Nintendo's Origins
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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 math I was playing in college on.

哦， that is a big wow. I had no idea you had that in you. I'm very impressed.

See if it's storing that up for .

the episode w when charlie mart name moves on from this moral coil, I think the ten o knows who the replacement is gonna. Ah, that is so good, I never to look the same.

good. That was a goal. Alright.

let's do IT. Let's ago. Easy you, busy you wait you who got the easy you?

Easy you with you, sit me down. Stand welcome. Two season twelve.

episode three of acquired the podcast about great technology companies in the stories and playbooks behind them i'm been gilbert.

David, rose all.

and we are your hosts. Video games are an absolutely enormous industry with the market size of over a hundred billion dollars of consumer spend every year that makes a bigger than the hollywood and the music industry combined today in twenty twenty three.

And while we are all aware that games are a fixture of life today, from your kids playing minecraft on an xbox to you popping up and Candy crash on your phone for a flight, this phenomenon of humans spending all this time playing video games is actually pretty new. Once upon a time, video games were a tiny niche market aimed at just teenage boys as a subset of the toys category that had fitted and starts. IT was not all up into the right. And in the early one thousand nine hundred eighties, the video game industry in the u. Had some dire straits and nearly evaporated entirely until nintendo made a huge bet and change history forever.

Oh, mad. I ve been a gamer all my life. I love video game history. I was so looking forward to doing this episode in covering the intend endo, and I had no idea what an incredible story IT is of how intendo single handedly resulted this industry and achieve ninety five percent global market share and dominated this multi billion dollar industry that was left for the dead. That is the story we're going to tell today like we're not going to get to the switch. We're not going to get to we we're barely even to get to the superintendent.

Yes, on this episode will be covering intendo s early years or at least the first hundred years of the company until about ninety ninety. And then I think we have a part two in the works, because the story of nintendo after one thousand nine ninety is like a completely different company and a completely different set of analysis to do. So consider this apart one and truly a story all to its own.

Well, listeners, we have a big announcement. We are renna ing. The L, P, O, the lp show has been public for the last year and has effectively served as acquired E, S, P and two channel.

The duce, yes. So we're going to make an official. The L, P, show is now known as A C Q two.

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Just search A C Q two in an ipod cast player. And we have some banger episodes come up up in the next couple months on the calendar for our lp s just so you're not confuse, we will keep updating your old feed with all these new episodes just so you don't miss them. And speaking of the lp program, we are revamping IT.

IT is not going away. We want to basically shift away from IT being about these episodes and make IT more about bringing you closer into the acquired kitchen. So for our limited partners, we're bringing back private zoom calls that will email you about the next one soon, and we'll be adding a new feature you can help us pick future episodes.

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Yes, as you know, service now is the A I platform for business transformation, and they have some new news to share. Service now is introducing A I agents. So only the service now platform puts A I agent to work across every corner of .

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Yeah, so learn how you can put A I agents to work for your people by clicking the link in the show notes or going to service. Now 点 com slash A I dash agents after you finish this episode， come discuss IT what the other fourteen thousand smart, thoughtful, kind, curious members of the acquire community at acquire data FM, slash slack. And without further a due, David, take us in.

And listeners, this is not investment advice. David and I may have investments or make investments soon in the companies that we discuss. And the show is for informational and entertainment purposes only.

So there are quite a lot of books written about the history of nintendo o, some of which are very good. And we've 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 realize, I bet I were texting about this as we are doing the research, all these books either focus on the intendo japan's story or the intendo american story, or the video games in the american story, or the video games in to pan story, and they keep them separate.

And the super weird, does I think that china misses the point of the story here, which is that the rise of video games and the rise of intendo is this incredible, interwoven global tae intend of amErica wouldn't happen without intend of japan. And intend of japan would not at all be what IT is without nintendo america. So what we're going to try to do here is unite these stories and tell them together as one canonical nintendo story, I think maybe for the first time, and at least that we've found. So this would can be fun. So speaking of this, we start our story appropriately enough, not in japan in the late eighteen hundreds when nintendo is founded, but in california in the ninety seventies with friend of the show and one of, if not maybe, the original father of silicon valley, len bushnell of a tari, and certainly the father .

of the video games industry.

we have a chance to interview knowledge back in two and ninety on the share. You can find that episode dinner back catalogue. E, he is such a character, you can understand him without listening to him.

And he is one of a kind. So no one goes up in utah, of all places, in the thousand. Nine hundred and fifties.

And he's just from birth, this incredible hustler r and entrepreneur, one of the jobs that he gets grown up is working at carnivals. He's literally a carne y and he gives referring to themselves as a cardy in our interview with them, which is fun. Arcade games back then in the fifties and sixties were not what we think of arcade games today.

They were what's called electro mechanical games. So these are things like everything from you shoot the water gun to, like, make the balloons pop to little lights and stuff go in on, you swing the hammer to hit the bell. They were games, and they might have involved some circuitry, components, lights and sounds, but they were not video games and lots of bars, head games like this.

There were something to do at bars. In fact, one of the leading companies that made these electro mechanical games back in the day was the company called saga, which would come up later. Is there no in?

In addition to having this incredible entrepreneurial chicken background in our kids, he does something pretty unique. He goes to college at the universe, sy of utah and majors in electrical engineering. And this was a prety special place in department to be in at that time. Other folks who came out of the university of utah engineer school around the time, alan k. Jim klerk of silicon graphics and let's cape a cat mall of pr.

all of which have been protag ous of acquired episode.

I know, I know IT is incredible. Silicon valley DNA that comes out of that time, and specifically focused on graphics inviting there, which, of course, nowen becomes part of this tradition. So while he's there, he programs on a deck.

P, D, P, one. This is one of the regal old school computers. On fifties and sixties. They MIT and several others had one of these devices.

And folks and 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 for. And IT was a very, very early rudie enti I C. asteroid.

Do not know quite space. A it's funny how many early video games were space games because of space war? They were inspired by and derivative 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. So when no one sees this, he's like, oh, holly craft.

You know, nobody else who is playing space war in the entire world, or using A P D P one, has also worked at carnival arcades. And also, like, man, this would kill IT if I could bring you back to the arts. But of course, at the time, I think a deck P D P one cost over one hundred thousand dollars, which is over a million dollars today. So like the idea that you could domesticate this animal, not even bring into homes, but get the Price point down to a point where bars or ards or carvings ford these things like, no way.

totally. I mean, that IT just literally never pays back when you're thinking about and if IT was nichole or quarters, but whatever you're put in the arcade machines, it's just never get a pencil.

So when no in 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, the company called apex, their main market was making taper quarters that we're used for. Movie is television, music, recording industries. But all the time that no one is working there, he can't really, both his entrepreneurs and carnival master DNA and this idea out of his heads of, like, if you could domesticate video and bringing them to the consumer market, they would do really well. So finally, after a couple years, by one thousand nine hundred sixty nine, he thinks, you know, thanks to fair child and national semiconductor and now intel l at this point, silicon has gotten cheap enough that maybe you could do this and basically takes space war and build a machine cheap enough that you could sell IT into archives and currencies.

It's total more law story. Look exactly the way that we opened our invited episode with, maybe not yet, but I can see you in the next year that i'll get cheap enough to make this new business viable.

Yeah so he packs up and leaves ampex goes to start a company with fellow ampex employee ted d and their business plans, they gonna do exactly this. They initially call the company sizer gee, but IT turns out that name is already taken by a candle maker. And the O I think they told us I .

was going to say the problem with that name is that it's terrible. Not that someone else .

also decided IT was a good name. Thank god that was terrible. So dolen rax is for comes up with an alternative idea.

He's become a big goal player, and he takes the term a tari from the game of go with a tari basically means check with the equivalent of check and chess go. They build a game called computer space that's based on space war. This is the first commercialized, programmed video arcade game in history.

They put IT together. They contract with a arcade dirigo tion for him called nothing to distribute IT. And it's okay.

It's not really a profitable enterprise yet one because the amount of silicon required to run the game, remember this coming from cutting out scientific military ee's computers is still enough that IT costs too much to make these machines. It's not really economically viably yet. IT has another more important problem though, which is that consumers in amErica aren't really ready for space games. They haven't yet made the leap to. We're gonna live in fantasy worlds, and we could pretend were piloting a spaceship about in space and blasted enemies that doesn't compute yet with audiences, right?

It's escape ism at its fine est. 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. No one in ted and they think are, well, one, we need to make this technology simpler so that it's more affordable and cost effective. So they hire one of the coworkers from amp. Skin, al alcorn, who is an amazing engineer. One of the themes is going to come up, abandon this episode, dis, the mythical tex hundred x 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 ing at this time was the ability to design systems with the highest amount of functionality with the future number of chips because every chip that you put in there added a whole lot of cost to the bill materials.

yep. And not just on the raw cost, but on the assembly time. Saddening takes time. And at this point, there is a very little software involved in these games. You're mostly hard coating the functionality onto the motherboards itself depending on what chips you put in. Yeah to put a final put on that.

I don't think is any software in both like I think everything is hard coded in these chips at this point time.

right? This is managing to create games using just electrical engineering.

right? And something anyone 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 being produced by 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 our kids, 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 L, L.

Corn over. He is the engineer that can make this happen. And to get him started, no one decides that he's gna give because I never made game before. He's going to give him like a training project to gets started.

And he thinking about what sound like small toy game, could I give out? And IT just happens that knowing has recently been to a demonstration by the consumer electronics company, mag vax and magna CS, which at this point time they were one of the companies, is riding the wave of television across america. As we talked about IT in the nfl and plenty other episodes, they were looking for ways to market their television as superior to other manufacturer out there, like Garcia or what have you.

And they had come up with this little device that logged into their televisions called the odd sy. And they called this thing a closed circuit electronic playground. What IT actually was, was the very first home video getting council. They just didn't think about IT that way.

This just goes to show to a lot of the times before a category is created, you don't know how to describe the jo B2Be don e of the ver y fir st pro duct in the cat egory. And so you come up with some really esoteric name like that and IT only when five other competitors come in after you does the category sort of get a name like video game consoles or home o games.

And I think this came up way back when we interviewed vlad from web flow on one of the earliest acquired lp. Now A C, Q two. He brought up.

The fact is like, oh, people started calling us no code. And he was like, we've been going for five years. We had no idea we will write no code company. But now apparently that's a thing and that's exactly what happened with the making of oxo dacy.

Yeah, it's even more extremely 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 G with device that they could have their sales rep s in their stores around the country demonstrate to consumers to help them sell tvs.

That's all that they thought of that they didn't think that this would be a market or a product line in enough it's on. But they had created this machine in partnership with guy named rough bear, who really created that. They licensed IT from him, and he is known as the father of home video games.

So they had game cards that you would plug into the auto sy. And depending on which game cards you have plugged, you could play different games. We'll see as we go along here.

But I wouldn't be for several more years until that idea would come back and people would realize, oh, hey, there's actually value to selling not dedicated hardware into the home of, like, this console only plays this game, but you want interchangeable software here. So this osi, like we said, magna x has no idea what are doing with IT here. And you can plain that there's no roman for this. But in what should have been a sign to them, and certainly was a sign to no in, even though they were not marketing this as a standard device or anything like that, IT becomes a pretty big success anyway. Despite magnavox, they end up selling a couple hundred thousand units of this thing.

The magnetic x auto sy was invented to solve a problem that magnet axed. And what they sort of failed to realize is that I had a tremendous jo B2Be don e for con sumers whe re the y sor t of acc identally fel l bac kwards int o a g ol d min e, but did not feel around enough to sort of grab the gold.

Yes, no wonder when he sees a demonstration of this, probably the most compelling game on the otto sy was called table tennis. And I was like a very, very radiometer tary approximation of either tennis ping on into table tennis that you could play with the auto si on your computer. So he brings this back to atari, into, Allen says, make something like this as your test project here.

All, of course, does does IT brilliant leave. And they start playing around with that at the office. And dank.

these things kind of fun and was IT IT like a proof of concept game. IT was basically a demo to show off the potential of what they could do as a tari. And they didn't realize in creating pong right there on the spot, they invented a mega hit as the proof concept.

Yes, that was the thing. So famously, they take the first cabinet to andy caps taken in Sunny vae california. They convert the answer there to set up this pong machine as they start calling IT at the end caps.

And IT is becomes like a quarter vacuum, like a magnet. Literally, all of the pieces of coin in customers pockets just gets separated to pon. It's incredibly compelling.

And the thing that makes IT so accessible to just average people who are going to the bark is it's reliable. You don't have to make the leap that you're a pilot of a spaceship out in space. Everybody knows what table tennis is.

You know how to play this game, you know what you're doing and that gets you in to try IT. And once you start playing this thing and you getting growth in IT and pung at this point time is only two player. There is no A I here.

You have to play against somebody else. You get the competitive factor going, especially in a bar. And I like, oh, we got some good here yeah.

So they .

start producing these confident tes, selling them to bars and arcade on the country. It's going really well so well that a certain newly minted venture capitalist comes and seeks out known and atari, the legendary down valentine.

When you say newly minted, you not funny. In today's terms, he'd be like an emerging manager as the key that raised what five million dollars find. And this is effectively like zoia fund.

one looking to make its first investment, yes. And a tari becomes scope avital very first investment. And IT goes even deeply than that with the money. No, in in the team military start bringing on additional folks to build an engineer games that they can sell. You know, this one thing worked out pretty well. They hire a younkit named Steve jobs, amazing to come in and design a one player solo version of pung that you can play with, end up being called break out. He does with his buddy ve was iac.

This is like my IT hidden. A tory story is that frequent. Steve jobs was the designer and the creator with Steve ozie of break out.

So just like that, not one, not two, but three industries are born. You've got the home video game console business with magaw x on the autism that tari copied with pung. You've got the rk video game business that a tari is really entering here and starts to take off faster than anything.

And then you've got the personal home computer business that Stephen was start with. Apple and IT all comes out of this one moment, which is incredible. So unalike today, with games or any type software, there is no APP store out there.

Turns out that distribution is a critical element to building a technology company. So the arcade business with the target starts to really take off. Companies, both existing electoral mechanical games companies like saga and others get into the video game business.

Tarries out there, obviously, the leader by the mid delate seventies, the top arcade games out there. We're making billions of dollars in annual revenue, like space invader s, which was launched by the japanese company title in one nine hundred and seventy eight IT does two billion dollars in annual revenue in the U. S. alone. Wow.

what is? Is this? This is in nineteen eight.

I don't .

think I realized how the cade market, god, before there were even video and councils. I've done all this research, and I did not realize how big the arcade market was.

Yes, this industry, not only was I did a dorf, the home council industry that the odessa started IT during the personal computer industry, this was the main application of silicon for the one thousand nine hundred and seventies for consumer markets. By the end of the seventies, the total video game r kid 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 seventies.

huh? That sud narrative violation. I thought this notion of eclipsing hollywood and music was a recent phenomenon to show how much time people spending games. But what you're pointing out is that there was a different farm factor and IT was a physical location at our cades. But like that 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 buzzing our kids, and this was a Better product of what they already did. So the industry just took off like wide fire.

The fascinating thing about this free home console era is that there is basically no intellectual property yet because there's no stories yet. These video games are so basic with pong, with break out. IT feels silly to compare IT to hollywood because there's not real franchises and characters and stories and anything you can really purpose. You're not gonna figure out how to make pong into a movie or A T, V show. There's nothing there.

right? You, good. But I would probably be pretty ad.

right. It's a false comparison at this point in history.

You, but again, that makes total sense. This came out of our kids carnival. You don't need to stay here. This is about competition in a public environment, right? So as atti really starts to take off to the early and seventies, no one decides, hey, they should probably get into the home video game business too.

More is lock keeps happening. We can now create what used to take a whole cabinet into a small box that you plug into your T, V. That's purchase ble by a consumer rather than costing tens or hundreds of thousands of dollars. It's finally happening.

yeah. So they start working on a programmable machine that can play versions of popular arcade at at the time, and they codenamed at the V, C S, the video computer system. Now, as they start working on this, he, in the board of a tory, realize this is going to be a very different business with different dynamics than the archie business.

