Nintendo's Origins

Oh, have I ever done my Mario impression for you?

No, I would not expect you to have a Mario impression.

I don't know where this came from, maybe all the super smash I was playing in college on N64, but here goes.

That is amazing, no idea you had that in you. I'm very impressed, Oh.

See that I've been storing that up for this episode. Wow.

When Charles Martin moves on from this mortal coil, I think Nintendo knows who the replacement is gonna be.

I'm never gonna be able to look at you the same good. That was the goal, all right, let's do it, let's go.

You sit me down, say it straight, another story.

Welcome to season 12, episode 3 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. Video games are an absolutely enormous industry, with a market size of over a hundred billion dollars of consumer spend every year. That makes it bigger than Hollywood and the music industry combined.

I've been a gamer all my life, I love video game history. I was so looking forward to doing this episode and covering Nintendo. And I had no idea what an incredible story it is of how Nintendo single-handedly resuscitated this industry and achieved 95 global market share and dominated this multi-billion dollar industry. That was left for dead. That is the story we're gonna tell today, like, we're not gonna get to the switch, we're not gonna get to the Wii, we're barely even gonna get to the Super Nintendo.

Yes, on this episode, we'll be covering Nintendo's early years, or at least the first hundred years of the company, up until about 1990. And then I think we have a part two in the works, because the story of Nintendo after 1990 is like a completely different company and a completely different set of analyses. To do so, consider this a part one and truly a story all to its own. Well, listeners, we have a big announcement we are renaming the LP show.

Okay, listeners, now is a great time to thank one of our big partners here at Acquired Service Now.

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So there are quite a lot of books written about the history of Nintendo, some of which are very good, and we've read basically all of them. At this point in particular, I would highly recommend Game Over and.

Power up, yep, and I read Super Mario also great.

But the thing that we realized, and Ben and I were texting about this as we were doing the research. All these books either focus on the Nintendo Japan Story, or the Nintendo America Story, or the Video Games in America story, or the Video Games in Japan Story. And they keep them separate, and it's super weird to us. I think that kind of misses the point of the story here, which is that the rise of video games and the rise of Nintendo is this incredible, interwoven global tale. Nintendo of America wouldn't have happened without Nintendo of Japan, and Nintendo of Japan would not at all be what it is without Nintendo of America. So what we're gonna try to do here is unite these stories and tell them together as one canonical Nintendo story.

Atari, and certainly the father of the video games industry.

We had a chance to interview Nolan back in 2019 on the show. You can find that episode in our back catalog. He is such a character, you can't understand him without listening to him, and he is one of a kind. So Nolan grows up in Utah of all Places in the 1950s. And he's just from birth this incredible hustler and entrepreneur. And one of the jobs that he gets growing up is working at carnivals.

All of which have been protagonists of acquired episodes. I know, I know it, just incredible.

Silicon Valley DN.A. That comes out of that time and specifically focused on graphics and innovating there, which, of course, Nolan becomes part of this tradition. So while he's there, he programs on a Dec PDP one. This is one of the original old-school computers from the 50s and 60s. They MIT and several others had one of these devices, and folks at MIT had, in their spare time, created a game for it. The very first video game played on a programmable computer, which was called Space War. And it was a very, very early, rudimentary, you know, kind of like asteroids.

It's funny how many early video games were space games because of space war, they were inspired by and derivatives of space war.

And of course, what's like a really easy graphical game that you could put on a black screen, that you had green little lines that you can manipulate on? Well, space, there's a lot of black in space. Yep, so when Nolan sees this, he's like, Whoa, holy crap, you know? And nobody else who is playing space war in the entire world or using a PDP.

Totally, I mean that it just literally never pays back. When you're thinking about if it was nickels or quarters, but whatever you're putting in the arcade machines, it's just never gonna pencil.

So when Nolan graduates, he comes out to Proto Silicon Valley, and he gets a job as an engineer at one of the leading companies there. At the time, a company called Ampex, their main market was making tape recorders that were used for movies, television, music, recording industries. But all the time that no one's working there, he can't really get both his entrepreneurial and carnival master DNA and this idea out of his heads. Of like, if you could domesticate video games and bring them to the consumer market?

It's like exactly the way that we opened our Nvidia episode with. Maybe not yet, but I can see it in the next year. That'll get cheap enough to make this new business viable. Yep, so he.

Packs up and leaves. Ampex goes to start a company with fellow Ampex employee Ted Dabney, and their business plan is they're gonna do exactly this. They initially called the company Scissor G, but it turns out that name is already taken by a candle maker. And Mendocino, I think, Nola told us.

I was gonna say, the problem with that name is that it's terrible, not that someone else also decided it was a good name.

Thank God, it was terrible. So Nolan racks his brain that comes up with an alternative idea. He's become a big go player. And he takes the term Atari from the game of go, which Atari basically means check, or the equivalent of check and chess and go. They build a game called Computer Space that's based on space War.

It's escapism at its finest, and now we take it for granted that whenever you play a video game, you're entering some escapist fantasy. But that was a brand new, novel idea.

So they get this feedback, Nolan and Ted, and they think, all right, well, one. We need to make this technology simpler so that it's more affordable and cost-effective. So they hire one of the co-workers from Ampex, guy named Al Alcorn, who's an amazing engineer. One of the themes that's going to come up a bunch in this episode is the mythical 10x 100x engineer game designer, somebody who can do things that other people can't. And specifically, what was really valued in Silicon Valley and technology engineering at this time was the ability to design systems with the highest amount of functionality with the fewest number of chips. Because every chip that you put in there added a whole lot of cost to the bill of materials.

Yep, and not just on the raw costs, but on the assembly time. Soldering takes time, and at this point, there's a very little software involved in these games. You're mostly hard-coding the functionality onto the motherboard itself, depending on what chips you put in.

Yeah, to put a finer point on that, I don't think there's any software involved. Like, I think everything is hard-coded in these chips at this point in time.

Right, this is managing to create games using just electrical engineering, right?

And something I hadn't even thought about till now. All of the applications of Silicon to this point in time, they were mostly for military use cases, somewhat for industrial and commercial use cases. But the end products, like the physical devices that were being produced by all these companies, were not meant to be distributed in large numbers to consumers. If you're making systems for the government, you're not making a high number of machines, right?

We were in the like, hundreds, maybe low, thousands of devices. When you're considering military communications equipment, now, with arcades, you're into the thousands and potentially tens of thousands, which is a huge leap.

So all this kind of value engineering, you can see why it's super, super important. So huge win. They bring Al Alcorn over. He is the engineer that can make this happen and to get him started.

This just goes to show to a lot of the times. Before a category is created, you don't know how to describe the job to be done of the very first product in the category. And so you come up with some really esoteric name like that, and it's only when five other competitors come in after you does the category sort of get a name. Like video game consoles or home video games. And I think this came up way back when we interviewed Vlad from Webflow on one of the earliest acquired LP now ACQ 2 episodes. He brought up the fact that he's like, Oh, people started calling us no code, and he was like, we've been going for five years. We had no idea we were a no-code company. But now, apparently that's a thing. And that's exactly what happened with the Magnavox odyssey.

Yeah, it's even more extreme than that. Not only did they not know what to call it, they had no idea what this market was. They thought this thing was a gee whiz device that they could have their sales reps in their stores around the country demonstrate to consumers to help them sell TVs. That's all that they thought about. They didn't think that this would be a market or a product line in and of itself. But they had created this machine in partnership with guy named Ralph Baer, who really created it.

The Magnavox odyssey was invented to solve a problem that Magnavox had. And what they sort of failed to realize is that it had a tremendous job to be done for consumers. Where they sort of accidentally fell backwards into a gold mine, but did not feel around enough to sort of grab the gold, yes.

Nolan, though, when he sees a demonstration of this. Probably the most compelling game on the Odyssey was called table tennis. And it was like a very, very rudimentary approximation of either tennis or ping-pong. You know, table tennis that you could play with the odyssey on your computer. So he brings this back to Atari and to Al, and says, Make something like this as your test project here. Al, of course, does, does it brilliantly. And they start playing around with it at the office and they're like.

