Copyright (c) 1996, 1997, 1998, 1999, 2000 Samuel N. Hart
All Rights Reserved
The Intimidation Tactics of Nintendo
Nintendo has been criticized as being the most "notorious video game company in history."9 Through their considerable influence in the market during the late 1980s, they were able to control much of the industry using intimidation, scare tactics, and price-fixing. It is interesting to note the events leading up to this domination, and the players involved.
Nintendo, who had been suffering financially since the gaming market crash during the Third Generation, entered the Fourth Generation market with a system that many consider to be inferior to the competing systems of that time.8 Hiroshi Yamauchi, Nintendo's president, instructed his engineers to leave out the frills of the other gaming systems, and include only the essentials to save money. The system would only have 2,000 bytes of RAM as opposed to the Sega Master System, a competing system, which had 64 kilobytes of RAM.10 Industry standard graphic processors were dropped in favor of cheaper, less functional, non-standard ones. The push to produce this system was intensified by the fact that the Master System, and other competing systems, had all been in the stores for months, and were achieving great success. When the system was ultimately finished, the defect rate would be as high as 30% per shipment 8 which angered many retailers and turned them against Nintendo (eventually damaging many of these retailers when Nintendo attained the popularity that they did.)
After the Nintendo Entertainment System (NES) was released, Nintendo pressed for huge media infiltration of their advertisements, which was something not being done by competing systems. The market had been extremely slow in the previous years, and many companies were very cautious. Nintendo, fueled by a marketing drive rarely seen, was able to capture nearly 90% of the U.S. gaming market by 1986.1 This popularity had dozens of gaming companies at Nintendo's door to produce titles for their system. However, because of Yamauchi's foresight, Nintendo had changed the previous "free-market" set up of the industry with the inclusion of something called a "key-chip" in his NES units.
During the preceding generations, a video game programmer would simply purchase the equipment to construct games for a system from the system's parent company. The programmer was then was free to design any game without permission from the company. (A prime example of this was the video game based on the "Porky's" movies released by CBS for the Atari VCS/2600.) Yamauchi did not like this freedom given to the designers. So he had his engineers create a chip that would lock out the instruction code from any cartridge, unless that cartridge contained another chip, called a "key-chip." This "key-chip" had a certain disabling code. The disabling code was then patented by Nintendo and copyrighted.4 The result was that it became illegal to reproduce the code, without Nintendo's consent. Nintendo then made specific contracts that companies must agree to abide by in order to receive permission to reproduce the "key-chip." This gave Nintendo complete control over its third party licensees, and they used that control to propel the Nintendo Entertainment System farther. Specific deals were made which prevented these companies from producing games for any competing home system.8, 9 Because of Nintendo's considerable market share, few companies argued with this policy. The result was that many competing systems were driven to extinction because of a severe lack of games. Companies like Atari and Sega could not hope to compete with a system with over 100 new games each year, when they could only produce a dozen or so annually without the help of third party licensees. This propelled Nintendo's domination of the market further.
Aiding in the promotion of the NES, were two sizable companies. Toys'R Us attributed 17 percent of its sales and 22 percent of its profits to the NES and its games. They in turn, helped firm up a deal between Pepsi and Nintendo in 1988 that involved the sale of nearly $10 million worth of Nintendo products to Pepsi, and NES advertisements on the outside of 2 billion Pepsi cans. "In return," Sheff wrote, "Pepsi got the cachet of being associated with Nintendo."5
Nintendo began orchestrating game shortages sometime in 1988. This was called "inventory management" by Peter Main, an executive in charge of public relations at Nintendo, but was really to keep the customers on a short leash. By limiting the amount of product available, Nintendo could keep the demand for the product high. The editor of one toy-industry journal noted that "Nintendo has become a name like Disney or McDonald's. They've done it by doling out games like Godiva chocolates." By design, Nintendo would not fill all of the retailers' orders and kept half or more of its library of games inactive and unavailable. In 1988, for instance, 33 million NES cartridges were sold, but market surveys indicated that upwards of 45 million could have been sold. That year retailers requested 110 million cartridges, almost 2.5 times the indicated demand. These practices would greatly benefit Nintendo, but drive many smaller software firms out of business. Certain titles would be produced, then sold very slowly over the span of a year, and the profits would not come in fast enough to keep these small companies afloat. The toy and electronics as well as department stores became dependent on Nintendo, in addition to most game producers. This gave Nintendo a great deal of clout in dealing with companies who were used to throwing their muscle around. 9, 6
