Another Wild Ride
And the NES rocket ship continues. By 1988 the market has more than doubled, to 1.7 billion. Demand remains strong: 8.4 million NES sets are ordered by retailers, but Nintendo can only manage to ship seven million. Other game makers have followed in the wake of this great success, with Nintendo owning 70 percent of the market in 1988, Atari (various legacy consoles, along with the Atari 7800 ProSystem) 16 percent and Sega (Master System) 14 percent. 97 percent of revenues for the company are coming from NES game sales. Considering that just a mere three years ago Minoru Arakawa was laughed off the show floor in a cramped 600 sq. ft. booth, the sprawling, glittering displays put up by Nintendo and Sega at the 1988 Winter CES in Las Vegas shocks showgoers. Atari and Commodore are relegated to proffering their wares in suites. “Nintendo City” takes up nearly half of the West Hall at the 1989 Winter CES, and for good reason: exhibiting a market penetration similar to that enjoyed by its cousin in Japan, one out of four U.S. households have an NES. As of March, America passes the Japanese as the biggest consumers of Nintendo consoles, passing the 13 million mark for installed units. 150 different games are available for the NES, racking up 75 million cartridges sales in America. In 1989, Miyamoto’s Super Mario Bros. 3 rakes in over $500 million in sales in the U.S., moving 11 million copies worldwide. At the next year’s Winter CES in Vegas, Nintendo continues to dominate floor space, housing 51 different licensees under its roof.
A License to Print Money
Nothing attracts lawsuits quite so much as rampant success and being a Japanese company with a Japanese name in the 80’s paints an even larger target on your back. So successful is the NES in America that it draws the ire of the U.S. Justice Department, spurred on by complaints from its competitors. Rep. Dennis Eckart, chairman of the House Small Business subcommittee, asks that the Justice Department begin investigations into a laundry list of various unfair market practices that seek to monopolize the home video game industry and keep prices artificially high. But is Nintendo merely attempting to retain the control and quality of their games, and prevent the kind of market over saturation that felled the entire industry a few years ago?
Flipping back to the time when the NES is being developed, President Yamauchi studies the video game crash of 1983-84 and realizes that a big problem was the flooding of the market with inferior product by numerous companies little concerned for quality. To avoid this, Nintendo instigates a strict (some might say, draconian) third-party licensee program, allowing only select developers make games for the NES. When you sign up for this program, you play by Nintendo’s rules. The company demands a 20 percent royalty on game sales, and although at first third-party companies are initially allowed to manufacture their own cartridges, Nintendo soon changes the rules. They demands that only they may produce the carts, at a manufacturing fee to the licensee of $14 per cartridge, which Nintendo farms out at a cost to them of $7 per cartridge. A minimum order for games is 50,000 units in the U.S., paid in advance. Licensees are limited to making only 5 NES games per year and have to hold off on releasing those games on competing systems like Sega’s Master System for two years.
Paying the Price
Companies agreeing to these conditions do get to put the Nintendo Seal of Quality on their packaging, but Yamauchi has another Ace up his sleeve to enforce compliance: every NES has a proprietary chip installed, that must successfully handshake with another chip inside the game cartridge in order for it to function. Called the 10NES, Lockout or CIC (Checking Integrated Circuit) chip, it is the ultimate gatekeeper to the riches of the vast and growing NES user base. Paying the price of admission, Namco, and Hudson become the first licensees for the NES. Game companies Capcom, Bandai, Konami, Taito, follow soon after. Nintendo might be playing hardball, but by the end of 1986 there are sixteen licensees, and 1987 sees 50 in the game. To get a sense of what is at stake, Konami’s earnings go from $10 million in 1987 to $300 million in 1991.