Dang, this thing's kind of fun. And wasn't it like a proof-of-concept game? It was basically a demo to show off the potential of what they could do as Atari. And they didn't realize. In creating Pong right there on the spot, they invented a mega hit as the proof of concept.

So famously, they take the first cabinet to Andy Capps Tavern in Sunnyvale, California, and they convinced the owner there to set up this pong machine as they start calling it at Andy Capps. And it just becomes like a quarter vacuum, like a magnet, literally all of the pieces of coin in customers pockets just gets sucked right into pong. It's incredibly compelling and the thing that makes it so accessible to just average people who are going to the bar is it's relatable.

When you say newly minted, you know it's funny. In today's terms, he'd be like an emerging manager. I think he had raised what five million dollar fund, and this is effectively like Sequoia Fund one.

Looking to make its first investment? yes, and Atari becomes Sequoia Capitals very first investment, and it goes even deeper than that. With the money, Nolan and the team at Atari start bringing on additional folks to build an engineer games that they can sell. You know, this pond thing worked out pretty well. They hire a young kid named Steve Jobs. Amazing to come in and design a one-player, a solo version of Pong that you can play, which ends up being called breakout.

Hidden Atari story is that freakin Steve Jobs was the designer and the creator with Steve Wozniak of Breakout.

So just like that, not one, not two, but three industries are born. You've got the home video game console business with Magnavox and the odyssey that Atari copied with Pong, you've got the arcade video game business that Atari is really entering. Here. It starts to take off faster than anything, and then you've got the personal home computer business that Steve and was start with Apple.

I don't think I realized how big the arcade market, God before there were even video game consoles in the home. I've done all this research and I did not realize how big the arcade market was.

Yeah, this industry not only was it, did it dwarf the home console industry that the Odyssey started, it dwarf the personal computer industry. This was the main application of Silicon for the 1970s, for consumer markets by the end of the 70s. The total video game arcade market is five billion dollars a year, which is already by then. You said in the intro, you know, today video games are bigger than movies and music.

It was already bigger than movies and music by the end of the 70s, huh? That's a narrative violation. I thought this notion of eclipsing Hollywood and music was a recent phenomena to show how much time people spend in games. But what you're pointing out is that it was a different form factor and it was a physical location at Arcades. But, like, that's basically always been true.

Well, it was this ultimate hack to get distribution of this new technology and business into the mass consumer market. People already went to bars and arcades, and this was a better product of what they already did.

So the industry just took off like wildfire. The fascinating thing about this pre home console era is that there's basically no intellectual property yet, because there's no stories yet. These video games are so basic with pong with breakout. It feels silly to compare it to Hollywood, because there's not real franchises and characters and stories, and anything you can repurpose.

Yeah, but again, it makes total sense. This came out of arcades carnivals. You don't need a story here. This is about competition in a public environment, right?

Moore's law keeps happening. We can now create what used to take a whole cabinet into a small box that you plug into your TV. That's purchasable by a consumer rather than costing tens or hundreds of thousands of dollars, it's finally happening.

Yep, so they start working on a programmable machine that can play versions of popular arcade hits at the time, and they codename it the VCS, the video computer system. Now, as they start working on this, he and the board of Atari realize this is gonna be a very different business, with different dynamics than the arcade business. And the first and most visceral thing they realize is this is very capital intensive. It takes a lot of firepower to bring a home console to market in the right way with arcade games. You make the game, you work with a distributor like Midway or Bali, or something like that.

And you make one of the machines and, like, a thousand people can play it. The way to address a thousand consumers is make a machine and let them flock to the bar to drop quarters in. Yeah, but in the consumer market.

Things are very different. You need to get machines into retail, and then you need to get retailers and marketers behind what you're doing and build demand amongst consumers. For people that, you know, have a reason to go to the store and buy.

Your thing and bring it home. And you need to build a hundred, a thousand times more machines to address that same set of consumers.

In their home, right? Toys R Us isn't gonna buy your product for their stores. If you only have ten of them, they're gonna buy your product if you have at least a million of them. Yep, so Silicon Valley has not evolved to the point yet. Where there are like big growth funds out there that could come in and give Atari a couple hundred million dollars to build up this inventory. So they decide the right thing to do is sell the company. They end up selling it to Warner Brothers in 1976 for 28 million dollars, and this becomes one of the greatest acquisitions of all time for a very brief period.

Yeah, that ubiquitous Atari 2600 system that everybody sort of has a fond memory for and recognizes pretty instantly. Basically, all the value of that accrued to Warner brothers, not the founders and investors in Atari, the independent company.

Yes, so they acquired the company in 1976 1977. They released the VCS, which gets renamed Just the 2600. It's a smash hit. It sells a million units in the first year, and then sales double every single year for the next three years. It's so huge that by 1980, just like three years after the 2600 launches. The Atari division of Warner Brothers does 415 million dollars in revenue, which is one-third of all of the revenue that Warner Brothers does.

That's insane. I had no idea it was that meaningful to Warner.

This is the thing that has just gotten lost to history is that the video game industry took off like almost nothing we've ever even seen to this day.

Right, I mean, we're building up to this impending crash here. But boy, those first five years were incredible.

Yeah, it is a total gold rush, so much so that Atari's not the only ones making money here. Lots of other toy companies, other media companies decide, hey, they want to get in on this home console video game business, too. So Mattel enters the market. A toy company called Coleco enters the market, which actually has its roots in the leather business, it's the Connecticut Leather Company.

Subcategory of toys in the sort of American consumer psyche, the way that people thought to spend on this is. Oh, my 8-18 year old son needs a toy and it's a big birthday or something, so I'm gonna get him a really nice toy. Which is gonna be one of these video game things.

Yep, and specifically, the magic to this and why these became so popular as toys. And what informs the whole business model for decades to come is the swappable game cartridges. So if you buy an Atari 2600, you're not just buying a toy for this year or this birthday or this holiday.

You're buying toys for the next several years to come. And this is like a full lean in on the Razor Blades Razors model. Where I'm pretty sure Warner's wasn't actually generating gross margin on the Atari 2600s they were selling, they would make all the money on the games, which has been true even in the modern gaming era. I mean, you look at the incredible amount of firepower in the PlayStations and Xboxes of the last 10 years. Those things sell for the very cheapest they possibly can in order to get an install base so that they can make money on the games. That's what was happening with Atari here, too.

Totally everybody's figuring this out all at once. So much so that a few engineers at Atari after the acquisition they start to realize this. And they think, man, all the money, all the profits are in the software here. What if we leave Atari and we set up a new company? That's just gonna make games? We're not gonna make hardware, we're gonna make games for the 2600.

They sell them on the market themselves because Atari didn't require you to do a deal with them.

Nobody was thinking about third-party developers yet these guys who left, they knew how to do it because they were Atari employees. So the company they start is a little company called Activision, which is now in the process of being acquired by Microsoft for just about 80 billion dollars. Just as a third-party publisher. So Atari ends up suing this new Activision. Like, Hey, you can't do this.

And by the way, the reason they name it Activision is, so it comes before Atari in the phone book. I'm pretty sure accolade. There were a handful of a publishers at the time that all had the same idea. Yeah, while they're fighting it out in court, which is just so funny.

Somebody must have taken a step back at some point and realize, Hey, wait a minute, what are we fighting about? There is so much money to be made here. What if we activision just pay you guys Atari like a royalty fee? For every cartridge that we sell, you get 10, 20, 30 percent away.

Oh, and we have to take no capital risk on you developing that game, we just make money only if it works. Got it, got it, Yes, please.

Yes, please, indeed, and obviously that works out very, very well for all involved.

For a time for Atari? Yes, for a time. So you've got this rush of competition coming in for the video game consoles.