And the first, the most miserable thing, they realizes this is very capital intensive. IT takes a lot of firepower to bring a home console market in the right way with arcane games. You make the game, you work with the distributor like midway or bailer or something like that. You get IT into arcades and bars and the money comes like cash flow cycle is very quick.

And you make one of the machines and like a thousand people can play at the way to address a thousand consumers is make a machine and let them flock to the bar to drop course.

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 the mayan amongst consumers. For people, you know, have a to go to the store and buy your thing and bring at 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 are us isn't going to buy your product for their stores. If you only have ten of them, they're gona buy your product. If you have at least a million of them, 要 so sick。

Eli has not evolved to the point yet where they are like big growth funds out there that could come in and give A A, A couple hundred million dollars to build up the inventory. So they decide the right thing to do is sell the company. They they end up selling IT to Warner brothers in one thousand nine hundred and seventy six for twenty eight million dollars. And this becomes one of the greatest questions of all time for a very brief period. But during that brief period, the payback on one about twenty million million investment is pretty incredible.

Yeah, that ubiquity atari twenty six hundred system that everybody sort of has a fun memory for and recognizes prety instantly. Basically all the value of that accorded to Warner brothers, not the founders and investors in, are the independent company.

yes. So they quit the company in one thousand nine, seventy six, one thousand nine hundred and seventy seven. They release the V, C, S, which gets renewed just the twenty six hundred. 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 one thousand nine hundred eighty to like three years after the twenty six hundred launches, the atari division of wonder brothers does four hundred and fifteen million dollars in revenue, which is one third of all of the revenue with that Warner brothers does. Basically, Warner brothers, the publicly traded, you know, hollywood studio, becomes a video game company for .

a couple years. That's insane. I had no idea. IT. Was that meaningful? The corner.

This is the thing that just got to lost to history, is that the video game industry took off like almost, I think, 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 attar is 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.

Two, so mattel entered the market. A toy company called clio enters the market, which actually had its roots in the little business. It's the connective leather company. H, wow. yeah. So everybody's coming .

in the market here. And IT quickly became a sub category of toys in the sort of american consumers psych. The way that people thought to spend on this is, oh, my eighteen year old sun needs a toy and its a big birthday or something, someone to get a really nice toy, which is going to be one of these video game things.

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 cartouches. So if you buy in a twenty twenty six hundred, 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 leaning on the razor blades razors model where i'm pretty sure wanna wasn't actually generating gross margin on the atti twenty six hundred and they were selling they would make all the money on the games, which has been true even in the modern gaming era. I mean, look at the incredible amount of firepower in the playstation and x boxes of the last ten years. Those things cell for the very cheapest they possibly can in order to get an installed base so that they can make money on the games. That's what was happening with the tory here, too.

totally everybodys figuring this out all at once. Someone so that a few engineers add a tar 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 vati and we set up a new company that's just gonna games. We're going to make hardware. We're gna make games for the twenty six hundred.

So they believe they actually don't set up a deal with the target. These guys, they start publishing their own games. They make the cartridge, they sell them on the market themselves .

because a ti didn't require you to do a deal with them.

Nobody was thinking about their party developers that these guys who left they knew how to do IT because they were a taran employee. So the company they start is a little company called the activision, which is now in the process of being acquired by microsoft for a just about eighty billion dollars, just as a third party publishing. So atari ends up suing this new activation. Okay, you can do this. They are like fighting IT out in court.

And by the way, the reason they named an activision is so IT comes before a tory in the phone book. And pretty sure actually there were a handful of a publishers at the time that i'll have the same idea. But while they're .

fighting IT out in court, which is just so funny, somebody must have taken a step back at some point, realized, hey, wait minute. What are we fighting about? There is so much money that you made here.

What if we, activision, just pay you guys a tari like a royal t for every cards that we sell, you get ten, twenty, thirty percent matter. Are all making money. I like, oh yeah, you mean you make the games, you sell them and we just get money OK cool.

Oh, and we have to take no capital risk on you developing that game. We just make money only if IT works. Got I got a yes, please.

yes, please. indeed. And obviously that works out very, very well for all involved for a time.

for a tory, yes. For a time. So you've got this rush of competition coming in for the video game councils.

yes. And the problem is, IT worked too well, got the parallel like web three encrypt u here just all over this episode. But there was so much money to be made. Everybody rush in with a game, game quote and quote here, like people were just shoveling any kind of software that they could.

Both the first parties like atari, like motel, and third parties, like activision, they were just trying to get games in the stores because people parents would buy them without knowing what they were. And like, I didn't matter if they were crapped. There 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 fifteen different companies rush to market in the U.

S. With consoles. And so suddenly these toys ers got flooded both with games and councils. And as you would imagine, there's intense concentration in the consoles that got selected. There is a real ecosystem effect and network effects that need to be developed for these things to work. And so for a council to be successful, you need a bunch of people buying the console.

And once you have a reason for people to develop for your thing, then suddenly you actually get the good games and not all the shovel wear crap that hitting the shelves. And so you kind of needed the market to suss out, hey, can we console IT down to just a few game devices, a few councils, because otherwise nobody knows what to buy, nobody knows what to develop for. And it's just a big mess and the whole things did not be a failure as a category.

The problem was IT was so overcrowded and so overfunded, just like things in recent history here and only twenty three that didn't half and nobody could figure out over 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.

So remember I said, by one thousand eighty, the arcade video game business was a five billion dollar annual industry in the united states. By the end one thousand nine hundred eighty two, just two years later, the home video game business is a three point two billion dollar industry, almost as big. And combined, they've got a ten billion dollar industry that just sprang up overnight. incredible.

And just a paint where we're going here. That three point two billion dollar video game market at home video game council market in ninety, eighty two by one thousand and eighty five would be worth one hundred million dollars. A reduction of thirty two x in the market size because the entire category just went away, disappeared.

To put that differently, in ninety seven percent drop in market size within two years. So everybody who came into this industry, the third party independence software, game developers, the hardware guys, a tari Warner brothers motel, they just lose their shirts because, remember, this is still the one thousand nine hundred and eighty software has real cogs to IT. These are physical packaged goods. These are cartridge and systems with silicon and chips in them .

and supply chains and labor.

There's billions of dollars of inventory tied up in these companies in all these systems and games that all of a sun now is set on on shelves and can sell. So all these companies have huge to loss as Warner brothers publicly traded Warner brothers company like has to report massive losses, so much so that do a peace wall story. They have to break up battery and sell IT off.

They sell the console business and the gams business separately and college and retail completely. Except the video game business, the whole industry, the home video game industry, is just deseine IT gets dead. This is when the famous ET atari game, the cartage burial, happens in new mexico.

Atari made so many of these E T. Games that they jointly developed with universal. And in fact, Stephen spilman himself was involved in approving the concept of, yes, let's turn E.

T. 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 in sixteen other games at the same time.

Eventually, the quality of every single thing that hitting the market is so low because all the incentives were to just get crap out there, the consumer to stop buying and so stores just stop buying upstream, specifically councils. They can't stop buying games, but they really stop buying councils, except for the wander two or three that are leading councils. But even then, they're not placing big orders anymore.

And that sort of how you have this whole whip crack effect all the way back up stream to the game makers and the new found publishers, these third party developer, that the whole thing and collapses. The interesting thing with E T is, to your point, they didn't want people discovering the buried games and then reselling them for cheap and compounding the problem even worse. So they you like literally took recking balls, and they like smashing the cartridge and they bury them in atlanta. And they poor concrete on top. And people have gone in like excavated this and looked, and this is a real thing that they had to bury all this inventory.

Point is IT was brutal. Now, like he said in 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 class their fat.

And so the mental model that everybody here in amErica has for what just happened is, uh, the home video game console was like the hole hoop or specifically you are mention colleague, which entered the industry. When they get out of the video game industry, the next thing they do is cabage patch kids doll. This is just how the toy industry works. You move on to the next thing. You make as much money out of IT as you can before the fat, the kids move on and the generation changes.

It's fat based and its super seasonal, basically like q 3q four matters and you're not selling anything q 3q one it's like just the rush up to Christmas and so everyone's sort of viewing IT as oh thousand nine hundred and eighty two two Christmas toy was the video game council and no yeah didn't paying out that people would want those in more future years。 But i'm sure we will find something else.

So here's this opportunity of a lifetime sitting right there in plain site for anybody who has the force. I actually realized, ed, this, which is the video game industries, 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 the 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 that is media IT doesn't get any Better than that. You sell a console, whatever you lose money on the console, who cares? You sell games into homes across america, across the world and fifty box of pop that even with all the manufacturing costs still making eighty percent cross margin on this stuff, that's pretty incredible. And you can sell three, four, five, ten of them a year.

especially once you flash a way forward to games today. There is zero marginal cost to make another copy of the game. There is zero distribution cost because you just hit bit over the internet. And to your point on top, it's media, that is software. It's also I P.

We've out to tell the intendo story here as we transition in ntn do and how they really find story and characters induction that just had, you know non human character spaceships and sort of animal objects. You have a whole new level on top, which is the durability of I P franchises that is about to come into view for the first time. You're right. Unbelievable business model to produce these games. And if you can be sort of the platform maker and get all of the platform network effects that a crew when you are the game council, god, you put those two things together, that is a pretty great combo.

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Okay, David, as we get in to the attender story here, there is one thing I think that's important listeners to know before we flash back and tell nintendo o from day one, which is the U. S. Video game market is decimated.

But in japan, for home game councils that were just starting to really find their footing around nineteen eighty three, they kind of resisted the urge to import all of these american councils that were flying off shelves. And so in japan, you had a completely different dynamic, which was there were only a few councils, 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 and do we go back to eighteen eighty nine, one hundred years earlier in kyoto, japan, when one future zero, yao chi, who was the head of a cement company at the time in kyoto, ya u. He was actually not his original family name. He had become the head of the cement company because he had worked in IT.

And the person who ran and own the man company we do was really retirer. I I didn't have any male air to take over the company, which is how companies transition in japan. And so what you did in that case was you adopted a mail air to take over the company.

So fua zero was actually born for a zero bookie, but he took on the yo family name to inherit this cement company. Now similar to nolin many, many years later in america, freezer was looking around for interesting new technologies and how we might apply a to a market that he knew had universal appeal, which was playing games and specifically playing games for money. He saw that there was an opportunity to get out of the cement, the boring cement business, and enter the playing card business.

So he sets up a new company. He named in intent do. And the named in nando o is actually a multiple onto rea. So the county characters nan, ten and du can be interpreted as leave luck to heaven, which of course, references luck in playing cards, and also maybe the entrepreneur spirit of a new venture.

but definitely plays on the fact that they are gambling company.

Well, that's all the guys. They 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 us, which were very, very, very much still illegal at the time. Now, why did fuzzo see the opportunity here? Playing cards and car games had originally entered japan from the west in the fifty hundreds, but then they'd been banned for hundreds of years when japan's ruler followed a strict isolation 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 rules of japan for this multiple hundred year period, from the fifteen hundreds to the eight hundreds? No, they institute the death penalty for any foreigners who entered japan and any japanese who leave the country.

wow.

So leg, they met at all western influence out of japan. 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.

yep. But human nature is human nature. And even despite this very strict effort to eliminate western influence from japanese s society, the eller 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 into pan, called, instead of the western deck, the honor food, the cards, and instead of four suits, these cards had four seasons. And instead of thirty numbers and faces on the cards, they had twelve months of the year, but used for basically the same purpose, switch games of gaming. So by the later to eighties, after the major restoration, the government had finally removed the official ban on plane cards.

So hunt future cards existed for hundreds of years, but even they were like underground. Finally, now you could legally produce these things. And so that's why mg starts and ten.

So intendo becomes quite successful in this new industry. So successful, in fact, that that they become the largest playing card manufacturer in japan. They like cool, that's great, interesting business.

Playing cards, fun games. I can see maybe how that leads to a you know what intend o becomes if you think about IT a little more though, playing cards. Now we go in japan.

Gambling is not though. And what is the main use of playing cards? Well, it's gaming. Who are the primary customers for playing cards. It's not household.

okay. So anybody who's Operating an illegal casino.

basically it's organized crime. It's the accuser in japan, the japanese mother.

Wow, I had heard whispers that there was some accuser involvement in intendo s history, but I didn't find anything about IT what you got.

Well, so the actions are Operated. Gambling parallels and casinos all there out the country and there, just like a casino in america, when they play games with cards to use at fresh pack of cards for every game, because you will want to have cheating. This is an incredible business.

What an incredible customer for intendeth. These gaming parties run by the ecus a 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 fifty plus years that they are just a playing cards company.

wow. So on this show, we talk a lot about value chain and wear power crews in the value chain and how you get powers as a company. IT doesn't feel like you want your biggest customer to be the ukusa, 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 with in the market .

is so interesting because in the U. S, the early arcade games industry was sort of the same way.

was also a mafia thing. We talked about this with known, yeah. And that is one hundred percent of roots of intended. So who A G yo g runs this business for a number of decades, quite successfully.

He ends up having the same problem that his adopted father, the original cement, had before him, which is when IT comes time for him to retire. He doesn't have a mail air, so he arranges for his daughter to marry a promising local Young man named seco. Canadian and c also changes his name to, he becomes the, at this point, now third coming of the medical yama UI and the second president of actual nintendo itself.

Seo also doesn't have any mailers. So for the third time, the yma ut patriarch arranges to adopt an air to run the business in the future, and specifically secure oranges for his eldest daughter, kimi, to marry another promising Young local man. SHE can no joe in abba? He also adopts the m he name.

He starts being groom to take over the business. And then finally, in one thousand nine twenty seven, he inked me, have a sun, the first yo. I sun in three generations. And they named him hero shi uji. Unfortunately, here's where things start to go pretty terribly wrong for an intended.

oh what eoe in where in one thousand nine .

hundred and thirty two. So this is before the war, hershe is five years old. He can o jao walks out on the family and abandoned the business, the family son.

And if nobody knows exactly why, this is kind of lost history, but I got to imagine between all the pressure, the family, the business, the acoustic connections, there's a lot going on here. His mother, kimi, also kind of never recovers from this incident. SHE basically also leaves the family so heroic.

Yao I, the first actual yao j born in generations, is pretty orphant at this point. His grandparents secure and his wife adopt him, but they're not parenting him. Not to mention that what were two happens when he's an early teenager, the life that he grew up in his quite a, quite difficult.

Finally, when he's eighteen, the world is over. He makes me assume, must have maybe been like a deal with his family and his grandfather. He escapes kyoto and goes to tokyo to study law, we say the university. But in exchange for being able to do that, the family and his grandfather arranges a marriage for him as well to the daughter of a formerly higher ranking sammer I family. And then, pretty much right after this happens, a couple years later, in one thousand nine eight, securum suddenly has a massive stroke and is completely incapacitated.

This is her osha s grandfather.

This is hersh's grandfather. I can no longer on the business. And so he summed heroes back from tokyo, from last school to kyoto, and command 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.

His twenty one years old, because his father had walked out on him in the family, there was this missing generation here. And then his grandfather, who is this very complicated relationship with, has the sudden stroke and all of a sudden herodias to come back and take over the business.

Now, listeners, the crazy thing is, you might be thinking, well, so this guy probably has no idea how to run this business, is unlikely that I would be successful. Interestingly, he develops into a leader who has an unbelievable eye. This killer taste gona flash wave forward like what games are fun and what games are not fun by not even playing them like observing them for like a half hour and he's like, this is going to be a winner. It's amazing that out of basically no training and no real apprentice in the business turns into this oracle of fun.

he comes back to you to, he takes over the family business. He wait until seq finally dies, which the writing was on the wall, happens in one thousand forty nine. As soon as that happens, he institutes a massive page. He fires not just anyone who is loyal to a security in the company, fires every single manager in in tandem, just decapitates everybody. He doesn't literally burn the company to the ground, but he just about burns the company to the ground.

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

yes. And there is no question who the new yo he is going forward and who is in charge here. wow. Yeah, totally crazy.

And so we're in what one thousand nine hundred and fifty ish .

when he takes over and nine. So when this happens, so but like you said for the first time, he's twenty one years old, like he's a Young man. He doesn't want his life to be shackled by like what? Nintendo o and the yma UI family has always been historical, so he's looking around for ways to make an nintendo his own. And finally, in one thousand nine hundred and fifty nine, the perfect opportunity arises. The world disney company is looking to enter to pick him as crazy.

