendo priced at 250 or 275 or 300 dollars because the genesis had already been preemptively cut to 150 they're like oh we really can't do that let's cut out this 75 dollar cost and come out of 200 hard to say if this was a mistake on nintendo's part or not they kind of had to do this certainly the mistake was not pushing their advantage in coming out with the super nintendo earlier they absolutely could have they let the genesis beat them to market and then this preemptive price war forces them to take what really would have been their best built in advantage for the new generation of porting the existing install base over to the super NES and just kind of hit reset on the whole industry which is crazy it's funny strength leads to strength if nintendo had just been aggressive and obseleated themselves they would have probably been in a great position but instead they sat back they sort of tried to play defense they tried to give enough running room to their NES to keep making good money as long as possible then it left this opening for sega to come in and pull this move and then suddenly nintendo no longer has an advantage to leverage it's like the classic football prevent defense thing will prevent defense prevents you from winning you gotta keep being aggressive in playing offense it reminds me of i think my favorite company values sheet of all time which is the legendary nike corporate values uh so good i think it's number two is we're on offense all the time yes yeah you don't win by playing the prevent defense nope absolutely not and i think we could maybe give some leeway to nintendo here and that this was all happening for the first time people didn't totally understand console business yet i mean if you fast forward to today sony and microsoft not only always have backwards compatibility in each new console they release they also do forwards compatibility so like new games for a couple years that are coming out for the ps5 or the xbox series s and series x those games will also be playable on the previous generation hard right now you couldn't do that back in the day but this is so important to feathering in each new console generation that literally billions of dollars of engineering across not only hardware but software titles are invested in this today nintendo didn't know that but this becomes a huge huge mistake yeah okay so that's one point two the pack in game obviously this is sonic the hedgehog sonic is just the most perfect example ever of counter positioning in brand yes totally so if you think about what nintendo's real strength is in games that we talked about so much on the last episode it's these amazing stories and not narrative but story-driven fantasy worlds that you can get lost and explore in you know that's what mario is that's what zilda is even more that's what metroid is but you know what that style of game is besides being amazing it's also really slow and that is the opposite of sega's dna which is all in the arcades that is fast and nothing is faster like i want to know what kind of drugs the people were on that came up with sonic hedgehog i think it was an internal competition within sega of japan it was it was a employee pitch yeah what would lead you to come up with a trash talking supersonic blue hedgehog that originally had fangs and an electric guitar that's right also like a human girlfriend that was not wearing much clothing i think originally yes scantily clad human girlfriend yes and the best and the worst of the 1990s but mostly especially with the final version of sonic just freaking awesome it doesn't get any better than that so mario is family friendly and kind of slow and open to exploration and sonic is not only fast but aggressive the whole brand of sega kind of adopted the brand of sonic on its means of competing against nintendo totally so remember how we talked about in the uh i think it was maybe the 1990 queue survey that mario was more recognizable than micky mouse well by the 1993 queue survey mario is still more recognizable than micky mouse but sonic is even more recognizable than mario by american consumers which is like wow just ridiculous a couple years later like that is how successful sonic was and this was part of colinsky's genius it was bundled in with every genesis console so sega's giving up on the incremental 50 to 60 dollar a pop revenue that they could get from sonic the hedgehog but this really drives genesis console okay point three we need american games for american audiences so nintendo at this point in time is basically making two types of games they're making the timeless works of art like we were just talking about the marios and the zelda's and the metroids and they're also making super quirky japanese stuff what they are not making is super quirky american stuff and specifically they're not making american sports games now they are making sports games they make punch out they make excited bike they make a bunch of baseball games third parties make games the developer techmo famously makes techmo bowl you know american football games like they're out there but these games don't capture the actual american experience of these sports they're sort of cartoon approximations of something based on a sport but it's not like you're playing madden exactly and we talked about this a lot with trip hoggins on our episode with him but that's what was so game-changing about eas john madden football it was 11 on 11 real football with real playbooks like if you ever played football or if you were a student of the game or if you watch the nfl every sunday you know it was still a rudimentary video game by today's standards but this was actually like simulating the game of football in a way that nothing coming out of japan really ever could now that first version of madden came out in 1988 for the apple two because electronic arts at this point in time was a pc game publisher they weren't in the console business at all they didn't want to play ball with nintendo in the ridiculous licensing terms that nintendo had and they're right in the middle of these negotiations with sega because trip and ea had famously gone out and reverse engineered the genesis in a clean room and he had these grand plans of he was gonna make his own genesis cartridges not pay any royalties to sega and then he was gonna take his program to other third parties and like completely end around sega all together which he had to sort of negotiate from that point but they were ready to do like they actually did the unbelievable engineering feat of in a clean room environment reverse engineering the way to make games work on this system totally so you can imagine why sega the parent company would be and were really really pissed at electronic arts and not want to play ball with them but kalinsky's like no no we gotta settle this we gotta embrace them if we can get madden on the genesis and not on super nintendo this is gonna be huge for us so they do and sega basically completely bends over backwards to ea to accommodate them which is the right move by the way absolutely the pie massively grows by this game seeing the light of day on sega exclusively versus if they enter litigation it's like okay let's divide up a small pie no absolutely not the answer in this moment where this is rapidly expanding market and to fight to the death between sega and nintendo is no side quibbles figure it out move forward launch the product everybody makes money totally so sega's original program and the program for other third parties was ten dollar licensing fee per game unit for ea they give them a two dollar licensing fee per game unit capped at a million units so ea will never pay sega more than two million dollars on any game very very different but like you said this is just an enormous win so that first year that first version of madden that comes out on the genesis ea and sega's prediction is that it'll sell 75 000 copies it ends up selling 400 000 copies oh my god that is just a huge hit for them and this is the exact kind of thing that is not on nintendo and soon to be the super nintendo ea eventually does spring madden to the super nintendo but they have a separate studio working on it they've got the a team working on the genesis version and they've got the bt working on the super nintendo version so the genesis versions were always better and i remember this as a good reason i was lucky i had the super nintendo and the genesis like i wanted sonic but even more i wanted really good madden games oh wow i didn't realize because these days you know the xbox and the playstation versions are like i think equivalent if there's any hardcore madden fans out there they're probably gonna come at me with no it's way better in this out of the other way or fifa kind of the same thing but i didn't realize there was such a difference then yeah back in the day they're actually made by different studios and there were some things about the super nintendo architecture that limited the frame rate that it could run at so like basically it was always better on the genesis and it's worth saying point one in eliminating the backwards compatibility it made nintendo have to fight sega on an even playing field it didn't mean sega was gonna win it meant even playing field that negated their advantage of large previous instalvase point two and three are the games you know you've got with point two sonic being faster brighter more exciting than mario when you see them head to head which sega was making sure that you saw them head to head sonic seems like a much more interesting game that you kind of want to buy regardless of the fact that you have loved mario the last few years on the surface it is much more compelling yes and of course with madden now they have even more advantage so the scales are really starting to tip towards sega here so point four punching nintendo in the mouth kalinsky goes out and brings on a guy named steve race who had master-minded rebox resurgence against nike in the 80s with the pump sneakers remember that oh yeah that was steve race's brainchild and kalinsky tells him to just go wild on the marketing steve would go on to leave sega and become the first president of sony computer entertainment america for the launch of the playstation but before that he would pretty much single-handedly yank sega and really the whole video game industry i mean this really sets the stage for the playstation out of the toy world and into full-on media technology the mtv generation this is sega and his work so they go out they hire the goodby silverstein ad agency and they come up with the welcome to the next level campaign which was just so great and had the trademark way that all of the ad spots ended with the sega scream yep there's also some pretty amazing jiu jitsu here around the idea that you've graduated from nintendo that's cool that you used to do that and like that was for babies and now you're a real grown up and it's time to graduate your real grown-up system it worked on every level it was so great so they premiere the campaign during the 1992 mtv video music awards what a perfect marriage of everything here literally like you know the same bmas where many years later kanye would take the mic from t swive this is like not the toy aisle here this is pop culture it's pinnacle they also invent the term blast processing if folks remember this the genesis has blast processing and that's what makes sonic fast it's a completely made-up marketing term there was something in the development manual like somewhere for the genesis about something that maybe could be translated as blast processing but like it didn't actually do anything apple's been hot on this recently what is the a12 bionic the neural engine and marketing terms for something highly technical such that it doesn't actually describe the technical thing that it's doing or another apple example is the retina display once they start marketing the retina display it doesn't matter if their competitors have something that's just as many pixels per inch like it's not a retina display but that's completely meaningless it all goes back to the genesis it's got huge font on the actual console in i think it's gold letters in japan and silver letters in america that's a 16 bits on the console itself it's amazing i love it i mean that is their competitive edge totally one of my big takeaways from this whole series is just how much apple took from the video game industry in their marketing mmm steven tom and patina tica also do super innovative stuff that really just brings the industry forward into the modern era before this era of siga there weren't actually release dates for video games when new nintendo games would come out they just start showing up at retailers and not even on the same day just like some regions of the country would get them before others there was no organization tom and steven the marketing department at segave america they're like nope this is the movies we are doing worldwide release days for our games and they're going to be just like movie premieres we're going to have celebrities we're going to have big marketing events the date is going to be plastered all over everything totally i mean there's millions of people that know may 12 20 23 is going to be zelda tears of the kingdom this has become the way that you market video games and that all started with segave america specifically it started with sonic two where they had sonic tuesday oh the launch day oh so hokey but this is hugely innovative the other thing that segave america does in their marketing and then you all love this is they literally do the pepsi challenge so they take trucks like 18 wheelers and they outfit them with super nintendo's and segogenesis is in the back and they drive them around to malls across america and they invite kids in to play head-to-head sonic versus super mario world and then they ask them which game they prefer after like five minutes of playing so the first five minutes of sonic are really good the next couple hours not as good right and this is an amazing trick it's the same thing that all the tv manufacturers do they gamma up and contrast up and brightness up all the tv's when they're in the store and you get mesmerized by the one that's got the most insane christmas light colors on it and then you take it home and you're like oh this is kind of terrible for watching you know the dark knight rises or whatever and it turns out that when you're comparing things side by side there are things that appeal to you that are actually not the best long-term option totally so they keep track of all this and lo and behold seven out of ten kids in america prefer sonic to mario and of course sega trumpets that in like the wall street journal and all of the investor press and like everything it's amazing yeah so at the same time it's segasmus and the fact that they like showed up to play but also nintendo keeps dropping the ball i mean the games that they're shipping for the super nintendo are like again very conservative very like we're gonna try to maintain our lead you play the mario game for it you're like okay yep it's mario again and like it's nice you know i like mario but this new i don't really understand necessarily why this even needed to be 16-bit right super mario world is an amazing game but is it that much different from super mario brothers three on the nes no like it's got yoshi yoshi is no sonic so all of these four points by themselves would any one of them have dethroned nintendo certainly not but all four of them working in concert and sega's just amazing execution by god they do it so it's tough to tell exactly because both companies nintendo and sega were highly incentivized at this time to be creative in what they were reporting as their console sales data shall we say right this is when you have to really tease out the cell into the channel numbers versus the cell through the channel numbers yes but as best as i can tell i think it is basically fair to say that every year that they're competing head to head on the market the genesis and the super nintendo the genesis outsells the super nintendo in a matter you can certainly quibble with that the data is not perfect but take a step back even if it's 50-50 we went from nintendo having like for all intents purposes 100 percent of the market yeah neck and neck with the genesis nintendo basically fights to a draw it's not like the super nintendo was a failure it was a success but corporate-wise for nintendo this is a huge failure they basically have given up half market share to this new entrant in one generation all right 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america and the parent company and the board back in japan massively disagree on how and when to launch the sega saturday the next 32 bit console generation that conflict and that mismanagement becomes a total disaster and it starts a downward spiral for sega with the failure of the saturday and then they follow it up really quickly with the dreamcast that also never really gets traction dreamcast was actually an awesome console and very innovative on a lot of fronts but they just start bleeding cash they end up exiting the hardware business and the company basically goes bankrupt and has to get acquired by a pachinko manufacturer called sammy it's really sad brutal they now make games for nintendo platforms well and the great outcome of that is that you can play genesis games on the virtual console on the switch so good for consumers the story