Oh, have I ever done my Mario impression for you?
No, I would not expect you to have a Mario impression.
I don't know where this came from.
Maybe all the Super Smash I was playing in college
on N64, but here it goes.
He, he, he, ho, ho, ho, ho.
That is amazing.
Wow, I had no idea you had that in you.
I'm very impressed.
See, I've been storing that up for this episode.
Wow.
When Charles Martin then moves on from this mortal coil,
I think Nintendo knows who the replacement is going to be.
Ho, ho.
He, he, he.
Oh, that is so good.
I'm never going to be able to look at you the same.
Good, that was the goal.
All right, let's do it.
Let's-a go.
Who got the truth?
Is it you, is it you, is it you?
Who got the truth now?
Is it you, is it you, is it you?
Sit it down, say it straight.
Another story on the way, who got the truth?
Welcome to season 12, episode 3 of Acquired,
the podcast about great technology companies
and the stories and playbooks behind them.
I'm Ben Gilbert.
I'm David Rosenthal.
And we are your hosts.
Video games are an absolutely enormous industry
with a market size of over $100 billion
of consumer spend every year.
That makes it bigger than Hollywood
and the music industry combined today in 2023.
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 open Candy Crush
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 fits and starts.
It was not all up and to the right.
And in the early 1980s, the video game industry
in the US had some dire straits
and nearly evaporated entirely until Nintendo
made a huge bet and changed history forever.
Oh man, I've been a gamer all my life.
I love video game history.
I was so looking forward to doing this episode
and covering Nintendo and I had no idea
what an incredible story it is
of how Nintendo single-handedly resuscitated this industry
and achieved 95% global market share
and dominated this multi-billion dollar industry
that was left for dead.
That is the story we're gonna tell today.
We're not gonna get to the Switch.
We're not gonna get to the Wii.
We're barely even gonna get to the Super Nintendo.
Yes, on this episode,
we'll be covering Nintendo's early years
or at least the first hundred years of the company
up until about 1990.
And then I think we have a part two in the works
because the story of Nintendo after 1990
is like a completely different company
and a completely different set of analyses to do.
So consider this a part one
and truly a story all to its own.
Well listeners, we have a big announcement.
We are renaming the LP show.
The LP show has been public for the last year
and has effectively served as acquired ESPN2 channel.
The deuce.
Yes.
So we're gonna make it official.
The LP show is now known as ACQ2.
It still has the same great expert interviews
with founders and investors like Vijay Raji,
the former Facebook exec who founded Statsig
and Megan Reynolds,
the head of capital formation at Altimeter.
You can still find it in every single podcast player,
whether you are an LP or not.
So if you've never given it a shot,
there is no better time.
Just search ACQ2 in any podcast player
and we have some banger episodes coming up
in the next couple months on the calendar.
For our LPs, just so you're not confused,
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 wanna 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.
So LPs, look out for an email on that
and more stuff to come.
You can join at acquired.fm slash LP.
All right listeners, this is a great time
to talk about one of our big partners, ServiceNow.
ServiceNow is the AI platform for business transformation,
helping automate processes,
improve service delivery and increase efficiency.
Over 85% of the Fortune 500 runs on them.
And over the past few years,
they've joined companies like Microsoft
as one of the most important
enterprise technology vendors in the world.
And speaking of Microsoft and ServiceNow,
they just announced a huge expansion of their partnership,
specifically integrating the two companies,
Enterprise AI Assistance.
Starting in the fall,
customers will be able to interact
with ServiceNow's Now Assist,
AI Assistant directly within Microsoft Copilot.
Yeah, it's telling for the magnitude of this partnership
to see Satya Nadella appearing in the keynote
at ServiceNow's big annual event, Knowledge, last month.
Yes, ServiceNow's Now Assist will be integrated
with Microsoft Copilot
and will be available directly from Office apps.
Starting with Microsoft Teams,
the AIs are integrated into one seamless user experience
without actually sharing data.
So if for example, a user asks Copilot in Teams
about how the company's laptop policy works,
behind the scenes, Copilot shares that request
and context with Now Assist
and Now Assist accesses internal company policy
with the right permissions for that user
and returns the answer to Copilot in a rich card
with options for the user to kick off a workflow
via Now Assist.
In the future, Microsoft Copilot will also be integrated
the other way into Now Assist
so it can automatically generate office files
like PowerPoint presentations and Excel spreadsheets
directly from assets and knowledge
in the ServiceNow platform.
It's pretty awesome for both companies
and especially awesome for enterprise users.
So if you wanna learn more about the ServiceNow platform
and how it can work with your company's Microsoft services,
go over to servicenow.com slash acquired
and when you get in touch,
just tell them that Ben and David sent you.
After you finish this episode,
come discuss it with the other 14,000 smart,
thoughtful, kind, curious members of the acquired community
at acquired.fm slash Slack.
And without further ado, 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 this show is for informational
and entertainment purposes only.
So there are quite a lot of books
written about the history of Nintendo,
some of which are very good
and we've read basically all of them at this point.
In particular, I would highly recommend Game Over
and Power Up.
Yup, and I read Super Mario also great.