The disney comes into the story especially because there are so many parallels between nintendos identity as a business, nothing that makes them great. And disney, it's crazy that what lands on his doorstep is well discover also.

given what intendo s business, what we just spent twenty minutes describing disney like, yeah, these are the guys were going to work with in japan.

right? Oh yeah, we're a family friendly brand that has to protect our brand safety above all else. Hello, 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 ninka ando licenses what disney characters and put them on playing cards. And they sell playing cards to kids into van.

I gotto buy some of these. If this still exists somewhere on ebay, I gotta find some.

oh, I bet they do some of the dom video footage of them. You can probably find them somewhere. We going to put .

these in the acquired museum of brand japanese disney cards.

So this is what ya och, I guess, forth at this point in time, heroic 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 non tandem, there's this an incredible opportunity to draft off the disney britt.

So they start with playing cards, then they start licensing from disney other kids toys to tell in japan. And then they go to the retailers and they say, hey, you like Carrying these disney toys. You're going to Carry the disney toys. You need to Carry some intendo a branded toys along with them.

IT is amazing. It's the story that we tell over over, over again on acquired where you acquire something, some asset that then gives you a leg up in a different party, your business. And now it's a self fulfilling profession where the 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. And now that you're in stores, doesn't matter how you got there. You have that channel, you have those relationships. And especially if you can hold them captive and say you have to distribute our stuff with disney stuff, then, uh, it's a pretty good bargaining position.

So during the thousand nine hundred and sixty, nintendo transforms itself into a japanese toy company. They are making things like the alter hand, which is like a extended graver. I know you did some research. Ch.

on this, this is awesome. So this guy, gunn, pay your coy in one thousand, nine and seventy comes up with an idea and word like breezed through history here. But we're onna have to at one hundred years. So you know, we went from nineteen forty nine with heroic taking over to one hundred fifty nine.

When the disney comes in fast four thousand and one nine hundred and seventy, you coy comes up with this telescoping fake hand basically as a gag and hero shi maui looks at IT because that looks like a winner, because this guy, he's just so good at identifying things that consumers are gonna ve. And so they market as the ultra hand. I mean, truly, he made IT as like a gag around the office.

They sell one point two million products of this ultra. And of course, they're all looking around there like, oh, we should become a novelty toy company all out like that, what we should do. So they come up with, I think, the ten billion barrel. May they have a love tester device that they market. They have a remote control vacuum like thirty years before roomba that so they're just coming up with crazy toys in the lab and break them on the market.

All these things is, and because they have this disney sort of damocles that they can hang over retailers heads, that they're gonna get their retailers to Carry all this stuff, it's amazing. So you mention can pay you go. He was a tack on the playing card assembly line, maintaining the machines within intent.

do. And to your point about Young, O T just has the six sense for products and for talent. He packed them off the assembly line and says, you are now the chief designer, the chief engineer for intendo.

It's crazy.

Good pay would go on to, uh, design the game boy and the virtual boy. He would run the metro de series and he would be the first boss and mentor of one segu momo to. So .

amazingly now, by the .

late sixties, early seventies, the intend do has become a toy company and a very profitable one of that. So Young uci starts investing in whole bunch other stuff at one of the things he invest in is failed bowling allies. What bowling was this incredible fat that had taken japan by hold in the late sixties.

And so all these bowling allies built, but then society lost. Interesting, they are all these empty balling. Alice yma. Uci goes and buys up these bowling allies, and he directly in pay to say, like, hey, come up with some gadgets that we can put in here and we can attract people to his bowling allies.

And they decide that they can use some of the technology that gum pays building for toys to make indoor shooting ranges, like gun shooting arranges like not laser tag like pigeons, but like simulating shooting range. indoor. In these former bowling, Alice, they do this.

This goes pretty well. This becomes another big thing. So this is kind of random, and intend to getting into indoor like and shooting ranges. But actually this becomes the critical thing that puts them into the video game market for a bunch reasons.

One, this gets an intent deu into the arcane business, because what else do you put involving allies and indoor shooting arranges, but our kid machines, so goods pay and gamut in the rest of the company, start making their own arcade games that they can put into their shooting range is evolving. Alice. At first, these are electro mechanical games like saga, but once pung becomes the thing and comes over to japan and arcade video games, they get into a two and intend to starts making their own arcade video games two for intendo.

These light gun ranges that they start building, they become pretty good at is and they decide that they can export the technology to north amErica and europe. So this is actually the first product that the intend to starts exporting out of japan, is this technology. They do IT using trading companies to start.

They're not setting up their own distribution international yet, but they start building relationships with american companies. And three, and this is kinds is unbelieved of all here, the light gun business gets them into a relationship with magnavox. Remember magnets from the beginning of the other, specifically for the launch of the art sy in america.

So the odd sy came with a bunch of peripherals for use in the games on the council. One of the peripherals was a light gun. wow. And who made the light gun for the main max atta nintendo?

That is, there was circular path to fighting their way into american home video councils.

But that make sense, right? You cannot script this any Better. nando. O, who single handed in a minute, comes in and dominates not just the american, but the worldwide market for home video game councils and builds this incredible jugan out around the world.

They were right there, part of the very first home video game council launched in america. Buy magic. 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. They build this relationship with magnetic x. They see that the auto si, despite magnetic x, is having no idea how to make this thing is succeeding despite itself in america.

They're like what we're in the toy business in japan. This thing might actually do decently here to van. So they license the autism for a magnavox and the intendo rebrand and starts distributing the magnet x odacis do its toy retail channels in japan.

And I had no idea that before the I. D. S, they had their own japanese distribution of a home video council. This all from .

these crazy light gun range. This is what gets nintendo into the video game business. So they started selling the auto sy in japan. And then pretty quickly, they actually just lessons a bunch of the tech from magnet x and start making their own modified consoles. So in nineteen seventy five years, one day license the auto sy.

The next year, in one thousand nine hundred and seventy six, they take a bunch of the attack and they make their own intendo home video game console, the very first one that they make, the color TV game six and IT. Just kind of a otis's knockoff, just more localized for japan and maybe a little tracked by the same thing, and only plays a couple of symbolistic games, one of which is table tennis. IT becomes a huge hit, just like the osi, that color T, V game. Sex sells a million units in japan. Instance is is like transformative for an .

instance of what year is this?

One thousand and seventy six.

okay. So this is kind of before the success of the U. S. Based home council rush. Uh hundred percent.

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 sex up with a new model, the color TV game 4， place, fifteen and games.

Instead of six games. I was like, why are they calling at the six?

O, yes, remember that these are not cartage based councils and you're not selling program .

able software for them.

huh? So that sells another one million units. And together, these councils, like I said, totally transform the company. They're making much Better margins on these things.

They can sell them for higher stage Price than the alter hand and the other toys that they're selling, right? The shooting gun arranges that's a fat that goes the way the bowling ally into pay. And so this is what intendo becomes, can eventually they become a japanese video game business.

a suo importer, reseller? 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 an intendo 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. But what that would require is for the TV, the target to have a detector on IT. Which you really don't want to have to force that constraint. That sounds really hard, especially when you trying to work with a lot of different tvs.

S ironic that later maintain the woods force that can straight with the week.

right, right? That fundy. So they flipped out on the head. They figured out that actually what we should be doing is we should make the gun, the detector, and we should specialize what's coming .

on the screen or 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 on games, but basically the screen flashes one frame where only the target is set up and the gun is the detector. And if in the guns side, IT sees the set of pixels that are lit on the one frame, then IT knows you got a hit. And if IT doesn't detect those pixel, then it's a miss.

No, I always wondered how duck can't worked.

I had no idea.

Yeah, that's amazing. So intendo, thanks to this relationship with magnificent, is in this incredibly privileged position in this new industry. They have a bird I view into the american home video game industry.

And the all the lessons from what's happening there, there are also pioneering and establishing themselves as the leader in the japanese video game industry. So they're in a great spot to all of this. They see come one thousand nine hundred and seventy seven when a tari, an Warner brothers, releases the V C S. Six hundred in america, the ymar g even despite not being an engineers like clearly this is the future.

Yeah, this piece of hardware not only is so much Better than all this dedicated stuff that's like the autism and like what we've been doing the king before, but the business model implications of this, he said, the razor and blades model, the inter changeable cartage selling software we get again into this. Yep, but they also see things are crazy over in america. Everybody's rushing into this industry.

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

So Young ug makes an incredibly four cited decision here. He says, we intend, do need to build a programmable home video game council like the atari twenty six hundred. But where's a tara in all these other american companies? They're rushing their consoles to market.

This is, if not chatty, hardware like the development cycles for these councils are like maybe a year, a year and a half. We have the luxury here in japan because is not direct competition. Let's take our time and let's make something really amazing.

Yeah, not to mention that by taking a long cycle development time, they actually get the benefit of more 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 seventies with intent to to develop their first program, able ROM cartage 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 seventy five dollars.

And on top of that, I want us to be 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, yes, this is a razor and blades thing we're happy to subsidize so that we can sell more games.

He's like we're going to do IT all on hard mode and we're just going to take years to do IT because this is seventy seven when he's saying this, the N. S. Won't debut in the U. S.

Until one thousand and eighty five to 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 at three. And so yma UI says the constraint, i'm onna, relax. Here is time, which is what nobody else in the video game market is doing.

So in nine hundred and seventy seven, what are they going to do in the meantime? Well, R N D is super, you know, heads down and secretive on building what becomes the firm.

ACCA in the N S. Yum splits intendo S R N D team 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 N D two team, and he dedicates them to this home console project and says, you have years.

You don't have a limited budget. You have a lot of constraints, but make this thing amazing. The original R N D team, the R N D one team, he says, you guys keep working on the line of tech that we already have, the dedicated home consoles.

And let's explore some other ways to use this technology to make money that leads to the game and watch business, which is this total dead end in video games and technology, but was insane ely profitable for the nintendo over a couple years. I played one dedicated game per machine. IT actually comes from the calculator industry, is where they take this tech.

IT becomes the spiritual four runner of the game boy. But this type of product is particularly suited to the japanese and broader asian markets. Like it's portable.

You can play at anywhere. You can play IT on the go. IT does really well for an intendo .

much lower Price point.

much lower Price point. They sell millions of these things in the late seventies and early eighties in japan, which keeps financing the other R N D T. Yep, also, they haven't forgotten about the arcade side of the business. Two yma. U G spends up a third R N, D, T just to focus on making our kid titles, because he also knows that software is going to be really important for this eventual home council.

Yep, they've basically saying we want to learn what games are great. And once we have a stable of those great games, then we can unleash whatever our next generation council ends up being. But for now, we kind of a need to, like create adventure games in the arcades, in cabinets, so we can know what the hitters are going to be.

And I will say to know what the hitters are going to be, basically none of them were at first. So I imagine there was like a year at nintendo over in japan where they're hitting the o crap button for they're like um we may not have any good games to put on this thing. Fortunately.

the council wasn't ready yet. There's one more piece of the puzzle though, and that's that he needs to get a foot hold in the american market so that they can get distribution relationship, if there, and actually be .

able to enter IT and ideas, his mind to be their own distributor. Nintendo is really obsessed, especially this point in history with not getting commoditized and not having to walk over fifty percent to this middle man and then another fifty percent to that middle man. It's like we need to get directly to customers.

They're been using trading companies to export the light on tech and other things. They want to set up their own distribution degradingly the yma uti family cycle is gna repeat itself as much as heroic hates IT he knows the perfect person to set up intended of america, his son in law who does not want .

to work in the intend to.

who definitely doesn't want to do IT, and whose wave he rose, his daughter absolutely does not want him to do IT mini ara.

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So whether you are start up or a large enterprise and your company is ready to automate compliance and streamline security, like vantage seven thousand customers around the globe and go back to making your beer taste Better, head on over to vantage outcome ssh required and just tell them that then. And David sent you. And thanks to friend of the show, Christina anta CEO, all acquired listeners get a thousand dollars of free credit. Veta com slash acquired, all right, where hedden into the eighties is going to be intendo s decade over there they have a four pronged strategy. Bring me to rather scope, David, of James and for IT and listeners, unless you are like nanjo history after you're like radar scope, but radar scope would be the ashes from which all of the phoenix es, you know about rise.

So ara ara yo is chosen some in law, beginning who he sends over to set up ni tando america, unlike other sun in laws in the nintendo family, history has a bit of a different background. So he is also from a very prominent high society, well respected family in kyo to, but he left japan and went to america, further education. He went to M I, T, where he was educated as an engineer. Any fell in love with america.

and he may have fAllen in love with the distance from his father in law, too. A whole ocean in the, in the way is pretty nice.

Well, this is before he met yoko, his wife. Okay, when he comes back to to pan, he meets yoga at a Christmas ball, while yoga in college. And yoga wants nothing to do just like heroic before her wants nothing to do with intendo, nothing to do with her father or nothing to do with the family business. And she's kind of take in by oracle in part because he loves america. He's so different, like there's no way that history is going to a repeat itself here.

right? If I don't want to be involved with nintendo and this guy is probably that ticket, he's my ticket.

So they get married and they move to vancouver in canada, where arka becomes a very successful, realistic, developing yoga loves IT. There they come back home to kyoto to visit family. And yma, he makes his pitch.

So raca was intrigued. But, you know, he's got a successful business of his own rate, and he's loves his wife. His marriage is very important to him, and he knows that if he accepts here, he's going to be in a real tough spot. But yama, he says he am not asking here. You can not need to do this.

And there's a little negotiation. I think they strike an economic deal that makes them very much worth arcos time. And arcos 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.

An this is part of the deal that convinces both yoko and mineral to do this. yo. He says, i'll let you run things your way in america.

Big concession.

But I know you live in vancouver. I want you need to move in the york city because the new york city is where the toy industry is accorded in america, and you ve got to go build relationships there. So they were Mandate to set up in india, america, in new york, which they do.

And at first, the additional console, they're not ready to enter the home video game market, but they've got these R K. Machine that they're gonna a build up. Intendo of amErica is through the ark business. They do the obvious first thing that makes sense. They hire the guys who had been running the trading company that was importing nintendo arc machines es in the vast.

And I think they were importing used nintendo market games from japan and like refurbishing them and then selling them into U. S. Bars and arcade. Like I was this very, almost like gray market way to acquire intendo s cabinets.

That was run by two Young guys at the time who were from seattle university of washington, alms elstone. And run judy, that becomes the initial seattle link for the intendo america. So the higher stone in duty to sell in ten dos arcade games that they are producing back in japan.

And to no one surprise, they don't sell very well. The games just won't pret good yeah and there was pretty robust competition, of course, as we talked about in the american market. So ara was like, guys, why are these not selling? Run an ali.

They're not selling because the game suck. You need to call up U S. Like, hey, send us some Better product.

They say, you know, what is selling here for now? One thousand and seven eight, one thousand nine hundred seventy nine in america. What is selling is space invaders has made by a japanese arted company title. Why did you get the guys back in japan to make something like space invaders and send IT over to us? So mineral calls up Young to you is like, hey, can you send something like space batters?

Ya oji doesn't really want to do IT because he's like, like you do you supose we building relationships over there? Can you just use our games? And a arka is like, no, no, I really think this is going to sell.

I'm in a place are really, really big order. I went you to send me three thousand cabinet ts of a space invaders. Not off like, I really know that this is gona work.

Yeah, we are your boots on the ground. We know this market IT has to work.

I put in my reputation with you on the line. I know you don't know me that well as a business partner yet, but I really think this is going to work. Yeah, which he says, okay, he directs the R D three team to come up with the space invaders knocked off, which they do.

They make radar scope its innovative as a different perspective. It's not the top down space invade s it's got like a three quarters view quasi 3d twist on the space in vats mechanic。 They started producing them in japan, unfortunately, to make the game from scratch, build them in japan and then ship them over to new york, which takes a long time on the water. To ship them IT takes four months. During this time, the american space raters made a peaks and 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 that will come with failures, too. But from this point forward, they never try the fast follow clone copy thing again, totally.