feels abrupt but i remember feeling abrupt when it happens to yep a story for another day but for our purposes here in the nintendo story the point is that nintendo has now fallen and they've fallen pretty hard there were a couple other self-inflicted nintendo wounds around this time too starting in 1988 they actually get embroiled in two separate antitrust lawsuits with each of the successor atari entities both the hardware side and the game side they win both of these but this really hurts nintendo's brand image it kind of comes out to the american public through this that what we know from doing part one nintendo corporate-wise is not really this family-friendly gentle kind company there's a great quote from howard licken in game over about this lawsuit he says i thought to myself you have no idea what you've taken on atari we're a tiger who will skit in you piece by piece obviously he doesn't say that publicly but this isn't really good for nintendo's image fun side note on this the atari game's case is actually the start of the video game's career for the then baby lawyer mitch lasky of benchmark and gamecraft podcast game oh no way yeah super fun mitch talks about that on gamecraft they're just so arrogant at this point in time they're arrogant and they're getting beat up yep and then they do even more dumb stuff so nintendo's sus blockbuster during this time for renting their games which is just really dumb like what's a really good marketing for you know games is renting them and letting people try them and what are american consumers really gonna hate you suing them to stop that they also sue the maker of the game genie which is one of my favorite video game artifacts from this period and the game genie was the thing that let you like enter weird cheat codes and modify the games and stuff this just shows another example of nintendo's belief that they know better than anyone else what makes a game fun and you are not to modify their game rules at all because miamoto will come down from the mountain and tell you what is fun or not so true so true it's also we would be remiss i think if we didn't point out to that all this was happening during the like incredibly ugly and sad era of japan bashing in the u.s that we talked about a little bit on the sony episode you and i were kid so thankfully didn't really experience this but i remember people in my parents generation just saying like really awful things about japan and japanese companies at this time and there was this real worry in the u.s especially in the business community that as japan's economy was ascending so rapidly that japanese companies would come take over all of american media and movie studios and stuff like that yep we talked about this a lot on this sony episode and this culminates for nintendo in another well-intentioned but really self-inflicted wound debacle where they buy the seattle mariners which really was well-intentioned the owner at the time was going to move them to florida and nintendo kind of has a goodwill gesture for how good the people of seattle in washington state had been to nintendo america steps in as like a white knight savior to buy the mariners and keep them in seattle majorly baseball tries to blackball them from buying the team because they're like a you know weird foreign company so company buying a team i mean that's not really sports team ownership in the u.s is owned by individuals so kind of again well-intentioned but probably ill-advised move on nintendo's part at this point in time and uh don't win a world series despite having kangrifi jr alex r but more importantly strategically like the net result of this is that a lot of the things that made the nes so powerful in the market are completely negated by the end of this so first and most importantly the whole years ahead of the competition hardware advantage that's gone they're now behind the competition to the lost control of the third-party developers they had this incredible lock on the third-party ecosystem with the nes now developers like electronic arts and others are saying well look at sega and look at these other new folks like sony who are going to enter the ecosystem i can make more money with less drama on their platforms screw you nintendo and less drama and often better economics they're willing to cut special deals with me that you're not exactly and in many cases they have more advanced capability so it's an easier platform to program for and then maybe worst of all nintendo's brand value just takes a huge hit in this generation and we talked about this you know as we've gone along here but to put a fine point on it older kids and teenagers no longer play mario or at least they don't want to admit that they do sonic doesn't become the long-term replacement but tomb raider does halo does grand theft auto does call of duty does nintendo ironically gets kind of trapped in the toy aisle ghetto for the next 20 years all right so we're through the genesis era we've unfortunately seen basically the end of sega but there's another sort of adult oriented gaming firm that's gearing up in the shadows right now to come aggressively at nintendo and expand the gaming market even further and that is sony so take us to the playstation so the whole 16-bit generation story for nintendo that we just told was really one of arrogance bordering on stupidity and self-inflicted wounds for nintendo but ultimately they were competing against at best a roughly equal-footed competitor in sega and really an underdog sega did not have the financial firepower the technological firepower that nintendo did it was like amazing that they came from out of where they did and battled nintendo to a draw that's not going to happen in this generation because now the big boys are coming and we talk about these often unacquired of self-inflicted wounds this may be the worst self-inflicted wound of all time what nintendo does here because as we talked about on the sony episode the playstation was supposed to be the nintendo playstation yes and somehow this partnership that nintendo had been working on with their fellow japanese technology and consumer electronics giant sony to enter the cd medium and the 32-bit era somehow that went from being a beautiful partnership to basically almost signing their own death warrant so at the june 1991 consumer electronics show there's big expectations nintendo and sony are all set to announce the cd rom add-on for the super nintendo system to bring the cd format to nintendo powered by sony the sony and nintendo playstation they're all set to announce it and in fact sony does announce it at their press conference and then the very next day nintendo turns around and in their press doesn't mention it at all and instead trumpets their major cd rom technology partnership with sony's arch rival phillips they betray sony they stab them in the back so much hubris so much hubris like dumb decision to do this period even dumber decision to do it this way to let them whip in the wind publicly like that and they just light a fire under exactly the company that you do not want to light a fire under at this point to come and destroy you and to illustrate how much bigger sony is i mean in 94 is when the sony playstation would launch they were doing 38 billion in revenue and at that point in tinden tendo was a four billion dollar revenue company so sony is the much bigger beast here yep now look this partnership that they were working on with sony it's unlikely that it ever actually would have worked out because there's just like too much money at stake the video game market is too attractive despite the fact that sony didn't enter the portable market with the game man and nintendo stuck it to them with the game boy like a bad blood goes way back here and the reason that nintendo pulls out of the partnership is they couldn't come to terms on how they were going to split the royal tees on software revenue which has been talked about in part one like that's where all the economics are in the business it's a razor and blades right which is actually quite rational there is not really a viable alternative history where the nintendo playstation came out there is a viable alternative history where like sony waited a little longer to enter the market and they didn't have as much burning hatred for nintendo as nintendo generated here so that happened at the 1991 CES can kuduragi goes off and within sony music builds the playstation franchise and steve race comes over from sega and gets involved on the american side the playstation finally comes to market at the end of 1994 in japan in 1995 in america and it's an amazing console it's cd based it's got incredible power it's much easier to develop for they've got all of sony's both technological and financial firepower behind it and it's a 32-bit system on par with the segra Saturn yes it's a 32-bit system so just blows away the super nintendo on every dimension here much more storage availability for games and game developers by using the cd format much more powerful processor it's clear that this is going to be a big investment from sony here and they're going to be a big player in the industry nintendo again probably in huverus tries to compete directly with sony here in response so they go off and they partner up with legendary silicon valley company silicon graphics sgi as we talked about on the andresin series back in the acquired canon to build the n64 they're going to leapfrog the 32-bit generation and go right to 64 bits with the n64 but one it comes out too late so the 64 doesn't come out until 1996 after the playstation has already had a year plus to be on the market and establish both the install base lead and the third party developer network to dn64 famously uses cartridges again instead of cds they have a very particular way they love doing things they do they do which i think was partially an anti-piracy thing they cared so much about stopping piracy that they were willing to hamstring developers and needing to use a much more constrained format in the cartridge than cds because they thought well cds are just going to get pirated and we don't have as many mechanisms to prevent that yep and then the third part of this yes the n64 was a very powerful 64-bit system but it required very expensive silicon graphics hardware to develop for that the playstation did not so like really the whole thing is just a giant fu to third party developers who already hate nintendo so at this point everybody pretty much abandons nintendo for the sony platform the n64 would sell 33 million units in its lifetime that's about half of what the nes sold versus the ps1's 102 million so nintendo just gets the floor wiped with them by sony here which was obviously predictable and the n64 ended up being a fantastic console to play nintendo first party games on yes and they even more than ever before entrenched that that is what our company is all about i mean super mario 64 mario kart 64 super smash brothers star fox gold knight i mean these are all first party titles the only one that wasn't is gold nai and that was rare which was a very close relationship with nintendo that was a second party title nintendo owned at that point in time something like 25 30 percent of rare and rare developed exclusively for nintendo platforms so that's the n64 playstation and then in the next generation the wheels just totally come off the bus sony and the playstation 2 goes on to become the best selling console of all time still to this day the ps2 has sold more units than any other console including the gameboy including the nintendo switch everything they sell 155 million playstation 2's my god did i love my ps2 i mean remember pin my ride people opening ps2's in cars that was the ultimate wrapper status symbol this was the console that i got after my bar mitzvah when i was finally allowed to have like a real console not just a gameboy and it is the last console i owned until i bought a switch a month ago and i've had n64 that i bought as sort of like a novelty thing to play smash after i graduated college but like that not a real thing the ps2 is totally the war course system that i grew up on as a teenager i mean this is sony at its absolute pinnacle in the like pre-internet era it was their consumer electronics expertise it was bringing dvd players to the living room of homes around the world for the first time right it was a dvd player and a game system in one for the price of just a game system i mean for god's sake there was all this fun i remember in the media at the time when it was launched in the american media about should we allow japan to export these things because what if adversarial nations to the u.s get a hold of these and use them to build missile guidance systems i mean the ps2 was a literal supercomputer at the time and this is the other huge advantage that sony had over nintendo and anybody else except michael soft let's talk about in a second which was they could afford to subsidize the crap out of this thing so the playstation 2 launched for two ninety nine in the u.s i don't actually know what the bill of materials was but it cost way more than two ninety nine for sony to make every one of those but they had so much capital that they could take that loss and then make it up on the software library over time for the high-end consoles this is how the business works to this day between sony and microsoft yep for nintendo oh god it's such a sad story their answer is the freaking game cube the poor game cube uh i actually have like a really fond memories of the game cube but 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 in high school get stuffed in a locker they had no idea who it was for they made it and it was more competitive on a spec's perspective than the ps1 and they did try to market it like it was for everyone like it was a game system for kids for adults yeah except it looks like a lunchbox totally and it also was competing against the super computer ps2 yeah literally people are worried about this thing guiding nuclear missiles like what do you think the american teenager is gonna want to buy the thing that their parents are freaking out about nuclear war or a thing that looks like their little brother's lunchbox and the ps2 you know it's black and it's sleek and it's the same playbook that the sega genesis ran in terms of we're like the grown-up gaming machine on top of all of this microsoft enters the market yes another company so suddenly you have a two-horse race both of which have infinite treasuries and are subsidizing this market they really want to get into and neither of the two horses is nintendo yeah so microsoft with the xbox microsoft takes at least a five billion dollar loss on the first generation of the xbox and they are thrilled about that because this is their entry into the long-term strategy of getting into the video game market and owning the living room it was there how do we get microsoft in the living room even though they took that loss on the whole generation like i think that's hard where hence software included i don't think xbox as a franchise was profitable at all for microsoft on that first generation they're willing to take that enormous capital loss which is basically all of nintendo's treasury to compete against them and they've got sony nintendo just gets rocked and on top of all of this there was a bill coming due to nintendo had to pay eventually and this is where they had to pay it they finally leave cartridges so they have zero backwards compatibility with the game cube because they were too stubborn to adopt discs sooner and on top of the fact that they're moving away from the cartridges they go with mini cds mini dvd's what on earth it's like did you learn nothing it's not backwards compatible with any of the stuff that they've had before which the n64 wasn't either another dumb move but that had to happen because of the silicon graphics technology which was dumb in the first place yeah it is truly hard to believe that nintendo would come roaring back from this moment so this is nintendo at their ultimate low yeah so put some numbers on that the game cube sells barely over 20 million units for the generation versus the 155 million that the playstation 2 sells even the xbox beats the game cube the xbox sells 24 million units with that five billion dollar plus loss that microsoft's taking so any other company like this is sega's failure with the saturday and the dreamcast that basically bankrupts the company this is that times ten like this is a smoking smoking crater for nintendo except unlike sega all the way back to the beginning of this episode they had one very small but very big thing that kept them alive through all of this the gift that kept on giving the game boy yep before doing the research for this part two like i didn't realize the game boy and its successors saved nintendo's skin for like 20 years so that's game boy which includes the game boy pocket it's game boy color it's game boy advanced and then of course they would launch the ds which will shine about in a minute here but it is amazing that nintendo basically had a monopoly on portable gaming this entire time there's the home console wars they're playing out and there's this whole side thing that's happening where nintendo is selling millions of units as the only credible player in handheld literally everybody's wragging all their hands about the home console business and that's all that anybody who's serious pays attention to but over in