Yes, and the problem was it worked too well. Got the parallels to, like, Web 3 and Crypto here just all over this episode. But there was so much money to be made, everybody rushed in with a game game. Quote-unquote here, like people were just shoveling any kind of software that they could. Both the first parties, like Atari, like Mattel, and third parties like Activision. They were just trying to get games into stores because people parents would buy them without knowing what they were. And like, it didn't matter if they were crap.

It was just a license to print money, and it wasn't just the games. Once people realized the power of this royalty model, they wanted to come out with systems too. And so you had 15 different companies rushed to market in the U.S. With consoles. And so suddenly these toy stores got flooded, both with games and consoles. And as you would imagine, there's intense concentration in the consoles that got selected.

Yep, the problem was it was so overcrowded and so overfunded, just like things in recent history here in 2023, that didn't happen. Nobody could figure out what was the crap, there was just too much out there, right?

The laws of economic physics were broken, and instead of free market dynamics playing out, there was just tons of incentive to just go make more stuff and get it out there.

Even if it may or may not work. Yep, so remember, I said. By 1980, the arcade video game business was a five billion dollar annual industry in the United States. By the end of 1982, just two years later, the home video game business is a 3.2 billion dollar industry.

Incredible and just to paint where we're going here. That 3.

Disappeared. To put that differently, a 97 drop in market size within two years. So everybody who came into this industry, the third-party independent software, game developers, the hardware guys, Atari, Warner brothers, Mattel, they just lose their shirts. Because, remember, this is still the 1980s. Software has real cogs to it. These are physical packaged goods, these are cartridges and systems with silicon and chips in them, and supply chains and labor.

Atari made so many of these ET games that they jointly developed with Universal. And, in fact, Steven Spielberg himself was involved in approving the concept of yes, let's turn ET into a game. The game was so poorly made, and the actual game mechanics were so not fun, much like basically every other game at the time. Because you're trying to figure out what console to make it for, you make it for, like five consoles. You're rushing to market with this and 16 other games at the same time. Eventually, the quality of every single thing that's hitting the market is so low. Because all the incentives were to just get crap out there, that consumers just stop buying, and so stores just stop buying upstream, specifically consoles.

Point is, it was brutal. Now, like you said, Ben, this was the way this industry went to market, was as part of the toy industry, so this is actually not anything new for the toy industry. Toys are so cyclical, they're fads. And so the mental model that everybody here in America has for what just happened is, oh, the home video game console was like the hula hoop.

And the generation changes, its fad based, and it's super seasonal. Basically, like Q3, Q4 matters, and you're not selling anything Q3, Q1. It's like just the rush up to Christmas, and so everyone's sort of viewing it as, Oh, 1982's Christmas toy was the video game console. And oh, yeah, it didn't really pan out. That people would want those in more future years, but I'm sure we'll find something else.

So here's this opportunity of a lifetime sitting right there, in plain sight, for anybody who has the foresight to actually realize this. Which is the video game industry, specifically, the home video game industry is not like toys. There actually was incredible product, market fit and demand for good games out there. There's a reason why kids wanted this stuff, and the business model of a home video game system is one of the best of all time. We talk on this show about how. The software business model is the best business model of all time, and the media business model is the second best business model of all time. Video games are software.

Especially once you flash way forward to games today, there's zero marginal cost to make another copy of the game, there's zero distribution cost. Because you just ship bits over the internet, and to your point on top, it's media that is software, it's also IP.

Enter Nintendo.

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Okay, David. As we get into the Nintendo story here, there is one thing I think that's important listeners to know before we flash back and tell Nintendo. From day one, which is, the U.S. video game market is decimated, but in Japan, for home game consoles that were just starting to really find their footing around 1983. They kind of resisted the urge to import all of these American consoles that were flying off shelves. And so in Japan, you had a completely different dynamic, which was there were only a few consoles, but they were selling quite well and they didn't have a ton of competition. So there actually was a moment in the Japanese market to look around and observe. When we make high quality games, people totally want to buy them and pay for them. And knowing that might give us an advantage in entering other markets, too.

Totally so nintendo we go back to.

But definitely plays on the fact that they're a gambling company. Well, that's what I was gonna say.

Specifically, the character ten at the time was a clear reference to the sort of mythical spirit. Tengu, which was a coded reference for gambling and casinos, which were very, very, very much still illegal at the time. Now, why did Fusajiro see the opportunity here? Playing cards and card games had originally entered Japan from the West in the 1500s, but then they'd been banned for hundreds of years. When Japan's rulers followed a strict isolationist policy and basically kicked all Western influence out of the country. I think I knew this, but I had forgotten till doing the research. You know how they did that, the rulers of Japan for this multiple hundred year period from the 1500s to the 1800s.

This goes on for hundreds of years. Wait, if you entered the country, it was just so illegal that they would kill you. Yes, oh my god, yeah, I.

Feel like I missed this part of world history, yeah, but human nature is human nature. And even despite this very strict effort to eliminate Western influence from Japanese society, the allure of playing games and gambling for money is too strong to resist. And so during that time, the playing card system developed a kind of substitute parallel track. In Japan, called instead of the Western deck, the Hanafuda cards, and instead of four suits, these cards had four seasons, and instead of 13 numbers and faces on the cards, they had 12 months of the year. But used for basically the same purpose, which is games of gambling. So by the late 1880s, after the Meiji restoration, the government had finally removed the official ban on playing cards.

Okay, so anybody who's operating an illegal casino, basically it's organized crime. It's the Yakuza in Japan, the Japanese mafia, whoa. I had heard whispers that there was some Yakuza involvement in Nintendo's history, but I didn't find anything about it. What do you got?

Well, so. The Yakuza operated gambling parlors and casinos all throughout the country, and they're just like at casinos in America. When they play games with cards, they use a fresh pack of cards for every game. Because you don't want to have cheating. This is an incredible business, what an incredible customer for Nintendo, these gaming parlors run by the Yakuza, who need thousands and thousands of packs of cards. Wow. Very, very successful business and a quite interesting distribution capability that Nintendo builds up over these 50 plus years. That they're just a playing cards company.

Wow, so on this show we talked a lot about value chain and where power accrues in a value chain, and how you get power as a company. It doesn't feel like you want your biggest customer to be the Yakuza, and it doesn't feel like you want them controlling your destiny.

Maybe maybe not. I mean, if you can navigate that successfully, you can really develop quite a lot of power within a market.

It's so interesting because in the U.S. the early arcade games industry was sort of the same way. It was also a mafia thing. We talked about this with Nolan, Yeah, and.

That is a hundred percent the roots of Nintendo, so Fusajiro Yamauchi runs this business for a number of decades quite successfully. He ends up having the same problem that his adopted father, the original cement entrepreneur, had before him, which is when it comes time for him to retire. He doesn't have a male heir, so he arranges for his daughter to marry a promising local young man named Sekiro Kaneda, and Sekiro also changes his name to Yamauchi.

Is completely incapacitated. This is Hiroshi's grandfather.

This is Hiroshi's grandfather and can no longer run the business. And so he summons Hiroshi back from Tokyo, from law school, to Kyoto, and commands him to take over the family business to become the next Yamauchi.

Running Nintendo Wow, and this is pretty young to take over the family business.

He's 21 years old because his father had walked out on him and the family. There was this missing generation here. And then his grandfather, who has this very complicated relationship with, has this sudden stroke. And all of a sudden.

Hiroshi has to come back and take over the business now. Listeners, the crazy thing is, you might be thinking, Wow, so this guy probably has no idea how to run this business. It's unlikely that it would be successful. Interestingly, he develops into a leader who has an unbelievable eye. This killer taste.

Oracle of fun, He comes back to Kyoto, he takes over the family business, he waits until Sekiro finally dies, which the writing was on the wall happens in 1949. As soon as that happens, he institutes a massive purge.

So there's basically, like, no more institutional memory of a leader other than him in the entire organization.

Yes, and there is no question who the new Yamauchi is going forward and who is in charge here. Wow.

Yeah, totally crazy. And so we're in what 1950 ish when he takes over.

1948 1949.