But the thing that we realized
and Ben and I were texting about this
as we were doing the research,
all these books either focus on the Nintendo Japan story
or the Nintendo America story
or the video games in America story
or the video games in Japan story
and they keep them separate.
And it is super weird to us.
I think that kind of misses the point of the story here,
which is that the rise of video games
and the rise of Nintendo
is this incredible interwoven global tale.
Nintendo of America wouldn't have happened
without Nintendo of Japan
and Nintendo of Japan would not at all be what it is
without Nintendo of America.
So what we're gonna try to do here
is unite these stories and tell them together
as one canonical Nintendo story.
I think maybe for the first time,
I don't know, at least that we found,
so this is gonna be fun.
So speaking of this, we start our story,
appropriately enough, not in Japan in the late 1800s
when Nintendo was founded,
but in California in the 1970s
with friend of the show
and one of if not maybe the original father
of Silicon Valley, Nolan Bushnell of Atari.
And certainly the father of the video games industry.
We had a chance to interview Nolan back in 2019 on the show.
You can find that episode in our back catalog.
He is such a character.
You can't understand him without listening to him
and he is one of a kind.
So Nolan grows up in Utah of all places in the 1950s
and he's just from birth,
this incredible hustler and entrepreneur.
And one of the jobs that he gets growing up
is working at carnivals.
He's literally a carny
and he keeps referring to himself as a carny
in our interview with him, which is fun.
Arcade games back then in the 50s and 60s
were not what we think of arcade games today.
They were what's called electromechanical games.
So these are things like everything
from you shoot the water gun to like make the balloons pop
to little lights and stuff going on.
You swing the hammer to hit the bell.
They were games and they might've involved
some circuitry components, lights and sounds,
but they were not video games
and lots of bars had games like this.
They were something to do at bars.
In fact, one of the leading companies
that made these electromechanical games back in the day
was a little company called Sega,
which will come up later.
So Nolan, in addition to having this incredible
entrepreneurial streak and background in arcades,
he does something pretty unique.
He goes to college at the University of Utah
and majors in electrical engineering.
And this was a pretty special place
and department to be in at that time.
Other folks who came out of the University of Utah
engineering school around this time, Alan Kay,
Jim Clark of Silicon Graphics
and Netscape, Ed Catmull of Pixar.
All of which have been protagonists of acquired episodes.
I know, I know.
It's just incredible Silicon Valley DNA
that comes out of that time
and specifically focused on graphics and innovating there,
which of course Nolan becomes part of this tradition.
So while he's there, he programs on a deck PDP-1.
This is one of the original old school computers
from the fifties and sixties.
They, MIT and several others had one of these devices
and folks at MIT had in their spare time
created a game for it.
The very first video game played on a programmable computer,
which was called Space War.
And it was a very, very early rudimentary,
kind of like asteroids, not quite space invaders.
Or Galaga or Leonard.
It's funny how many early video games were space games
because of Space War.
They were inspired by and derivatives of Space War.
And of course, what's like a really easy graphical game
that you could put on a black screen
that you had green little lines that you can manipulate on.
Well, space, there's a lot of black in space.
Yup.
So when Nolan sees this, he's like, whoa, holy crap.
You know, and nobody else who is playing Space War
in the entire world or using a PDP-1
has also worked at Carnival arcades.
And Nolan's like, man, this would kill it
if I could bring it back to the arcades.
But of course, at the time, I think a deck PDP-1
cost over a hundred thousand dollars,
which is over a million dollars today.
So like the idea that you could domesticate this animal,
not even bring it into homes,
but get the price point down to a point where bars
or arcades or carnivals could afford to buy these things.
Like, no way.
Totally.
I mean, that it just literally never pays back
when you're thinking about,
I don't know if it was nickels or quarters,
but whatever you're putting in the arcade machines,
it's just never gonna pencil.
So when Nolan graduates,
he comes out to Proto Silicon Valley
and he gets a job as an engineer
at one of the leading companies there
at the time, a company called Ampex.
Their main market was making tape recorders
that were used for movies, television,
music, recording industries.
But all the time that Nolan's working there,
he can't really get both his entrepreneurial
and carnival master DNA
and this idea out of his heads of like,
if you could domesticate video games
and bring them to the consumer market,
they would do really well.
So finally, after a couple of years,
by 1969, he thinks, you know,
thanks to Fairchild and National Semiconductor
and now Intel at this point,
Silicon has gotten cheap enough
that maybe you could do this
and basically take space war
and build a machine cheap enough
that you could sell it into arcades and carnivals.
It's total Moore's law story.
It's like exactly the way
that we opened our Nvidia episode with,
maybe not yet, but I can see it in the next year
that it'll get cheap enough
to make this new business viable.
Yep.
So he packs up and leaves Ampex,
goes to start a company
with fellow Ampex employee, Ted Dabney,
and their business plans,
they're gonna do exactly this.
They initially called the company Scissorgy,
but it turns out that name is already taken
by a candle maker in Mendocino, I think Nola told us.
I was gonna say the problem with that name
is that it's terrible,
not that someone else also decided it was a good name.
Thank God it was terrible.
So Nola and Rax's brain comes up
with an alternative idea.
He's become a big go player
and he takes the term Atari from the game of go,
which Atari basically means check,
or the equivalent of check and chess and go.