the handheld market nintendo is just continuing to crush it like it's like 1989 here so remember how we said all the way back in the beginning of the episode that the game boy is the fourth best selling console of all time and then we just said the playstation 2 is the first best selling console of all time numbers two and three are the ds and the switch and then the game boy advances in far behind so everything and we're gonna talk about the switch at the end of the episode obviously but everything that nintendo gets wrong in the home console market they get right in the handheld market we could have retitled this episode as nintendo the handheld gaming company and that wouldn't have been far from the truth that is a hundred percent of truth so let's go down the checklist global monopoly yes sony does launch the playstation portable i had one oh you have one oh that's also i never had one got stolen out of my locker in high school oh no brutal which is a great device but it was for a different market segment than the game boy i never competed head to head with game boy it had a really fancy screen so it was like pretty good for watching movies it was more like a small computer it's kind of like an ipad it's probably the precursor to an ipad type device totally very sony device yes all the way to the proprietary memory sticks very sony yes so global monopoly check most innovative technology ironically also check thanks to gumpay ucois maxim of lateral thinking with wither technology a huge and dominant third-party developer platform check locked in consumer software libraries with perfect backwards compatibility check literally everything that they got wrong in the home business they get right in the handheld business so the gameboy and gimboy color sell 118 units over a 12 year run that is the more impressive headline number but the gimboy advance which comes out in 2001 only ends up having about a three to four-year lifespan before the ds comes out in 2004 during that time the gimboy advance sells 81 million units making it the 10th best selling console of all time despite having this incredibly short primary lifespan so average selling price for the gimboy advance is about a hundred dollars a pop that is eight billion dollars just in hardware revenue and remember nintendo is making margin on this hardware revenue during those years it also does 375 million units in software sales which is almost double what the gamecube did so like literally you're right like this episode should be titled nintendo the handheld gaming company it's crazy i mean it just gives them so much margin of safety to screw up generation after generation over in the home console market and then the ds i was perfectly within the generational window where i'd missed the ds so i didn't realize what a monster this was and what i mean in the window i was too old to buy it as a kid and too young to buy it as a old funny daddy we'll get into that in a minute the ds was a monster remember we just said the ps2 sold 155 million units and the ds is the second best selling console of all time it's sold 154 million units so basically neck and neck with the ps2 let's be conservative and say that the average selling price for the ds was 100 dollars it was actually more but we'll be conservative we'll say it's 100 dollars that is 15 billion dollars in hardware revenue for nintendo and that's just the hardware the ds sells almost a billion game units at an average selling price of like 30 dollars so that's 30 billion dollars in high margin software revenue and at this point nintendo is still dramatically a first-party publisher for their own platforms and so that billion units sold also most of that or at least half of that is them is nintendo yeah it's incredible i mean the ds franchise generated almost 50 billion dollars in revenue for nintendo wow that's wild how is it possible that this same company is failing so spectacularly on the home console side while simultaneously succeeding so spectacularly on the hardware side and i'll say the portable side is the side that's paving the future for what nintendo would become for better or for worse they're the ones who are having this very strong opinion of let's innovate on a gaming device and what a gaming device is and to this point that hasn't really been nintendo's mo i mean you look at the nes the controller is kind of what you would expect the snes okay cool they came out with the shoulder buttons on top the lnr okay that's a small step forward you know the n64 i think does deserve credit particularly mario 64 that was the first gaming game system that showed how to do 3d games like it was incredibly innovative totally agree and then the game cube is a very me too console you know everything about it is like we wish we had done some of this on the n64 but it's too little too late now but what you're seeing in the handheld especially in the ds is okay this is super innovative to have two screens one of them is a touch screen with a 3ds it would come later one of them is a 3d screen nintendo is starting to at least a handheld group figure out the way forward for us is we design innovative hardware that can inspire new types of games to be played and new types of games to be designed especially by our first party team and house and that does all kinds of amazing things for them think about the we think about the switch switching literally and the joy cons and how popular that is it also does terrible things for them which we'll talk about for the we you but this is when they really discover they are unapologetically innovating on the hardware to play games and that is what defines them this is so much the future direction for nintendo that in 2002 when haroshi yamauchi is leaving the company and transitioning to the next ceo sotaru uwada and leaving it in his hands his final request is quote that nintendo give birth to holy new ideas and create hardware which reflects that ideal and makes software that adheres to that same standard yes and it's not just new types of games to be made on new types of hardware it's serving the end goal of enabling new types of people to play games so what's going on here and why the handheld business becomes such a juggernaut for nintendo is i think as we alluded to earlier it starts serving two completely different markets than the playstation and the xbox and both of those other markets are a completely ignored by sony and microsoft and b very very large so the first is the kids market this is a bread and butter all the way back to the nes and the toy aisle as sony and microsoft moved into the grand theft auto era and the call of duty era and the halo era right core gamers and more mature content the game boy became the new home for kids it's cheaper a so like if you're a parent of a four or a five-year-old you're not going to worry about buying a hundred dollar piece of plastic for them it's less immersive which is actually a feature for kids because it's easier to play and then back to the nintendo kind of guarantee seal of quality brand you can be pretty sure that little sousie and little jimmy isn't going to be playing really violent or adult content games on your gimboy advance or ds or what have you so it's really compelling for little kids and their parents and as we talked about a few minutes ago nothing embodies this more than pokemon we talked about pokemon on the nfl episode where pokemon is i think in my opinion wrongly listed as the highest grossing media franchise of all time because the nfl really should be a single media franchise and is bigger but it doesn't matter pokemon is number two or number one no matter how you want to say lifetime pokemon franchise revenues are just under a hundred billion dollars and the primary medium for it is the freaking game boy yeah so let's take a little detour and tell the pokemon story here because it is incredible i think this is not a super deep story but so cool so many little aspects of this are like one in a million chances so you mentioned a hundred billion dollar lifetime franchise since 1996 when it came out 60 billion dollars of that is merch merch like video games is only 35ish billion of the hundred billion so people became such big fans of this that they tripled quadrupled to the actual video game sales in merch revenue and that's 60 billion dollars if you compare it to say i don't know the marvel cinematic universe which people think of as a big media property the mcu is 30 billion dollars lifetime which is half of pokemon's merch revenue yes now pokemon is a masterfully managed business franchise ip i don't know for sure the breakouts but i believe a large portion if not maybe even the majority of that merch segment is the trading card game all the way back to hanofrudic cards and nintendo almost 50 billion cards have been sold that's five zero billion pokemon cards exist in the world wild all right so pokemon 1990 gameboy comes out and satoshi tajiri had started this thing called game freak like a decade before with some of his friends as a fan magazine for video games they eventually get into making their own video games none of them really necessarily take off certainly not to the extent of pokemon so at gamefreak satoshi tajiri is sort of pitching internally hey we should make something for the gameboy i saw the functionality with the link connector and i loved collecting bugs as a kid and it sort of made me think about bugs going back and forth on the link cable between these two gameboys i wonder if there's something we can do around kids and bug collections and treating them or battling them or something and so he comes up with this concept and he pitches it internally now internally what is it it's four programmers that started life as a video game magazine yes right up about this and he goes and pitches it to nintendo nintendo's not excited about it but there's one person who sees promise and says i think we should green like this and i will mentor satoshi tajiri that person is miamoto and so suddenly you have the very best game designer in the world seeing promise in your hairbrained concept literally bug collecting which you don't know anything about miamoto personally like obviously that would resonate with him yes gamefreak raises money from creatures ink who i think the right way to kind of think about it is creatures ink is the publisher and gamefreak is the developer yeah i think creatures also manages the training card game okay makes sense so they then spend six years developing the game four people over six years with a whole bunch of setbacks living off of basically satoshi's dad's money because they're living in his basement and trying to survive off of him having a real job and in 1996 it's finally ready and they launch it yeah i believe it was red and green in japan initially and then it was red and blue in the u.s oh you're right and the whole thing is so unbelievably frail that when they go to translate it make an american version they actually need to recode the whole thing from scratch because it's like spaghetti code everywhere so it does well but unlike every other gameboy game that peaked and started trailing off this thing just accelerates and it just goes and goes and goes and everyone at nintendo is shocked everyone at gamefreak is shocked everyone creatures is shocked no one expected this thing to be this successful especially after taking six years to bring it to market with basically four crazy people yeah it's just wild and you're obviously fast forward today and pokemon is enormous on just about every dimension but it goes from that to selling just on core video game consoles nintendo consoles over half a billion lifetime units of console software sales it's incredible do you know the trivia with the names of the pokemon characters oh no i don't so ash kacham in the japanese version is named satoshi after satoshi tajiri uh uh so satoshi's nemesis you know gary oak the sort of rival of ash kacham in the japanese version is named shigeru after shigeru mimodo uh uh uh that's awesome yeah but this would evolve eventually into and we'll come back when we talk about pokemon go later but it would evolve into the pokemon company which is sort of the licensing body that is 32 owned by nintendo and the other thirds are owned by gamefreak and creatures and i think the way they basically operate is as if they're a studio of nintendo at this point it's the most successful second party business of all time wow i don't know that for a fact but i assume it is a fact i can't think of anything else that is second party business that would be as big as pokemon yeah so obviously the kids market is cute i mean i'm not this is all i did all day at recess and anytime i could bust out my game weight school like this is what we were doing and it spans generations like i think it's all kids are doing today all day and we're old now like i have kids not yet at pokemon age sadly okay so that's the kids market obviously huge the other market that the gameboy slash ds franchise serves for nintendo and this is perhaps not surprising given if you think back to the original history with goon pay observing the businessman on the train playing with the calculator but it's what eventually becomes the casual gaming market now people aren't thinking about it quite as that at this point in time nintendo totally discovers slash and vent schedule gaming they 100 do i mean this is my dad and millions of dads around the world playing tetris in the 80s and 90s it really like nintendo codifies this and embraces it best with the ds this is brain age brain age where these like mind training games that were targeted at older people and like grandparents it's nintendo's which is me a modos dog raising simulator that's like really popular with women and older women as opposed to most video games and it turns out that this category which nobody knew existed until nintendo accidentally found it and then they didn't even like truly embrace it until the mid-2000s this is actually the biggest gaming category of them all by far and it's incredible because the modern instantiation of casual gaming certainly the largest is mobile free to play casual gaming and nintendo sort of invented it before mobile and before free to play totally so brain age one and two combined sell 34 million copies on the ds nintendo's sells almost 25 million copies tetris all the way back on the game boy sold 35 million copies now most of those are bundled in the u.s these are billion dollar franchises within nintendo that nobody thought about for decades it's kind of crazy yep so we asked the question how is nintendo screwing up so royally on the home console side while they're succeeding so spectacularly on the handheld side and it's one that the kids and the casual segments were viewed as these kind of ghettos for a long time that no serious company and certainly nobody like sony or microsoft would go after and go compete with wrongly so by the way and the people who would have competed with them were atari and sega and both were basically defunct by this point so nintendo had this lane y-open because everyone else who's trying to come into the industry is coming after the core gaming segment or the serious gaming segment or the high arpoo the high average revenue per user people that are buying 60 dollar dvd discs to play and so you know then to the other side of how they allowed to screw up so badly in the home side i don't want to say it doesn't matter but it kind of doesn't matter so nintendo's revenue and operating profits more or less stay flat from the nes era all the way through to the mid 2000s even though the home console business basically just gets like doused in gasoline and lit on fire but the handheld side completely replaces it nintendo's kind of always doing a solid four to five billion revenue a year called and maybe half a billion to a billion dollars in operating income like there's no gun to their head yeah so handheld very good business for nintendo and when you couple that with a generation of home console that is also a good business for nintendo and they absolutely knock it out of the park and define a brand new form factor and a brand new way to play games that has mass mass audience then they do the most revenue in the company's history and that's going to be the we and we're going to get to that all right listeners now is a great time to talk about one of our favorite companies legora the agentic operating system for legal work yes most of you have dropped a contract into a chatbot by now but as a lawyer how far can that really take you it's never seen your firm's precedence it doesn't respect confidentiality and you can't check where its answer came from so legoras founders approached this the way that great founders do early on the team moved into the office of a big law firm in stock home and learned four months how the work actually gets done a couple of thousands of enterprise customers and a hundred thousand users later they still work that way they employ a hundred legal engineers on staff these are lawyers sitting inside of firms and legal departments to deploy legora onto live situations like the deal closing this week or the policy review do friday the product has gotten very powerful in a short period of time a year ago the goal was a good answer from a chatbot with the legora agent you hand it the work and it comes back with a plan tasks like running diligence on a data room or reviewing a new vendor contract get completed inside the tool you