Nintendo: Infinite Games

If you’re looking for the piece “Revisiting The Generalist’s 2020 Predictions,” click here. I accidentally put the wrong link in the email 😬


WHO IS THIS FOR?

  • Founders. Under the leadership of Hiroshi Yamauchi, Nintendo scaled new heights, becoming a global force. Founders may find lessons in the irascible president's ambitions and willingness to experiment.

  • Investors. Up 30% year-over-year, Nintendo's stock has gone from strength-to-strength during the pandemic. But is the company well-positioned for life after lockdown?

  • Learners. Yakuza, love hotels, and instant rice. Nintendo's corporate history is surprisingly eclectic and intimate.

Share


Hiroshi stared at his grandfather. How small he looked in the bed — the stroke had laid him low.

What was said in the sullen hospital room, death already hanging over Sekiryo Kaneda, is not known. Perhaps it was a long conversation, or shorter than we might imagine.

We know that, at some point, the old man looked at his grandson and told him what he had to do.

"Hiroshi. There's no one else. It's time."

He was young, only 21 years old, still in university, but he was ready; he had to be. It was time to take over the family business.

It was not what Hiroshi wanted. To take on this much responsibility at his age? To win the respect of workers with decades more experience? If he was going to do it, he was going to do it his way.

"You should know what I'll do before you say that. You should know — I'll fire them all."

Press Start

Across a plaza in Turin, Friedrich Nietzsche watches a horse flogging, runs to the animal, wraps his arm around its neck, and falls to the pavement, and into madness.

So begins 1889, a year that saw three new states brought into the American union, the advent of a magical machine to wash dishes, Queen Victoria's "gifting" of Zambezia to businessman Cecil Rhodes, the opening of a terrible mess of iron devised by the visionless engineer, Gustave Eiffel.

And, in a downtrodden neighborhood of Kyoto, the founding of a new business.

Nintendo Karuta, the brainchild of Fusajiro Yamauchi, sold handcrafted hanafuda, a type of playing card made with mulberry bark. Nintendo's intricate designs proved popular, particularly with an unexpected customer set. The yakuza, Japan's version of the mafia, developed a predilection for the gambling games that could be played with hanafuda, running money-spinning casinos that used Nintendo's products. Yamauchi struggled to keep up with demand, especially since professional players demanded a new deck each game to avoid cheating.

He hired staff to help and revamped his manufacturing to increase output. He expanded too, to Osaka, which brought a wave of new customers. By 1907, Nintendo cards were available across the country — a partnership with Japan Tobacco granted Yamauchi national distribution.

That proved a significant year for personal reasons, as wel: Yamauchi's daughter married Sekiryo Kaneda. And since he had no male heirs, Yamauchi formally adopted Sekiryo in preparation for the day when he would bequeath the business to his son-in-law.

That moment arrived in 1929. Yamauchi promoted Sekiryo to the presidency of Japan's largest playing card company. Over the succeeding twenty years, he streamlined Nintendo's operations, introducing an assembling line to speed production. It represented a period of steady evolution, though perhaps Sekiryo would have made more significant strides in his later years. In 1948 he had a stroke; dead the next year.

It was time for Hiroshi to step in.

Hiroshi and Gunpei

Hiroshi made good on the promise he'd made to his grandfather. One of his first acts as president of Nintendo was firing every manager hired by Sekiryo, including members of his own family.

It turned out to be an accurate representation of the man — relentlessly business-focused, domineering, unafraid to make radical calls, a cunning strategist. In his spare time, Hiroshi enjoyed playing Go, reaching a seventh Dan's status, equivalent to a chess master. Later in his life, Tetris creator, Henk Rogers, would affectionately compare him to fictional mafia boss Don Corleone.

A new era began at Nintendo, one of rapid expansion and radical experiment. In 1959, Hiroshi signed a deal with Disney, giving the company the right to print the House of Mouse's characters on Nintendo's cards. The partnership led to the sale of 600K packs in a single year, a record-breaker for the business.

Four years later, Nintendo made its public market debut, listing on the Kyoto and Osaka stock exchanges. Though the company was financially healthy, Hiroshi had his eyes on the future. A visit to the United States Playing Card Company (USPCC) offices had left him dumbfounded. Though USPCC was a giant in his industry, they worked out of a meager location in Cincinnati. He realized that for all Nintendo's success, it was stuck in a small market.

The year Nintendo went public, Hiroshi set the company loose, beginning a string of initiatives to diversify revenue. Over the next five years, Nintendo launched a taxi company called Daiya, an instant rice product, and a chain of "love hotels," with rooms available to rent by the hour.

None stuck. Daiya proved profitable, but clashes with labor unions forced its closure. Despite Hiroshi's ironclad belief in the idea, instant rice proved a flop, burning cash. As for the love hotel — Hiroshi was believed to be one of its best customers. They closed, too.