It's crazy that Disney comes into this story. Especially because there's so many parallels between Nintendo's identity as a business and the thing that makes them great. And Disney. It's crazy that what lands on his doorstep is Walt Disney calling, also given what Nintendo's business is.

We just spent 20 minutes describing Disney's like, Oh yeah, these are the guys we're gonna work with in Japan, right? Oh yeah.

We're a family-friendly brand that has to protect our brand safety above all else. How about these guys that do business with the mob?

But the reason they do it is the way that they want to enter. Japan is with playing cards, so Nintendo licenses, walt Disney characters and puts them on playing cards, and they sell playing cards to kids in Japan.

I gotta buy some of these, if these still exist somewhere on eBay, I gotta go find some.

Oh, I bet they do. Some of the documentaries I watched, there's, you know, photos and video footage of them, so you can probably find them somewhere. We got to put these in the acquired museum, wow.

Nintendo branded Japanese Disney cards.

So this is what Yamauchi, the I guess fourth at this point in time Hiroshi is looking for. This is the opportunity. Not only does this open up a new market and a new distribution channel, the kids market, the toys market, the legitimate retail. For Nintendo, there's just an incredible opportunity to draft off the Disney brand. So they start with playing cards, then they start licensing from Disney. Other kids toys to sell in Japan, and then they go to the retailers and they say, Hey, you like carrying these Disney toys?

It's this story that we tell over and over and over again on Acquired, where you acquire something, some asset, that then gives you a leg up in a different part of your business. And now it's a self-fulfilling prophecy, where that other part of your business is made better. And so by having a scarce commodity, Disney branded cards, they get power over the distributors, so now you actually have a reason to be in stores.

So during the 1960s, Nintendo transforms itself into a Japanese toy company. They are making things like the Ultra hand, which is like a extended grabber. I know you did some research on this, this is awesome.

So this guy, Gunpei Yokoi in 1970, comes up with an idea. And we're like, breezing through history here, but we kind of have to. It's a hundred years, so, you know, we went from 1949, with Hiroshi taking over to 1959, when the Disney comes in flash-forward down to 1970. Yokoi comes up with this telescoping fake hand basically as a gag, and Hiroshi Yamauchi looks at it and he goes. That looks like a winner. Because this guy, he's just so good at identifying things that consumers are gonna love. And so they mark it as the ultra hand. I mean, truly, he made it as like a gag.

Have this Disney sort of damocles that they can hang over retailers heads, they know they're gonna get the retailers to carry all this stuff. It's amazing. So you mentioned Gunpei Yokoi, he was a tech on the playing card assembly line, maintaining the machines within Nintendo.

What?

Bowling was this incredible fad that had taken Japan by hold in the late 60s. And so all these bowling alleys got built, but then society lost interest in them. And so there are all these empty bowling alleys. Yamauchi goes and buys up these bowling alleys. And he directs Gunpei to say, like, hey, come up with some gadgets that we can put in here and we can attract people to these bowling alleys. And they decide that they can use some of the technology that Gunpei is building for toys to make. Indoor shooting ranges light-gun shooting ranges like not laser tag, more like clay pigeons, but like simulating shooting ranges indoor.

That is the most circuitous path to fighting their way into American home video consoles.

But it makes sense, right? You cannot script this any better. Nintendo, who single-handedly in a minute comes in and dominates not just the American but the worldwide market for home video game consoles and builds this incredible juggernaut around the world. They were right there, part of the very first home video game console launched in America by Magnavox.

Wow, but in a way that sort of lets them observe this market without having to push their chips in on this market.

Well, let's take the story from there. So they build this relationship with Magnavox, they see that the odyssey, despite Magnavox, is having no idea how to market. This thing is succeeding despite itself. In America. They're like, Well, we're in the toy business in Japan.

Oh, I had no idea that before the NES, they had their own Japanese.

Distribution of a home video console. This all from these crazy light gun ranges. This is what gets Nintendo into the video game business. So they start selling the Odyssey in Japan, and then pretty quickly they actually just license a bunch of the tech from Magnavox and start making their own modified consoles. So in 1975 is when they licensed the Odyssey.

1976.

100 Nintendo is very early to the market, just in their own unique way, isolated to Japan, but they're learning everything along the way. The next year, they follow the Color TV Game 6 up with a new model the Color TV Game 15 plays 15 games instead of 6 games. I was like, why are they calling it the 6??

Pseudo importer reseller? Yep, it's crazy, by the way. Do you know how the light gun works and why that was such a leap forward? No, so, this was a very clever invention by Nintendo's engineers. You could imagine that the way a light gun, the most intuitive way for it to work, would be. Well, you take a regular gun that shoots bullets out of it, and instead you make it shoot some kind of laser out of it.

That's super cool.

There's like a one frame thing that happens, and I think that you can still see this in the early Duck Hunt games. But basically, the screen flashes one frame where only the target is lit up and the gun is the detector. And if in the guns site, it sees the set of pixels that are lit on the one frame. Then it knows it got a hit, and if it doesn't detect those pixels, then it's a miss.

No way. I always wondered how Duck Hunt worked. I had no idea. Yeah, pretty cool, that's amazing. So Nintendo, thanks to this relationship with Magnavox, is in this incredibly privileged position in this new industry.

Yeah, they gotta be very judicious here, it's a very attractive market to enter, but they have to figure out a way to differentiate. And not make all the same exact mistakes that everyone else is making. And rush in with crap products that eventually people are gonna stop buying. They have to figure out how to sell something interesting, durable and unique.

So Yamauchi makes an incredibly foresighted decision. Here, he says. We Nintendo need to build a programmable home video game console like the Atari 2600. But whereas Atari and all these other American companies, they're rushing their consoles to market, this is, if not shoddy hardware. Like the development cycles for these consoles are like maybe a year, a year and a half. We have the luxury here in Japan because there's not direct competition. Let's take our time and let's make something.

Really amazing, yep. Not to mention that by taking a long cycle development time, they actually get the benefit of Moore's law. They get to come out with something a few years later that is much, much better.

Exactly so. He starts a project in the late 70s within Nintendo to develop their first programmable ROM cartridge swappable software home video game console. But he's willing to take a very long view and he instructs the team. I want this device that we produce to be at least one year ahead of any competitors on the market anywhere in the world. And I want us to be able to sell this thing for the equivalent of $75. And on top of that.

Unit Economic positive on these machines. I want every game system that we sell to be profitable for us. And this is completely contrary to the rest of the industry. Who's like, Oh yeah, this is a razors and blades thing. We're happy to subsidize so that we can sell more games. He's like, we're gonna do it all on hard mode and we're just gonna take years to do it. Because this is 77 when he's saying this. The N.E.S. won't debut in the U.S. until 1985, and not in Japan until 1983.

So it kind of reminds me of the old saying you can have high quality, you can have cheap and good prices, and you can have something done quickly. But you can only choose two out of three, and so Yamauchi says the constraint, I'm gonna relax here is time, which is what nobody else in the video game market is doing so. It's 1977..

Well, R&D is super, you know, heads down and secretive on.

Building what becomes the Famicom and the NES. Yep, Yamauchi splits Nintendo's R&D teams from one singular team that's working on all of their video game business into multiple teams. And he takes the new team, the r&d to team, and he dedicates them to this home console project. And says, You have years, you don't have unlimited budget, you have a lot of constraints, but make this thing amazing. The original R&D team, the R&D one team.

They're basically saying, we want to learn what games are great, and once we have a stable of those great games, then we can unleash them on whatever our next generation console ends up being. But for now, we kind of need to, like, create a bunch of games in the arcades, in cabinets. So we can know what the hits are gonna be, and I will say, to know what the hits are gonna be. Basically, none of them were at first.

Fortunately, the console wasn't ready yet. There's one more piece of the puzzle, though, and that's that he needs to get a foothold in the American market. So that they can get distribution relationships there and actually be able to enter it, and, ideally, in his mind, to be their own distributor.

Nintendo is really obsessed, especially at this point in history, with not getting commoditized and not having to fork over. 50 to this middleman and then another 50 to that middleman. It's like, No, no, we need to get directly to customers, right?