So when the garvet show up, intendo of amErica camp, sell them. And we've got all this capital tied up in, and they only managed to sell l about one thousand and three .

thousand antes. So got two thousand scope in a warehouse in new jersey at the current headquarters of a nando of amErica collecting dust.

So minor now needs to call up ya ug again.

If feel like you are right.

you like, so about you do. When I kind of put my neck on the line with these red r scope cabinet, I was wrong. Can only adverted how this conversation went, like gotto do something like we can't. You know, amErica is going to go bankrupt. All this in tory these cabinet sitting here, can you get somebody to reprogram some new chips that we can insert into these cabinets and just try and move this inventory?

right? So red or scope 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 mother board and leverage basically the assets we've got to create a new game out of this thing.

Yeah and things are so bad you're go 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.

This is a pretty constrained problem too because you basically are saying, hey, create a different shooting game because when you only have the joystick in a couple buttons, basically every game at the time is kay use that to sort of move the gun to wear, 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 can turn this into your .

and less so Young age is so pissed he can't take anybody off the console. Projects like those are his best engineers. Who could baby pull some rabbit out of the hat here he goes to good pay and his, like my dumb as son in all over america, I gotto give him something.

Can you give me like a genre or somebody? They'll like, make a game here. Gp, like, I literally can't take any engineers, and at the time, only engineers made games.

Like there was no game designer role. That was just the engineers who made the games. I can give you engineers. We do have this Young kid who I brought under the team who is our design guy. He is here to help with the hardware design. He's worked on the color TV game designs of the hardware, and some of the user in her face, he is very tell he is not an engineer, but he's been wanting to make a game. I gave me a that guy Young is like, fine, whatever.

And importantly, this isn't the b team. This is the unknown.

right? This is literally like the janitor, right? And that guys name is sugary me a model. And this is how he comes to make his first media game.

yes. And if you don't know that name, which I suspect ninety percent of you don't, oh.

I suspect ninety percent of people do know that name.

That's the thing. I'm really curious if people are like, this is me a moto? Or if people are like, what the hell you talking about? And I think like for those of you who know you're an intendo 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.

The tablets come down from the mount. Those this brings them down via modem is, well, the game that Young SHE give me a moto mix to replace the radar scope software in these cabinets is called donkey kong. And donkey kong would itself go on turn hundreds of millions of dollars immediately in north amErica alone.

In the totally says an intent of america, skin earns one hundred eighty million dollars the first year and one hundred million dollars the second year in our kids. IT becomes such an incredible franchise. And I, P, which will get into in a second, that just this game, the original donkey kong, has grossed over five billion dollars alone in the decade sense on all the platforms. It's been released.

David, the year that IT was released in one thousand hundred and eighty two IT made more money than any film released that year, except T, T.

Even more importantly though, so curious what percent of our audience already knows this? What person doesn't the playable character? The the game donkey is actually named ed after the villa. The playable character .

in this game is this very small, big headed, wearing ahead, 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 ed man, the carpenter.

So what's going on here? Like I set up to this point everywhere in america. In japan, the only people who made games were engineers.

Moma to has this incredible quote about this. He says, until done, ka on programmer and engineers were responsible for game design. These were the days when engineers were even drawing the pictures and composing the music themselves.

They were pretty terrible, weren't they? And specifically, like we ve been talking about all episode, there was no story. The whole point of making the game was to make a technically and something competitive that would have enjoyable game play for mostly to suck up quarters in our kids.

It's also a fricking miracle that they work at all. You think about the very early technology involved to like more hard things on top of make 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 arranged the chips in a way that IT works and doesn't break quickly.

right? Me, a mono. On the other hand, he's not an engineer, he is a designer, and he thinks games can be an art form.

So yu, he gives him the chance to make a game. Finally, I can bring my genius today. He's not a self consider man. I'm sure he didn't think about that way, but he is a very different vision for what a game can be.

Here's what David chef who writes came over h, which is great book rites about the conversation that moment to and yao have when he gets a sign to make the game. Ma moto baldly told the intended chairman that he would enjoy creating a game. However, he said the shooting up and tennis like games that were in the arcades at the time, we're uni maginness tive, simply uninteresting to many people.

He had always wondered why video games were not treated more like books or movies. Why couldn't they draw on the great stories? Some of his favorite legends, fairy tales and fiction? King khan, Jason and the argonauts, even make back. And this is exactly what my moto does. 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 APP that's throwing barrels, like it's not a lot of story is .

his girlfriend .

I will really yeah, originally IT was not a princess. Well.

so here's the story that me about to comes up with full video game. A regular, every man, jump man has a pet gorilla who he keeps in his house. He is not very nice to this pectoral la.

He doesn't treat him very well. So one day the gorilla escapes and kidnap are protected nous girlfriend as revenge for not being treated. 那 it's important the gorilla is not want to hurt the girl。

That's right. Her name is just like lady, right? Yes, like they don't even name her.

He was polling 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. He just wants to stick IT to the protagonist. So he runs with the girlfriend into a skyscraper construction site, climbs up to the top of this half constructed skye scraper and starts throwing barrels and construction equipment down at the protected onest as he tries to chase them up.

And your goal as the player is to reach the top of the construction, say, defeat the gorilla and save the girlfriend, which is incredibly symp P I stic. today. But nothing like this had ever existed before.

And so like wonderfully innocent and kind of convoluted, like everything about that, you're like what that worked, that was the best .

story could come up with. Yep, but despite its kind of wackiness and simplicity, it's a classic three act story total. There is a beginning, dramatic tension is introduced, there is a middle and a struggle, and there is an end in a Victory, a resolution.

Yep, it's also worth saying mea moto came up with all this within the constraints of what rate our scopes s hardware was. 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 latter and avoiding the barrels using the same controls originally intended for our scope.

So tell me a motto, like you said, not even the B, T. Or the c team, just the unknown team is working on this game. Back in japan, wild card team, wild card ara is totally freaking out.

Back in new york, his wife has gone back to japan taking their kids. He's like, are right. I don't know if this is gna pan out here, but I know one thing, if we're going to save both the business for intendo in amErica and my marriage, we gotto 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. As we place this huge order with a four months lag time, we couldn't get any feedback. We couldn't get any test machines into the market.

I assume they to go .

through the panel. Can I assume so, right? You can just put all this stuff on an airplane and and send IT there.

So he says, we've got to leave in new york for business reasons. We loved being in vancouver. We don't like new york. We can't move to vancouver because we gotto be in the united states for what we're trying to do here. But we can move to seattle.

Yep, nicer to japan, easy shipping times.

drive to vancouver. Yoko can hang out with all our old friends back there. This will will be great.

And microsoft was seven, eight years old at this point. And so you know, there started to be some tech talent. There is a former bowling engineers.

absolutely. And it's even more perfect. Our distribution guys who we hired and broaden house there from seattle. It's perfect. We need to move there. So while all this is going on back in japan, they move the company to seattle, the least a warehouse space in tequila. For folks you don't know, the yala reality tequila is just out of the city of the airport, very like real great place.

Video, where .

exactly they ship the cabinet ts across the country by railroad from new jersey to the qua. They're all hanging out there. You'll go when the kids come back then like, okay, great.

And then the roms show up with the replacement game for radar scope. 我 打开 看， they plug them in, they all hidden around, they start playing and they're like WTF. So what is this works of is super different.

They weren't really told what to expect. They're basically get these conversion kits, you know that show up the freak over the ocean that's got instructions of here's all the ways to replace all the components with these other components. Here's the way to load the new music on. In fact, there were rumors that this was gonna be some like really great recognizable I P. To help with sales that nintendo actually had some preexisting relationship with the owners of the poppi IP.

Yes, they were working on a POI license with king features.

Yes, this wasn't gonna be like jump man and lady and donkey kong is .

a nonsexual name for a gorilla, right?

This was going to be poppy and that was going na be olive oil instead of lady. And that was gonna Bruce, the kidnappin character that would sell well to an american audience. And this thing arrives with these brand new characters that no one ever heard of, and they like crap.

We are totally screwed. So stone and duty threatened to quit. They they like this is not gonna anywhere but they've got this.

They're to hire a couple kids and see adult to work in the warehouse, move stuff er around, get a chipped out. And there's this one kid and Howard phillips working there who's just a total arcade, not loves video games. He plays IT in the warehouse is like, guys, this is the greatest game i've ever played. This is a work of genius.

and the game mechanics are a work of genius, even though at first blush you 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. There's random variable, so you can't just beat at the exact same way every single time if you memorize all the right things to press IT actually has a lot of art to IT exactly what .

your moto set out to do and rated. It's exactly what you're describing. This thing is really fun. If you pick up and play IT, you can into IT really quickly how IT works, how to play IT, and you can just start having fun.

There's a maximum in the video game industry that a great game is easy to play, but hard to master. And that is exactly what this is.

So phillips in the warehouse is like, really please me, is like guys like this really good. And like, okay, well, let's take IT to a couple bars around the atall and just set IT up and see what happens. And just like pung back of the day, this thing becomes a quarter magnet.

Phillip p's. Intuition was right. None of the senior guys know the older guys hard coa, stone and duty. They didn't get IT, but the kids did.

And on the back of that, phillips ends up becoming ark was kind of most trusted adviser about games. And he becomes the intendance game master. He becomes a hero in intendeth power, all of this like a national celebrity.

It's incredible, the intendo of amErica management that he does decide one thing we get, okay, that there's this narrative revolution here with this game. I don't think it's gonna here. If we call the protected nous jump man, we need to give him a little more of an identity than that. So they're casina vow trying to decide what to name this character.

And by the way, I should say I would shocked that donkey on predated mario. His name is not on the cover art. In the very first game he appears in, of course he does have a name.

but yeah so the letting go is that as they are 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 it's freak company .

and make any money to and because there early.

And the way I know he shows up is because he starts jump in a and ranting and raving and waving his arms. And the irony is like super animated and they can see him there and .

he's got this big bushy ash alien .

guy named mario.

And this is how super mario gets his name.

Amazing.

totally amazing. They named the girlfriend. Pollin, I think, is the either wife, girlfriend or of one of the guys working at the company and intend over amErica at the .

time yesterday polling, because the warehouse manager who was taking lot of the heat from maro saga and directing IT away from the intendo guys and sort of like taking the hits for them, his wife was named Polly. So they named the character Polly after her as a thank you to him.

nice. Tendu is a history of doing this swither characters. Well, one more thank you.

Naming of a character is onna. Come up in just a second here. So the game feels like wild. I like we said, all the two thousand, you former radar sco machines fly out of the warehouse. They order more like the end up selling thousands and .

thousands of this IT expands the time of who plays video games too. That's the other thing. It's like it's .

not just for boys and t anymore or people in bars. Irony of ironies, title the japanese company that made space vats. They call up yuma UI and they like, hey, worth like the really good jeffy ese r game manufacturing.

Now you've made this hit ark game. Can we buy the rates to IT? From you to distribute IT for an nintendo around the world will pay you a toned money for IT.

Ya h is kind inclined to sell because when he didn't really care about the arced business, he really just wants to set up in intendo of amErica to get the distribution ARM for the console that's coming. But he lets arawa make the final call arrow says, note, we're going to keep IT. We're going to distribute IT in house and ten america, of course, that ends up being totally decision and kind of return you just trust .

from him like a multi billion dollar .

correct decision, multibillion dollar correct decision. The other hilarious thing that happens is M C. A universal and the legendary sid shine berg, who we talked about with Michael vets, with Michael evets over A M C. Universal, of course, is what's go out on with donkey and he's like, I makes some money on this.

He's like, way, way, way, way big a thing all the way at the top of a building named kg IT sounds .

like king kong, which I think I own the right too.

This is my circus and this is my monkey.

I think we talked about this with my god, but this is where IT comes out. In the court case said would refer to the legal ARM of mca universal and their legal suit activities as a profit center for the company. Could he filed suit against ninna do o amErica for infringing ing on his kong trademark ninja do LED by seattle lawyer Howard likin, who were going to succeeded aca as the president of nintendo to 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 in intendo of amErica up with a great anti trust lawyer to fight off. M, C, A. IT is a crazy decision, like they should have just settled with M.

C, A, right? Tiny companies that are not doing well, getting sued by very dominant global entities like M, C, A universal. You roll .

over lincoln sets up in nintendo, do with a great and I trust layer, john Carry and he and linking together, team up and they fight off sig, berg and M, C, A universal. 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 exact. And they knew IT too.

I knew IT. Yes, that's the thing. And the judge slapped him across the face. He's like you guys new. You are 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.

Yes, they're wrong. And a bunch of vectors to they're like way, way once a gorilla ones, an APP. And then the other argument that john corby finds because john Carry flies to japan and starts interviewing a bunch of people at and tender to try and like mount the argument of, like they didn't know, of course they in reference kinka IP and he's in japan and he's looking around and his like wait in japan that use kong to describe big monkeys generally that's like a word that's commonly used.

And so he uses that to we is like this day was invented very quickly by the small team in japan using common parliament. And so the judge just serves M. C. A univerSally. He's like, you guys are dicks and you knew IT and you were wrong, and you owe all their .

illegal fees of easy, which is not Normally what happens when M. C, A universal .

business court. no. And so as a thank you, nintendo goes to john curve few years later and says, we've got this great game in development, and we're going to name the protagonist after you. And that is how curve got his name. Uh.

great smash character.

yes. Oh yeah. A lot of jumps. okay. So we're at this point in time where donkey console like busters, they know they've gotten hit on their hands. There's potential for these characters to really embrace their own story lines and they're strong incentive by nintendo, the parent company in japan, to really flush this all out because they've got the faa com nearing release.

And so they're trying to figure out, is this thing that me, a motto came up with on a luck? Can he keep doing IT? Should we turn the keys over to him creatively and say, hey, see if there's a there there for to be like the centerpiece of our launch of our council.

which they do? So me moto makes a couple more games. He makes the sequel, di junior, that also does really well. He makes an actual pop yi game. They finally get the license, get in the same vin that's a foot note in history.

And then in one thousand nine hundred eighty three, he makes the first dedicated mario game, mario brothers, as an arkite game, super mario of brothers, right? Will know their different games. Mario brothers was an arced game that me, a moto made, and that's what introduced lui.

J and you had two pomas. This is what canonically made, the plumbers. The setting was underground in the Green pipes. And h, that's how they became plumbers.

Side note, when they came out this game, the MRI of others people were like, await the mario brothers so mario is the last name and intendo confirmed IT. And so they're like, it's so that guy's name is li g. Mario, and that guy's name is mario mario and the nintendo was like, correct. And I think theyve maybe changed their stand on that over time.

But what but yes, it's clear that momo's got the golden touch here, yes, and has created this whole new discipline of game design where the same principles as engineering apply. And ya uci completely understands this, just I I I understand with comee there are these certain engineers out there who are so talented and so creative that they can do things and enable things with technology that nobody else can do.

The same dynamics applied to game designers that there are very few cigarand ea motors out there, and the value of what they make is worth many, many multiples of what every other game designer out there makes. Yeah, so after me, a motor proves that he wasn't just a flash in the pan. Yama ut creates a fourth R, N D division within intendo o puts me a note in charge, and the sole purpose of this new R N D four unit, which would later become the legendary entertainment analysis and development group within intent do the sole goal is to make games and to make the very best games in the world.

And their manifesto really ends up becoming fun first. And that sounds obvious, but in a way, that sort of ziggy, 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 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 mea motto 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 corneal, that core mechanic that we love and no more. We don't need to do any the other stuff on top of that, if it's fun and if he continues to be fun and it's super repayable, then our mission is accomplished. And IT is a very, very, very different approach to how other people were designing games.

Yes, exactly. Ya ut has this great quote about memo to and the intendo philosophy of what makes for a great game designer. He says, an ordinary man cannot develop good games.

No matter how Hardy tries, a handful of people in this world can develop games that everybody wants. Those are the people we want at inten. Oh, it's just so wild that Young. Ut, he's never played a game in his life.

and that is actually true. We haven't really hardon this yet. But like this guy LED nintendo, thw, its heyday invented the modern intendo, found the talent to design and market all these games and never play any of them. Yes.

but he totally intuitively grasp all these principles that were 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 the philosopher building and more about, like most people don't have what IT takes in me, a motto has what IT takes, and we've got me a motto. So good luck.