These failures didn't cow Hiroshi. He continued to look for new ideas and business lines relentlessly. One afternoon, on the floor of the company's factory, he found it.

Gunpei Yokoi had only been hired by Nintendo the year before. A graduate of Doshisha University with a degree in electronics, the company hired Gunpei to help maintain its card-printing machines. Beyond just fixing the odd paper jam or misaligned gear, he had a knack for making things. He played with one of his inventions, a silly thing, the day Hiroshi arrived on the floor. A lattice of plastic, Gunpei's design operated as an extended hand, giving the user the ability to extend their reach by a couple of feet.

Even if no one else did, Hiroshi saw its promise. That Christmas, the "Ultra Hand" hit the shelves, selling 1.2 million units in Japan. Suddenly, Nintendo was in the toy business, and Gunpei was at its vanguard.

It was the start of a fruitful collaboration that would see Nintendo produce a string of playful, bewildering toys devised by Gunpei, including the "Love Tester," "Ten Billion Barrel" puzzle, and the "Ultra Machine," a ball dispenser. They established Nintendo as a true toymaker rather than a printer of playing cards, setting the company on an entirely new path.

The best was yet to come. Sitting on the Shinkansen in the 1970s, Gunpei noticed a bored businessman playing with his calculator pressing buttons. That moment of tedium served as the inspiration for Nintendo's first foray into electronics with Gunpei's invention, "Game & Watch," released in 1980. Simple though it was, it proved another breakout hit, selling 43.4 million units worldwide and establishing Nintendo as a leader in the budding video game space.

It also set the stage for much of what followed. Gunpei would play a leading role in producing Donkey Kong and Mario Bros. and the creation of the Game Boy.

The "God of Toys" also contributed a philosophy to Hiroshi's business, one he described as "lateral thinking with withered technology."

The Nintendo way of adapting technology is not to look for the state of the art but to utilize mature technology that can be mass-produced cheaply.

Gunpei's point was that ingenuity did not require novel technology but mental dexterity. On October 4, 1997, a truck rear-ended him. As Gunpei stepped out to survey the damage, a car swept along the freeway, knocked him down. He died at fifty-six.

By then, his employer had released the Nintendo 64, a console that would come to define the company to a generation of gamers. It proved the penultimate product put out under Hiroshi's watch, with the greying president overseeing the release of the GameCube. Still, there could be no doubt of the effect he'd had on the comparatively modest card company he'd helmed since dropping out of college.

Over more than fifty years of leadership, Hiroshi Yamauchi created a global behemoth synonymous with ingenuity, fun, and a willingness to think outside the box; to experiment. In Gunpei Yokoi, he identified a seminal creative talent and provided both the structure and latitude for him to take risks and fail.

This attitude, this posture of risk, is missing from today's rendition of the company.

The Dogma of Satoru

Hiroshi broke with tradition in choosing a successor from outside the Yamauchi family.

Satoru Iwata, a game developer by training, presided over a transitional period in Nintendo's history. He picked up the pieces after the underperformance of the Game Cube — which saw the company losing share to Playstation and the Xbox — and propelled the business toward a new golden age of hardware hits. Under his watch, Nintendo released a new handheld device, the DS, which sold 154 million units, and the Wii, which created a new paradigm for gameplay. Before his untimely death to cancer, Iwata laid the groundwork for pandemic-favorite, the Switch.

Iwata was respected both for his vision and commitment to expanding gaming's market size, but he hamstrung the company's adjustment to the mobile era. Though Iwata recognized Apple and the App Store as a significant threat, calling the company the "enemy of the future," he resisted shifting resources to address the opportunity. As crucial as his strategic rationale for eschewing mobile, noting in 2012 that he believed such a decision supported Nintendo's "mid and long term competitive strength," was the philosophical, quasi-moral framework he applied to the matter.

Asked about a move into mobile, Iwatu commented, "If we did this, Nintendo would cease to be Nintendo." Having spent much of his career crafting titles like Pokémon Gold, Iwatu took a purist's positioning, seeing mobile and the traditional "free-to-play" business model as cheapening the quality of games. A dogma was created: the best of Nintendo could only be experienced via the company's consoles. By extension, Iwatu implied a cautiousness concerning the company's IP. Mario and Zelda could not be debased by featuring in a gacha game.

This positioning was not always part of Nintendo's DNA. Iwatu's fiery predecessor once said:

[People] do not play with the game machine itself. They play with the software, and they are forced to purchase a game machine in order to use the software. Therefore the price of the machine should be as cheap as possible.

Hiroshi's vision was not about tethering software to hardware but about allowing as many people as possible to play.