They've been using trading companies to export the light gun tech and other things they want to set up their own distribution.

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All right, we're heading into the 80s, it's gonna be Nintendo's decade. Over there, they have a four-pronged strategy. Bring me to RadarScope David, I'm jonesing for it, and listeners, unless you're like Nintendo history buffs, you're like Radar Scope.

So Arakawa Yamauchi's chosen son-in-law, begrudgingly who he sends over to set up Nintendo of America, unlike other son-in-laws in the Nintendo family. History, has a bit of a different background, so he's also from a very prominent, high society, well-respected family in Kyoto. But he left Japan and went to America for his education. He went to MIT, where he was educated as an engineer, and he fell in love with.

America, and he may have fallen in love with. The distance from his father-in-law to a whole ocean in the way is pretty nice.

Well, this is before he met Yoko, his wife, Okay? When he comes back to Japan, he meets Yoko at a Christmas ball while Yoko's in college. And Yoko wants nothing to do, just like Hiroshi before her, wants nothing to do with Nintendo, nothing to do with her father, nothing to do with the family business. And she's kind of taken by Arakawa, in part because he loves America, he's so different. Like, there's no way that history is gonna repeat itself here, right?

If I don't want to be involved with Nintendo, then this guy's probably that ticket, he's my ticket.

So they get married and they move to Vancouver in Canada, where Arakawa becomes a very successful real estate developer. Yoko loves it. There, they come back home to Kyoto to visit family, and Yamauchi makes his pitch, so Arakawa's intrigued. But, you know, he's got a successful business of his own right, and he loves his wife. His marriage is very important to him and he knows that if he accepts here, he's gonna be in a real tough spot. But Yamauchi says, Hey, I'm not asking here, you kind of need to do this and there's a little negotiation.

I think they strike an economic deal that makes it very much worth Arakawa's time, and Arakawa's strong belief is. I have to be in America and do it my own way, rather than me sort of starting to take over the company in Japan. This is part of the deal that.

Convinces both Yoko and Minoru to do this, Yamauchi says I'll let you run things your way in America. Big concession, but I know you live in Vancouver. I want you to move to New York City because New York City is where the toy industry is headquartered in America. And you got to go build relationships there. So they have a mandate to set up Nintendo America in New York, which they do. And at first, you know, there's no console yet. They're not ready to enter the home video game market. But they've got these arcade machines, and so the way that they're gonna build up Nintendo of America is through the arcade business.

And I think they were importing, used Nintendo arcade games from Japan and like refurbishing them and then selling them into U.S. Bars and arcades. Like it was this very almost like gray market way to acquire.

Nintendo's cabinets that was run by two young guys at the time who were from Seattle University of Washington Alums Al Stone and Ron Judy. That becomes the initial Seattle link for Nintendo of America. So they hire Stone and Judy to sell Nintendo's arcade games that they're producing back in Japan. And, to no one's surprise, they don't sell very well. The games just weren't very good, yeah, and there was pretty robust competition.

We are your boots on the ground. We know this market, it has to work, yep.

I'm putting my reputation with you on the line. I know you don't know me that well as you know a business partner yet. But I really think this is gonna work, Yamauchi says. Okay, he directs the R&D3 team to come up with a space invaders knockoff, which they do they make radar scope.

Starts to die off. And this is pretty much the last time that Nintendo will pursue the strategy of Something is hot. Every single success that Nintendo has from here on out is from their own discovery of something fun, from being inventive and from taking risk. And that means it will come with failures, too. But from this point forward, they never try the fast follow clone copy thing again, totally.

So when the cabinets show up, Nintendo of America can't sell them, and they've got all this capital tied up in this inventory. They only managed to sell about 1,000 of the 3,000 cabinets.

So they got 2,000 radarscope cabinets sitting in a warehouse in New Jersey at the current headquarters of Nintendo of America, collecting dust. So Minoru now needs to call up Yamauchi again. It'd be like you were right.

Like, So about, you know, when I kind of put my neck on the line with these radarscope cabinets, I was wrong. You can only imagine how this conversation went. And he's like, we gotta do something like, we can't, you know?

So Radarscope is this game that has, I think, one joystick and maybe two buttons. And like, can somebody come up with a game that leverages that? And like most of the same chips that are on the motherboard and leverage basically the assets? We've got to create a new game out of this thing. Yep, and things are so bad.

Yoko, at this point, is so pissed, she takes the kids and basically moves back to Japan. She's like, I can't believe this has happened, like, we're out of here.

Because you basically are saying, hey, create a different shooting game, because when you only have the joystick and a couple buttons, basically, every game at the time is okay. Use that to sort of move the gun to where you're gonna shoot it and then press shoot, and then maybe you have a different button. And so you're giving a pretty prescriptive order, and you're giving a pretty narrow set of things you could turn this into.

Yep, and less so. Yamauchi is so pissed he can't take anybody off the console project. Those are his best engineers who could maybe pull some rabbit out of the hat. Here. He goes to Gunpei and he's like my dumbass son-in-law over in America, I.

Importantly, this isn't the B team, this is the unknown, right? This is literally like the janitor, right? And that guy's name.

Is Shigeru Miyamoto? And this is how he comes to make his first video game. Yes, and if you?

Don't know that name, which I suspect 90 of you don't. Oh, I suspect 90 of people do know that name.

That's the thing.

I'm really curious if people are like, this is Miyamoto, or if people are like, What the hell are you talking about? And I think, like, for those of you who know your Nintendo history, David just said, And this is how God is discovered, but for those of you who don't, this is how God is discovered.

Miyamoto Moses Well, the game that young Shigeru Miyamoto makes. To replace the radar scope software on these cabinets, it's called Donkey Kong, and Donkey Kong. Would itself go on turn hundreds of millions of dollars immediately in North America alone. It totally saves Nintendo of America.

David. The year that it was released in 1982, it made more money than any film release that year, except for ET. Even more importantly, though.

I'm so curious what percentage of our audience already knows this and what percentage doesn't. The playable character that the game Donkey Kong is actually named after the villain, the playable character in this game.

Is this very small, big-headed, wearing a hat, sort of innocent? Nameless carpenter? Yes, listeners, you might have thought that I was going for Italian plumber named Mario, but here we have Proto Mario, we have Jump man, jump man, the carpenter.

So what's going on here? Like I said, up into this point, everywhere in America, in Japan, the only people who made games were engineers, and Miyamoto has this incredible quote about this, he says. Until Donkey Kong, programmers and engineers were responsible for game design, these were the days when engineers were even drawing the pictures and composing the music themselves.

It's also a frickin miracle that they work at all. You think about the very early technology involved to, like, layer on more hard things on top of making this thing work. Like, make it, make people enter a flow state when they're playing it, and make it repeatable over and over again. And add story like, No. Arrange the chips in a way that it works and doesn't break quickly, right?

Miyamoto, on the other hand, he's not an engineer, he's a designer, and he thinks games can be an art form. So when Yamauchi gives him the chance to make a game, he's like, Finally, I can bring my genius to me.

He makes the first narrative driven video game now it's a super simple narrative and a very thin character. I mean, this notion of jump man running around at the bottom, trying to save this nameless princess from an ape that's throwing barrels, like, it's not a lot of story.

Well, so here's the story that Miyamoto comes up with for the video game. A regular every man jump man has a pet gorilla who he keeps in his house. He's not very nice to this pet gorilla, he doesn't treat him very well. So one day, the gorilla escapes and kidnaps our protagonist's girlfriend as revenge for not being treated.

The gorilla does not want to hurt the girl. Oh, that's right, her name is just like Lady, right?

Yeah, like, they don't even name her, she was Pauline in the American version. Okay, yeah. The gorilla this is important, does not want to hurt the girlfriend. He actually likes her quite a bit.

Today. But nothing like this had ever existed before. And so like, wonderfully innocent and kind of convoluted to, like everything about that. You're like, what that worked? That was the best story you could come up with. Yep, but.