Well, it's too, I think, I think fun. And that brand of fun is the mere motto and intendo o style of game design. There are other brands of game design I mean folks like over uh square enix into pain with the dragon quest ies and the final fantasy y series. Here are nobody such a guy who was the father. The final fantasy y series would probably ly 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 that what they do and nobody else can match them.

yep.

So we're now in one hundred eighty three and all the pieces are coming together in ten. Those got the games. We've got the I P.

They've got the creative genius, me a motor running R N D four. They've got the distribution network that they ve always had. Japan, you've got to set up in north amErica as well.

And the technology is just about ready. So the R, N, D, two team has accomplished something nobody else can or wood, for years in the industry. Yeah, they've created a home video game console that is not just a year, many years ahead of the competition and will sell for cheaper and profitably.

There's so many of these unbelievable moments in the intendo story. The way they do IT that takes them years to come up with is they realize that the groove force way of accomplishing the year, plus ahead of the competition directive the yuma he gave them, would be to get the fancy est fastest. Most more is law enabled ahead of the curve processor out there, but that would kill the bill materials that would make a way too expensive up.

So they come up with this incredible innovation. They realize, okay, we're constraint on cost. We can only use cheap off the shelf, you know, at this point, dated technology for the CPU of this machine.

And up until now, the C P U is everything. The C P. U is the brain of the computer. He were in the eighties, even due to the nineties. Remember, in tells marketing, and like the PC industry, and the CPU was so important with the intendo team realizes because even though this is a programmable console, we're doing specialized applications for gaming. This doesn't have to be a machine that can also do your spread ed sheet.

We can pair a cheap C, P, U with a secondary ary processing unit within the machine the day dub, the P, P, U, the picture processing unit. And I think maybe i'm wrong and this is why nobody talks about this or maybe like we've stumbled on to something like incredible in history that is everybody overlooked. I think this might be the first example of a dedicated GPU in a .

piece hardware. Oh, interesting. I wonder .

if that's right. A program able GPU. So let's impact act this a little bit.

The atti twenty six hundred had a CPU that did most of the work, and then IT also did have another chip, the interface with the television. And a tory called this the T, I A, the television interface adapter. But there is no memory on this T, I, A.

chip. IT was literally just there to, like, draw the graphics that the CPU is outputs to put on the television screen. The P, P, U that nintendo designs and develops is its own programmable chip that sits next to the C, P, U within the N.

S. And IT has eight bites of memory and is dedicated to processing the graphics. They get output on the television.

So that has specialize circuit tory, both for doing the backgrounds of the games and for processing the spirits. So which are they like characters, the movable items on the screen. wow. And I think this was the first example of a machine in an architecture in history. Oil, like the workload, was split up like this, because I was a decade later when NVIDIA came around and invented the GPU.

which is farcical.

Of course they didn't. But you know, I would be until that time when people would think about using this architecture in computers in PC is right. But in this subset of the computing market, IT was intendo. I think you're right.

I mean, I can think of a counter example off top my head. Or where are a counter example even exist.

right? That's I thought about you. I like I can't think of anything else.

Anything like that is technically true that the atari and other councils had chips that handled the graphics output from the C. P. U.

But they weren't programmed. They didn't have on board memory, and they weren't doing any of processing of the graphics. The P, P, U, at the N.

S, is actually doing a lot of work. And they all came about as this. The essence ated by this constraint, the yma, ut. Put on the team of like this, has got a cell for less than one hundred bux.

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 us. As lateral thinking of season 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, is not about using the most expensive hardware. It's about how clever and inventive and fun can you be with IT IT sounds like the first example of cost savings was around this P P U.

Well IT actually was the game and watch your choice work on the game and watch which he's the um author of this philosophy within intendo and that's what let him that is like, oh, i'll take this calculator technology and apply to games and we can use this kind of lateral technology to make something fun while keeping the cost on. But it's the same thought here. I mean, the C P U that they end up using in the N S is a slightly customized, but basically off the shelf mos technology, sixty five o two, which by this pointing 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 twenty fourteen android friendship .

and a crappy that.

uh, 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.

And in this case, I was really interesting and that the N. S. Had graphical capability literally years beyond any of its competitors. But I did IT with cheaper technology, and now is the amazing innovation.

And that enabled a bunch of things, most importantly at the outset, for the fame of com and any yes, IT meant that this new council would be able to have totally one hundred percent accurate ports of ark games. When arcade games would come to other home councils like the atti twenty six hundred. They had to be dumb down a little bit because the hardway I couldn't handle IT.

When you're making an arkite cabinet, you can have dedicated customize chips and systems and circuit boards for that game, which would allow you to do Better together. Ics, more fancy your stuff, right? That if you're then trying to bring IT to something like the two thousand six hundred you're gonna to make about to compromises, the N. S. Was able to have the best parts of donkey kon marie of brothers tender title, the third party titles.

Still right. So interesting. I mean, that makes a lot of sense with the way that cartage work too, because unlike cds where you know in the moderna, you're reading a game off of some media loading IT in the memory and then executing IT on the hardware of the actual platform of the console in the Carter gera, the circuitry was in the council. And so everything kind of like loads instantly because you are literally playing the game on the hardware within the carriage and is the perfect marriage of the circuitry and the cartridge and the circuitry in the council itself that creates exactly enough resources to play that game. And nothing more of the .

wild innovation technology wise that comes out of nintendo in this time is just incredible. They do stuff like later in the fema and N S S. lifecycle.

I think with supremo three, the N S. Is kind of like old. In the truth, the genesis is is out of this point. And like the graphics aren't industry leading like they used to be, they start putting computing chips on the cartoons to help the console because they like marries together in the same system. When the cartage is in the console, they do some similar stuff with ela.

Okay, so take us to one thousand and three. Take us to launching the fame icon in japan.

So on gel five, fifteen in thousand and eighty three, after years of work, nintendo o finally launches the family account, the family computer fame for short in japan, because they had .

broader ambitions than gaming, right?

They had they any stuff they thought, like, all this is so powerful, what we can do with these two chips, we're going to the keyboard. We're gonna like, be a church. And hours into the home, like all the stuff that tony would do, sort of stupidly later, tend to originally wanted do that.

They ended up cutting all of IT to save cost. They still don't get the machine under a hundred dollars in japan that retails for fourteen thousand eight hundred yen, which is like hundred and ten hundred and twenty box at the time, but still way below any the competitor or on the market. And way, way, way Better.

The first shipments in japan immediately sell out. They sell five hundred thousand units when they launch. Then there is actually they have to do a recall.

There's a fault in the motherboard because is such a complex system and they hadn't worked dead all the kicks when they launched IT. It's kind of like the famous thailand all case. They do a nationwide recall. They recall every female system in japan.

And they don't just replace the one broken ship. They strip out the entire motherboard and replace every mother board on every single unit to show people like we're really serious about quality.

yep. And so starting from the summer of one thousand and eighty three in japan, right, is the video game industry is dying in america, this rocket ship of the intendo. And the female just takes off. In japan, they sell over the next two years, every single unit they can make. They had placa three million unit order with recover the japanese, some I contact.

manufactured ro manufacture. H my god.

And intendo became by far their biggest customer.

huh? I A records are a that's right.

So they did a deal with. We go to manufacture the C, P, U 和 P， P, U tension system together. And the only way they could get the Price down far enough to hit the Price point they wanted every tail was to place a three million unit order of the front, which was like crazy at the time.

There was three million units over two years. They couldn't make vast enough. They sold out the whole thing. Who is incredible?

God intendo got so lucky that the japanese market wasn't saturated at the same way that the U. S. Market was. They launched and the leg, the very best conditions in japan. They could have, Frankly, not a lot of competitive consoles at that moment.

So over the next few years, the feminism would go on the cell. Almost twenty million units in japan. In japan, in the eighties, there were only thirty eight million households, so they get in almost fifty percent penetration into the japanese market.

Wow isn't .

a wild wow .

that is crazy.

IT just becomes this enormous jug t in japan. But meanwhile, of course, the big kohona market is the U. S.

There's ninety million households in the U. S. At the time in the eighties, and not just ninety million households.

They are planning other countries that have ninety million households. There are ninety million U. S. Households that mostly one hundred percent of them have a television were used to playing our kid games and new about the home video game market for everything that that just happened.

has the highest G, D, P per capital in .

the world and could afford to buy a console, especially a relatively cheap council like the N. S. You know, not one hundred percent, but seventy percent.

Eighty percent of the U. S. Market could afford this. yeah. Wa, that's crazy.

So by one thousand nine hundred eighty three, like, everything's all set up ready to go in america. He is like, are I lets go. And like.

you gotta 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 intendo 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 one hundred million dollars. And they're bearing games in concrete, in land fills and smashing them up and throwing away councils. And this is ninety three. So it's the exact same moment in japan that somebody, I don't know exactly who exactly what the story is, but somebody is deciding .

to pull .

the trigger and say, take the family become and make an .

american version of IT. yes. So our 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. Perspective, stories from the japanese perspective. Do you the sense of how that dynamic went?

I read so many versions of this, so a lot of this is my speculation. I can one hundred person say for sure that this is exactly what happened, kind of how I imagine, based on everything I read, I think, amo, he wanted to do IT.

And I guarana did not, and I think I T overruled arka and said, fine, if you're going to do IT, we're going to partner with somebody who will, even though you set up everything to be in house with intendo o set up the holding inten america, the situation tion, we went through all this. You proved yourself with donkey on, even though I saved you, but I wanted to sell the title and you said that was wrong. I want to get this in the us.

So badly i'm going to go around you and intendo goes to a tari. Remember this, we talked about this with no, but he was like was not involved. Those really done because he had already left the tari at this point.

And there was oed by Warners. Yug goes to a tari and says, intend, amErica is not going to launch the first come. I want you to launch.

The family become now in the U. S. wow.

And they basically have a deal done. They negotiated. This is going to be atari. You know, other wonders knows that they are hardware. The twenty six hundred at this point is, like dada can compete with any yes, they also know the market is totally go on sideways.

So they're like, sure, you know worst case scenario, we can just sit on a competitor and tie up and intend do and not launched this best case scenario. This is the atari in the entertainment system. wow.

So what happened? They basically have a deal done. They are all set to sign IT at the summer C.

S. Conference in june of one thousand nine hundred eighty three. So yma ut.

directs. Are cola and Howard on to go down the L. A.

And meet with the tarra and warning n brothers start the initial negotiations. They do that. IT goes well and not sure R I was like a king. This happening. Then the atari folks fly out to japan and meet with yama uji.

They get a deal basically agreed to in principle, where is gonna distribute the family acom, not just in north america, but everywhere in the world, except for japan. And they are going to pay in intent to upper unit royalty v nintendo do would still get to sell the game cartridge. So I actually would have been like a terrible deal because all the money and all the profits are in the game cartridge. But still like talk about history change on a nive point, this would have been authorized .

business yeah and nintendo wouldn't have had the direct relationship .

with certainly not customers, but not even retailers. Retailers wouldn't and were .

going to mazing of and did for mcm yeah.

So they're all set to sign this at the june c show in chicago in one thousand nine hundred eighty three. So somewhere one thousand and eighty three. But by this point in time, the crash is already underway and a tari and Warners are keeping these negotiations going and just keep intendo o tied up.

But they know that they can't actually follow through and like oh, deliver on this partnership because in the second quarter of one thousand nine hundred eighty three, a tari reports of two hundred eighty three million w laws as part of foreign earnings in two q thousand nine hundred and three in the third quarter. So after C I goes up to a five hundred and thirty six million dollar a quarterly loss of the atari division a year before. I think like we said, at the top of the epo de a tari had been half of Warner brothers entire revenue and sixty percent of its Operating income.

And now it's reporting a five hundred and thirty six million dea quarterly loss. So like the other shoes about the drop, they have know how they can do anything at this point. It's just to charge.

So this probably would have happened.

This definitely what have happened if the timing were different.

wow.

But well, maybe a world of maybe a winner of, you know, I think I don't know, one hundred percent for sure. But I I think arka was like you. The reason I don't want to launch now is like, now is not the time to launch this in america. I can see what's onna happen here. So maybe a wind of, like, if things were different, maybe he in the ten of amErica would let IT from .

the beginning, and in a sense, arcos. right. The fact that they didn't release what became the N.

S, the U. S. Version, which is a little bit modified from the the japanese one for another two years.

In one very key way, it's modified which into .

a sec two years later, a much Better time to launched the system.

much Better. And in the end, revenge two years, all the revenue profits that nintendo of japan intendo col. T. D, the parent company, was making allowed the whole company to be in a much Better position to whether the investment they're going to have to make to reeducate the american market when they do launch.

And just to put some numbers on that, for the first couple of years of the family micham in japan, not only are they selling every piece of hardware that they can make, every council that they sell as a what comes to me known in the industry as an attack, the number of games that are sold with IT going up to like eleven or twelve games per council, not per year, but for the life of the council. And I couldn't actually find what the retail Price of female cartage were in japan at that time. But let's assume they were comparable to the us, which would become of seven to ten thousand yen, kind of like half ish of the Price of the console.

If you're selling twelve games at half the press the console you're making another six x the console revenue at like eighty percent girls margins. That's crazy. It's just a cash flow .

speak on and that attach rate is high even relative to like the big councils today. Like I think yeah play station in xbox. It's different with the subscribe stuff today.

But target like a seven, eight game at rate. What did you say? Eleven game atri eleven .

to twelve.

Yet nuts.

totally nuts. Even more importantly though, building up to an eventual U S. Launch, it's during those couple years from one thousand and eighty three and one hundred eighty five, that mea motto and R N D four start turning out an existing library of just amazing game. So douk cut super mario brothers, which is the first title mario game like we know IT today.

absolute smash hit side scholar platformer. Yes, you know what?

IT is the legend of Zelda, which actually was the launch game for the family comm disc system in jv, on which is we won't get into IT here, but the legend result of 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's sold over sixty million copies, is obviously across multiple platforms.

not just the of just super mario of brothers. One super .

mario of brothers is one sixty million copies. Douk hunt sells twenty eight million copies later. Super mario rather 3， twenty four million copies.

Keep in mind listeners, there are ninety million households in the us.

So these individual games, this is the point we are making earlier that ya mu ci understood they're making billions, billions of dollars per game. You know, that takes me a motto in a small team at this point in time, somewhere between six months in a year to make these games.

There are some games that take four, five years, right, right?

But even in just those two years, from one thousand nine hundred eighty three to one thousand nine eight, five ducks on super maria brothers, legend of ela launch during those two years, actually, elder, that might have been a little bit later, like that. Billions and billions of dollars is like incredible. So when they're finally ready to launch in the U. S. In one thousand nine hundred eighty five, they've got so much firepower to .

bring the bear here. yeah. So they do a few things differently. When they're develop in the N S, they take away the word computer, which is sort of an important not to, you know, we wanted this thing to do, all sorts of stuff, to have checked stocks and weather.

And I even think I 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.

In their 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 N. S. Also had removable controllers.

They were hardwired in on the famam in japan and in the U. S. An important difference. The cartridge had a lockout chip.

Yes, the critical difference 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, we've basically talked about for an intendo of amErica is they were a distributor, they were regulatory ARM. They had to pay payroll and they had to do that in U.

S. Dollars for U. S. employees. And also 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 they aren't doing a lot of product specific work.

Our business model or yemi definitely thought of arka and intend of amErica despite him being a senate law because he was his senate arted. My american distribution network, yes, but here's where things start to change. So yma, he did know and had learned from the atari third party licensing business model that we talk about with activision and all that, that that was an incredible cash for the stream and point of power.

You know, he knew that even he wasn't GTA be able to get all of the elite game designers in the world become work for memo to and intendo, but he didn't know that he could get all of the only game designers in the world to publish on the family. So he sets up third party licensing in japan. The first two licenses are name the japanese archie game company that made packman and hudsons the first games that those company they were establish.

Companies especially name co, like we're big existing companies, video game companies in japan. Before publishing on the family, macon IT transforms their business when they publish their first titles. As their party licenses with intendo o conomo, which is another japanese game developer that listeners might recognize once they start publishing into plan on the firm, on their revenue goes from ten million dollars a year to three hundred million dollars. You go. This is how powerful what they built this.