use every day like microsoftward and against your own precedence and playbooks every finding is sourced the lawyer directs the work and signs off before the system executes any steps every legal team can get access to the same AI models so the models themselves do not give you an edge what you can do with your own data people playbooks that's the whole game today over a hundred thousand legal professionals at more than eighteen hundred law firms and in-house legal teams in over fifty markets use legora and when legora goes head to head with its top competitor in a pilot it wins seventy percent of the time a demo is one thing but what matters most is an associate who reaches for it at two in the morning during a closing or whether a general counsel trusts what it says before the board meeting so if your legal team wants to check it out whether you're at a firm or in-house go to legora.com slash acquired and be sure to tell them that ben and david sent you all right so the we there's a little bit of a lead up to the we which is some leadership changes so toru water comes in and succeeds haroshi yamuchi as president of nintendo lt d the parent japanese company and right around the same time in two thousand three ish red jifisa may works his way up the ranks and comes in as the president of nintendo of america and so you've got this pretty awesome tag team of leadership that is ready to do something very different and the gamecube comes out they sort of know right away this is a miss they're still doing everything that you sort of think they would do to try to occupy the time until they have something really great but they're already foreshadowing very early that yep yep we hear you developers and gamers like we need to be doing something different and they're learning from the ds which they just launched and became this enormous success they're like oh maybe these people want to play games at home too totally so there's a great keynote in 2004 where regi comes out on stage he's introducing himself and he says i'm regi i'm about kickin ass taking names and we're about playing games and then they have this whole keynote of kind of the most hardcore nintendo i've ever seen it's almost like a dark in your face they don't know who they are as a company it kind of reminds me of luke skywalker at the beginning of return to the jedi like you're really not sure which way it's gonna go could be dark could be light but what you do see is them starting to really embrace something so they start talking about the ds and they're showing off the backwards compatibility it looks kind of funny but you can put in a gameboy game and it kind of sticks out in a way that is clearly awkward but they know that this is an important thing because they have this massive install base of people that had all these gameboys and gameboy advance and everything over the years so okay we're embracing that check you also see them talk about everything they sort of can in the gamecube but then regi invites setorio wada out on stage in from japan to talk about this revolution that is coming for home game that's right the code name for the we was project revolution yes and they really start sort of just foreshadowing how they really want to change everything again and how it's an exciting time to be working with nintendo as developers because everything is just about to be so different and truly a revolution they laid this groundwork a whole year before they even announced the name we yeah and i think almost two years before the we actually comes out i think that's right yeah the we is such an enormous success on basically every level but it really is the triumph now fully across all of nintendo as a company and all their product lines of the goompa yukoi lateral thinking with withered technology maximum infrared motion sensing which is what the wemo uses is an incredibly novel technology to bring to video games but it's a well understood quote-unquote withered technology like tv remotes have been using this for decades it's a world war two technology yeah but it works just unbelievably well the we goes on to be incredibly counterposition to the ps3 and xbox 360 again we talked on this only episode about all their problems with the ps3 that was this like cell-based supercomputer that was a total beast of program four and here's the we that's underpowered and using this whole technology but opening up brand new markets it sells over a hundred million consoles coming back from barely 20 that the game cubes sold what a turnaround it beats the ps3 it beats the xbox 360 it becomes the seventh best selling console of all time and the fourth best selling home console and the games they make for it they make we sports and they bundle it in with the we they make we fit they make we play this completely revolutionizes the market my favorite sidebar story on this is uh remember how travis calonic was like a world champion we tennis player right second best in the world or something which later got debugged because turns out there were no global leaderboards i think he was just really obsessed with we tennis or something like that he was probably really good at it and just told people he was second best in the world totally but this is part of the market that the we enables which is like travis calonic doesn't have time to go spend you know thousands of hours playing call of duty but he will go play we tennis and he'll get like really into it totally and they intentionally make the controller look like a tv remote because they just want people to call it the remote they don't want people to be intimidated by it it's like if you can use a tv you can use a we totally the we moat they also made it smaller i think the mandate was that it's the size of three dvd boxes so that it's not this big intimidating yes the console itself yes exactly and this is where we should talk a little bit about the different segments of games because it's starting to become important and i think this will help us understand nintendo today the we really start to lay the groundwork for understanding what their position today we have three people to thank for conversations that we had leading up to this nick fight from rec room long time friend of the show and some games industry veterans the creators of xbox live arcade john david and greg kinesa for kind of going down memory lane with us and helping us to understand the way that this landscape looks so there are many segments of games but it's worth breaking it down to three there's casual there's mid core in the middle and then there's a core gaming audience and so casual games are what we've been talking about that have sort of broad appeal that you can kind of pick it up and play it's a quick in and out it takes you minutes to understand but hours to master it's Tetris it's brainage it's we tennis exactly and in the modern casual world the most common type of monetization model is free to play and this is the thing that's really taken off on mobile you see candy crush that's sort of almost brainless thing that you could listen to a podcast while you're playing this type of game and the revenue per user per day if you're really good and this sort of thing is like 20 to 40 cents that's the way to sort of think about the monetization potential if you're not good at it can be like one to five cents then there's mid core games which it's like games where you pick up where you left off that's sort of how i think about it like not core games like world of work raft but a version of that where they're taking these core game mechanics and you're making them more approachable and so they take some time to learn but once you learn them you really love the game zelda breath of the wild is a really good example of this and when we are talking about arped out the average revenue per daily active user that metric we mentioned before it's more like a dollar in terms of monetization potential smaller market than casual gaming but a dollar per person like that's definitely a market worth going after a dollar per person per day once you get into the core gaming segment i mentioned the world of work raft but this is really anything where you're like training yourself even to play it at all and your grandma can't pick it up and start playing league of legends right the revenue per user on that is through the roof but it's a much smaller audience and so i wanted to sort of paint this picture to try to help us understand where nintendo decides to start playing from here they've typically been kind of a mid core company with their titles you think of the zelda's the super mario odyssey and with some casual games you think about super smash brothers or mario kart you know you're kind of button mashers those games lean more casual what they did with the we which in some ways was shooting themselves in the foot and david you can push back on this if you disagree is that they started walking away from their mid core characters that really defined who nintendo is and launched a casual gaming home console the thing that was a hit for the we was we sports these sort of lifestyle games and the things that i don't even ever remember playing on the we are mario and zelda that's not what that platform was for yes i would agree with exactly how you characterize that and i also agree that by doing this nintendo shot themselves in the foot but i don't know that you can blame them necessarily i think it actually was completely brilliant at the time and it completely revitalizes the company so with the we and its success nintendo's revenue almost quadruples from the five billion dollarish range to just under 20 billion in 2009 all-time high even to date even including all the switch success that was still the all-time high and operating income goes through the roof over five billion dollars they're killing it this is like an unbelievable revolution as they would have said unfortunately though you know and this is where you can debate whether it's possible to see this coming or not right after the we launches and brings this revolution so that's 2006 2007 time frame the app stores launch on mobile late 2008 into 2009 and that just sucks all of this away and this is the problem about shooting themselves in the foot they were so vulnerable to this in a way that microsoft and sony weren't because the core gaming market and the hardware and the platforms that microsoft and sony were putting out they weren't threatened by mobile mobile didn't take share from them but it took like all of nintendo's share right because the we was not the mario console the we was the casual gaming console and 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 market away from them and then it took them a decade to basically go back to their roots with the switch and figure out how to like revitalize all the mid core nintendo ip onto a platform that was dedicated and best in class for that use but this is like the really sad part of the story if they just get rugged here and you can see it at the stock price it is nuts when you look at when it wada came in and took over in 2002 and we talked about the we was released in 2005 in the four years from october of 2003 to october of 2007 nintendo's market cap nearly 8x from nine billion to 70 billion they were a 70 billion market cap company but very briefly i think their market cap was even bigger than sony's for that year but by 2012 it was all the way back down below where it even started to eight billion dollars yeah the impact of mobile gets felt pretty much immediately in 2009 which is just the third full year that the we is on the market and when it should be hitting like the fat part of its lifecycle at its prime that's when the af stores really hit and we sales decline 20 percent that year when they should be accelerating and then they fall roughly another 30 percent each of the next two years and software sales which are more important decline even more that's on the home console side in the we which is like maybe a little more insulated from mobile meanwhile the ds which was this juggernaut is just getting rocked yeah it's weird in some ways nintendo called it because they realized that casual gaming was going to be a huge market and they realized that portable gaming was going to be a huge market but they did not have any strategy around mobile yes it was the perfect marriage so nintendo launches the 3ds to try and differentiate and versus smart phones and having the 3d screen they launched that in 2011 but sales stall out pretty much immediately i'd forgotten this about the 3ds and they have to do a major price cut on it within six months of launch so they dropped the price 30 percent less than six months after the console launches like that is bad so that does stem the tide for a bit and 3ds sales do grow for the next couple years but then the smart phone juggernaut is just too big 2013 1415 3ds sales just fall off a cliff the saving grace that they had their entire life or from 1990 onward of no matter how much we screw up our handheld gaming system will sort of protect us shields are gone totally and so now nintendo is in a sega post Saturn and dreamcast type situation there is an existential crisis happening so in nintendo's fiscal year 2012 they report their first ever annual loss so this was a company that even during the crappy years was making half a billion to a billion dollars in operating income is just coming off the we-year bonanzas where they're making five billion dollars in operating income all of us on their bleeding cash and it gets doubly bad because the only way out of this for them if they're going to keep their hardware strategy is to rush out a new console which means they have to invest capital in rnd and in marketing for launching a new console to try and stem the losses both on handheld and mobile it's rough so they rush out the 3ds they rush out the Wii U as the successor to the Wii oh the Wii U is a piece of garbage the thing sucked and there's so many insights with the Wii U that are correct directionally correct let's put it that way people want touch screens okay you're right phones and iPads are really starting to take the market by storm so having a controller for your home console that has a little touch screen on it okay i can see that but god is this convoluted you basically handed people what looks like a portable console this controller with a screen on it but it's got to be in range of the console right they can't actually use it as that they have to use it as a controller for the console and there's all sorts of innovative things they can do that this is sort of where the maxim of nintendo really comes into play where they're obsessed with designing hardware that enables new game experiences and then designing games to work with that hardware they still to this point in time have never shipped a game on any hardware where they did not design the controller and so they're starting to make all these like very clever use case games for this very strange piece of hardware where like there's accelerometers in the controllers you can tilt it back and forth or you can put it down on the table and you can write on it or you can be like playing chess and you can flip it sideways we're watching the commercials for this because you're like wow this could do everything this is like a very innovative console but a bunch of things were wrong with it including the fact that it was rush to market wildly misnamed it sounds like it's an accessory for the Wii which it wasn't it was a full new generation yeah it was bad so the Wii U just really compounds the gravity of the situation for nintendo it only sells 13 million units in its entire lifetime remember the gamecube was bad selling over 20 it's nintendo's worst selling console ever save for the virtual boy which was worse and these losses continue year after year after year i think most of the years from 2011 to 2017 18 were in the red yeah and so as that happens shareholders and shareholder activists start demanding that nintendo go the way of zigat and get out of the hardware business there's this really really obvious value maximizing at least in the short term move that nintendo could do which is take their ip and publish it on smartphones and this argument makes a lot of sense what does this company have anywhere they do have ip that is super valuable that you should but nobody likes their last console they can't prove that they've been able to do two consoles in a row they can't prove that they've been able to leverage their user base into buying the next console literally ever they can't prove that there's any purpose to everything they learn from the Wii because all that great casual stuff that they learned for the Wii is now happening on smartphones which they have no play in so it would be very reasonable to be like you really need to stop making hardware and you have this unbelievable asset which is some of the world's most valuable ip yes so there's a legendary story which maybe apocryphal and after some more research i think actually is apocryphal but the spirit of it is absolutely on point mentioned like tell this over on the game craft podcast where at the 2013 shareholder meeting Iwata's up on stage is taking questions from the audience he gets an argument with a shareholder not even an institutional shareholder just like an individual shareholder who's there who says like hey my daughter loves playing games on her smartphone and she loves playing nintendo games why are there no nintendo