They build a game called Computer Space
that's based on Space War.
This is the first commercialized
programmed video arcade game in history.
They put it together.
They contract with a arcade distribution firm
called Nutting Associates 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 is coming
from cutting edge scientific military use computers,
is still enough that it costs too much
to make these machines.
It's not really economically viable 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 we're piloting a spaceship
out in space and blasting enemies.
That doesn't compete yet with audiences.
Right, it's escapism at its finest.
And now we take it for granted
that whenever you play a video game,
you're entering some escapist fantasy,
but that was a brand new novel idea.
So they get this feedback, Nolan and Ted,
and they think, all right, well, one,
we need to make this technology simpler
so that it's more affordable and cost-effective.
So they hire one of their coworkers from Ampex,
a guy named Al Alcorn, who's an amazing engineer.
One of the themes that's gonna come up a bunch
in this episode is the mythical 10X, 100X engineer,
or game designer, somebody who can do things
that other people can't.
And specifically, what was really valued
in Silicon Valley and technology engineering at this time
was the ability to design systems
with the highest amount of functionality
with the fewest number of chips,
because every chip that you put in there
added a whole lot of cost to the bill of materials.
Yep, and not just on the raw costs,
but on the assembly time.
Soldering takes time, and at this point,
there's very little software involved in these games.
You're mostly hard-coding the functionality
onto the motherboard itself,
depending on what chips you put in.
Yeah, to put a finer point on that,
I don't think there's any software involved.
Like, I think everything is hard-coded in these chips
at this point in time.
Right, this is managing to create games
using just electrical engineering.
Right, and something I hadn't even thought about till now,
all of the applications of Silicon,
to this point in time,
they were mostly for military use cases,
somewhat for industrial and commercial use cases,
but the end products, like the physical devices
that were being produced by all these companies,
were not meant to be distributed
in large numbers to consumers.
If you're making systems for the government,
you're not making a high number of machines.
Right, we were in the hundreds,
maybe low thousands of devices
when you're considering military communications equipment.
Now with arcades, you're into the thousands
and potentially tens of thousands, which is a huge leap.
So all this kind of value engineering,
you can see why it's super, super important.
So huge win, they bring Al Alcorn over.
He is the engineer that can make this happen.
And to get him started,
Nolan decides that he's gonna give Al,
because Al's never made a game before,
he's gonna give him like a training project to get started.
And he's thinking about what sort of like small toy game
could I give Al?
And it just so happens that Nolan had recently
been to a demonstration
by the consumer electronics company Magnavox.
And Magnavox, which at this point in time,
they were one of the companies riding the wave
of televisions across America,
as we talked about it in the NFL
and plenty of other episodes,
they were looking for ways to market their televisions
as superior to other manufacturers out there like RCA
or what have you.
And they had come up with this little device
that plugged into their televisions called the Odyssey.
And they called this thing
a closed circuit electronic playground.
What it actually was,
was the very first home video game console.
They just didn't think about it that way.
This just goes to show too,
a lot of the times before a category is created,
you don't know how to describe the job to be done
of the very first product in the category.
And so you come up with some really esoteric name like that.
And it's only when five other competitors come in after you
does the category sort of get a name
like video game consoles or home video games.
And I think this came up way back
when we interviewed Vlad from Webflow
on one of the earliest acquired LP, now ACQ2 episodes.
He brought up the fact that he's like,
oh, people started calling us no code.
And he was like, we've been going for five years.
We had no idea we were a no code company,
but now apparently that's a thing.
And that's exactly what happened with the Magnavox Odyssey.
Yeah, it's even more extreme than that.
Not only did they not know what to call it,
they had no idea what this market was.
They thought this thing was a Gee Whiz device
that they could have their sales reps
in their stores around the country,
demonstrate to consumers to help them sell TVs.
That's all that they thought about.
They didn't think that this would be a market
or a product line in and of its own,
but they had created this machine in partnership
with a guy named Ralph Baer who really created it.
They licensed it from him.
And he's known as the father of home video games.
So they had game cards that you would plug into the Odyssey.
And depending on which game cards you had plugged in,
you could play different games.
We'll see as we go along here,
but it 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 Odyssey, like we said,
Magnavox has no idea what they're doing with it here.
And you can't blame them.
There's no roadmap for this.
But in what should have been assigned to them
and certainly was assigned to Nolan,
even though they were not marketing this
as a standalone device or anything like that,
it becomes a pretty big success anyway, despite Magnavox.
They ended up selling a couple hundred thousand units
of this thing.
The Magnavox Odyssey was invented to solve a problem
that Magnavox had.
And what they sort of failed to realize is that
it had a tremendous job to be done for consumers
where they sort of accidentally fell backwards
into a gold mine, but did not feel around enough
to sort of grab the gold.
Yes.
Nolan though, when he sees a demonstration of this,
probably the most compelling game on the Odyssey
was called table tennis.
And it was like a very, very rudimentary approximation
of either tennis or ping pong, you know, table tennis,
that you could play with the Odyssey on your computer.
So he brings this back to Atari and to Al and says,
make something like this as your test project here.
Al of course does, does it brilliantly.
And they start playing around with it at the office
and they're like, dang, this thing's kind of fun.