Though Iwatu moderated his position over the years that followed, striking a partnership with mobile publisher DeNA, his suspicion and distaste for mobile lingered. Though Nintendo is now onto its second president post-Iwatu, little has changed.

With the Nintendo scaling heights not seen for over a decade, that focus on hardware seems justified. It may prove a mirage.

The Blindness of Prosperity

Even the most optimistic of Nintendo bulls couldn't have predicted so rosy a year. With the world in lockdown, Nintendo served as an unlikely savior. The soothing environs of Animal Crossing led to a breakout pandemic hit, with the company selling over 26 million copies. Over 68 million Switch units had been sold as of November of this year, making it the second best-selling console of all-time, only trailing the Wii. Revenue and operating profits were up 73% and 209% YoY, while the stock is currently trading 30% above where it was a year ago.

That performance has given plenty of reason for optimism. Purchasers of the Switch should continue to buy games for the next couple of years and may purchase additional hardware. Furthermore, Nintendo has some new projects in the works, including a theme park with Universal and a Super Mario movie slated for a 2022 release. That's resulted in a favorable view from analysts, with 20 out of the 26 tracked by Bloomberg rating Nintendo a "buy," and a further five marking it a hold.

But prosperity, success, can produce a kind of blindness. There are signs that Nintendo remains in the thralls of Iwatu's doctrine, diligently avoiding the obvious opportunity in mobile gaming, stumbling into streaming, and extending IP gingerly.

Mobile is Nintendo's most conspicuous weakness. Despite making up roughly 50% of the $159 billion gaming space, just 4% of revenue came from mobile, as of March 2020. Fire Emblem Heroes, the closest Nintendo has to a mobile hit, grossed $154 million in 2019, while Super Mario Run pulled in a genuinely pathetic $7.5 million. Compare this to Tencent's Honor of Kings, which brought in $1.7 billion over the same period, while Fornite grossed 407.1 million on its app alone. Given Nintendo's demonstrable excellence in creating games for the Switch cannot be read as incompetence, but disinterest.

Streaming represents another area of weak activity. While Google and Amazon have moved aggressively into gaming with cloud-based offerings, Nintendo only began dabbling with the format in 2018. It has remained undefined and small since then, with the service only opening up in the US this October. The company had yet to enunciate its ambitions with the technology.

Finally, though recent moves are encouraging, Nintendo's reluctance to leverage its formidable IP base has left it playing a game of catch up. That the company has not attempted another Mario Bros. film since the live-action debacle of 1993 reads less like judiciousness than fear.

Consider that the rights to Spiderman alone were mooted to be worth $10 billion to Sony, or that the Marvel Cinematic Universe has printed over $22 billion to date, with a full slate lined up for the next few years. Harry Potter, a much more recent phenomenon than Super Mario, has brought in almost $10 billion from films alone. It is also single-handedly rejuvenating Universal's theme parks business, doubling visitors and revenue within the first few years of opening.

Blinded by its console business's successes, Nintendo squandered the chance to dominate mobile, lead in streaming, and turn its cast of lovable characters into multi-media stars. If the company is to make the most of its many gifts, it must open up games across platforms, take theme parks seriously, and aggressively extend its IP.

It's time for Mario to level up.

Infinite Games

In April of this year, Nintendo welcomed a new investor to the fold. ValueAct, an activist fund with experience operating in Japan and with media conglomerates like 21st Century Fox, acquired a 2% position during the pandemic.

It may represent the catalyst needed for Nintendo to usher in a new era of perennial play, infinite games. The first place to begin is with mobile.

Despite themselves, Nintendo may be perfectly positioned. As a co-owner of the Pokemon Company — it owns about a third — Nintendo has had a first-row seat for the success of Pokémon GO. The game brought in $1 billion over the first 11 months of 2020, an 11% increase overall of 2019. That's particularly remarkable given GO was presumed to be a game that had to be played outdoors, in some degree of contact with others. An overlooked pandemic pivot has been the adaptation that makes GO compelling, even indoors.

GO is the product of a partnership between Pokemon and Niantic, an AR gaming business spun-out of Google. Alongside its exposure through The Pokemon Company, Nintendo is a direct investor in Niantic. In addition to Pokémon GO, Niantic has released an AR game based on Harry Potter IP. Yet, there are no suggestions Mario & Co. are next.

As part of a genuine commitment to mobile, Nintendo should begin forging a closer relationship with Niantic. Not only is Pokémon GO an illustration of the money that can be made through a hit AR game, but the creativity enabled by Niantic's platform and how it has brought first-time gamers into the fold is perfectly aligned with Nintendo's core ethos. Imagine, for example, a Super Smash Bros. game that leveraged real-world monuments as part of its battleground, or a worldwide version of Kirby’s Adventure.