games on smartphones and that Iwata's like mortal honor is offended and he jumps off stage and punches the shareholder in the face what really so i don't think this really actually happened i think it's a urban legend but it very well could have because nintendo and Iwata were just so stubborn through all of this they're like no the Wii U it's the future like please buy our console and they're philosophically opposed to in mobile in a number of ways one they like controlling the whole experience they did not design the smartphone controller therefore they don't feel that they can make great games for it which is pretty stupid but it's how they feel they also philosophically hate the business model that's doing well on mobile which is free to play they think it's like the devil they think it is an immoral thing to do so ironic given nintendo's history right you talk to video game veterans and they do say like we are very grateful that nintendo exists in the industry because otherwise it would literally just become this detritus of capitalism i totally sympathize with this point of view and you know Iwata says this isn't actual quote from him around the time he says making smartphone games is absolutely not under consideration if we did this nintendo would cease to be nintendo having a hardware development team in-house is a major strength it's the duty of management to make use of those strengths it probably would be the correct decision in the sense that the moment we started to release games on smartphones we'd make profits remember they're not making profits but however i believe my responsibility is not to short-term profits but to nintendo's mid and long-term competitive strength now he's absolutely right and history proves him right here but from a shareholder perspective at the time people are like you gotta go we've had enough well the funny thing about the survivorship is if history didn't prove him right in the long term we also wouldn't be doing this episode somebody who could have had that same opinion and then gone the way of sega and today we will be talking to you about the xbox or some other episode totally nintendo's stock price from the highs after the week declines over 80 percent so like oh it's brutal and i think there's probably a decent chance that elwato would have been forced out unfortunately and completely tragically he dies way way way too young and unexpectedly of cancer in 2015 h55 it's just terrible it's also really sad because he and miamoto and other nintendo executives finally do realize that they have to change things and they come up just like tom and sega had the four-point plan they come up secretly and internally around this time in 2013 with an internal three-point plan for nintendo and it is everything that they need to do and it starts with point one we need to stop fighting the smartphone battle and embrace it but we're going to embrace it in a nintendo way and this is super smart we're going to build a new standalone business unit and we're going to do it in partnership with the japanese mobile company dna to co-develop smartphone games using nintendo ip but we're not going to fully transition the business to smartphone games like the investors want us to we're going to use this as a way to unlock our ip and spread it out more broadly to the rest of the world kind of like we've seen pokemon has done the pokemon ip is applicable so far beyond the gameboy games and all of the revenue and activity from that it drives sales back to the gameboy games and to the gameboy platform we can and should be doing that same thing with all of our ip with mario aszlda etc speaking of if we want to do that right just like we see pokemon doing it it's not just that we want to do mobile games we also want to do theme parks we want to do movies we want to capitalize on nostalgia because now just like you and me then the core nintendo customers from the old days have gotten old enough that we have nostalgia for the nes the sne s the n64 they start releasing nes sne s classic editions like re-releasing the home consoles with hdmi ports this is genius they make tons of money from this so they sign a partnership with universal studios to start building super nintendo worlds first in japan and then in hollywood which is just open it's coming to florida it's coming to singapore and then really these points one and two embracing smartphones embracing the ip strategy is really to buy time so that they can rethink the hardware strategy and reimagine what the future of nintendo is going to be because i think it's totally right for better or worse nintendo is not nintendo if they exit the hardware business csega is a shell of its former self and nintendo probably would ultimately have gone the same way if they had exited the hardware business at this point in time all right so in 2013 they start laying the groundwork for the switch for leveraging the ip to you know the movie coming out right now and theme parks and of course mobile so that takes us to the summer of 2016 and a big surprise announcement the very first smartphone game with quasi nintendo ip it's not through their partnership with dna it's not mario it's not zalda it's pokemon and pokemon go and this is like the perfect everything mobile game way for nintendo to dip its foot in the water oh it's just amazing pokemon go is one of those things that you just cannot make up what happens here the craziest thing is i had been playing ingress for the previous 18 months and so when pokemon go came out you and all the nerds out there i was like wait this is just ingress with pokemon in it this is very strange do you know how the nintendo pokemon google relationship starts no so niantic which developed pokemon go in collaboration with the pokemon company and nintendo was one of the main shareholders of the pokemon company was a spin out from google and niantic was the team that within google had made the mobile location based game ingress that ben was just talking about which was super geeky and like really fun but it was basically pokemon go without the pokemon yeah it was like a test of the infrastructure and to develop the right game mechanics and the ip that it was using was sort of an old sci-fi novel but it wasn't like exactly one-to-one that's right but the spark of this relationship actually goes back to 2014 and the 2014 april fools joke google loves april fools jokes and i had forgotten about this until i read about it in the research and then i was like oh yeah which was the google maps pokemon challenge so on april fools day 2014 google released a video saying they were recruiting for a new position within google that was like the i think they called it like pokémaster or something like that like a google pokémaster and that it was a competition to get this job and the way you could compete was by capturing pokemon on google maps and they had like a video for it and all this stuff and it was hilarious now what i don't know and wasn't able to find was were they already starting to think about pokemon go and building a game together because very clearly the work that went into putting pokemon showing up on random spots on google maps was exactly the work that needed to go into building pokemon go but this was a total like under wrap surprise nobody outside of google and pokemon company nintendo knew that this was coming then one day in the summer of 2016 it hits and it's just a cultural touchstone i mean i'm sure totally almost everybody listening to this episode remembers this i was convinced ar had arrived i was like oh we found the ar use case the world will never be the same every venture capitalist was running around trying to find ar and vr companies niantic spins out and then does raise a boatload of venture capital from you know all the big vcs pokemon go itself gets over 500 million downloads just in 2016 which is mind-boggling now a lot of those folks churn but it becomes a real viable ongoing smartphone game but the ones who don't churn spend they love it so it has well over a hundred million ongoing monthly active users it now earns about a billion dollars every year it's one of the top mobile games out there period investors in nintendo get so excited about this and in particular what this means is a harbinger for other nintendo ip coming to mobile that within two weeks of pokemon goes release the nintendo stock price doubles from call it a fifteen billion dollar is to a thirty billion dollar market cap and everybody's just going well like this is nintendo is finally gonna embrace smartphones the reality is maybe perhaps in part because of pokemon go success in the breathing room that abys them they don't the funny thing is that this game is not released by the pokemon company that nintendo has 32 percent ownership in this game is released by niantic who has secured a license to the ip from the pokemon company and to your point around the stock spiking nintendo has to issue a press release telling investors mid quarter hey y'all are real excited we do not expect this to impact our revenue meaningfully for the quarter this was a license what's interesting is i think the stock does drop back a little bit when they issue that press release but not that much people are still really excited they're like this is the great unlocking of value it's happening but to like really underscore this i mean there's a few interesting nuances here one to this day only three percent of nintendo's revenue is the entire basket of mobile and licensing and theme parks and movies they clump mobile in with all that they don't look at games like pokemon go or what we'll talk about in a minute super mario run as a nintendo game they look at this as oh we've licensed rip for someone else to do something with and the fact that it's a game even though that sounds like what we do as a company in our core business oh no no no this is different this is a license it's actually part of the ip strategy and it's actually marketing right it is only three percent of their revenue so all of this pokemon go stuff that happened is like okay like a lot of people got reminded what pokemon is again but niantic makes a bunch of money from that nintendo doesn't make a bunch of money from that yep now i suspect the pokemon company made and continues to make a bunch of money from pokemon go not quite as much as niantic but a bunch is relative like it's not impactful to nintendo's business it's not transformative certainly also it's worth pointing out if the pokemon company were the developer of this game there's no way it would have the attractive business model that it has it is a whale driven microtransaction game that nintendo is philosophically opposed to and so in the same way that apple gets to claim um you know where the privacy company but then get paid tens of billions of dollars by google nintendo gets to claim like oh we don't touch these dirty microtransactions and yet we're selling a license to a company that is making billions of dollars from doing that so pokemon go is the first quasi nintendo ip to hit smartphones later that year in the fall of 2016 they do come out with the first game in the dna partnership super mario run and hold onto people download it it doesn't end up becoming a big ongoing game like pokemon go so me moto gets up on stage in an apple keynote which was really cool to see because you know these companies are like sort of spiritually aligned although one sort of ate the other's lunch you know nintendo's throwing stones at apple saying that their business model is a moral evil so you got me a moto announcing on stage that they're gonna bring mario to the iphone which to me watching it i remember thinking like okay so they have no strategy this is like him waving their arms around and being like oh my god the we you is so bad we don't know what to do don't look over here look over there and i think even in the keynote they say we don't know what the price is going to be yet but it's not going to be in that purchases you're going to buy it once up front because that's how we believe games should be bought which of course is him saying we're not gonna make any money on this because you're not going to sell a sixty-seventy eighty dollar skew on the iphone you're gonna sell a five dollar skew on the iphone and so the game itself is effectively the original super mario but since nintendo doesn't own the controller it's sort of a little bit of a weird mechanic you're like tapping on the screen to make him jump and you're holding it to make him jump higher yeah it's like a really weird baby between the original super mario and a runner game which are somewhat popular niche genre on mobile right because you're not controlling the speed at what you're running you're just going the funniest thing about it is it's so nintendo in all these different ways they're super super anti-piracy so even though they're making basically no money on this thing they won't let you play it without an internet connection because they're so afraid of people jailbreaking the iphone that like you can't play it on a plane or in the subway it's so that's so nintendo sometimes they like cut off their entire body despite their face i had forgotten that that's ridiculous matthew ball puts it the very best he has a great piece written in 2020 willing to in the show notes which is basically here's why nintendo looks a lot like apple and disney but isn't actually as attractive of a business as apple and disney it's kind of the crux of the piece and there's a spare graph that says 2016 super mario run is one of the 10 most downloaded mobile games of all time with over 700 million installs however it is achieved only 75 million in gross revenue after four years according to sensor tower these downloads are a testament to the power of nintendo's ip but 11 cents per user and less than 100 million in total top line likely make super mario run the worst performing game with nine figure installs by far which you know on the one hand point taken on the other hand this is explicitly not nintendo's strategy right which brings us to the announcement at the end of 2016 and then the launch in march of 2017 of the switch now the switch is so interesting it obviously goes on to become this enormous success i love mine i've played the hell out of it 123 million sold in the first six years yep it's the first console you bought since the ps2 is that right yeah yeah i guess i had a psp but i didn't consider that a console exactly it is this amazing success but when it's announced so many people certainly the investor community and i raised my hand and count myself among this i thought it was a terrible idea it was not obvious at least to wall street that this was the savior that it ended up being when they announce it nintendo's stock drops seven percent and then it keeps falling until launch remember everybody's all excited about like oh nintendo's finally coming to mobile like there's a great bookcase narrative for nintendo out there and then they drop the switch and people are like what the hell is this we're making a thing that's like a phone but bigger and you need to also carry it with you so now you need a second device it's an underpowered home console combined with a big portable console that doesn't fit in your pocket even though you do have a console that does fit in your pocket right you have better versions of like both of those out there on the market now this will be really fun for us to talk about because i think there's two things going on here and i think nintendo saw both of them the one that they certainly saw then is what you're talking about earlier of the mid-core market being underserved at that point in time and in particular the mid-core market for nintendo ip there wasn't a really good platform to play nintendo or otherwise mid-core type games out there and the switch was the perfect platform to do it that certainly was one thing that the market didn't appreciate that nintendo saw i think there was also another dynamic here at least this is my experience with the switch while the dynamics in the mobile gaming industry on the one hand were very different than the atari 1983 video game crash in that obviously that industry still makes tons of money it's by far the biggest segment of the gaming industry i think it's a hundred and twenty billion dollar annual revenue industry in and of itself now mobile gaming on the other hand some of the same problems are definitely there it's filled with shovelware crap even the games that make the most money are crap this is why nintendo is philosophically opposed to it and so many people appreciate their point of view and so when the switch launches it's actually kind of a throwback to the nes seal of quality a lot of people certainly myself included i would play more casual like certainly mid-core but also more casual mobile games if i had a seal quality knowing that this wasn't crap this wasn't gonna try and drain my credit card of hundreds if not thousands of dollars and treat me like a whale and that's what the switch becomes even despite all the success of mobile there was this room for like quality you're right that quality is the way to describe it it's not first party it's not third party it's quality and nintendo is gonna basically have a pretty low volume throughput of third party games and the way that they design the device kind of forces you to custom make games for it because it's not great for porting other games so it sort of flies in the face of everything