Despite its kind of wackiness and simplicity, it's a classic three-act story. Totally. There's a beginning, dramatic tension is introduced, there's a middle and a struggle, and there's an end and a victory in a resolution.

Yep, it's also worth saying Miyamoto came up with all this within the constraints of what radar Scopes hardware was right. So he managed to figure out a way to retrofit this hardware to create a non-shooting game and come up with a completely new game mechanic of climbing these ladders and avoiding the barrels using the same controls originally intended for radar Scope.

So while Miyamoto, like you said, not even the B team or the C team, just the unknown team, is working on this game. Back in Japan. Wild card, Team, wild card. Arakawa is totally freaking out. Back in New York, his wife has gone back to Japan taking their kids. He's like, Alright, I don't know if this is gonna pan out here, but I know one thing if we're gonna save both the business for Nintendo in America and my marriage. We got to leave New York, we got to go to the west coast of America because the shipping times. That's what the fatal mistake that we made with Radar Scope is. We placed this huge order with a four-month lag time.

I assume they had to go through the Panama Canal.

I assume, so, right, you can't just put all this stuff on an airplane and send it there. So, he says, we got to leave New York for business reasons. We loved being in Vancouver, we don't like New York. We can't move to Vancouver because we got to be in the United States for what we're trying to do here.

But we can move to Seattle, yep, nice and close to Japan, easy shipping times, easy drive to Vancouver.

Yoko can hang out with all our old friends back there.

This will be great. And Microsoft was seven, eight years old at this point, and so, you know, they're starting to be some tech talent. There's the former Boeing engineers.

Absolutely, and it's even more perfect. Our distribution guys who we hired and brought in-house, they're from Seattle, it's perfect. We need to move there.

We're screwed, it's super different. They weren't really told what to expect. They basically get these conversion kits, you know, that show up via freight over the ocean it's got instructions of.

Yes, they were working on a Popeye license with King features. Yes, this wasn't gonna be like.

Jumpman and Lady and Donkey Kong is a nonsensical name for a gorilla, right? This was gonna be Popeye, and that was gonna be olive oil instead of Lady, and that was gonna be Brutus. The kidnapping character that would sell well to an American audience. And this thing arrives with these brand new characters that no one's ever heard of, and they're.

Crap, we are totally screwed. So Stone and Judy threatened to quit. They're like, Well, this is not gonna go anywhere, but they've got this kid.

This is a work of genius, and the game mechanics are a work of genius. Even though at first blush you're like, this is not the type of thing that is selling well, once you start playing it, you're like, Oh, everything about it is thoughtful. It doesn't get boring right away, the music is continuous and recognizable without getting repetitive.

Yep, and not only does it have that narrative and art, it's exactly what you're describing. This thing is really fun if you pick up and play it, you can intuit really quickly how it works, how to play it, and you can just start having.

Fun There's a maxim in the video game industry that a great game is easy to play but hard to master, and that is exactly.

What this is? Yep, so Philips is a warehouse. Is like, really pleasing. Guys like this is really good, and they're like, Okay, well, let's take it to a couple bars around Seattle and just set it up and see what happens. And just like Pong back at the day, this thing becomes a quarter magnet.

And by the way, I should say I was shocked that Donkey Kong predated Mario. His name is not on the cover art in the very first game he appears in, of course, he doesn't have a name, but yeah.

So the legend goes that as they're debating this, the landlord of their warehouse in Tequila either shows up or sends a letter.

It's unclear. Shows up because they were way behind on rent, because this freaking company didn't make any money, it demands the rent because they're late. And the way I know he shows up is because he starts jumping around and ranting and raving and waving his arms in the air. And he's like, super animated and they can see him there.

And he's got this big, bushy mustache, he's this Italian guy named Mario Sagale, and this is how Super Mario gets his name. Amazing, totally amazing. They named the girlfriend Pauline, I think was the either wife or girlfriend, or of one of the guys working at the company at Nintendo of America at the time.

Yes, so they never Pauline, because the warehouse manager. Who was taking a lot of the heat from Mario Sagale and directing it away from the Nintendo guys and sort of like, taking the hits for them. His wife was named Polly, so they named the character, Pauline after her, as a thank you to him. Nice.

Nintendo has a history of doing this with their characters. Well, one more thank you naming of a character is going to come up in just a second here. So the game sounds like wildfire. Like we said, all the two thousand, you know, former radarscope machines fly out of the warehouse.

They order more, like they end up selling thousands and thousands of this. It expands the tam of who plays video games, too. That's the other thing. It's like, it's not just for boys anymore, it's not just teenage boys anymore or people in bars.

Irony of ironies, Taito, the Japanese company that made space invaders, they call up Yamauchi. And they're like, Hey, we're like, the really good Japanese arcade game manufacturer. Now you've made this hit arcade game. Can we buy the rights to it from you to distribute it for Nintendo around the world? We'll pay you a ton of money for it.

He's like, way, way, way, way, way big gorilla thing all the way at the top of a building named Kong.

That sounds like King Kong, which I think I own the rights to. This is my circus and this is my monkey. I think we talked about this with Michael, this is where it comes out. In the court case, SID would refer to the legal arm of MCA Universal and their legal suit activities as a profit center for the company. God. He filed suit against Nintendo America for infringing on his King Kong trademark Nintendo, led by Seattle lawyer Howard Lincoln. Who would go on to succeed our cow as the president of Nintendo America?

And I think Howard Lincoln was the personal lawyer first of the two guys who ran the import distribution business.

That's right. So Lincoln sets Nintendo of America up with a great antitrust lawyer to fight off MCA, which is a crazy decision, like they should have just settled with MCA, right?

Tiny companies that are not doing well, getting sued by very dominant global entities like MCA, Universal, you roll over.

Yep, Lincoln sets up Nintendo with a great antitrust lawyer, John Kirby, and he and Lincoln together team up. And they fight off Sid Sheinberg and MCA Universal, and they end up winning in court the case. And it hinges on they discover that Universal doesn't actually have the trademark for King Kong.

Because it was public domain.

Exactly, and they knew it to Sheinberg knew it. Yeah, that's the thing. And the judge.

Slaps him across the face, he's like, You guys knew you were in the wrong here. You've been suing this company and all their partners just to try to be extractive, even though you know you don't have a case.

I can't believe you followed up with this. This is where the profit center language comes out. Yep.

They're wrong on a bunch of vectors, too. They're like, wait, wait, once a gorilla, ones an ape. And then the other argument that John Kirby finds what? Cuz John Kirby flies to Japan and starts interviewing a bunch of people at Nintendo to try and like, Mount? The argument of like it, they didn't know, of course.

Amazing, which is not normally. What happens when MCA Universal goes to court? No. And so, as a thank-you.

Nintendo goes to John Kirby a few years later and says, We've got this great game in development. And we're gonna name the protagonist after you, and that is how Kirby got his name. Great smash character. Yes, oh yeah, a lot of jumps, okay? So we're at this point in time where Donkey Kong sold like gangbusters.

They do so. Miyamoto makes a couple more games, he makes the sequel Donkey Kong Jr. that also does really well, he makes an actual Popeye game.

That's how they became plumbers. Side note When they came out with this game, the Mario Brothers people were like, Oh wait, the Mario brothers, so Mario is the last name. And Nintendo confirmed it. And so they're like, Wait, so that guy's name is Luigi Mario, and that guy's name is Mario Mario. Nintendo was like, correct. And I think they've maybe changed their stance on that over time, but amazing.

What a Nintendo of Japan thing to do.

Their manifesto really ends up becoming fun first, and that sounds obvious, but in a way, they're sort of zigging where everyone else is zagging. Where a lot of other game designers, at this point in history, are starting from a place of. We need to make a game that's in this category, or other people have made this game and it is successful, or games that are great. Today. Involve this set of things that everybody thinks you need for a game and what the team that Miyamoto is leading is saying. We are on a quest to be inspired and find fun. And then we will build exactly the right window dressing around that fun, that real kernel, that core mechanic that we love. And no more. We don't need to do any of the other stuff on top of that. If it's fun and if it continues to be fun and it's super replayable, then our mission is accomplished. And it is a very, very, very different approach to how other people were designing games.