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 bucket.

This is the power of a platform and a network effect in the video game council business. Yma ut gets all this. The terms that he sets up for the initial licences in japan teaches copies the atari business model.

They pain intendo a twenty percent royalty on their revenues from the games. And that IT, I mean, great cash full stream for nintendo. Do a wonderful all that, but they could be doing so much more. And indeed, the next set of licences in japan, nintendo, ups the cut to thirty percent that they take and says, oh, by the way, only we can manufacture the countries you get to buy the cartridge from us you can make them yourself to and we're going to make .

a profit on that point. Is just contractual. It's a technical .

limitation. Yes, exactly. And there is also no legal structure that they've set up in japan that prevents anyone else from sort of unofficially making and publishing games for intent.

zo. And so a gray mark in emerges of developers who say we're going to make famous on games, but not work with nintendo and sell them ourselves. And famous ly, one specific company from taiwan called hacker international, starts making both pornographic games and gambling games super ironic given intended s origins.

And then tenno, meanwhile, has drifted like very disney, very apple and their family friendly inez. And so this is so like antha themal.

strict sensor share, blag. All of this stuff that we think of the time today has have been in the two business for decades. At this point.

this sounds hard to do. Like you have to figure out how a manufacturer r 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 fema on cartridge es. Creating that sounds really hard, but the .

economic incentive to do so is worth IT. This market is so big, so companies like cake in their national are making tons of money, selling their own charter is directly and not paying a dime intendo. And meanwhile, they're got this brand, the problem that's emerged and all this stuff.

And like if they're not careful, even though the fame ACM is so advanced and so superior, you're not going to end up with the same thing has happened in amErica and in one thousand eighty three with a video game crash. But you can have some of the same problems if you don't control the ecosystem of publishing around you platform. So in intendo of america, when IT comes time to launch, what would become the N.

S. In the U. S. They come up with maybe the most genius inversion of all time. One, they say we should engineer a lack out chip that you are referring to, the hardware and the software.

I was actually unclear to me if that idea came from japan, ana, from america, but the japanese engineers implement. This is a specific chip in the console that needs to handshake with specific chips in the cartridge for the new systems in amErica that will lock out any not official nintendo approved. Carter is from playing in the council.

I don't know it's actually how works, but it's effectively a intendo signed cypher graphic thing. So it's like unless you actually go through intendo to make sure you get the specific ship with the specific hotoke phy and put IT in the culture, just start in a rot on them.

You totally. And actually later versions of the firm com in japan would also include a lack of chip on them. So they try and retroactively also bring this to the japan ane's market.

But in ten of americans, like obviously a lot of people in ecosystem are gonna te this. What if we marked IT though, to consumers, as this is a good thing, we know that you consumers got burned by the glut of mediocre software in the last video game bubble. We intendo are on your side.

We're going to make sure that doesn't happen here. This is our seal of quality, the intendo seal of quality that we are promising to you. Our customers that had only the very best, highest quality software and hardware preferable are gone to come out for your system. This is absolute genius.

And this is the exact thing that apple 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.

This is for the benefit of our users. Sid loading is the worst thing ever. I watch clock federici. I give a talk on stage and in two years ago, talking about how sidelining or external APP stores will be the worst possible thing. And apple generates tens of billions of dollars a year from the thirty percent of everything that .

runs to the APP store. And they stole IT, all from the ten of america.

IT is to the number, the same thing that the antenna was getting over thirty percent good.

And the internal amErica doesn't stop there. They're so dacians with what they do. But they could get away with that because nobody cared in amErica who 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. The competition. I think that ended up being round IT may be a year too, but like, basically, right, the firm was five years ahead, the competition.

And councils, so they go and they have the very best device on the market that everyone wants. You aggregate all the users. You can do whatever that help you want to your developers.

Oh, my gosh. And they just make money six ways from sunday on this. So IT continues the legal innovations of the day of amErica here.

And really, I think Howard linking is behind a lot of this. They say where you can go further. Any third party that makes dams for the N.

S. In america, we're going to limit the number of games that you can make per year. We're only going to allow you to release a maximum of five games per year. The platform there is like flagrant here. They just like all of idea j is never gonna for us.

which they didn't. I don't think no.

they didn't hear up. I think they're got in trouble for this, but somehow they escape in the us. There is truth to the promise that nintendo is making to consumers.

If you do this IT does mean that anybody who publishes for the N. S. Can't just offload a tonic crap on the system. They have to pick their five best games, and that's all they can do any year.

And intendo is gonna like if they feel like someone's games is crap, there's not going to prove IT. Yep.

no chips for you. exactly. And then the third thing that they build into the intention american licensing program, your games that you published on the N S. Have to be exclusive to the N S. For at least two years, which doesn't matter right now because there's no viable competition.

but will become the second went come out.

very important, very sad.

Yeah dirty or clean .

intend that would say clean. Guess they would. We are keeping our platform clean.

So nan tando of amErica and nintendo japan finally line that they're going to launch in north amErica for the one thousand and eighty five holiday season and they're going to launch in a test market to start the new york city metro market. Super important because this is the episode of toy industries. So they managed to get relationships with both of shorts.

And toys are us, and toys are us would become huge course. It's already national this point. The biggest toy chain, america, is based in new jersey.

So it's very strategic to launch in new york. They convince of the retailers to Carry them. And this is where the next set of innovations come from, an intendo of america. Partially, I think this was necessity because the retailers, even though they know this is an incredible product, they're sceptical like it's not obvious that this is gonna work that consumers are way, way, way down on whom video games at this point, even still in one thousand and eighty five nintendo do, says we will come merchandise this within your stores for you will make IT so easy for you to do this test with us. You don't have to take your staff off of other things if you can give a space in your stores.

How very luise .

at all exactly tly. This is that I think the first store within a store ah literally they come in and they set up and intend to displays and they do everything. Eventually this would evolve and become the world of nintendo. Dad is the way that you know, if you were a kid or parents in the eighties and nineties, and you bought intendo products in the toy store, you bought them at the world of nintendo store, within the toys arrest, or, you know, the target, or the babies or whatever, and all of that, that experience was controlled by nintendo of america.

fascinating. And of course.

they could put all sorts other answers merchandise in their mario backpacks.

t shirts, law would backpacks and t shirt.

Boy did they ever. They managed to sell fifty thousand 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 ll be about five million dollars in total cells. And like, not a lot. But given that the whole industry had drunk to a hundred million dollars in sales, that they could sell five million in one metro market in one holiday .

to take five percent of the U. S. Is market share just in that one holiday season.

That one metro. Not bad, not bad. It's footy when you said fifty thousand. And so IT flopped when I launched. But actually when you think about IT relative to how terrible the market was.

no, like everybody was like, look, do we wish we sold more? sure. But like this is actually a success. yeah. So throughout one thousand nine hundred eighty six, they start rolling out more metros throughout the us. They take a kind of rolling thunder approach, which are you get two one minute, also becomes the next innovation from an intendo of america.

Can you imagine this a day if they ruled out the switch like city by city, so that.

so that, but so brilliant, which were going to do the, they sell a million units throughout all of one thousand nine hundred eighty six. So like, okay, we're now like in real business, one thousand nine hundred and eighty seven, it's officially available nationwide. They sell three million units in one thousand nine hundred eighty seven and ten million game packs.

So I. At this point, they're already basically coming close to parity with to pan, which is incredible given that the whole industry was dead two years ago in america. You but the strategy and how they roll out to retail is brilliant. Remember, I was oversupply that killed the market before you're trying to bring a market back from the dead.

Like what will kill a market is when you have supplied demand out of wac, where is way more the demand even though there's just a trickle of demand for video games at this point in america, intendo of amErica leads into IT. And they say retailers, after that first new york city test launch, we only have a very small amount of product available. They rh in the product, I think .

they fill fifty percent of every order.

And this is an unofficial, never written down anywhere for a fear of the D O J, but like a unofficial al policy of nintendo america. For years and years and years, retailers only get half their orders. wow.

And IT works like a charm. All of a sudden the N. S. And a video game console goes from being like on the markdown, collecting dust in have been somewhere to the hot thing.

You you Better show up at six A M to get IT on the shelf.

You gotto stand in line like IT becomes the super hard to get yet. It's everything we talked about in the L V episode, this objective desire that is very difficult to get.

They also take a page at a disney book and they keep most of their game catalogue out of production most of the time. Yeah and so it's also hard to get a game unless it's new or one of the few that they've brought back into production.

Yeah so ym ug actually brings a lot of these innovations from the intent do o amErica back to japan. So they alter the terms of the licensing agreements with their parties. They go even further intervene, and to yamato style, they only make three games a year in japan instead of five games in the U.

S. They add the exclusivity caused. Like we said, they changed the hardware on future for micon models to add a lockout chip.

They have so much control over every player in the ecosystem .

is so does not like. And then finally, in one thousand nine hundred eighty eight to amErica still has their retail strategy, shall we say. But IT blows through the roof. They sell seven million N S units in one thousand and eighty, which is way more than japan, and thirty three million game packs in amErica in one thousand and eighty. So that's just in america, a billion dollars in console revenue and another one and a half billion dollars in software revenue.

A billion dollars in console revenue in one thousand and eighty eight is ten times the entire market size for home video game councils. Four years before .

nineteen eighty nine and one thousand nine ninety, they fell about another ten million units of the hardware each year, such that by the end of one thousand nine hundred and ninety one third of american households thirty million american households have in any s and in the um annual q ratings in amErica are as much of a thing anymore. But I had to be reminded of IT. It's the measure of recognizably of celebrities and brands in amErica in nineteen ninety. Mario has a higher key rating among american kids and Mickey mouse, wow.

isn't that wild. Had is wild.

And this is where they just start running away with .

in nineteen ninety. This is when they have ninety five percent of the video game market right in the U.

S. Yes, this is like the peak. This is nintendo at the peak of their power. The secret genesis is the mea drive in japan had launched in one thousand and eighty in japan and eighty nine in america.

But it's a flop at first that takes them a couple years to figure out the marketing and how to compete against the intent. do. So intendo is just .

an unbated path.

innovative path, firing on all cylinders. They do things, just incredibly innovative things. They launch a one eight hundred toll free line for game councillors. This is incredible ble.

Do you know my personal story with this?

No.

so my wife, mom, worked in redmond in the correspondence department, foreign tender. And they are two groups. One is the game councillors.

And this is like, super hard core. Like you take a test. There is a great netflix documentary that describes IT called high score. And in interviews it's got footage of a bunch of people in the game councillor group out right after they take their test like they are on the phone talking people, three levels and kids are calling up. And yeah, my mother in law worked in the .

corresponding department, the letter letters.

And so SHE was saying that they would get hundreds and hundreds of letters. They would answer every single one. And they were almost always like to illustrate and validate the point that like this was a little boy thing for a long time and and teenage boy thing should like, basically all the letters are from little kids, mostly little boys, and they're just like asking for help and like thanking in tenno for making great games. And it's just a unbelievably heart warming thing. But I also gave nintendo such a direct relationship with customers.

They eventually do make the phone line. I think it's an intendo power line paid, but in the beginning it's free. Think this is crazy. They're offering game counselling advice like help with games for free, for free. This is eleven star experience. Not only are we gna sell you the most powerful hardware on the market by years for a really cheap Price, we are then going to give you a toll free number that you can call for free, and we will help you play the games.

Because they wanted to answer single one, so they had eighty people regularly on staff. But during the holiday season, IT would be like three, four hundred people that they would staff up to the hand.

All the calls. Yeah, this also tells about the margins that they were making. On the sound I asked .

my mother in love at last night was I. As I was getting ready for the episode, SHE said I was like, a pretty amazing place to work because, as you can imagine, like, I don't think her logic was because I was so profitable. But the fact that I was so profitable and IT was such a like central part of the country's, I gust trickles into the culture where like everyone's doing well, everyone's haven't fun. Network work itself is fun is such a like family safe, clean brand that like there's only like upside to every interaction that you're having.

So it's funny, right? Like this is a subsidiary of a japanese company. So it's not anybody work in there has equity, what's tic right? And in fact, they are all paid at or below market.

But as one example, the money flowing around have one plain intendo of amErica buys a bunch of properties in hawaii, basically like creates their own internal like resort for an nintendo do american employees that you could like book to go take your family to hawaii and stay in the nintendo own properties. And then we'll talk about this a little bit more next time. But um they buy the seattle mainners. Can we talk about that? Look um this is a very profitable enterprise.

pretty amazing perks to get to work there. You end up with free games systems and free games. And like you are the cool parent.

So this is one half of the amazingly innovative direct relationship with customers the nintendo amErica comes up with. The other half is the ninth ando o power. And it's crazy, I mean, like doing the research for this. There issues of ninna deo power that sell on ebay today for thousands of dollars, the amount of brand, definitely, that this creates.

Well, I used to buy so much of next episodes going to be about pokey, but I used to buy nintendo power for the maps of the pokey levels to be able to, like, show you where you need to go walk to unlock something and where different pokemon are found.

And the idea that, like, you're taking a pretty small screen, I mean, in my case, that was the game by color, but back the famous come days, IT, was you still a pretty small snapshot of the world on the screen? And to be want to lay IT out in a magazine format to really show you the whole thing, IT helps you understand how to play the game so much Better. Of course there's a notorious and of course there's like secrets that they divulge. But I think this thing built up a pretty significant leadership.

Six million circulation.

crazy, right?

So here's what they do. Everybody who males in the warranty card for in any s automatically gets added to the intendo fund club fan club. So they're .

getting all the addresses and names of every single one other customers directly .

intends had a marketing Peter main and then gale. Tilda, who worked in the marketing deprivation, came up with all this stuff, and gale ended up running the tender power. So for the first kind of year of the N S.

In the us, they send out the fun club news letter for free once a quarter to everybody who registered. And then they realized, like what this could be, so much more. So gale starts an actual magazine in intendo power.

They send in the next mAiling everybody. They say, hey, you can subscribe for fifteen dollars a year to a monthly magazine. They instantly get a million and a half subscriptions, is the fastest magazine to reach a million subscription circulation in the U.

S. And history, and becomes one of the largest magazines in the country. wow. And so all this is amazing.

So they I think they eventually raise the cost to twenty dollars a year. They get six million subscribers. So that's one hundred twenty million a year in margin spacing, revenue drop in the bucket. What is way, way, way more valuable for, though not just the relationship with the customers, it's for selling games.

Uh, amazing.

So the game previews, they use intendo power to just juice all of the endo do first party and some third party games. They control the entire ecosystem. Now like the marketing channel to the customers, the retail experience within the stores, the hardware, the software, everything is one of the greatest businesses that created of all time.

The intendo power strategy reminds me so much of the nfl with N, F, L. Films and the nfl print division. absolutely.

Not only are you doing with the nf. Felted, which is building hype around your media properties and around all of your intellectual property. You are going one level furthers, as we just talked about what you are.

You actually have a direct relationship with the customer. I mean, built a six million plus C R, M of people who bought ten and ten do that. They otherwise ouldn't have had their contact information. But now they have a new way to market stuff to them.

Yeah, it's just this incredible story.

So here's a crazy st thing that I was china. I contextualized some numbers. Member, how I said in one thousand nine and eighty nine. Then ten do sales were ten times the market bottom. Yep, at that a billion dollars a revenue relative to one hundred million low point. Well, two years later, in one thousand nine ninety nine, ten do did almost three billion in revenue, which was the entire industry market size at its peak before the fall. Ndos revenue alone in one hundred and ninety is the same as the entire industry in one thousand nine hundred eighty three at the height of the mania.

Just incredible. I don't know if IT first happened that year in nineteen ninety. The only thing I read I for is by one thousand nine hundred ninety two intendo s profits.

So not their revenue, but their profits surpassed all of the major movie studios and television networks combined. Is no wild. It's so insane.

So the N. S. And I think it's probably about time to start tying a bow on the N.

S. Story here. What eventually sell sixty two million councils worldwide. I think we should save the superintendent boy and the whole battle with sega as the beginning for per to.

what do you think? Yes, that was my intention along.