And wasn't it like a proof of concept game?
It was basically a demo to show off the potential
of what they could do as Atari.
And they didn't realize in creating pong,
right there on the spot, they invented a mega hit
as the proof of concept.
Yes, that was the thing.
So famously, they take the first cabinet
to Andy Capps Tavern in Sunnyvale, California.
And they convinced the owner there to set up
this pong machine as they start calling it at Andy Capps.
And it just becomes like a quarter vacuum, like a magnet.
Literally all of the pieces of coin in customers' pockets
just gets sucked right into pong.
It's incredibly compelling.
And the thing that makes it so accessible
to just average people who are going to the bar
is it's relatable.
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 get engrossed in it,
and pong at this point in time is only two player.
There's no AI here.
You have to play against somebody else.
You get the competitive factor going, especially in a bar.
And they're like, oh, we got something good here.
So they start producing these cabinets,
selling them to bars and arcades around the country.
It's going really well.
So well that a certain newly minted venture capitalist
comes and seeks out Nolan and Atari,
the legendary Don Valentine.
When you say newly minted, you know,
it's funny in today's terms,
he'd be like an emerging manager.
I think he had raised what, $5 million fund.
And this is effectively like Sequoia fund one
looking to make its first investment.
Yes.
And Atari becomes Sequoia capital's very first investment.
And it goes even deeper than that.
With the money, Nolan and the team at Atari
start bringing on additional folks
to build and engineer games that they can sell.
You know, this Pong thing worked out pretty well.
They hire a young kid named Steve Jobs.
Amazing.
To come in and design a one player,
a solo version of Pong that you can play,
which ends up being called Breakout
that he does with his buddy, Steve Wozniak.
This is like my favorite hidden Atari story
is that freaking Steve Jobs was the designer
and the creator with Steve Wozniak of Breakout.
So just like that, not one, not two,
but three industries are born.
You've got the home video game console business
with Magnavox and the Odyssey
that Atari copied with Pong.
You've got the arcade video game business
that Atari is really entering here
and starts to take off faster than anything.
And then you've got the personal home computer business
that Steve and Woz start with Apple.
And it all comes out of this one moment, which is incredible.
So unlike today with games or any type of software,
there's no app store out there.
Turns out that distribution is a critical element
to building a technology company.
So the arcade business with Atari starts to really take off.
Companies, both existing electro mechanical games companies
like Sega and others get into the video game business.
Atari's out there, obviously the leader
by the mid to late seventies,
the top arcade games out there
were making billions of dollars in annual revenue.
Like Space Invaders,
which was launched by the Japanese company Taito in 1978.
It does $2 billion in annual revenue in the US alone.
Whoa, what year is this?
This is in 1978.
I don't think I realized how big the arcade market got
before there were even video game consoles in the home.
I've done all of this research
and I did not realize how big the arcade market was.
Yeah, this industry,
not only was it, did it dwarf the home console industry
that the Odyssey started,
it dwarfed the personal computer industry.
This was the main application of Silicon for the 1970s,
for consumer markets.
By the end of the seventies,
the total video game arcade market is $5 billion a year,
which is already by then you said in the intro,
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's a narrative violation.
I thought this notion of eclipsing Hollywood and music
was a recent phenomenon to show
how much time people spend in games.
But what you're pointing out is
that it was a different form factor
and it was a physical location at arcades,
but like that's basically always been true.
Well, it was this ultimate hack to get distribution
of this new technology and business
into the mass consumer market.
People already went to bars and arcades
and this was a better product of what they already did.
So the industry just took off like wildfire.
The fascinating thing about this pre-home console era
is that there's basically no intellectual property yet
because there's no stories yet.
These video games are so basic with Pong, with breakout.
It feels silly to compare it to Hollywood
because there's not real franchises and characters
and stories and anything you can repurpose.
You're not gonna figure out how to make Pong
into a movie or a TV show.
There's nothing there.
Right, you could, but it would probably be pretty bad.
Right, it's a false comparison at this point in history.
Yeah, but again, it makes total sense.
This came out of arcades, carnivals.
You don't need a story here.
This is about competition in a public environment.
Right.
So as Atari really starts to take off
through the early and mid seventies,
Nolan decides that, hey, they should probably get
into the home video game business too.
Moore's law keeps happening.
We can now create what used to take a whole cabinet
into a small box that you plug into your TV
that's purchasable by a consumer rather than costing tens
or hundreds of thousands of dollars.
It's finally happening.
So they start working on a programmable machine
that can play versions of popular arcade hits at the time.
And they codename it the VCS, the Video Computer System.
Now, as they start working on this,
he and the board of Atari realize
this is gonna be a very different business
with different dynamics than the arcade business.
And the first and most visceral thing they realize is
this is very capital intensive.
It takes a lot of firepower to bring a home console
to market in the right way.
With arcade games, you make the game,
you work with a distributor like Midway
or Bally or something like that.
You get it into arcades and bars and the money comes in.
Like the cashflow cycle is very quick.
And you make one of the machines
and like a thousand people can play it.
The way to address a thousand consumers is make a machine
and let them flock to the bar to drop quarters in.
Yeah, but in the consumer market,
things are very different.