Dissension in the Ranks
It’s not all sunshine and 1-up mushrooms in Nintendo licensee land, however. Namco is the first to complain about Yamauchi’s restrictive rules, and they start to align themselves closer to other console makers. The long-time head of Namco, Masaya Nakamura, complains to the press, telling the Japan Economic Journal that “Nintendo is monopolizing the market, which is not good for anyone.” It is over these monopolistic practices that former Namco partner Atari files a $250 million anti-trust lawsuit against Nintendo in Feb of 1989. They also go so far as to sell unlicensed carts through a subsidiary named Tengen. The company is an official licensee at the time but wants to produce more games per year than allotted by their agreement with Nintendo. In order to accomplish this feat, a technical team at Atari reverse engineers the NES in order to analyze its inner workings. First examining the communications between the console and cartridge, they move on to deconstructing the 10NES chip to pull out its object code. This they hope to decompile into source code but are unable to crack it. In a desperate ploy, a lawyer at Atari applies for a copy of the source code that Nintendo has filed at the U.S. Copyright Office, under the false pretense that the info is to be used in an intellectual property lawsuit. With this purloined data, Atari is able to produce their own version of the 10NES key, which they call Rabbit. You don’t have to be Perry Mason to figure out what comes next. Nintendo sues Atari, crying copyright infringement. A court eventually agrees with Atari that reverse engineering object code falls under the Fair Use legal doctrine, but Atari’s clandestine acquiring of the 10NES source code scuttles their anti-trust lawsuit.
Other sources join the chorus, accusing Nintendo of using their leverage to strong-arm retailers. Company “Investigators” might show up at their places of business, and if it were found that a competitor’s products enjoy favourable shelf space, trucks with new NES cartridges might mysteriously fail to show up at loading docks. Favoured game developers would be extended more cartridge production capacity, while others might find themselves out in the cold during critical sales periods. As an example of the sorts of tactics Nintendo is accused of, in 1988 there are requests for 110 million NES cartridges by retailers. Analysts reckon that the market could support sales of 45 million of these games, but Nintendo only produces 33 million carts. Some feel the company is holding back to create scarcity and consumer hysteria over its products, but Nintendo insists the shortage is due to the dearth of semiconductor chips. These scenarios rattle retailers, already struggling to keep popular NES games in stock. It is suggested that Nintendo’s near monopoly causes game prices to be inflated for consumers by an estimated 20 to 30 percent. Senior Vice President of NoA Howard Lincoln accuses Eckart and the Justice Department of grandstanding and denies any wrongdoing by his company. However, due to pressure from the Department of Justice investigations and various lawsuits, in 1991 Nintendo drops the exclusivity clause from developer contracts, allowing third-party game companies to produce product for competing systems without the former two-year waiting period. The same year they also settle with American States Attorneys General over price fixing charges, where Nintendo and certain dealers were alleged to conspire to sell the NES at a higher price point. As ordered by Judge Robert W. Sweet, U.S. District Court of N.Y., the settlement offers compensation to customers who purchased an NES for $99.95 between June 1988 and December 1990. The company is to give out up to $25 million in $5 coupons to purchasers, which can be used towards the cost of a Nintendo cartridge. If less than $5 million worth of coupons is actually redeemed by customers, the company is to pay the difference up to $5 million to a settlement fund, to be used as the States determine. An additional $3 million will also be paid by Nintendo. As before, the company denies any guilt in the settlement, stating it is merely agreeing to avoid lengthy litigation.
The Power of Nintendo
Investigations notwithstanding, by 1991 33 million U.S. homes have an NES. There are over 100 licensees and over 450 titles available for the console. By 1992, the industry is worth over $5 billion. Nintendo is netting over 1 billion dollars gross profit annually, and in an echo of Atari’s heyday, their net profit beats that of all American movie studios combined. Like the Atari VCS, the NES has paved the way for competing systems that try to carve their own market share from Nintendo’s pie. The Sega Master System is probably the most venerable of these challengers, released a year after the NES first lands on American shores. And we mustn’t forget old stalwart Atari, who makes a go of things by finally releasing their 7800 ProSystem console in 1987, with a low-balled price. Also, like the Atari VCS. the NES is showered with a plethora of peripherals, perhaps the most notorious of which is the Power Glove, released in 1990 by Mattel. Intended to allow gesture-based control of games, it does little more than create a lot of frustration and strain a lot of players’ arms. The NES also spawns its own magazine. Starting as a newsletter servicing the Nintendo Fan Club headed by former NoA shipping manager Howard Phillips, it eventually morphs into long running magazine Nintendo Power in the summer of 1988. NP eventually reaches 1.5 million subscribers and sees its plug finally pulled in December of 2012.