else happening in the industry which is we want our game available on the most endpoints because it's going to be some kind of open world services oriented events based game and you want to be able to play that with all your friends no matter what devices they're on and what nintendo is saying is we're gonna make a device so weird that it's basically a smartphone but without bluetooth it does have bluetooth it's just neuter-to-k-use headphones yeah right what the heck i can use my bluetooth headphones with it it's weird and also it is going to have like a 2013-14 era tegra chip the Nvidia tegra finally finds its use case it's so strange and so what it means is it's a great first party device because nintendo is not big in their games for any other platform so they're happy to custom write for this weird thing and indie developers at first probably won't write games for it because there isn't an audience but over time if it gets an install base it's great as an indie developer to develop a really high quality game purpose driven for it but if you're developing call of duty it's pretty unclear that this is a great device for you yeah i think we need to separate out two different parts of the market because on the one hand when you're talking about call of duty when you're talking about fittingly madden football is not on the switch still to this day stuff like that the very very high end the core gaming market what you're saying is absolutely correct there's no call of duty for switch right pretty sure it actually is going to be part of the divestiture oh i love it i love it mikersoft has announced that activation will do it if they're acquired right but only it's like a concession to the doj and no consumers actually want so i think that's a hundred percent right on core games but indie games the switch becomes this very vibrant flourishing platform and like yes you have to do some work to port it over but it's actually not quite as hard as you're making it out to be especially if you originally develop the game in unreal or in unity or for the pc or for steam because the switch runs on the tegra on Nvidia's system like you got to do some stuff with the controls to make it work but you can port these games over and so games like Hades is a great example or Undertale or Celeste like these indie games that i played and i loved on my switch like the switch is by far the best platform for games like this because they kind of harken back to the old 16-bit Nintendo era for the first time in generations Nintendo has actually become a really viable third party platform for the right type of developer and it tends to skew more indie we talked to folks in preparation for this episode who have games that even tend to be kind of more mobile smartphone based games that are actively working trying to get them onto the switch because of this quality dynamic and that players on the switch are much more likely to monetize even though it's a smaller audience base i mean people on the switch will buy like 20 plus 60 dollar games over the life of owning their switch this is not a casual arped out type audience this is a high monetizing high intense audience yep and then finally i think there is another element that we really got to give nintendo credit for with the switch that i and very few other people saw the potential and when they announced it which is that the use case that they market it the primary use case of seamless playing between on the go and at home is actually pretty compelling totally legendary game director and designer hideo kojima of the middle gear solid franchise he was one of the few people pre-launch that like publicly really recognize this he has a quote he says the fact that you can play something at home and take it outside this is the gamer's dream the switch is an evolution of that and before the switch you really couldn't do this your same save state your same progress your same everything yep exactly right the other thing that got right with the switch which has been huge for them both as a business and as an unlock for player dynamics is a finally finally got online yes this is a thing where people have been saying oh nintendo is always five years behind i think nintendo was like 10 years behind an online play this was literally their third attempt they now finally have this thing called nintendo switch online and there's two versions of it there's a $20 and $60 but they finally have some semblance of like an xbox live type service that works and before i think they had the nintendo wi-fi connection and the ds and we era and that had some really weird sub things inside of it the we shop channel and dsi shop and they had this whole like friend codes thing and then they deprecated all of that and they launched the nintendo network and inside of that they had the nintendo e-shop and the e-shop eventually got folded into nintendo switch online with that launch but it has taken a long time and some pretty like half toe in the water technology bets to get here famously they launched switch online and they said it's great because it's pure to peer and everyone was like that's terrible for us that's good for you because you don't have to build data centers but it's slow and buggy what do you mean it's pure to peer xbox live has existed for like eight years xbox live has existed for like 18 years yeah it is wild so they finally kind of have their act together with that i have never bought a physical game for my switch i've only bought them digitally the difference between the twenty dollar and the sixty dollar is there's a bunch of differences but one of them is like you can get access to the n64 emulator if you do the sixty dollar online so the twenty dollar a year online and i think you get the uh mario kart dlc courses if you buy the uh sixty dollars version yes you do the functionality is good and now there's compelling reasons to subscribe to nintendo which is a pretty big unlock in their business and if you had told me in 2016 before they launched the switch that at some point i'd be paying an auto recurring subscription to nintendo for services i may or may not be using at any given time to play on a dedicated nintendo device at that point in history i would have told you you were completely insane the switch really is just an incredible comeback for nintendo and while the we was also an incredible comeback it was kind of one that they had clear line of sight into from their experience in the handheld business and they sort of knew of course creativity was involved in making it but if we can build this we're pretty sure they will come the switch i don't know if it was luck or genius or just what but this was the first time they were the true underdogs and they had all the deck stacked against them and they proved everybody wrong right and the big question is do they have to keep doing this and betting the farm on inventing a brand new form factor half the time they fail on or have they now discovered something that is a durable platform for the future that they can keep building on top of leverage the existing base i mean how frickin attractive is it now that they have a hundred and twenty three million people who have bought these things for developers developers finally want to be in business with nintendo again especially in these but the major parties too okay we're gonna have a very robust analysis discussion of this because nintendo is literally right at the crossroads again of what to do about the next generation the harvard business school should be like surrounding nintendo and doing a seance to like it's like the most incredible business strategy microcosm to learn how they're going to handle this unique position that they're in right now forget harvard business school this is why we're here acquired is on the scene all right so let's finish out the story and then we'll go to analysis so once they launch the switch it is an immediate hit nintendo plans an initial two million unit worldwide remember the vu was such a flop they only sold 13 million units in the whole lifetime so like two million units it sells out immediately they have to airship more units from their production lines to retailers across the world at a cost of 45 dollars per unit just to get more in the hands of demand out there which was a brilliant move that the old nintendo never would have done like it's worth eating that cost to serve demand and build out the install base what a difference yep although i wonder if they still have some of that in them i mean it's the sixth year of the switch and i was like backed up to like a month to get one online and i drove to a target and got the last one in person like i think there's still some games going on over there for limiting supply yeah now and they can probably use the excuse of oh chip shortage for like no chip shortage on the tegra from 2014 it's a huge success to your point about the mid-core market it launches with selda breath of the wild which originally was supposed to be a wu game it launches also on the wu it's forward and backward compatible to the switch and switch copies of breath of the wild sell at literally a one-to-one rate as the console itself for a hundred percent attachment this is never before happened in history of a non-bundled game you can't separate out breath of the wild from the switch's initial success in that first year or two it was a generational game that deserves its own episode on a different podcast and i'm sure has many out there and this is one where like when you talk to game industry insiders a hundred percent of people are like this game is just so beautifully designed the quote that i got from someone i was chatting with is when breath of the wild two comes out next month the whole industry will stop will not go to work and will just play tears of the kingdom similarly though to the switch i think there's some questions of like what could tears of the kingdom do to top breath of the wild but we'll see the switch sells over 15 million units in the first year so like more than the we you just in the first year goes on as you say to sell 123 million units so far it's still on the market we'll see i think it's unlikely it will pass the ds and the ps2 but it depends how long nintendo waits to launch the successor and what form the successor takes my money's on switch to in the next six months i think that is where the betting line is but we will discuss on the back of all this nintendo revenue just explodes from less than five billion at the end of the weu era immediately in the next year to 10 billion after the switch launches then 12 up to 16 billion during 2021 and the pandemic the stock goes up another 50 percent as switch sales now have started to slow that we're in the sixth year of the console life cycle the stock has fallen again a little bit but they're still doing five to six billion dollars in annual operating income it's still a 50 billion dollar market cap nintendo today is so far removed from nintendo of the weu era and then there's the ip we are literally recording this the day before the super mario brothers movie comes out which is supposed to actually be pretty good i suppose to be pretty good i want to go see it i mean they've got chris prat they've got huge stars this is a departure for nintendo now they did do a super mario full mu once nintendo yeah we won't talk about that one that was a disaster back in the day matthew ball points out that the 1993 i think that's when it was movie it was so bad that it set the whole industry back by a decade for licensing video game ip for movies i totally believe that because obviously as we see here now in the mid 2020s video game ip is fantastic for movies and tv shows but yeah it was because of that movie i think in large part the people shied away from it the first super nintendo world opened at universal studios japan in 2021 and the first american one opened at universal studios hollywood just a couple months ago by all accounts they're both pretty awesome two more are opening in 2025 in singapore and orlando pokemon go continues to crush it on the ip strategy you're talking about a lot of things right now that don't seem to make much money from nintendo i just want to point out it is getting their characters out there that's all well and good maybe they'll start making a bunch of money in the future but like so far non-material to the top line i think that's the point well all right let's transition to analysis and talk about this first yeah so what is the end game is the end game to get people to fall in love with the characters all over again on a continuous basis so that then they go buy more switch games and switch to stuff i think yes with the additional nuance that i'm no brand ip strategist here but i think the additional goal is generational management that frankly the pokemon company has done so well every year is a new cohort of children in the world who can and should be brought into the nintendo fold and pokemon has done this so well you and i played a growing up and kids today play a growing up equally if not more passionately and i think once you start moving into like across generations like that you really do need a broad multimedia ip strategy to make sure that you're engaging and bringing the new generations into the fold i think that's right the better comp is probably the nfl then disney originally i was like oh they're running the disney playbook but disney takes on all of the in-house work of operating their own theme parks and having all their own employees and needing to like have that core competency also disney has hundreds of stores nintendo has like two stores but they don't have like physical touch points with consumers as much as in part one we talked about world of nintendo in the stores to sell the games it's so different than the actual boots on the ground stuff that disney has that sort of makes up the disney flywheel and so you know in our old disney plus episode we talked about how a dollar on a disney movie in revenue equals two dollars in parks and merch the way that nintendo is sort of structured where they've decided they want to make great hardware to play games and they want to make games and they don't want to not do anything else because that's all not very nintendo that's a different strategy where all of this other stuff is brand building and it might make some money i mean nfl films was like break even so it's probably one click away from nfl films but it's certainly not the disney flywheel i think the nfl and nfl films is the exact analogy i think the mobile game's strategy within nintendo is don't lose money but extend the ip they're not trying to build it into a revenue driver in other words they're willing to give away margin dollars to not have to be in those businesses but accomplish the same touch points with customers yep okay so that's the ip let's talk about the big question what is switch to yes okay so here's an interesting way to tee it up let's work backwards from nintendo switch online so that launched in december 2018 so the switch didn't have it at first which i think is interesting it grew very quickly three months after launch it had eight million subscribers by january of 2020 it had 26 million september of 2021-32 today a reasonable estimate based on everything they've sort of disclosed is somewhere between 35 and 40 million subscribers there's about 100 million active switch players per month when you sort of think about the churn and people buying multiple devices and devices breaking and stuff like that so you have an attach rate of like 35 to 40 percent on a recurring revenue software business that's pretty good it's pretty good it's not something you would want to just throw away like intended with the NES install base and with the NES install base it was theoretical right it was like well these people who we have relationships with should stay our customers but our customers the hour is doing a lot of heavy lifting in that sentence because they were your customers when they bought a game last time you hope they will be your customers when they buy a game in the future flash forward to today with the nintendo switch online there are 40 million people who are your current customers who are paying you money their credit cards are automatically being charged every month yes and when you do some quick math there's two price points there's the $20 and the $50 assume the average revenue per customer's I don't know 30 bucks maybe 35 bucks depending on the mix between those two SKUs that's a billion dollar maybe a billion and a half dollar recurring revenue super high margin software business and that is before you even factor in the digital games it's probably a three billion dollar business when you think about the one off digital purchases people are making so there's like a company called nintendo that does all the stuff they used to do but also makes a billion dollars of recurring revenue and another two billion on top of that of super high margin software revenue this is so funny on acquired we always talk about how software is the best business model of all time and media is the second best business model of all time and video games are truly the best because they are software that is media and nintendo with help from setting a target figured that out before anybody with the NES and built this incredible juggernaut but then they like forgot it for a very long time everything you just described is not new innovative business models well