You need to get machines into retail
and then you need to get retailers and marketers
behind what you're doing and build demand amongst consumers
for people that have a reason to go to the store
and buy your thing and bring it home.
And you need to build a hundred,
a thousand times more machines
to address that same set of consumers in their home.
Right, Toys R Us isn't gonna buy your product
for their stores if you only have 10 of them.
They're gonna buy your product
if you have at least a million of them.
So Silicon Valley has not evolved to the point yet
where there are like big growth funds out there
that could come in and give Atari a couple hundred million
dollars to build up this inventory.
So they decide the right thing to do is sell the company.
They end up selling it to Warner Brothers in 1976
for $28 million.
And this becomes one of the greatest acquisitions
of all time for a very brief period.
But during that brief period,
the payback on Warner Brothers' $28 million investment
is pretty incredible.
Yeah, that ubiquitous Atari 2600 system
that everybody sort of has a fond memory for
and recognizes pretty instantly,
basically all the value of that accrued to Warner Brothers,
not the founders and investors
in Atari, the independent company.
Yes, so they acquired the company in 1976.
1977, they released the VCS,
which gets renamed as the 2600.
It's a smash hit.
It sells a million units in the first year
and then sales double every single year
for the next three years.
It's so huge that by 1980,
just like three years after the 2600 launches,
the Atari division of Warner Brothers
does $415 million in revenue,
which is one third of all of the revenue
that Warner Brothers does.
Basically Warner Brothers, the publicly traded,
Hollywood studio becomes a video game company
for a couple of years.
That's insane.
I had no idea it was that meaningful to Warner.
This is the thing that has just gotten lost to history
is that the video game industry took off
like almost nothing we've ever even seen to this day.
Right, I mean, we're building up
to this impending crash here,
but boy, those first five years were incredible.
Yeah, it is a total gold rush.
So much so that Atari is not the only ones
making money here.
Lots of other toy companies,
other media companies decide,
hey, they wanna get in on this home console
video game business too.
So Mattel enters the market,
a toy company called Coleco enters the market,
which actually has its roots in the leather business.
It's the Connecticut leather company.
Oh wow.
Yeah, so everybody's coming into market here.
And it quickly became a subcategory of toys
in the sort of American consumer psyche.
The way that people thought to spend on this is,
oh, my eight to 18 year old son needs a toy
and it's a big birthday or something.
So I'm gonna get him a really nice toy,
which is gonna be one of these video game things.
Yep, and specifically the magic to this
and why these became so popular as toys
and what informs the whole business model
for decades to come is the swappable game cartridges.
So if you buy an Atari 2600,
you're not just buying a toy for this year
or this birthday or this holiday,
you're buying toys for the next several years to come.
And this is like a full lean in
on the razor blades razors model
where I'm pretty sure Warner's
wasn't actually generating gross margin
on the Atari 2600s they were selling.
They would make all the money on the games,
which has been true even in the modern gaming era.
I mean, you look at the incredible amount of firepower
in the PlayStations and Xboxes of the last 10 years,
those things sell for the very cheapest they possibly can
in order to get an install base
so that they can make money on the games.
That's what was happening with Atari here too.
Totally, everybody's figuring this out all at once.
So much so that a few engineers add Atari
after the acquisition, they start to realize this
and they think, man, all the money,
all the profits are in the software here.
What if we leave Atari and we set up a new company
that's just gonna make games?
We're not gonna make hardware.
We're gonna make games for the 2600.
So they leave, they actually don't set up a deal
with Atari these guys.
They start publishing their own games.
They make the cartridges,
they sell them on the market themselves.
Cause Atari didn't require you to do a deal with them.
Nobody was thinking about third-party developers yet.
These guys who left, they knew how to do it
cause they were Atari employees.
So the company they start
is a little company called Activision,
which is now in the process of being acquired by Microsoft
for just about $80 billion,
just as a third-party publisher.
So Atari ends up suing this new Activision.
They're like, hey, you can't do this.
They're like fighting it out in court.
And by the way, the reason they name it Activision
is so it comes before Atari in the phone book.
I'm pretty sure Accolade, there were a handful
of A publishers at the time that all had the same idea.
Yeah, while they're fighting it out in court,
which is just so funny,
somebody must have taken a step back at some point
and realized, hey, wait a minute.
What are we fighting about?
There is so much money to be made here.
What if we Activision just pay you guys Atari
like a royalty fee for every cartridge that we sell.
You get 10, 20, 30% away.
It doesn't even matter.
We're all making so much money.
Atari's like, oh yeah, you mean you make the games,
you sell them and we just get money?
Okay, cool.
Oh, and we have to take no capital risk
on you developing that game.
We just make money only if it works.
Got it, got it.
Yes, please.
Yes, please indeed.
And obviously that works out very, very well
for all involved.
For a time for Atari.
Yes, for a time.
So you've got this rush of competition coming in
for the video game consoles.
Yes, and the problem was it worked too well.
Got the parallels to like web three and crypto here
just all over this episode.
But there was so much money to be made.
Everybody rushed in with a game, game, quote unquote here.
Like people were just shoveling any kind of software
that they could, both the first parties like Atari,
like Mattel and third parties like Activision.
They were just trying to get games into stores
because people, parents would buy them
without knowing what they were.