There's plenty of analysis to do just on .

a part one here. This is the perfect place to leave IT, because here we are by the end of the N. S. faa.

Com generation, nintendo has revived, rescued this industry from death store, built one of the most impressive monopoly of all time in business anywhere in the world, and a global monopoly too. They can basically do no wrong. And what happens next is the fall from Grace.

And I think that's going to be the perfect place to start. The next episode is how they fall and then how they come back. Yeah agree.

it's also worth pointing out a little bit at this point. So for fiscal eighty nine, just put some numbers around this. They did one point eight four billion in revenue and two hundred and seventeen million earnings. So they're doing twelve percent ish net income margin, which is like good but not as good as big tech companies. today.

We were talking about how amazing the business model is, but like IT is worth pointing out like just how much R N D they had, just how hard IT was to manufacturer a lot of this physical stuff at this point. And eighty nine, they were heads down on two future generations of council, actually three, including the virtual boy. There's a lot of like real expense in the business even though they are blow in the doors of sales.

I think that's true. I think that net income was probably suppressed and artificially low, perhaps in part because of all the cash slashing around that they are using, but also all the international entities. I believe I don't have the state at my figuratively, but I believe Operating margins were more in the thirty eight percent range. okay. So still not like to companies today.

but good, right? So spitting off hundreds of millions of dollars in cash is nice.

Yes, there are a lot of ways that you can find tax efficient ways to a hide those reds of millions of dollars.

That's a good point. Before we get to analysis, I have two very fun asides for you that are little branches off the tree of story. And i'm curious if you found them, because one is, like, incredibly up your ally.

This is my favorite part of every episode when you try and stump me.

I think so too. So we talked about one thousand nine hundred eighty three being a really crazy year for gaming. There was a company started in one thousand nine hundred eighty three that was supposed to be a gaming company that became very large. That was not a gaming company.

Do you know what that is? Well, obviously not slack because that happened later.

Obviously it's not slack.

Ah let's see, electronic guards were started in one thousand and eighty two by triple kins. And is the gaming companies you are not talking about that?

Yeah and IT might be more affair to call IT a game distribution company than a game developer. Again, I didn't really happen. So it's hard to say what is exactly we've .

been you're also not talking about netscape, which started as obviously market country and jim Clark of sick graphics and university, which started with the initial business plan of building software for .

the sixty four. But you're getting much warmer.

OK OK nineteen eighty three.

The original company name was a control video. c. CoOperation is probably not helpful.

Wait, I know this. This is the problem. When you become a parent is like your mental acuity. Just like if I were a couple years Younger, we wouldn't be having the stage of the conversation I would be. But I, I, I gotta cry, uncle.

i'm going to keep giving you a hands because, like, you're going, na, get this. It's like the netscape story in every single way. They wanted to develop a way to internet, connect a game console, and instead became something like netscape.

Have we covered IT on the show?

We have extremely early on as we did not pay in, in a great light. And IT is not silicon valley based, its east coast, Virginia based.

Well, I I carefully, if I ve still like on this.

i'm hoping there's listeners like screaming into their airplanes right now the questions .

how much this are we going to cut in post production?

IT is A O L.

My good is. So IT started as control .

video CoOperation in one nine hundred and eighty three. There was one product, an online game service called game line for the atari twenty six hundred. And IT had an amazing amount of very president technology, the ability to temporarily download a game cash IT locally on device and keep track of high scores. IT would work by connecting a telephone line, and game line would eventually go through some corporate restructuring and eventually emerge six years later as amErica online. Wow.

I carefully, I messed that. Here is a crazy total aside, when I was in business school and stanford, the years twenty twelve to twenty fourteen, the A O, L building in palo alto was still a central hub of thing. So startups, the stanford, you know, incubator that I was part of when I was there was actually based out of the A O L building at that point time. Like isn't that I like even at that point in time, A O L still had its to ten drills in silicon valley.

wow. Okay, i've got another one and i'm .

just going to start .

telling the story. me.

You doing the time we ve got to keeps score.

alright, so hit your buzzer when you have a guess. okay. So in one hundred and ninety, right where we ended our story, a smaller game developer approaches intendo to show off that they had ported the first level of supermarket brothers. Three.

come on, that's too easy. Carmin rameri. This is a crazy story.

Do you know what is first name .

was before they shortened IT to itself? I mean.

you just read the book, so doesn't fair.

No, I actually got this. I'm sure it's in the book, but from research for the episode that I had completely forgotten.

uh.

I do not know when I looked at video of what you were .

talking about, what is IT like .

S M B three dos? No.

it's from the deep, uh, cool.

So what happened was john car mac, one of these geniuses that Young too, was identified, talking about, had engineer. And I understand this so much Better. Now, having done the any has said, this is why what karmic did at IT was so incredible.

He had developed in software away for generic PC to do sites growing graphics like the N. S. This was incredible because the reason the N S could do this was because of the picture processing unit, the P, P, U, that we talked all about.

Regular pcs only had A C, P, U. They couldn't do this car macro software, then enable IT. And then they famously made a demo version of the supermarkets thers. Three, four, the P, C.

And we didn't talk about super mario brothers three. But like that is widely held to be the best. Super mario brothers, one was, the original.

Two was too hard. Three was, like, widely anticipated. And then I came out and just was like.

even Better than everybody thought I could be. A three was mazing. But so you can find very willin' to and show notes.

You can find video that came out decades after the fact of the actual a demo that carma coded up like IT was lost. I think somebody found IT on an old machine at some point time recently. And so there's really youtube, but you can go get video of watching a play. It's amazing. It's so incredible what connected 本 background of IT so they have the background of the deaths p vivo in a window playing on A P C.

huh? Which you still can't do unless you're running nt emulator .

on your computer. Yes, I guess three point one maybe at when the three point .

one IT was dos based.

h was dos based? Yes, what there was whatever the gooey was that they had on top of IT because they've guy to play game. So the background wallpaper of the guy just said, I F D, I F D, I F D, I F D. And rose to cross the screen like, what the hell is I F D? Then I figured out that was ideas from the deep.

That's awesome. So here's how the story go. So he invents, in an unbelievably genius s way on this architecture, a way to do the sides growing mario thing and the approach in intendo. And he's like a look at this market opportunity i've discovered for you.

Can we be the developer of nintendo s entry under the PC mario on PC? And then tando thinks about, they say no, because we only want mario to be available on the N. S.

To promote council sales, which of course this is the right decision. Of course they they turn down the short term money to promote long term stability. But IT would then go on to rip mario out of that PC size scholler and turn that into commander keen. So calm acr marrow will then, of course, gone to create wolf stein in 3 doom quake。 There is some alternate world where nintendo could have said yes, and those could have been nintendo games.

the alternate worlds in this episode, or wild, like the atari N. S. Doom by intendo.

the internet being air well on atari devices, right?

To talk about IT on this episode, escape being an and sixty four information super highway based technology platform.

crazy. All right. Well, let's get into analysis here.

Let's do that. Should we start with powers as usual?

Yeah, let's do IT. So far.

folks are newer to the show. As always, we ve run each company. We analyzed through hampton helmers wonderful seven powers framework, where he identified seven ways by which a company can earn persistent differential profit margins versus its competitors in any given industry.

A, K, A, have power in its industry. Seven powers are counter positioning, scale economies, switching costs, network economies, process power, branding and cornered. Resources, let's get into a friend intendo.

O well said, far above. Number one, in my opinion, the scale economies we have done all but .

named IT not work economies.

Well, to get question, keep on with scale economies.

I want I agree.

the recent scale economies jumped to mind is we just keep talking about on another episode without naming yet. And when we talk about things like nintendo produced the most desirable console, which all the consumers bought, which then meant that nintendo had power over its developers, that is a peer place scale economy, that a game was worth way more on nintendo for the N. S.

S. Distribution, then IT was worth anywhere else. And so if you're developer and most doesn't matter how bad the terms are with intendo, you have to build from intendo because there's more money there because it's amorites zed across so many different users of the platform that is just always worth IT. okay. So I totally .

agree with you. I think this is the number one source of power. Isn't this network economies though a two sided twice k affect the more users you have on your install base, the more attractive you are to to developers. The more and Better ten ex hundred dex developers you have developing for your platform, the more likely you are to attract more users.

To good question. I mean, I think the scale economies when you define IT is that you can make a fixed cost investment that is more valuable to you than IT is your competitors because you can spread that cost across more customers that can t to pay IT back in a bigger way. And so because you have more customers to spread across that fix, cost investment is more valuable to you and intend do than IT would be to your nearest competitor. Like the fact that netflix can pay more for content because they have more people watching.

I think this might actually be a special case of both network and scale economies or it's both as a fuse together .

if the tender was acquiring the games that, that would be here play scale economies, but they're not they're convincing developers to build on their system.

Yes, but there is A A strong component of scale economists here too. I think you're on the something that these are linked because it's all about the hardware R N D cycle because you have to invest an enormous fixed cost of both money and for everybody now, but at the first for the end of time in developing a superior hardware platform that is a scale economy advantage and then that directly links to the network economy of like because you can have that scale economy advised on the hardware platform. Then you can get the network economy affect going of consumers and developers .

yeah interestingly enough, nintendo historically hasn't done a great job of leveraging a large installed base to advantage them with the next platform. We'll talk about this next episode. But like their success in the end, sixty four did not Carry through to the next generation with game cube. They were started starting from zero again.

IT started even before then, and these were like, this is, we will talk about this, a lot of the next deficit, but an incredible self inflicted wound that intend there is part of killing their dominance. They didn't have backward compatibility at every early generation. The superintendent a was not backwards compatible with the N S. The n sixty four was not backwards compatible with the second intendin the game, he was not backwards compatible with the n sixty four. They completely delighted on this really important lesson.

And so console R N D is actually not a scale economy because you don't have the benefit of all the people that bought your old console to advertise the cost of your new council across, because you don't know how many people going to buy the new council. And so I think that something they'd have woken up to with the switch again for shadowing here. But to the extent where the next big council that antenna comes out with is a switch and as super switch compatible, then they actually start entering the scale economies game where they can make the biggest, best piece of hardware if they get more people paying a sort of subscription .

well that they can put their existing user base over to, they first start doing IT with the we, which not coincidentally, is their big come back the we can play game, keep games. We're getting ahead ourselves.

Definitely we are. But you're right. I think there's sort of some scale economy, some network economy here, but we were both describing the same phenomenon.

You know, it's interesting. I I remember back from my days D S P. Stanford, one of my favorite professors, uh, professor him, Susan eighty, who then later would join the rover that com board, uh, with me, and I get the intersect with there. A wonderful, wonderful person, incredibly smart SHE. In addition to being a professor, G, S, B, the chief economist at microsoft, and a lot of her work was on x box, in .

the video, in figure .

out is network of x lag. Everything you did with network of x and video game consoles and software is like the textbook classic definition of the two sided that works effects. And I remember reading all about IT in her class, like this is so cool. yeah. So no question to me that both network effects and scale economies are huge sources of power for an intent, ok?

Mea motor definitely as process power. yep.

And he's a great resource.

There is something that happens in his group where they come out with an unbelievably creative game concept that i'm sure at first, much like pixar movies, i'm sure the first cut isn't super fun, but they have a way of turning IT into fun and reading out things that aren't fun that is absolutely process power. Because I bet IT would be really hard for him to write IT down totally.

And i'm sure a lot of people listening to this snow by heart, all of the games that memo has made. Fox, I don't know. We mentioned a couple. But like, I mean, he is the beetles of video of like, so they like.

he's probably the best game designer to ever live.

No doubt about IT. And in fact, there's this amazing story of, I think he was in the nineties when palm carney was torn in japan. He's contacted in tadeo. He wanted to meet you get on me about like he had such like reference for him. But all the mario games, mario sixty four, which he was, revolutionized the industry. The first true 3d game。 Let is all a linked to the past on the superintendent, the okay, in a time on and sixty four, breathe of the wild now for sweets.

Did he design breath of the wild?

Well, so he's the head of nando s gives so he's the producer CER.

he's the producer .

now on the older series and there are other directors below him but like it's all his process power .

yeah by the way, new breaks of the wild, or what they call IT IT tears, the kingdom comes out next month.

which is ever fessing to make. I've never been the biggest shelter fan. Like, I like them. I play them and I thought breath the wild was great. This is not my total like style. But I mean, there are people who named their children, although a lot of people who need their children's s delt after the video game.

And you and I both talked to some games industry people preparing for this episode. And from real core gamer tight people, it's amazing how much reference they have for breath of the wild where like everyone just looks at IT like, wow, how do they make us to pull this because it's not for a core gaming audience.

And IT was once again to the point of process power. IT was a similar situation at a smaller scale where open world games were dead. They've been totally overdone, over saturated. The market was sick of them. And here along comes in intendo, M, E, moto and completely real visions and reenergized the genre.

yeah. So back to the powers is their counter positioning in the way that nintendo created cabinet games, or maybe in the general concept of, or not, about the fastest and newest.

Absolute, I think, is plenty of counter persisting all throughout the intent du history. And I think there are several examples here in this chapter of the story, or these chapters, the story one with narrative driven games, uh and donkey come to do with the family com and the N S. Relative to especially the rest of the american video game industry, right, is like worry about a small number of high quality games, not a large number of crappy games up again.

this will show in the next episode, not this one. But switching costs harder for them. If an intended had a viable competitor in the late eighties, they are be switching host, but they weren't. And so that will show up in the sega battle of once a pick aside, you're sort of a dug into that side .

at least for the next six, seven years. And for the majority of the market in both america, in japan, families are only gonna buy one council system that they're going to buy all their games on. There is a subset of the market that is going to buy both the superintendent o and they say good genesis, but that's a small subset like today, most households are going to choose between the play station in the experts. And it's interesting that nintendo do is a third alternative thing by hundred percent working costs. My god, I think nintendo might have every single one of these powers of looking at this.

I don't think they have branding what .

they do now with their I P.

I don't know that that's branding though. The definition of branding is if you receive two identical objects and you're ready to pay more money to buy from the firm with branding power.

Great point. And I P is accorded resource. Not the reason .

you buy something from the intendo is all sorts of reasons, but not because IT says intendo, like the nearest competitor, doesn't have any of the same features and capabilities that they have. IT doesn't have the games. IT doesn't have the same form factor in the later years.

It's like that your friends don't have IT, so you can play online like there's lots of differentiation. It's not like a banker insurance company where everybody he's competing at a commoditized way. And so brand really matters.

Two thoughts. I think intendeth does have brand power, but I think IT is the weakest of the seven that IT has also just incredible. I think IT has all seven, but the brand power, I think, is a smaller piece of the story.

And its brand power around the seal of quality, and especially with parents. And in this era, if I buy my kids an intendo system, I can be very sure that there's not gonna excessive blood, guts, there's not gonna be sexual content there, not gonna profit. I think that's definitely branding because the genesis brands against that yeah that's true.

They counter position there. I guess that the reason I bring IT up is because IT never actually comes down to branding because there are so few competitors. That they differentiate in all sorts of ways that they don't actually need to rely on branding. You could argue maybe in the modern era, the xbox versus playstation war is actually more of a branding power for one versus the other of why you'd pick sensor less differentiated. But nintendo s wildly differentiated in the IP that .

is on their platforms and nowhere else. I an I they are strong power during, yeah, the corner of research being the I P. Process power.

We talked about with me, a moto to network economies and scale economy is probably being cheap among these switch costs for sure. Counter positioning, yes. law.

Have we ever ever the company like this? I don't think so. I don't think so either. And IT reflects in what happened like they had ninety five percent global market share in this enormous industry ah .

and perfect timing right playbook. We ve talked about a lot of these, so I don't want to just revisit some. I want to bring up them that I think are kind of new. So mario as a character and I pull this out of the super mario book from going deep on that franchise is so perfect because he's so universal, get story driven, but there's not that much personality. So anybody can sort of see themselves in mario, whether if you're playing more of a core game and you're like or or even an .