sass is new right but microsoft figured this out 20 years ago and this was the whole point of the Xbox and why they were willing to lose five billion dollars up front on it because they knew that if they can get those Xbox live subscribers and now the game pass subscribers that's a really really really good business model and nintendo is only just figured it out so funny yeah so they basically make 10 billion dollars a year selling physical things on a non-recurring basis and they make three billion dollars a year selling digital things that have super high margin revenue and a billion of that is recurring so i think that's the framing that you sort of have to go into when you think about what their next move should be now they're nintendo so they're gonna do whatever their next move whatever they want it to be but if it's what should it be the answer is figure out how to launch a next generation piece of hardware that makes people upgrade very similar to the way that people do with their iPhones that has backward compatibility to every other thing that they've purchased in your ecosystem before so preserve you know make it so that you're growing your monthly active customer base if they're thinking like this we might see them do the thing that apple shifted to which is instead of reporting total devices sold reporting their monthly active participants in their ecosystem and make it so that the switch to has all these cool capabilities that make people want to upgrade but the same great games work everywhere this is the forward compatibility piece that exactly like a soft and Sony and apple to have figured out of like make sure the software for a certain period of time keeps working with the old switch consoles and they've already done this for a half generation like you have the switch light and when you're at my house and you're playing with the switch OLED that i went and bought couple months ago i could see a glimmer in your eye i could see you saying boy if they don't release a switch too soon i might be buying this OLED thing because boy is this nice if i didn't know that we were going to have this robust discussion about the switch to i would have already bought a switch OLED it's so funny because i went out and bought and i was like i can't believe i'm buying a thing that's a six-year-old piece of hardware like how is this thing not outdated and then as i started to do the research it seems like what happened was they were planning a switch pro that was going to release some time during covid but then when demand popped right around the time of animal crossing in 2020 hit and they sold a whole bunch of them they were supply constrained i think the plan for switch pro sort of went out the window and they were like let's just extend the life of the switch and some of the features they were planning for the pro like the OLED screen sort of went into this mini step of the switch OLED before they do the switch to which kind of presidges like i think it's unlikely nintendo will do this because they're nintendo but if you really want to take the logical conclusion of this business model to the extreme you turn the switch hardware line into the iphone hardware line totally where it's not switch one two three blah blah i mean i guess iphone is 13 14 15 but like you might upgrade every now and then and there's plus models and like incremental s models but you enter the ecosystem at whatever point feels right to you and you're part of the ecosystem yes and we shouldn't take credit for this this is the exact thesis popularized by crossroads capital who's a nintendo long and writes awesome letters that we'll link to on the sort of bull case for nintendo but if you are a buy on nintendo right now this is the sort of thing that you believe they should do and there's sort of this question of like okay but what will nintendo do what do the close insiders at nintendo who don't care about the stock price who don't really care about their revenue who don't really care i mean they care enough about shareholders i think they care about the spirit of nintendo as we just discussed for several hours make really fun games on hardware that pushes the envelope on what types of experiences are possible for people so i think if they get a be in their bonnet about a new hardware idea that they think is groundbreaking and will enable a whole bunch of new game experiences they're gonna do that and then they will figure out the business model implications later i think the thing that is a little scary and we'll see how much this is imprinted on nintendo the we you debacle and when smartphones came out really existentially challenged nintendo for the first time ever like they could afford to have that philosophy during the 90s and the 2000s when they had the handheld business to save them every time they could kind of do whatever the hell they wanted and it was fine there was no existential risk we've seen now even with all the incredible success from the switch and the five billion dollars of annual operating income that they're generating right now they're in a much more precarious position like if they don't get things right consumers will just leave and go back to mobile they can't do another we you now we're full on in bull and bear so let's just pull that forward and do it now this is one of matthew ball's point on the bear case which is everyone's all hot on the switch as the best-selling console nintendo's ever done blah blah blah but really it's not one console it's two because it cannibalized their other business line so you kind of have to look at not how's it doing against the we how's it doing against the we plus the ds or the nes plus the gameboy and that really kind of puts it in a different perspective we're like they have no backup plan they can't you know move forward in one while keeping the other one stable they now have one platform for better or for worse and they really can't screw it up which is a great thing as a consumer that's awesome it's just like please don't screw it up so here's all the other angles on the bear case nintendo missed mobile and they'll never have a business on mobile and all the future growth is in mobile gaming and they just are not there disagree i hate mobile gaming and i love my switch okay but let's talk about the business so nintendo is cute doing 13 billion of revenue a year five billion of operating income but let's look over at mobile let's see how apple and google are doing who by the way make no games just operate stores and sell devices they're getting away with murder on mobile games 61 percent of app store purchases are games turns out that the killer app is mobile games casual free-to-play mobile games turns out to be the killer app for the iphone 90 billion dollars in total revenue per year which means almost 30 billion dollars for apple and google that is nearly 3x nintendo's very impressive revenue from the switch this year that is the pot of gold in gaming yes totally true i think one of the things that this episode is really crystallized for me though is that it's kind of wrong to think about gaming as one market because it's not i think that's right especially as we're entering the sort of era of people hanging out in video games i mean the metaverse is here it's just in people spending time in a digital environment that isn't necessarily vr isn't necessarily immersive it's like you know hanging out on discord while you're playing games together whatever to the extent that video games are where you hang out with your friends that's like a super different use case than me playing mario kart to pass the time in my living room and also a super different use case than someone who wants to basically play a slot machine on their phone while they're on a flight these are all such different human experiences and like jobs to be done that it is totally crazy to call them all gaming and to your point i bet if you talk to an nintendo executive you know they look over at mobile and they're like okay sure apple is making 27 billion dollars a year apple and google on people playing what you're calling mobile games but if i look at that i think only two billion of those are games and the rest of that is something that's not games it's some kind of like statistical uh extraction of people's money through digital marketing yes and i think the reality is even more fine grained than that for example i love the new halo infinite it's had a lot of problems as a live service but it's finally getting ironed out and having spent a large portion of my teenage years on halo i just love playing it if you were an alien or let's say if you were a 60-year-old person observing me playing halo infinite versus observing somebody else playing fortnite on the surface it looks pretty similar you're in a live service environment with other people and you are shooting at them but the job to be done of those two experiences is completely different yeah and those are very different markets yeah you said live service which is another nintendo bear case nintendo is not a good live services company so even if you're writing off the whole mobile market fortnite on xbox and fortnite on playstation people play those games as forever games because they're live services you need to have fresh content introduced you need to be able to sort of have events the way you monetize those games is with this live orientation which nintendo has none of in their dna so that's sort of like a second market that is not particularly addressable to nintendo or at least they don't seem to want to address well i think they're building into it mario kart 8 deluxe has certainly become that especially with the new waves that they're building into which is their version of seasons like a mario kart 8 wave is the same as a league of legends season well it's the same concept whether nintendo is as good at seasons as riot is they're absolutely not but they are building towards it clearly as you sort of look around it i'm not sure it's a bear case but it is interesting to just note where everyone else has sort of ended up in this market where microsoft is trying to do the netflix of gaming they're really pushing into this predictable revenue subscription you pay us we give you all you can eat we don't even care if you play on xbox is we want this to be available anywhere and you should use our app that you pay a subscription for to play games on all devices that's a very different strategy than what sony has done at least for the last five years they might be changing right now but we're sort of in the middle of a potential pivot for them they're basically playing the same old console game and they're playing it with the highest monetizing audience of people who want to pay a whole bunch of money for a game and get the unbelievable graphics experience out of it and play it on that device it's interesting how all three of these companies nintendo sony and microsoft after competing for a while have now all chosen completely different lanes to occupy in terms of what they're marketing to consumers and what the business model around that is and i think the big question for nintendo is do they care about the strategic position and picking a lane and deciding to be microsofty in this way with the subscription or is it really just like do they pay attention to their shareholders i don't know it is a legitimate question i don't know but thank god that someone is a nintendo in the world and gets to innovate and drive things forward because everybody else is just kind of copying each other and figuring out is there a cash grab to be had or are we gonna miss out on something we need to hurry up and go chase it nintendo is really not doing that yeah i think that is what is clearly different about nintendo now than the past 20 years which is they're no longer stupid they may not be as commercial as shareholders would like them to be but they're no longer stupid and i think you probably got to have some faith that they're gonna figure it out on the other hand relative to a sony or a microsoft where you can be pretty sure that they're not gonna screw up the next generation there is still that wild card risk with nintendo totally which is the bear cases games are hit driven consoles are even more hit driven and they take six to eight years to recover from a mistake and now they have all their eggs in one basket just to close out the bear case even with the switches success revenue still hasn't matched the 2008 peak sure they're doing more with like this licensing movie theme parks other mobile apps but it's not clear how they will make a material amount of revenue from all of that relative to their core business we've talked a lot about the bear case the bull case i mean if they actually transition to this durable platform business they have a billion plus dollar subscription business on their hands they have a three billion dollar digital high margin direct-to-consumer business on their hands they also on top of all of this to your like video games the best business model of all time they also have durable IP perhaps the most valuable IP in all the video games on top of the subscription business creating the additional stickiness and as we get into the crossroads capital viewpoint here there's a valuation bull case because you have this company that if they're actually set up in this way and they do actually execute the platform playbook their price to sales is at a measly three and a half x where they're trading right now you compare that to apple that's half of apple if they're actually going to go execute apple strategy and they actually have the ability to have the margin structure and the growth rate and the durability that apple has with the iphone business with the app store on top of it you can make a case that you should value those companies the same based on their multiple of revenue but then let's get to profits their price to earning is only 13x for comparison frickin sony is at 16x apples at 28x disney's at 54x earnings so nintendo's got a three billion dollar digital business if you value that comparable to other sass businesses that's like a 21 billion dollar business you add in their cash so that gets you to 34 billion if you look at nintendo's actual market cap where they're trading today it's 47 billion so that means the difference between those two is 13 billion would you value their entire hardware business hardware switches and hardware cartridges games for the switch and all the future licensing revenue at just 13 billion dollars that's a frickin steel that's like the whole AWS narrative around you buy a AWS and you get the retail business for free if everything goes right and if you believe the whole platform thesis that's the like valuation bull case that crossroads is sort of astutely pointed out what's really interesting is that crossroads and others have been talking about this narrative for a long time at the same time it's funny a video games executive told me last week we've all thought nintendo was going to go on a business for the last 20 years right right right right i suspect there are a lot of people listening right now at the end of our two par call it 70-hour series on nintendo that have learned a lot and are surprised about a lot of things however i think people that actively follow the stock and either are long or short in it are not surprised this is not new information per se there's just so much uncertainty and i do think anywhere in a very fun period here because we will get to learn what their strategy is i think in the next six months around the next generation console yes and that will be amazing i guess though there is sort of a third option which you never know with nintendo which is that we don't and they just do nothing i don't think they will do this but they could right is there a really compelling reason right now to release another hardware generation is the switch under attack from any angle right why release another the switch oh that's a great device right it's awesome i was playing it at your house i'm tempted to buy one the only reason i'm not is because i think there might be a switch to coming soon and i'm actually not sure what the switch to would have maybe it would solve a developer problem where there's certain developers that are frustrated right now by the processor and there's a bunch of games that can't get created that consumers might want certainly that is a big thing the processor is woefully woefully underpowered at this point but processors are so good in particularly in the gaming world that cannot mobile processor from 2014 that invidia made run the latest games sure can will it run them with ray tracing no do most consumers care no that's a good question there's also some weird way left field thing that they could do is they could actually decide we want to be the next disney and they could do theme parks and house and movies and house and merch and house and design all the toys themselves and sell them in stores that they own which is what marvel did you know marvel initially didn't make their own movies and then they kind of stared stepped into it and then when they started their own studio that's when that really took off right the tea leaves are reading against it since they're constructing four whatever new theme parks in partnership with nbc universal so i imagine they've got a pretty long dated license on that to break ground yep yeah that's the bear in the bowl all right listeners now is a great time to talk