If at all possible, Nintendo should fortify this relationship with a mind towards acquiring Niantic. The company was valued at $4 billion in 2019 and may soon be out of reach. Not only would a Niantic purchase put Nintendo on the mobile game map, it would ready the business for the next platform shift: AR glasses. Playing Pokémon GO through the letterbox of one's phone screen is fun; smart glasses will open up a new universe.

This should not be viewed as a cure-all. Nintendo also needs to invest in non-AR mobile. In this respect, the company can take a page out of a rival's book. Square Enix Holdings, the owner of properties like Final Fantasy and Dragon Quest, has operated a cross-platform strategy, releasing glossy console games that drive users to play (and spend) on mobile. Not only does this deepen the customer relationship, but it serves to turn one-time revenue into a steady stream. For those that don't own a console, these games serve as a lower-commitment method to engage with Square Enix's properties, which may, in turn, prompt a console and game purchase down the line.

On a recent shareholder call, current president Shuntaro Furukawa stated, "we have no plans for cross-platform play for Nintendo titles." This may come to look as foolish as Iwatu's initial reticence.

Theme parks represent another area of opportunity. As mentioned, Nintendo is already making moves in the space, with Super Nintendo World park opening in Osaka 2021, in conjunction with Universal Studios. The first thing to say is this: it looks incredible. Universal is salivating at the potential of the property, with outgoing NBCUniversal CEO stating:

Nintendo, based on our research, is one of the biggest potential drivers of attendance that you could have [of] any kind of IP. It's up there with Harry Potter...I think Nintendo is going to be potentially a big accelerator of growth in the theme park business.

It's promising that Nintendo is taking this step, but in the medium-to-long term, the company should consider doubling-down and building a new core competency. Nintendo's licensing agreement with Universal should give them a 9% cut of revenue. Given that Universal reported revenue from theme parks of $5.9 billion in 2019, across properties, a ~10% tithe on a single location is lucrative but unlikely to be a game-changer. Nintendo may be leaving money on the table.

Interestingly, ValueAct has experience in the theme park business, having held a 9.3% position in Merlin Entertainment, the operators of Legoland and Madame Tussaud's. In June 2019, Merlin was acquired for ~$6 billion by Kirki Invest, the family arm that controls The Lego Group. In doing so, Lego brought the theme park operator under their umbrella and may now realize the revenues from it.

A similar move could make sense for Nintendo. NBCUniversal is unlikely to relinquish its hold on Universal Studios Japan. It only completed the purchase in 2017 for a $7.4 billion valuation. Picking up another operator could make sense. With attendance decimated by the coronavirus, now may be a particularly opportune time.

The final move Nintendo must make could be its most significant. After purchasing its stake in the business, ValueAct disclosed its rationale for investing:

We believe Nintendo will be one of the largest digital media services in the world, in a category with the likes of Netflix, Disney+, Tencent Interactive Entertainment and Apple Music.

Both firm and company must ensure this prediction comes true. While the Super Mario movie is a good sign, and a live-action Legend of Zelda television show is reportedly in the mix, Nintendo shouldn't wait to expand its slate. Animal Crossing's popularity should be leveraged, perhaps via an animated release, while Fire Emblem could quickly become another live-action adventure franchise. A multi-decade-long plan is required, similar to that which propelled Marvel's IP to its current ubiquity. Like the Disney subsidiary, Nintendo has the opportunity to build a universe of characters, using the popularity of one to elevate the other.

Nintendo must embrace its destiny.

~

In his book, Game Over, author David Sheff recounts an interaction between Hiroshi Yamauchi and Gunpei Yokoi.

One day, Gunpei went to his boss and asked, "What should I make?"

Hiroshi's response was typically short: "Something great."

Over the years, few companies have thrilled as much as Nintendo, winning over children and adults with lovable characters, ingenious gameplay, and a unique sense of fun. But success has made the company precious, cautious, conservative in its maneuvers. Much of that is down to the misconception that hardware is fundamental to Nintendo's identity.

It doesn't need to be.

Look far enough back, and the same might have been said of playing cards, toys, perhaps even taxicabs and instant rice and love hotels. If there is a unifying philosophy extractable from Nintendo's story, it is this: the game should be infinite. Not only should it change as we change, moving from paper to pixels, but it should meet us where we are. Bored, on a train, pecking at a calculator, or bereft and alone in the middle of a pandemic.

It is this Nintendo should think about as it considers its next step. Where can it meet us? On our phones and computers, in movie theaters and theme parks, Nintendo can be there. If it takes that possibility seriously, there's a chance ValueAct's faith will bear fruit.

And so we return to the place the story started. As Nietzsche once said:

The snake which cannot cast its skin has to die. As well the minds which are prevented from changing their opinions; they cease to be mind.

Nintendo must think laterally and change its mind if it is not to wither along with the technology and beliefs it holds to be true.

Share