And like, it didn't matter if they were crap.
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 15 different companies
rush to market in the US with consoles.
And so suddenly these toy stores got flooded
both with games and consoles.
And as you would imagine, there's intense concentration
in the consoles that got selected.
There's a real ecosystem effect and network effects
that need to be developed for these things to work.
And so for a console 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,
not all the shovelware crap that's hitting the shelves.
And so you kind of needed the market to suss out,
hey, can we consolidate down to just a few game devices,
a few consoles, because otherwise nobody knows what to buy,
nobody knows what to develop for.
And it's just a big mess.
And the whole thing's gonna be a failure as a category.
Yep.
The problem was it was so overcrowded and so overfunded.
Just like things in recent history here in 2023,
that didn't happen.
Nobody could figure out what was the crap.
There was just too much out there.
Right, the laws of economic physics were broken.
And instead of free market dynamics playing out,
there was just tons of incentive to just go make more stuff
and get it out there, even if it may or may not work.
Yep.
So remember I said by 1980,
the arcade video game business was a $5 billion annual
industry in the United States.
By the end of 1982, just two years later,
the home video game business is a $3.2 billion industry.
Almost as big and combined,
you've got a $10 billion industry
that just sprung up overnight.
Incredible.
And just to paint where we're going here,
that $3.2 billion video game market,
that home video game console market in 1982,
by 1985 would be worth $100 million,
a reduction of 32X in the market size
because the entire category just went away.
Just disappeared.
To put that differently,
a 97% drop in market size within two years.
So everybody who came into this industry,
the third party independent software game developers,
the hardware guys, Atari, Warner Brothers, Mattel,
they just lose their shirts.
Because remember, this is still the 1980s.
Software has real cogs to it.
These are physical packaged goods.
These are cartridges and systems
with silicon and chips in them.
And supply chains and labor.
There's billions of dollars of inventory tied up
in these companies in all these systems and games
that all of a sudden now is sitting on shelves
and can't sell.
So all these companies have huge losses.
Warner Brothers, publicly traded Warner Brothers company,
has to report massive losses.
So much so that to appease Wall Street,
they have to break up Atari and sell it off.
They sell the console business
and the games business separately.
And Coleco and Mattel completely exit
the video game business.
The whole industry, the home video game industry
is just decimated, it gets dead.
This is when the famous E.T. Atari game,
the cartridge burial happens in New Mexico.
Atari made so many of these E.T. games
that they jointly developed with Universal.
And in fact, Steven Spielberg 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
and 16 other games at the same time.
Eventually, the quality of every single thing
that's hitting the market is so low
because all the incentives were to just get crap out there.
The consumers just stop buying.
And so stores just stop buying upstream,
specifically consoles.
They kind of stop buying games,
but they really stop buying consoles
except for the one or two or three
that are the leading consoles.
But even then, they're not placed in big orders anymore.
And that's sort of how you have this whole whip crack effect
all the way back upstream to the game makers
and the newfound publishers,
these third party developers,
that the whole thing kind of 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 like literally took wrecking balls
and they're like smashing the cartridges
and they bury them in a landfill
and they pour concrete on top.
And people have gone and 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 you said, Ben,
this was the way this industry went to market
was as part of the toy industry.
So this is actually not anything new for the toy industry.
Toys are so cyclical.
They're fads.
And so the mental model that everybody here in America has
for what just happened is,
oh, the home video game console was like the hula hoop.
Specifically, I mentioned Coleco,
which entered the industry.
When they get out of the video game industry,
the next thing they do is Cabbage Patch Kids dolls.
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 fad, the kids move on and the generation changes.
It's fad-based and it's super seasonal.
Basically, like Q3, Q4 matters
and you're not selling anything Q3, Q1.
It's like just the rush up to Christmas.
And so everyone's sort of viewing it as,
oh, 1982's Christmas toy was the video game console.
And oh yeah, it didn't really pan out
that people would want those in more future years,
but I'm sure we'll find something else.
So here's this opportunity of a lifetime
sitting right there in plain sight
for anybody who has the foresight
to actually realize this,
which is the video game industry,
specifically the home video game industry,
is not like toys.
There actually was incredible product market fit
and demand for good games out there.
There's a reason why kids wanted this stuff.
And the business model of a home video game system
is one of the best of all time.
We talk on this show about how the software business model
is the best business model of all time.
And the media business model
is the second best business model of all time.
Video games are software 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
and across the world at 50 bucks a pop
that even with all the manufacturing costs,
you're still making 80% gross margin on this stuff.
That's pretty incredible.
And you can sell three, four, five, 10 of them a year.
Especially once you flash way forward to games today,
there's zero marginal costs to make another copy
of the game.
There's zero distribution costs
because you just ship bits over the internet.
And to your point on top, it's media that is software.
It's also IP.
We're about to tell the Nintendo story here
as we transition to Nintendo
and how they really find story and characters
in an industry that just had non-human characters,
spaceships and sort of inanimate objects.
You have a whole new level on top,
which is the durability of IP franchises
that is about to come into view for the first time.
So 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 accrue
when you are the game console manufacturer,
God, you put those two things together.
That is a pretty great combo.
So enter Nintendo.