about one of our favorite companies stat-sick yes there is a reason why the best product teams rely on stat-sick whether they are iterating on their core product features or shipping a power it experiences at scale yep in a crazy speed of today's a world shipping fast is just table stakes now it's basically trivial to build and deploy your app constantly the real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next this is where stat-sick comes in it brings experimentation feature flags and product analytics into one unified system so teams can ship safely test rigorously and directly link what they changed to how users actually behave so if you want to make learning your competitive advantage whether you're building new AI experiences or just evolving your existing core product go to stat-sick.com slash acquired to get started we're out of order here but i would like to do power and playbook if you're game for sure all right so what of the seven powers and for listeners who are new to acquired go listen to our previous episode with Hamilton to learn what power is do you think that nintendo has in the time period from 1992 today well let's start with what we talked about last episode and what we talked about with Hamilton and Chen Yi about this amazing magical alchemical blend of scale economies network economies and switching costs that the NES was in the 1990s i think they basically do not have that anymore that has disappeared in all the ups and downs over the last 20 30 years i think you could maybe argue that none of the console players have this anymore at least not in the same way that the NES did they do have these elements but so did their competitors so it's not differentiated anymore good point so i think that's actually no longer the case for nintendo i think they absolutely have a cornered resource in their ip for sure that's the strongest one now that may be the strongest one and potentially also process power there's nobody else that can make breath of the wild there are other studios that can make other amazing games but the core nintendo games serving that mid core audience nobody does it better and i don't think anybody can really compete with them i have a hard time with this i'm sure there's any developers okay fair enough too much nostalgia maybe i mean i haven't played breath of the wild yet i don't know what i'm waiting for but i don't know i'm not sure that they uniquely can create that type of game if you were to pluck out all the ip yeah that's fair you're right it's cornered resource it's the ip i do think there's a new one that they've introduced with nintendo switch online which is no pun intended switching costs i bought my games from nintendo like i don't own them it's a different version of switching costs totally and interestingly if i let my subscription lapse if i don't pick it up again for six months or like a six month grace period then i lose all my saved data so if i'm someone who got like super invested in all the progress i made in breath of the wild i have to keep paying nintendo assuming that i bought the game digitally instead of as a little as a cartridge yeah which is weird that they offer both by the way it's a very contrived it's very nintendo i think that is actually a console games industry problem as a whole not just nintendo xbox and sony have the same issue like you look at the ps5 and the xbox series x through one line you're like why the hell do you have cd slots on the other hand core gamers feel very strongly about this for the reason you said they really want to own their games and make sure that nobody can ever take them away from them and resale i can't ever sell i just paid nintendo 120 dollars for two games in the last week that's money i'm never getting back you know they still have like a weaker version of that scale economy network economy switching cost thing it's just not solely theirs like microsoft and xbox have their version of it too right if i'm any developer the 120 million switches is a very attractive group to distribute it to and so are the play stations and so are the xbox's i think the switch and nintendo is counter positioned against the smartphone gaming market right now in particular because of this quality concept i can be very sure that when i buy a game for my switch it's going to be quality right and apple to adopt that stance would have to forgo revenue so it is counter positioning all right playbook playbook there's a great line that chigeru mio has which is a delayed game is eventually good a bad game is bad forever so good i think about this all the time ever since i first read the quote when we were first starting researching three months ago it is something i think about a lot for acquired episodes it's like we loosely have a schedule you know we do six episodes every six months but you and i just keep cancelling stuff and we're like eh quality's low and i'm not sure it's the best way to run a business but it is the best way to create art yes which to our discussion about what is it that the people who work out in run nintendo think they're doing there yes it's somewhere in between right they really do value the art and i think that's pretty rare when you look around like activation ea the people making the big decisions do not care about the art they are running the spreadsheet businesses and nintendo is not but there's a bunch of stuff to read into in this quote which is great a delayed game is eventually good a bad game is forever also nestled in that quote is that nintendo doesn't improve upon their games after releasing them right that's so the opposite of epic games such a good point and even my favorite example halo infinite halo infinite was a bad game when it launched it still has a lot of room for improvement but it is so much better than when it launched fortnite didn't have battle royale when it launched right it's crazy so that's another interesting one mattie ball points out a third thing about this quote where he looks at the word is a delayed game is eventually good now we're into bel clinton territory define is and matthew's well a delayed game could be eventually good but i think there's this sort of artist polishing thing which is like if i just take enough time and i make it the way that i want it will eventually be good yes i think nintendo falls victim to this we haven't really talked about the games themselves side of nintendo because that's way beyond the scope of the quietness of podcast i think there's a big element of this though with nintendo like i think they think that every zalda game is like amazing and it's not yes yeah you can kind of feel that all right i'll jump in with a couple here one really popped up to me in this episode in part two is the jobs to be done framework and we talk about this sometimes on a choir not a lot certainly not as much as we talk about seven hours and other ideas but the handheld market in particular really highlights this for me and how everybody in the industry like basically ignored it forever and i don't know if nintendo thought about this consciously but the gameboy and the ds were hyper serving two jobs to be done one was games for kids and one was casual adult players and neither of those audiences were being served well at all by all the innovation and investment going into all the other gaming platforms and nintendo just got it right and so on the surface you look at like the gameboy and you're like what is this thing you know but then like it's actually serving these wildly diverse audiences in very good ways yeah that's such a good point two more that i want to talk about one i don't really know what to take away is for this on me but i've really stuck on this episode of like how stark the difference is for me on switch games versus smartphone games i know that smartphone games are a much bigger market and are likely to continue to be but the actual experience of playing them is so bad and many people argue with me on this that we're being reductionist on how bad mobile games are and we're not talking about any of the good ones totally and back to what i was just saying on the jobs to be done framework i think a lot of people that are playing those games that game is accomplishing a job to be done for them yep absolutely but what this really makes me think and makes me a little bit sad for is how badly apple failed the consumer in gaming on ios there is an alternative history where ios and ipados is a nintendo like gaming platform and like game design and the art of gaming is flourishing there and it would be so compelling as a consumer that like my phone that i have with me all the time also has these beautiful game experiences and that is just so not the case the ethos of what these devices were supposed to be and steve jobs as apple is very nintendo like and when you think about the app store an app store review and we don't need fart apps when you have an enormous pile of money on the scale it's pretty hard to let your values outweigh it and i think that happened to apple i think they all sort of looked at it and i'm not saying steve jobs would be any different it's probably one of the same thing happened and the whole thing was said in motion while he was there but i don't think anyone had any idea how much money well driven casino mechanic type games loot box games candy crush type games how much money those could make and if you sort of could go back a priori and say apple you can have a much more closed down app store that looks a lot more like nintendo switch online or you can have what it is today i think they wish maybe they wish they could have gone the nintendo route but being the most valuable company in the world and the most profitable company the world's ever seen is also pretty attractive i think they want to think that they would have gone the nintendo route but they for sure wouldn't them and it's funny i was just thinking as you say that on the one hand nobody could have predicted and nobody did predict how big the mobile gaming market would become but i'm thinking all the way back to bring it full circle to the origins of nintendo of course you could have it's called gambling it's human nature it's been there forever you know like the more things change the more they stay the same but it's not just gambling it's gambling combined with social status and sometimes it's not gambling you know sometimes literally dude what do you think casinos are that's true gambling combined with social status that's true it's just all digital now yep you can't tell a what is nintendo hundred and thirty five hundred and forty year old company story without it fundamentally boiling down to being like human nature is human nature and the nintendo story just illustrates so much for me that the seeds of success are sewn in a fall and the seeds of a fall are sewn in success the nintendo story with the ups and downs the falls came from their successes and the successes came from their falls right yeah their greatest strengths are their greatest weaknesses yes all right so my last one is kind of what would have happened otherwise and that question is how is this company not owned by disney you have to imagine bob iger was on a plane in japan at some point discussing this it's unimaginable that he wasn't they bought pixar they bought lucas film they bought marvel and in 2012 the year that lucas film was purchased nintendo was only worth 12 billion dollars oh man so assuming that that happened how did that meeting play out and i think nothing has ever come out about this but either disney would have had to decide we don't want to be that in the video games business i mean they bought playdom and they do have games i think they make billions of dollars from mobile games but maybe they decided that ip is not the type of ip that we were buying and we think that movie ip is more repurposable into our flywheel than games ip i don't think that's the case no because it would be perfect to be so perfect mario zelda the whole cast donkey kong is first class ip along with those three franchises they bought and the disney princess series totally i'm not the first person to say this but like i suspect this new mario movie is gonna do really well you know what's gonna just tell them freaking crush it absolutely when there is a zelda movie television series whatever people are going to go absolutely nuts we talked about it in part one but like more people like mario than like zelda but people who like zelda get freaking tattoos of like like they name their daughter zelda it's gonna be like lord of the ring style yeah so one thesis i have is that japan as a nation would never let nintendo be sold to a foreign buyer it's like the reverse of what almost happened with the mariners yeah i just have a hard time imagining the japanese government allowing a deal to go through and i have to imagine there's sort of some discussion with the state before you even try to propose it i mean it's a national treasure the olympics opened with nods to mario i think when camera what year it was but the japanese prime minister came out of a tube like one of the mario and exactly oh that's such a good point yeah there's no way that that conversation didn't happen right no way no way all right carvouts so i have two carvouts podcast and podcast related one is really really good vanity fair article with kara swisher that just came out friend of the show former acquired guest kara swisher pioneer of our industry and our category so good when we had her on the show way back when we told the story of the recode acquisition and she's had like six more chapters in her career since then which is just so i hope we have six more chapters in our career at that age yeah good for her you know she has two children that are about my daughter's age two amazing wow i could not imagine being 20 years older and parenting it's like i am now like her energy is just incredible while also doing all these things so that's carvout number one carvout number two is a long long long time coming but i have finally listeners will be like finally finally really gotten into our core history nice it's always been an inspiration for us in theory and i've never just actually spent the time to dive into it and dance so good like very easy oh gee everything we do is trying to be a shadow of him so so good if you haven't listened to it go check it out yep all i do is research for acquired so i'll come up with some other ones but the Tetris movie is great i think it's like totally worth your time it's a fun watch let's see i should come up with one oh i did just listen to a great podcast episode this week invest like the bass with patch goshan asi always a great show i mean truly like he's just one of the best interviewers alive and friend of the show we've done home with him and we need to do something again he interviewed darryl mori the gm of the philadelphia 76ers i think he's a gm right oh wow i'm not up on my mba yeah yeah so he left the rockets he was considering leaving basketball he thought he was out and he is now oh the president of basketball operations at the 76ers wow i am so behind on my mba drama so he took kinky's job wow it is a fantastic interview it is really fun it actually dovetails off this episode well they spend a lot of time on the topic what makes a good game and they're basically for all the video game nerds out there who love thinking about balance and things that are OP or overpowered or nerfing versus buffing and sort of trying to make a game the most competitive this episode spends a lot of time on that and obviously darryl has thought a lot about this problem and how do you continue to tweak the rules of sports to make it a the most competitive like the best true game and the purest sense of the word but also the most interesting to watch which in some situations you actually want to make it less skill driven you want to make it more about luck because you want the any given sunday effect and so there's a lot of very interesting uh points that he makes and as usual patrick just does a spectacular job with the interview so highly recommend it we'll link in the show notes i haven't listened to that one yet i need to go add it to my queue it's awesome related to that i'm cautiously interested skeptically interested to see how the pitch clock goes in baseball this season oh yeah well i'm literally going to the mayor's game tonight the former uh property of nintendo of america and uh i'll have to keep you posted it'll be fun yeah y'all to report back well with that you should join the slack it is a great way to discuss this episode share childhood stories of playing nintendo here from people who are involved in the industry who are always dropping great nuggets in after we record so awesome place for post-episode discussion that is acquired dot fm slash slack acq two is churning out bangers so go subscribe if you're not subscribed you should because the next one seriously with the ceo of retool was like one of my favorite conversations we've ever had on the show oh david is so great we've also got some really great acq two episodes coming up too so stay tuned there we're taking the deuce to the next level we are speaking of the next level david that is a fancy shirt that i see you wearing how can people get sweet merch like that in the acquired merch store acquired dot fm slash store all right listeners with that we'll see you next time we'll see you next time who got the truth is it you is it you is it you who got the truth now huh