Yes, exactly. Yamaguchi has this great quote about Miyamoto and the Nintendo philosophy of what makes for a great game designer. He says an ordinary man cannot develop good games. No matter how hard he tries. A handful of people in this world can develop games that everybody wants.

He's never played a game in his life and that is actually true. We haven't really harped on this yet. But like this guy led Nintendo through its heyday, invented the modern Nintendo, found the talent to design and market all these games and never played any of them.

Yes, but he totally intuitively grasped all these principles. That would just come to define not just the video game industry, but all technology industries. Yeah, amazing, and that's right.

That quote is less about fun and what defines fun and their philosophy of building, and more about, like. Most people don't have what it takes, and Miyamoto has what it takes, and we've got Miyamoto, so good luck.

Well, it's true. I mean, I think fun. And that brand of fun is the Miyamoto and Nintendo style of game design. There are other brands of game design. I mean, folks like over at Square and Enix. In Japan. With the Dragon Quest series and the Final Fantasy series, Hironobu Satoguchi, who was the father of the Final Fantasy series, would probably have a very different take on that. But he's equally a genius. Like, there are these few people who are just the very best in the world at what they do, and nobody else can match them.

Interesting, I wonder if that's right a programmable GPU.

So let's unpack this a little bit. The Atari 2600 had a CPU that did most of the work. And then it also did have another chip that interfaced with the television. And Atari called this the TIA, the Television Interface Adapter. But there was no memory on this TIA chip. It was literally just there to, like, draw the graphics that the CPU was outputting to put on the television screen. The PPU that Nintendo designs and develops is its own programmable chip that sits next to the CPU within the NES. And it has 8 bytes of memory, and it's dedicated to processing the graphics that get output on the television.

Which is farcical.

Of course, they didn't. But you know, it would be until that time when people would think about using this architecture in computers, in PCs, right? But in this subset of the computing market, it was Nintendo.

I think you're right. I mean, I can't think of a counterexample off the top of my head, or where a counterexample would even exist.

Right, that's what I thought about, too. I'm like, I can't think of anything else. And again, like, it is technically true that the Atari and other consoles had chips that handled the graphics output from the CPU. But they weren't programmable. They didn't have onboard memory, and they weren't doing any of the processing of the graphics.

Super clever, I mean, the famous thing that Nintendo also went on to do. And I'm very curious if you know. Sort of how this came to be is that their games are optimized for fun, not to show off the hardware, and so they're always able to do. What translates very poorly to the U.S. as lateral thinking of seasoned technology, that it's about inventiveness, I think the literal translation is withered technology, withered technology. You know, it's not about using the state-of-the-art chips, it's not about using the most expensive hardware.

Well, it actually was the game watch Gunpei Yokoi's work on the Game Watch, which he's the author of, this philosophy within Nintendo, and that's what led him to that. He's like, Oh, we'll take this calculator technology and apply it to games. And we can use this kind of lateral technology to make something fun while keeping the cost down. But it's the same thought here, I mean, the CPU that they end up using in the NES is a slightly customized, but basically off-the-shelf MOS technology. 6502, which, by this point in time, is like a very standard off-the-shelf CPU used in thousands of applications around the world. It's like how the switch processor is like a circa.

2014 Android phone chip. And a crappy one at that, huh? Okay? So they already were fully embracing the idea that we actually don't need the most expensive hardware to create the most fun experiences.

Yeah, and in this case, it was really interesting in that the NES had graphical capability literally years beyond any of its competitors. Hmm, but it did it with cheaper technology, hmm, and that was the amazing innovation, and that enabled a bunch of things. Most importantly, at the outset. For the Famicom and NES, it meant that this new console would be able to have totally 100 accurate ports of arcade games.

Right, so interesting. I mean, it makes a lot of sense with the way that cartridges work, too. Because, unlike CDs, where, you know, in the modern era, you're reading a game off of some media. Loading it into memory and then executing it on the hardware of the actual platform of the console. In the cartridge era, the circuitry was in the console, and so everything kind of like loads instantly, because you are literally playing the game on the hardware within the cartridge. And it's this perfect marriage of the circuitry in the cartridge and the circuitry in the console itself. That creates exactly enough resources to play that game, and nothing more. Yeah, the.

Wild innovation technology wise, that comes out of Nintendo in this time, it's just incredible. They do stuff like later in the Famicom and NES's lifecycle, I think with Super Mario 3, the NES is kind of like old in the tooth. The genesis is out at this point, and, like, the graphics aren't industry-leading like they used to be. They start putting computing chips on the cartridges to help the console, because it like, marries together in the same system when the cartridge is in the console.

Okay, so take us to 1983, take us to launching the Famicom in Japan.

So on July 15th, 1983, after years of work, Nintendo finally launches the Famicom, the family computer Famicom, for short in.

Japan because they had broader ambitions than gaming, right? They had zany stuff.

They thought, like, Oh, this is so powerful, what we can do with these two chips? We're gonna give it a keyboard, we're gonna like, be a Trojan horse into the home. Like all the stuff that Sony would do, sort of stupidly later, Nintendo originally wanted to do that.

They strip out the entire motherboard and replace every motherboard on every single unit to show people like, we're really serious about quality. Yep.

And so, starting from the summer of 1983 in Japan, right? As the video game industry is dying in America, this rocket ship of Nintendo and the Famicom just takes off in Japan. They sell over the next two years every single unit they can make. They had placed a three million unit order with Ricoh. The Japanese semiconductor manufacturer. Ricoh manufactured them. Oh, my god, and Nintendo became by far their biggest customer.

Huh, I used to have a Ricoh camera, that's right.

So they did a deal with Ricoh to manufacture the CPU and PPU tandem system together. And the only way they could get the price down far enough to hit the price point they wanted at retail was to place a three million unit order up front, which was like, crazy at the time, there's three million units over two years. They couldn't make them fast enough, they sold out the whole thing. It was incredible.

God, Nintendo got so lucky that the Japanese market wasn't saturated the same way that the U.S. market was. They launched into, like the very best conditions in Japan, they could of, frankly, not a lot of competitive consoles at that moment. Yep.

So over the next few years, the Famicom would go on to sell almost 20 million units in Japan. In Japan in the 80s, there were only 38 million households, so they get an almost 50 penetration into the Japanese market. Whoa, isn't that wild? Wow, that is crazy.

Wow, that's crazy.

So by 1983, like, everything's all set up, ready to go in America.

Yamauchi's like, All right, let's go. And like, you got to be wondering, like, should we pull the trigger? This is like a crazy moment to decide, like, yes, let's launch. Let's flash back two hours before the Nintendo story and remember the state that the United States was in. They just went from three point two billion dollars being the home gaming market size to 100 million dollars. And they're burying games in concrete, in landfills and smashing them up and throwing away consoles. And this is 1983, so it's the exact same moment in Japan. That somebody, I don't know exactly who and exactly what the story is. But somebody is deciding to pull the trigger and say, take the Famicom and make an American version of it.

So Arikawa is like, I hear you. I don't think this is the right time, so that's the crazy thing.

This is the thing that I think I couldn't tell. Between reading stories from the U.S. perspectives, stories from the Japanese perspective, do you have a sense of how that dynamic went?

I read so many versions of this, so a lot of this is my speculation. I can't a hundred percent say for sure that this is exactly what happened, but this is kind of how I imagine, based on everything I read, I think Yamauchi wanted to do it.

Atari's business, yeah, and Nintendo wouldn't have had the direct relationship with certainly not customers, but not even retailers retailers.

It wouldn't have built the brand. You know, all the IP we're gonna get into, all the amazing stuff.

That really Nintendo of America drive. Oh, it would have been an Atari branded Famicom. Yep.