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Okay, David, as we get into the Nintendo story here,
there is one thing I think that's important listeners
to know before we flashback and tell Nintendo from day one,
which is the US video game market is decimated.
But in Japan for home game consoles
that were just starting to really find their footing
around 1983, they kind of resisted the urge
to import all of these American consoles
that were flying off shelves.
And so in Japan, you had a completely different dynamic,
which was there were only a few consoles,
but they were selling quite well
and they didn't have a ton of competition.
So there actually was a moment in the Japanese market
to look around and observe when we make high quality games,
people totally wanna buy them and pay for them.
And knowing that might give us an advantage
in entering other markets too.
Totally, so Nintendo, we go back to 1889,
a hundred years earlier in Kyoto, Japan,
when one Fusajiro Yamauchi,
who was the head of a cement company at the time in Kyoto,
Yamauchi 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 owned the cement company,
Vuto was ready to retire.
He didn't have any male heirs to take over the company,
which is how companies transitioned in Japan.
And so what you did in that case was you adopted a male heir
to take over the company.
So Fusajiro was actually born Fusajiro Fuki,
but he took on the Yamauchi family name
to inherit this cement company.
Now, similar to Nolan many, many years later in America,
Fusajiro was looking around for interesting new technologies
and how he might apply it 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 business,
the boring cement business
and enter the playing card business.
So he sets up a new company,
he names it Nintendo.
And the name Nintendo is actually a multiple entendres.
So the Kanji characters Nin, Ten and Do
can be interpreted as leave luck to heaven,
which of course references luck in playing cards.
It also may be the entrepreneurial spirit of a new venture.
But definitely plays on the fact
that they're a gambling company.
Well, that's what I was gonna say.
Specifically the character Ten at the time
was a clear reference to the sort of mythical spirit Tengu,
which was a coded reference for gambling and casinos,
which were very, very, very much still illegal at the time.
Now, why did Fusajiro see the opportunity here?
Playing cards and card games had originally entered Japan
from the West in the 1500s.
But then they'd been banned for hundreds of years
when Japan's rulers followed a strict isolationist policy
and basically kicked all Western influence
out of the country.
I think I knew this,
but I had forgotten till doing the research.
Do you know how they did that?
The rulers of Japan for this multiple hundred year period
from the 1500s to the 1800s?
No.
They Institute the death penalty for any foreigners
who entered Japan and any Japanese who leave the country.
Whoa.
So like they meant it 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.
Oh my God.
Yeah.
I feel like I missed this part of world history.
Yeah.
But human nature is human nature.
And even despite this very strict effort
to eliminate Western influence from Japanese society,
the allure of playing games and gambling for money
is too strong to resist.
And so during that time,
the playing card system developed
a kind of substitute parallel track in Japan
called instead of the Western deck, the Hanafuda cards.
And instead of four suits, these cards had four seasons.
And instead of 13 numbers and faces on the cards,
they had 12 months of the year,
but used for basically the same purpose,
which is games of gambling.
So by the late 1880s, after the Meiji restoration,
the government had finally removed
the official ban on playing cards.
So Hanafuda 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 Yamaguchi starts Nintendo.
So Nintendo becomes quite successful in this new industry.
So successful in fact,
that they become the largest playing card manufacturer
in Japan.
You think like, cool, that's great.
Interesting business, playing cards, fun games.
I can see maybe how that leads to what Nintendo becomes.
If you think about it a little more though,
playing cards are now legal in Japan.
Gambling is not though.
And what is the main use of playing cards?
Well, it's gambling.
Who are the primary customers for playing cards?
It's not households.
Okay, so anybody who's operating
an illegal casino basically.
It's organized crime.
It's the Yakuza in Japan, the Japanese mafia.
Whoa.
I had heard whispers that there was some Yakuza involvement
in Nintendo's history, but I didn't find anything about it.
What do you got?
Well, so the Yakuza operated gambling parlors and casinos
all throughout the country.
And they're just like at casinos in America
when they play games with cards,
they use a fresh pack of cards for every game
because you don't want to have cheating.
This is an incredible business.
What an incredible customer for Nintendo.
These gaming parlors run by the Yakuza
who need thousands and thousands of packs of cards.
Wow.
A very, very successful business
and a quite interesting distribution capability
that Nintendo builds up over these 50 plus years
that they're just a playing cards company.
So on this show, we talk a lot about value chain
and where power accrues in a value chain
and how you get power as a company.
It doesn't feel like you want your biggest customer
to be the Yakuza.
And it doesn't feel like you want them
controlling your destiny.
Maybe, maybe not.
I mean, if you can navigate that successfully,
you can really develop quite a lot of power within a market.
It's so interesting.
Because in the US, the early arcade games industry
was sort of the same way.
It was also a mafia thing.
We talked about this with Nolan, yeah.
And that is 100% the roots of Nintendo.
So Fusajiro Yamauchi runs this business
for a number of decades quite successfully.
He ends up having the same problem
that his adopted father,
the original cement entrepreneur had before him,
which is when it comes time for him to retire,
he doesn't have a male heir.
So he arranges for his daughter
to marry a promising local young man named Sekiro Kaneda.
And Sekiro also changes his name to Yamauchi.