RPG of any sort of RPG yeah you're experience .

a story that's unfolding before you as an observer .

like reading a book.

right but in mario, know there's not enough depth tomorrow o to say like i'm observing mario. You just are mario and that's like the perfect casual gaming character to just massively expand the gaming audience beyond teenage boys and make IT the most accessible ever. Yep.

completely agree. It's also interesting to note though, during this era, too, and IT came as to how powerful nintendo o was as a platform. They also had all of the great opposite kinds of games, the dragon quest, the final fantasy, the hard core story driven. R, P, G.

yeah. Mario was also fun every time you don't get sick of the music. The levels were easy to play, but hard damasked. Most of the levels only had small tweak between that stage in the next stage.

But somehow I still felt fresh, new every time, especially in this era where, like a lot of the competitors games, you'd quickly tire of them, like you could play ario for one hundred and fifty hours and IT would still feel fresh, new every time. And that an extremely difficult thing. That is why momento is such a genius.

Yep, he does the serious thing of incredible world building, especially starting with super mario of brothers of, like, you're in the mushroom kingdom and like it's this incredible, fantastic y world. But its story driven, not narrative driven. So like you can create your own narrative within the world.

right? IT was funny that the pop I IP stuff didn't work out because, like, IT was their first choice to use pop I P. But by not getting IT, they did not creating this unbelievably valuable franchise with mario.

And I pull some numbers. You mentioned three hundred eighty five million super mario games were sold cumulatively. And so that gets beat by tetris, poker, call of duty and G, T. A. In terms of like total franchise copies sold ever. But mario, if he sort of pop up a level and include mario car and mario party, that's eight hundred and twenty six million copies of mario game sold, which definitely makes IT the best selling franchise .

of all time ah wow.

it's so valuable and in fact and intendo lean into this, this is another sort of clever thing. They did not allow licensing of other characters. If you wanted to license an intendo character for a backpacker or a lunch box, or one of the other ten thousand things people have licensed than tender I P.

For for the longest time, they would only grant you maria license because they wanted to build a mascot. They wanted to build so much I, P. And brand value into the mario character that he became Mickey mouse.

Uh, interesting. They concentrated the effort as opposed to having carb licenses or link licenses or Zelda licenses, right? It's interesting .

what that allowed them to do because IT made mario more than a plumber. IT made IT so that when mario appears in other games, that doesn't feel strange. Because mario just means in tando, IT doesn't mean size scrolling plumber character, which is another clever creative decision where is just like how is the intendo aska and sure he's got a game of his own. He shows up in all these places and IT keeps going back to like it's important for him to not have that much character depth because that makes IT so that he can be super universal as the mask up.

Yeah, great point.

There is one more in this train of thought. And this i'll be, I think, a big theme of the next episode. But the fact that nintendo platforms are, first and foremost, foreign nintendo IP, and they love making high margin revenue on other developers, and they're going to say no to a lot of developers because they're inappropriate for the platform or they don't demand a good game or whatever other pinny belief that they have that it's not intendo in some way.

But unlike other platforms where they have a launch title and sort of a mascot for the platform, that's just like to produce the initial sales of the platform so that they get a network effect and then they can really make money from the third party developers. Nintendo has such good owned I P that I think they would be delayed just making the N S N S N S in the game boy. And it's only ever their games on IT.

And the way that that has compounded out over all these years is that they own some of the most differentiated IP in the entire world, and basically the only globally recognizable video game I P. In the entire world. And in second places, poke him on. And they own a third of that. I think IT was play accidental at first, but then once they realized the value of what they had, they were super protective of IT.

Yep, well, with poke and again, talk about this more next time. But they only owe a third of the IP. But they own poke on only being on the title platform, to your point, correct?

Yeah, it's very burnt. No, it's control more so than economics, right? What do you got?

The one big playbook theme that I want to talk about, Peter man, who we mentioned was the intended america's VP of marketing. And he, along with gale, tilda and others, were really responsible for like the core of the innovation that came from the .

american side of the business.

He qualified what ultimately became the company's sort of unofficial slogan, besides, like, do everything to be a monopolist without using the word manually. But that, aside for minute, the crazy comes up with is the name of the game, is the game. And I think this is like such a key understanding lan tn, D O and so applicable elsewhere.

And specifically I think like all great personal incorporate, uh encapsulation, it's both a hundred percent true and one hundred percent ridiculous and not true. And so what he means and what intendo means by IT, is that the quality of the games that we make and that others make for the platform is the name of the game that is all that matters. The quality of the product, the quality of the games, if we make and make available exclusively the very best games out there on our platform, we will win.

And that's one hundred person like that is what matters. And that part of Young is true genius was, as a complete outsider, recognizing that leg, the chicago eo motos. You know, the group yoko's are like the key to making all this work right. At the same time though, the reason is under ly ridiculous and di ridiculous because Peter main coins IT, he does everything besides make the games. And that is so important to like I really understand, like product and distribution, both are really important.

will also like the best cm OS party line is our product is just so amazing, IT sells itself, that's exactly what you hear there.

But I think the tend to is such a perfect custody of this of like this, uh, economy and their both so true in tandem has the best products, the best I P, the best games, they also, especially in this area, head the best distribution channels, the best relationships with their customers, the best control .

over their ecosystem, the best strategy.

the vast strategy here. And man, when you can marry both of those, that when you get ninety five percent global market chair.

this was my sort of final question in my the playbook themes that I had written down that I wanted to post to you. What other businesses ever have had ninety five percent market here? Or maybe the interesting one might be like what businesses today because this isn't like a narrow ly scoped market.

This ninety five percent represents global video games. You know, it's not like browser market share on IOS devices or something like that. It's like global video games.

The only one that immediately comes to mind is um I think apple and IOS not of revenue but a profits. Apple and IOS have something you know on the order of that global market chair of smart phone profit.

smartphone profits. Yet the other one that's like close, but I think is more around eighty five to ninety percent, is search U. S. space. Such changes usage.

I mean, I guess at a certain point, facebook had something like that of social networking across all of their family products the day before .

instagram launched.

the day they acquire instagram.

Yes, that's true.

And what's happy like doing that? Hey, day.

And the most interesting thing is like all the examples were naming are under heavy regulatory review and pressure. And another one that I was going to raise is, uh, microsoft share of the Operating system market. You know that probably was something like ninety five percent also.

or microsoft office.

And every single one of these have gone under significant D O J. concerns. And intend do never seemed to.

And is IT like people viewed this as a toy market that was like not terribly important to our economy. I mean, is a much smaller market. In one thousand nine hundred ninety, they are only doing three billion in revenue. It's not like these companies that are doing a hundred billion in revenue.

I think there's this really weird dynamic with intent du, which is why i'm so happy for doing this episode that it's just kind of overlooked and under appreciated as a business story. Yes, partially for the reasons you are saying, partially because it's the japanese company. And so there's like weird by cultural .

thing and the belief that is so hit driven makes people think like, oh, well, it's probably whatever market theyve accumulated surely is durable.

But yeah like and even there's such great books, as we said at the top of the epo de out there and work in documentary on the intendeth. but. There are ones from a business perspective, but they're not like nobodies covering the tender.

like people are covering apple. No, everyone's covering intendo for the nostalgia, the character development and the fan service.

right? And yet business story is just as good.

Yeah all right. I even though we killed IT wanted do grading on this episode. Where is a fear game? I think barn wall stupid since we know history from one thousand nine hundred ninety to twenty twenty three. So like what's actually great?

Oh, that would be really interesting to do if we could go back in time and not know what happened next. But obviously, we can do that.

That's true. Would we think that like nintendo was gona take over the world and expand beyond gaming? probably? Would we think that gaming would go from a three billion dollar market to a hundred and two hundred and fifty, whatever is billion dollar? Now that would have been a tough prediction to make.

I bet we would think what jim Clark and markin rison thought, which is the nintendo is going to become the computer, the window.

the internet. yeah. And we would not .

at all and predicted that just gaming itself was the thing and would become one hundred and fifty billion down market. We would have said to be one hundred and fifty million times .

about something else, right? That's a good point because it's you're out on a lib if you try to make the prediction in one thousand nine ninety that gaming becomes one hundred and fifty billion dollars total but it's a nice little hedge to be like, oh, I totally think nintendo could address one hundred and fifty billion dollars PPT unity but IT, it'll be a bunch of stuff it's almost like all the people in twenty teen when I asked about crypto, they were like, oh, i'm not so sure about bitcoin, but I think the block chain going to be a fundamental technology. It's it's the way to hedge. And you're like, I don't know exactly what the A I use cases are yeah, but i'm sure it's gonna huge.

Yeah okay, that was kind of a fun. Like, uh.

what would have happened? Others, yes.

but grading.

grading. So I suppose the interesting thing is to take IT from a shareholder perspective. In call IT, the late sixties, early seventies through ninety ninety, let's to say, the twenty years span from seventy and ninety.

You know, how do you feel about nintendo relative to being a shareholder of anything else? And IT was hard, especially because of all the exchange rates and the changing inflation in japan and inflation in the U. S.

And all these decades happened since then. But IT seems like the market cap in nineteen ninety of nintendo is in the like fifteen billion ish category, which by today's standards, of course, seems quite small. And we're like fifteen billion of our companies are in consequently when stacked up against big tech, right?

But was huge back that especially because there is all this weird of having to buy a japanese listed company and one, like most of the global capital markets.

are not based to pay, right? But one question I didn't have is in your notes, do you have any, in the seventies, any revenue figure? Because we know that I was billion in nineteen ninety.

I do not. I got to imagine that was inconsequent compared to what I would become.

yeah. So the framing is IT rounds to zero. And then twenty years later, IT goes to three billion in revenue, fifteen billion and market cap.

From a market addressed ability perspective, it's interesting that what happened is they had literal perfect timing to enter a market that would become a hundred plus billion dollar market, and they win in, and they captured ninety five percent of IT. So like what I should be saying to you is this is an a plus. No question.

They couldn't be positioned any Better and they couldn't executed IT any Better. Oh, and they own the relationships and they own all the IP, and they have a acute control over the whole thing. But I thinking about and the reason I don't think IT isn't a plus is because of the fall that will happen at the beginning of the next episode, which is like they canna blew a lead where they were up by ten runs in the bottom of the nth. And maybe the technology wasn't available at the time to have further lock in. But IT does feel like if the gaming industry was going to grow from three billion to one hundred plus billion over thirty years, it's kind of amazing that nintendo didn't manage to surf on top of that wave, but kind of ended up getting clobbered by IT two or three more times before figuring out how to really find their place there.

Yeah I think had some really unforced to own goal areas there along the way, like nintendo, very much good of embrace backward compatibility unto their council cycles. And then then they very much could have embrace the C. D. Format, you know, and failed spectacularly .

at both of those. Yeah, so I guess i'm in a and I would be an a plus. But for the fact that we do know the future and we do know that they earn as positioned as well as the numbers with state, I think that's why it's hard to be an investor and specifically, hard to be a public company investor because the numbers can tell you one story. But then there are either execution problems in the form of unforced areas or blacks on events or the the worlds sort of changes in ways that you absolutely could not have predicted by just looking at numbers.

It's so hard. I mean, I absolutely incline to agree with you given that we know what happens next. On the other hand, if you purely scope IT to this period time, like these guys executed ten ten during the you know nineteen, seventy.

one hundred and ninety complete master class in business strategy and execution.

D like we're saying earlier, we've never covered the company that scored so high on so many the powers yeah .

are I give me your great David.

I hear your argument. I love IT. That's the reason we're doing in the second episode. But I only seven plus for one hundred and seventy and one thousand .

nine hundred ninety.

There you have IT.

There we are, carrots, car bouts. By the time the episode comes out, the Oscars will have happened. So you will know if this already is best picture or not. But even if IT is everything everywhere, all that wants was exceptional, and I highly recommended.

Oh yeah, you have told me before that that was amazing.

really good. Have I recommended on the show? My double car voting?

I can't remember. I know you've told me about IT. It's hard to separate like our conversations on the show and not on the show.

You know it's a great couples movie, but it's also a great sort of like indy film, like it's a feel good movie to watch together. I also recommend watching IT alone because I think it's just a great piece of like, independent film making. IT is unbelievably vfx heavy.

What you don't expect from the first twenty minutes you're going to start watching this movie and be like, what do you mean that this is unbelieving F X. Hey, but IT was done by a four person team and it's like a completely different take gun, the effects. It's not like avatar AR the way of water. Let's go spend two hundred and fifty million dollars to create a film. I think it's like a twenty five million dollar total budget where it's almost like, let's show off how amazing after effects and other state of the art software that can run on your computer have gotten did they use .

like unreal engine to do somewhat?

Imagine i'm not sure i'm not sure I I got to watch more youtube videos s like behind the scenes, which which is funny .

rather we spend all of time on the official of course, the natural comparison video s music and movies fully. It's all converging .

yeah well, I but there is a difference with video games, which you pointed out earlier, which is like IT is a different part of your brain in terms of my experiencing the media is IT coming at me passively, or do I have .

to be active in the media? Oh yeah. I industry. But like the tools and the technology are converging. My car out slash outs or two relative ones, Michael Lewis interviews, for whatever reason, I got like on a kick of listening to Michael Lewis.

I just love my Lewis so much and I went back and I listen to, I think I think you are. I have before I had as a car without his interview at the various a couple years ago. So great that I mean, in a kick of seeing what else is out there either he definitely has his leg.

Everybody does his a quiver of stories that he pulls out. He listen to a few you like OK. I've heard you you talk about this like sixteen times, but I found one that i'm so glad I did deep cut on youtube.

It's a three hour interview on sea ban on book. T V. I think it's even span too. I have no idea why Michael l did this, but um is from a couple of years ago and a is by far the longest one out there and like he goes like three clicks deeper on everything that was just fascinating to here all like the real deep cut Michaelis stories. I thought I had listened .

off his interviews so I can't wait to listen.

I've get youtube premium, which is amazing. So i've been listening to IT in podcast form, like without the video while I go on runs box and stuff. Only way to live. Only way to live. Oh, I can't believe I went so many years without youtube premium.

Yeah what is ten box a month is pretty easy. Ten box a month.

I mean, literally you're valuing your time if you don't pay for youtube premium and you watch any amount of youtube, you're saying that like my time on all these ads is worth like zero .

yeah I mean, if they were Better ads, I be more inclined to pay attention.

right? It's not like these are like high quality brand to acquired style like ads. You wants to hear about youtube ads or youtube ads.

It's like, oh, spray. I guess I do you drink spray, huh? Never mind that I haven't drink the sugar soda and fifteen years, but sure, show me another spread ad, right? alright.

Anyway, listeners will give you the arrest to your fifth hour back. Fourth hour back, whatever IT is. Thank you for coming on the journey with us. You can join the revamp, reinvigorated acquired lp program and become a limited partner.

H, since at the end of the epo de, I thought about doing this early, but I thought, get in an nintendo. But now that we're at the end, I can say the inspiration for how we've revamped the acquired lp program, where one of the core things we want to do is involve L P S in the audience in helping us choose topics that we cover on the show. Was inspired by my favorite video game, pot gas, which does this, yeah, the great folks of a resonant arc.

They are a video game book club pockets. So they play video games like a book club, and they choose a game to cover and their patron, on the key benefit of being their patron, is you can vote on the that they cover. I like, that's brilliant. We should do that on required.

That is brilliant. So, L, P, S, I would say maybe like a week after this episode comes out, keeping eye out for an email, pulling you on diving, and I ve a short list of the next episode that we will do. We're curious to hear your feedback will put a free form field in there too, and also were starting back up with the zoom calls.

So if you want to hang out with David and I on zoom for an hour, keep an eye for email on that too. If you are an lp, acquire da FM slash lp to join. Go check out A Q two.

We have duce seriously like the best content that we've had on that feed in a long time coming up. I've been really pumped with the last few and chock full of IT even more so. Search A C Q two in the podcast player of your choice. No space and then we may change that. But as a right now, no space just like S P N two arms and yeah we're pumped launch that join this lack almost fifteen thousand folks strong ah we .

just pass fifteen thousand.

fifteen thousand yeah update my script. Smart, thoughtful people talk about the eisner de get emerge acquired data m flash store why we have lots of things, small media empire.

The acquired slack is like a aversion of nintendo power and the power light.

There we go. We need to produce an intense of power. I'm cut this off, listeners. Thank you. Let's see.

You next time. Will see next time. Easy you, easy you, busy you who got the truth?