Whoa, so they're all set to sign this at the June CES show in Chicago in 1983, so summer 1983. But by this point in time, the crash is already underway. And Atari and Warner's are keeping these negotiations going just to keep Nintendo tied up. But they know that they can't actually follow through and, like, deliver on this partnership. Because in the second quarter of 1983, Atari reports a two hundred and eighty three million dollar loss as part of foreigners earnings in the TQ 1983 in the third quarter.

Release what became the NES, the U.S. version, which is a little bit of modified from the the Japanese one for another two years.

In one very key way, it's modified, which we'll get into in a sec.

Two years later is a much better time to launch this system, much better, and.

In the intervening two years, all the revenue and profits that Nintendo of Japan Nintendo Co. Ltd, the parent company was making, allowed the whole company to be in a much better position. To whether the investment they were gonna have to make to re-educate the American market when they do launch, and just to put some numbers on that. For the first couple of years of the Famicom in Japan. Not only are they selling every piece of hardware that they can make, every console that they sell has a what comes to be known in the industry as an attach rate. The number of games that are sold with it going up to like 11 or 12 games per console, not per year, but for the life of the console. And I couldn't actually find what the retail price of Famicom cartridges were in Japan at that time. But let's assume they were comparable to the U.S. Which would be kind of seven to ten thousand yen. Kind of like half ish of the price of the console. If you're selling 12 games at half the price the console, you're making another 6x the console revenue at like 80 gross margins.

That's crazy, it's just a cash flow spigot. And that attach rate is high, even relative to, like the big consoles today, like, I think, yeah, PlayStation and Xbox. It's different with the subscription stuff today. But target like a 7 or 8 game attach rate, what did you say at 11 game attach rate?

11 to 12.

Absolute smash hit, side-scroller platformer. Yes, you know what it is.

The Legend of Zelda, which actually was the launch game for the Famicom disk system in Japan. Which is, we won't get into it here. But, uh, the Legend of Zelda was the best thing to come out of it. Let's put it that way. So Super Mario Brothers for a long time was the top selling video game in history. Over the lifetime of that title, it sold over 60 million copies, obviously, across multiple platforms, not just the Nes of just Super Mario Brothers one.

Well, there are some games that take four or five years, right?

Right? But even in just those two years, from 1983 to 1985, Duck Hunt Super Mario Brothers Legend of Zelda launched during those two years. Actually, Zelda might have been a little bit later. But like, that's billions and billions of dollars, like, incredible. So when they're finally ready to launch in the U.S. in 1985, they've got so much firepower to bring to bear here.

Yeah, so they do a few things differently. When they're developing the NES, they take away the word computer, which is sort of an important nod to. You know, we wanted this thing to do all sorts of stuff, to just have check stocks and weather, and I even think it did some of that in Japan. By this, they did have the ability to connect to your phone line in sort of like a pre-internet way and get some of these services. But they launched in the U.S. and they're, like this, an entertainment system. Congratulations, you've just bought the very best way in the world to play video games. And for the U.S. version, the NES also had removable controllers.

That brings up the next pillar of the unbelievable Nintendo business model that we need to talk about.

Third party licensing? And this is probably like a place to talk generally about the role of Nintendo of America versus the Japanese parent company. Because to this point, what we've basically talked about for Nintendo of America is. They were a distributor, they were a regulatory arm, they had to pay payroll and they had to do that in U.S. dollars for U.S. employees. And they set up the distribution network and had some opinions on a go-no-go decision of whether to launch in the U.S. But, like, they aren't doing a lot of product specific work.

Or business model? Or, yeah. Yamauchi definitely thought of Arakawa and Nintendo of America, despite him being his son-in-law for me, because he was his son-in-law. Just thought of them as like my American distribution network. Yes, but here's where things start to change. So Yamauchi did know and had learned from the Atari third party licensing business model. That we talked about with Activision and all that, that that was an incredible cashflow stream and point of power, you know?

This is how powerful what they built is, all right. So this is how consumers want to play video games. So if you make a video game, you should probably figure out a way to go to market on.

This is the power of a platform and a network effect in the video game console business. Yamauchi gets all this, the terms that he sets up for the initial licensees. In Japan, Keaches copies the Atari business model. They pay Nintendo a 20 royalty on their revenues from the games, and that's it. I mean, great cash flow stream for Nintendo.

It's not a technical limitation. Yes, exactly.

And there's also no legal structure that they've set up in Japan that prevents anyone else from sort of unofficially making and publishing games for Nintendo. And so a gray market emerges of developers who say we're gonna make Famicom games but not work with Nintendo and sell them ourselves. And famously, one specific company from Taiwan, called Hacker International, starts making both pornographic games and gambling games. Super ironic given.

Origins and Nintendo, meanwhile, has drifted like, very Disney, very Apple and their family friendliness. And so this is so like, antithetical.

Strict censorship, like all of this stuff that we think of Nintendo today, has, you know, they've been in the toy business for decades at this point.

By the way, this sounds hard to do like. You have to figure out how to manufacture the like, correct sized plastic and the correct motherboard with all the correct pin connectors. Like, if you don't have a factory set up to make Famicom cartridges, creating that sounds really hard.

But the economic incentive to do so is worth it. This market is so big, so companies like Hacker International are making tons of money, selling their own cartridges directly and not paying a dime to Nintendo. And meanwhile, they've got this brand problem that's emerged and all this stuff. And like, if they're not careful, even though the Famicom is so advanced and so superior, you're not gonna end up with. The same thing has happened in America in 1983 with a video game crash. But you're gonna have some of the same problems if you don't control the ecosystem of publishing around your platform. So Nintendo of America.

Nintendo signed cryptographic thing, so it's like, unless you actually go through Nintendo to make sure you get the specific chip with the specific cryptography and put it in the cartridge. It's not gonna run on them. Yep, totally, and.

Actually, later versions of the Famicom in Japan would also include a lockout chip on them, so they try and retroactively also bring this to the Japanese market. But Nintendo of America is like, obviously a lot of people in the ecosystem are gonna hate this. What if we market it, though?

Steals from this is the exact party line, this is the exact strategy. When they launched the App Store to this day, this is the exact reason that they have to justify it. Oh my gosh, for privacy, for security.

So, so, so good. And they don't. Nintendo America doesn't stop there. They're so audacious with what they do, but they could get away with it because nobody cared in America.

It was a dead industry and also they had a great device, like again, the iPhone. Parallel here. Steve Jobs always said This is five years ahead of the competition. I think that ended up being around it maybe a year or two. But like, basically right, the Famicom was five years ahead of the competition. And consoles, so they go, and they have the very best device on the market that everyone wants.

Oh my gosh, and they just make money six ways from Sunday on this. So it continues the legal innovations of Nintendo of America here. And really, I think Howard Lincoln is behind a lot of this. They say we're gonna go further. Any third party that makes games for the NES in America?

And Nintendo is gonna just like, if they feel like someone's game is crap, there's not gonna prove it.

Yep, no chips for you, exactly. And then the third thing that they build into the Nintendo of America licensing program. Your games that you publish on the NES have to be exclusive to the NES for at least two years. Which doesn't matter right now, because there's no viable competition, but will become. The SeGa would come out very important very soon.

What have, god knows? Did they put Mario on backpacks and t-shirts? Oh boy, did they ever.

So they managed to sell 50,000 units during the Christmas season in New York, which is not a Grand Slam success by any means. But like that, they even sold that much, that'd be about five million dollars in total sales again, like, not a lot. But given that the whole industry had shrunk to a hundred million dollars in sales, that they could sell five million in one metro market in one holiday to take 5 of the U.S.'s.

Market share just in that one holiday season, that one metro. Not bad, not bad. It's funny. When you said 50,000, I was like, So it flopped when it launched.

No, like, everybody was like, Look, do we wish we sold more? Sure, but like, this is actually a success, yeah. So throughout 1986, they start rolling out more metros throughout the U.S. They take a kind of rolling thunder approach, which we're gonna get to in a minute. Also becomes the next innovation from Nintendo of America.

Can you imagine this today if they rolled out the switch like city by city, right?