There are also plans formulated to follow the Famicom’s lead and create an online service for NES users, titled the NES Network. Stock trading, home banking, and head to head online game play are to be offered in a bundle with a modem, keyboard and printer. Jerry Ruttenbur, previously senior vice-president at HBO, is named as president of network products for Nintendo in 1989. Ruttenbur eventually finds that the project is being underfunded, and leaves the company in 1991. The NES Network fails to materialize.
Another online scheme that is floated on the NES is a system to allow state residents to play the Minnesota State Lottery via the console. A planned market test is to involve 10,000 homes, charging $10 a month to receive an NES and modem, with which users would connect to the central Lottery server and purchase lottery tickets. Heavily criticized by the Minnesota attorney general as a pathway to juvenile gambling, the planned test and service craps out in 1991.
The video game pop culture pattern continues with TV shows capitalizing on the NES’s success, all produced by DiC Animation. We get the syndicated Super Mario Brothers Super Show in 1989, starring wrestling sensation “Captain” Lou Albino as Mario, and Danny Wells as Luigi. Captain N: The Game Master appears in NBC’s 1989 Saturday Morning lineup, becoming the top-rated such cartoon show for six to eleven year-olds. The Adventures of Super Mario Bros. 3 surfaces on Sept. 8, 1990, on NBC, accompanying Captain N during its second season in an hour programming block. The eventually morphs in Captain N and the New Super Mario World in 1991.
Goodnight, Sweet Prince
In a move similar to Atari and Mattel’s cheaper-but-the-same redesign of their flagship 2600 and Intellivision consoles, the NES is retooled in 1993 and called the NES-101 or NES Top Loader. The unit is priced at a low $49.99 but doesn’t extend the line for long. The last game for the NES, Wario Woods, is released in 1994. The next year, the Nintendo Entertainment System is officially discontinued. There have been 60 million NES units sold worldwide, and 500 million cartridges of 700 NES games. Shigeru Miyamoto makes eight Mario games for the NES between 1985 – 1991, selling nearly 70 million copies. Mario himself, according to Q rating scores, is more recognizable to kids than Mickey Mouse. Yamauchi’s gamble, initially seen as a sucker’s play in the context of the U.S. video game market at the time, has paid off amazingly. When people make a generic reference to a video game, they don’t call it an Atari anymore.
It’s now a Nintendo.
Sources (Click to view; inert links are kept for historical purposes)
“The Video Game Update.” Computer Entertainer, Jan. 1990, p. 11.
(The game has sold 2.6 million copies to date in Japan.)
“1990 Winter CES Overview.” Computer Entertainer, Jan. 1990, pp. 1–7.
Nintendo took the biggest chunk of real estate (51 licensees take up a lot of space)
“Nintendo and Japan: The Story So Far.” N64 Magazine, June 1997, p. 90. Namco and Hudson were the first to sign up. These privileged developers were initially allowed to produce the cartridges themselves, but it wasn’t long before Nintendo removed that right.
Kent, Steven. “Retroview: Ressurection (Part 2).” Next Generation, Oct. 1998, pp. 144–145. Arakawa chose to work out of a small (600 square feet), quiet booth at Summer CES. Shortly after launching their system in Los Angeles, Nintendo set up a very strategic partnership to help with future markets. Their new partner was Worlds of Wonder. Several ex-Atari executives founded Worlds of Wonder, and not surprisingly, its marketing executives were mostly from Atari too. Nintendo hired many of World of Wonder’s field representatives, giving the Japanese company complete control of the marketing arm.