One such company was Child World, at the time, the second largest toy-store chain in the United States. They refused to play by Nintendo's rules, and ended relations with them. By 1989, they were experiencing severe financial difficulties due to the loss of 20% of their sales through video games. They came back to Nintendo, trying to appease them, and were met with open hostility. Nintendo agreed to sell them product again, but they would have to pay for the product a year in advance.7
Another Nintendo policy that made retailers furious was their return policy, or lack thereof. Because Nintendo's quality control was boasting a defect rate of 0.9% for hardware and 0.25% for software by 1988, Nintendo executives did not see a need for their previous 90 day guarantee. A new policy was announced to the retailers: no returns. Once a game cartridge box or system box was opened, a refund was out of the question. Concerning this, Sheff wrote:
"Pandemonium followed. One of the largest retailers in the country threatened to stop carrying Nintendo Systems and products. Nintendo refused to change the policy and the retailer refused the products. The retailer held out for three months; after that it crawled back and agreed to Nintendo's terms."7
Nintendo's next atrocity would be to use the considerable monopoly they had to control the consumer. Because of the game shortages, consumers would be more concerned about getting a particular title than the price. And because of Nintendo's domineering stance with the retailers, they were able to dictate the expected prices for their games. 9
In the electronics and computer industry, you can expect equipment to reduce in price over time. When new devices are created that make older ones obsolete, the older devices are reduced in price to compete with the newer ones. This is clearly evident if one simply peruses the want-ads in their local paper and notes the prices of computer systems that were considered state of the art a year previous. This logic applies to all aspects of the computer and electronics industry, including video games. Why then between 1985 and 1989 did the Nintendo Entertainment System only lower $10 in its price? 9
This was exactly what Attorney Generals from all fifty states were wondering when they began investigating the activities of Nintendo of America in 1989. They found that Nintendo had been fixing the price of systems and games in the stores, using intimidation to influence retailers to abide by their wishes, and were making astronomical profits. Nintendo had been doing this since they first brought out the NES in 1985. They had strived to construct the system inexpensively, however, it was being sold at the same price as the competing systems. An antitrust action was brought up against Nintendo by these same Attorney Generals, and on October 17, 1991, District Court Judge Sweet granted approval of settlement agreements. [775 F.Supp. 676 (S.D.N.Y. 1991)]
Nintendo was ordered to reimburse $25 million to consumers who had purchased systems and games between June 1, 1988 and December 31, 1990. This was to be done through coupons that entitled the bearer to an immediate $5.00 reduction in the purchase price of any NES game cartridge. This was to be for every game purchased by the customer. If someone had five games they would be entitled to $25 in coupons. While they were ordered to pay $25 million, they wound up only paying around $1.5 million. The reason for this was because Nintendo convinced the Judge that they needed to be certain of a consumer's truthfulness regarding ownership of the system before they could reimburse them. The Judge agreed, and allowed Nintendo to make their own terms. Nintendo required that the consumer had three things: the dated store receipt, the UPC code from the original box, and the serial number from the back of the unit. 9 Considering that this occurred in 1991, how many customers do you think still had the original UPC code from the box let alone the dated store receipt from 1988? This is why the refund failed, because only around 300,000 people qualified based on Nintendo's guidelines. [775 F.Supp. 676 (S.D.N.Y. 1991)]
The final problem Nintendo would cause before they were humbled by Sega in the early 1990s, would be to hinder the production of 16-bit systems against the consumers' requests.
In 1988, when it was becoming apparent that 16-bit technology was becoming inexpensive enough to warrant inclusion in the next breed of video game consoles, Nintendo issued a press release that sounded very similar to that fateful statement by Atari made in 1982. Nintendo said, "We feel that the average game player is not mature enough for a 16-bit system, and that the demand is insufficient for it to be a high priority."8 They were wrong. In the summer of 1989, the first 16-bit system, called Genesis and produced by Sega, would arrive in the stores. By the next Christmas, they were outselling Nintendo's NES 3 to 1 9 and Nintendo was losing many of their licensees to Sega. This forced Nintendo to reconsider its decision about 16-bit technology, and begin designing one of their own.
When these events are considered with those that occurred during the Third Generation and caused the gaming market crash, the flaws of a single system market become painfully obvious. The fact that more software innovations and higher employment rates in the industry transpired during the Fifth Generation where we find a multple system market and increased competition adds to this argument as well.3 I personally think that the inherent risks of a signle system market are sufficient to warrant concern if the industry becomes dominated by one company again.
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