“A Question of Character.” Next Generation, Oct. 1998, p. 80. In 1989 Super Mario Bros. 3 sold more than 11 million cartridges worldwide and grossed more than $500 million in the U.S. alone.
Brown, Mark R. “Show Report Winter CES.” Info Mar.-Apr. 1989: 65-67. Internet Archive. Web. 27 June 2017. “Nintendo City” occupied almost half the building.
Info on Department of Justice investigation into Nintendo’s business practices from Elyria Chronicle Telegram (AP), “Eckart asks Justice antitrust probe of Nintendo”, pg. E-3, Dec 8 1989. Retrieved Oct 17, 2015.
50,000 number for units sold during NYC text phase from European Stars and Stripes (NY Times News Service), by Andrew Pollack, pg. 13, Nov 15 1986.
“ProNews Report.” Editorial. GamePro Jan. 1992: 160. Internet Archive. Web. 17 Aug. 2016. The Minnesota State Lottery announced that it will stop plans for a limited market test that would have allowed lottery players to purchase tickets from their homes using a Nintendo Entertainment System and modem.Further Los Angeles, Chicago and SF NES roll-out schedule from above European Stars and Stripes article, as well as allnes.com – www.allnes.com/history2.php. Wide release of NES in fall of 1986 from same allnes.com article. Unknown date retrieval.
Strategic Management: An Integrated Approach, by Charles Hill and Gareth Jones, published by Nelson Education. Pg. C166, “Despite these restrictions, 6 companies (Bandai, Capcom, Konami, Namco, Taito and Hudson) agreed to become Nintendo licensees.” “…Konami’s earnings went from $10 million in 1987 to $300 million in 1991” Pg. C168, “As of 1991, there were over 100 licensees for Nintendo, and over 450 titles were available for NES.” “In 1988, retailers requested 110 million cartridges from Nintendo. Market surveys suggested that perhaps 45 million could have been sold, but Nintendo allowed on 33 million to be shipped. Nintendo claimed that the shortage of games was, in part, due to a work wide shortage of semiconductor chips.” “In 1990, under pressure from Congress, the Department of Justice, and several lawsuits, Nintendo rescinded its exclusivity requirements, free up developers to write games for other platforms.” Retrieved Oct 18 2015.
Historical text for the AVS display at Nintendo World, NYC Feb 8 2006. “The system included a keyboard, handheld joystick, light wand/gun, music keyboard, and a data storage unit, that were all infrared wireless. The revolutionary controllers were also wireless, and could be stored in the front of the main unit, or control deck when not in use.” Retrieved Oct 17 2015.
Phoenix, the Fall & Rise of Videogames, by Leonard Herman, pg. 98, 107, “Ray Kassar became enraged when he saw the display and threatened Nintendo with both a halt of the Famicom deal and litigation for breach of contract.” “In 1984, Nintendo had sold 2.5 million Famicoms in Japan and 15 million cartridges.” “Since a videogame console is only as good as its available software, Nintendo unveiled 25 cartridges at the CES.” Retrieved Oct 17 2015.
Images of AVS 1985 brochure with wired controllers and ROB from I___E___T’s Bucket, Photobucket. Retrieved Oct 17 2015.
Info on Sears relegating initial NES sales to only their catalog from Hutchinson News (NY Times News Service), “Video Games: Gobbling Up Part of the Christmas Market”, pg. 9, Oct 16 1986. Retrieved Oct 16 2015
Images of the NYC mall demo, ROB playing Gyromite and Stack-Up and their respective game boxes, and of Howard Phillips in bow-tie, from Howard Phillips’s Gamester Howard Facebook page, Timeline Photos. and ROB and his games albums. Retrieved Oct 17 2015.
New York Magazine, “The Bottom Line: Video-Game Comeback” by John Crudele, pg. 20, Jan 25 1988. “In 1987, NES beats out Pictionary (#2), Hasbro’s G.I. Joe (#3) and Mattel’s barbie (#4) for hottest toy of the Christmas season, according to Toy & Hobby magazine”. Retrieved Oct 15 2015
Info on Atari’s $250 million anti-trust lawsuit, America becoming the largest consumer of Nintendo consoles with 13 million sold, and Nintendo selling 75 NES carts in 1989 from Daily Herald (AP), “Nintendo’s trump card is computer fun, games, section 3, pgs. 5-6, May 29 1989. Retrieved Oct 17 2015.
Compute, “Editor’s Notes” by Keith Ferrell and Selby Bateman, pg. 4, Mar 1988. “The resurgence of video games at the 1988 Winter CES is Las Vegas is the show’s biggest surprise, with Nintendo and Sega manning huge displays. Meanwhile, Atari and Commodore are absent from the show floor, opting for suites instead.” Retrieved Oct 4 2015
Image of the 10NES lockout chip, and other information from Retro Nintendo Reviews, “10NES Lockout Chip Basics”. “Nintendo devised the 10NES (or Checking Integrated Circuit/CIC) lockout system…”. Retrieved Oct 17 2015.
“Pronews Report: Nintendo Settles Price Fixing Charges.” Gamepro July 1991: 76. Internet Archive. 13 Aug. 2016. Web. 13 Aug. 2016. Nintendo of America says it will hand out up to $25 million in coupons to customers and will pay $5 million in order to settle price fixing charges brought against it by the Federal Trade Commission.
Info on Nintendo having a NES in 1 out of 4 households in the U.S. in 1989, as well as selling 90 percent of the consoles sold in the year from “Brookings Papers on Economic Activity, pg. 64
“Pronews Report: Nintendo Drops Exclusivity Clause.” Gamepro Apr. 1991: 76. Internet Archive. 9 Aug. 2016. Web. 9 Aug. 2016. Nintendo of America has dropped the exclusivity clause from its licensing agreement with third party developers…Image of NES-101 top loader by Evan-Amos, posted to Wikimedia Commons on Feb 28, 2011. Retrieved Oct 17, 2015.
Image of NES test launch box and games, as well as other information from 1up.com, “In Their Words: Remembering the Launch of the Nintendo Entertainment System” by Frank Cifaldi. Pg. 7, “Nintendo’s first wave of games carried a distinct visual style, with pixelated in-game graphics blown up against a black, starry sky. This (Nintendo’s game box art), like every aspect of Nintendo’s campaign, was to differentiate its products from those that came before. ‘There was an over-promise in the games that had been introduced prior,” said (Gail) Tilden” Pg. 4, “Lance Barr and I (fellow NoA designer Don James) took the time to take it back into our design studio and created that light grey, dark grey and black band for the final version of the product”. Retrieved Oct 17, 2015.
Nintendo Settlement Fund Legal Notice, By Order of Judge Robert W. Sweet, U.S. Dist. Ct., S.D.N.Y. Printed in GamePro Magazine, September 19911989 images of kids at F.A.O. Schwartz’s Nintendo Corner from The Stars of Famicom Games, Game Software Production and Distribution, pg. 32-33, PHP Institute 1989. Scanned by Chris Covell.
Image of the NES Deluxe Set contents from Unbox Therapy’s “Nintendo NES Deluxe Set Unboxing (1985)” video. Retrieved from YouTube, Oct 16 2015
New York magazine, “The War On Wall Street’s Inside Dopesters” by Jack Egan, pgs. 41-44, Mar 28 1983
Image of front and back of VS. System flyer from The Arcade Flyer Archive, “VS. System”, last updated Jul 9, 2002. Retrieved Oct 6 2015. Nerdist: The Indoor Kids: Gamester Howard! – http://www.nerdist.com/2012/10/the-indoor-kids-67-gamemaster-howard/
New York magazine, “Steve Ross On the Spot” by Tony Schwartz, pgs. 22-32, Jan 24 1983
Image of AVS from Wikimedia Commons, “Nintendo Advanced Video System (retouched).jpg”, retrieved Oct 14, 2015