He becomes the, at this point now,
third coming of the mythical Yamauchi
and the second president of actual Nintendo itself.
Sekiro also doesn't have any male heirs.
So for the third time, the Yamauchi patriarch
arranges to adopt an heir to run the business in the future.
And specifically Sekiro arranges for his eldest daughter,
Kimi, to marry another promising young local man,
Shikinojo Inaba.
Shikinojo also adopts the Yamauchi name.
He starts being groomed to take over the business.
And then finally in 1927, he and Kimi have a son,
the first Yamauchi son in three generations.
And they name him Hiroshi Yamauchi.
Unfortunately, here's where things start to go
pretty terribly wrong for Nintendo.
And what year are we in?
We're in 1932, so this is before the war.
Hiroshi is five years old.
Shikinojo walks out on the family
and abandons the business, the family, son, and leaves.
Nobody knows exactly why this is kind of lost in history,
but I got to imagine between all the pressure,
the family, the business, the Yakuza 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 Hiroshi Yamauchi, the first actual Yamauchi
born in generations, is pretty much orphaned at this point.
His grandparents, Sekiro and his wife, adopt him,
but they're not parenting him.
Not to mention that World War II happens
when he's an early teenager.
The life that he grows up in is quite, quite, quite difficult.
Finally, when he's 18, the war is over.
He makes what I assume must have maybe been like a deal
with his family and his grandfather.
He escapes Kyoto and goes to Tokyo
to study law at Waseda 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 high-ranking samurai family.
And then pretty much right after this happens
a couple of years later in 1948,
Sekiro suddenly has a massive stroke
and is completely incapacitated.
This is Hiroshi's grandfather.
This is Hiroshi's grandfather
and can no longer run the business.
And so he summons Hiroshi back from Tokyo,
from law school to Kyoto,
and commands him to take over the family business
to become the next Yamauchi running Nintendo.
Wow.
And this is pretty young to take over the family business.
He's 21 years old.
Because his father had walked out on him and the family,
there was this missing generation here.
And then his grandfather,
who has this very complicated relationship with,
has this sudden stroke,
and all of a sudden,
Hiroshi has to come back and take over the business.
Now, listeners, the crazy thing is
you might be thinking,
wow, so this guy probably has no idea
how to run this business.
It's unlikely that it would be successful.
Interestingly, he develops into a leader
who has an unbelievable eye,
this killer taste.
We're gonna flash way 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 gonna be a winner.
It's amazing that out of basically no training
and no real apprenticeship in the business
turns into this oracle of fun.
He comes back to Kyoto.
He takes over the family business.
He waits until Sekiro finally dies,
which the writing was on the wall,
happens in 1949.
As soon as that happens,
he institutes a massive purge.
He fires not just anyone who was loyal
to Sekiro in the company.
He fires every single manager in Nintendo,
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 leader other than him in the entire organization.
Yes, and there is no question
who the new Yamauchi is going forward
and who is in charge here.
Wow.
Yeah, totally crazy.
And so we're in what, 1950-ish when he takes over?
1948, 1949 is when this happens.
So Hiroshi though, like you said, for the first time,
he's 21 years old, like he's a young man.
He doesn't want his life to be shackled
by like what Nintendo and the Yamauchi family
has always been historically.
So he's looking around for ways to make Nintendo his own.
And finally in 1959, the perfect opportunity arises.
The Walt Disney Company is looking to enter Japan.
It's crazy that Disney comes into this story,
especially because there's so many parallels
between Nintendo's identity as a business
and a thing that makes them great.
And Disney, it's crazy that what lands on his doorstep
is Walt Disney calling.
Also given what Nintendo's business is,
what we just spent 20 minutes describing,
Disney's like, oh yeah,
these are the guys we're gonna work with in Japan.
Right, oh yeah, we're a family-friendly brand
that has to protect our brand safety above all else.
How about these guys that do business with the mob?
But the reason they do it
is the way that they wanna enter Japan
is with playing cards.
So Nintendo licenses Walt Disney characters
and puts them on playing cards.
And they sell playing cards to kids in Japan.
I gotta buy some of these.
If these still exist somewhere on eBay,
I gotta go find some.
Oh, I bet they do.
Some of the documentaries I watched,
there's photos and video footage of them.
So you can probably find them somewhere.
We gotta put these in the acquired museum.
Wow, Nintendo branded Japanese Disney cards.
So this is what Yamauchi,
the I guess fourth at this point in time,
Hiroshi is looking for.
This is the opportunity.
Not only does this open up a new market
and a new distribution channel,
the kids market, the toys market,
the legitimate retail for Nintendo,
there's just an incredible opportunity
to draft off the Disney brand.
So they start with playing cards.
Then they start licensing from Disney other kids toys
to sell in Japan.
And then they go to the retailers and they say,
hey, you like carrying these Disney toys.
If you're gonna carry the Disney toys,
you need to carry some Nintendo branded toys
along with them.
It is amazing.
It's this story that we tell over and over and over again
on acquired where you acquire something,
some asset that then gives you a leg up
in a different part of your business.
And now it's a self-fulfilling prophecy
where that other part of your business is made better.
And so by having a scarce commodity, Disney branded cards,
they get power over the distributors.
So now you actually have a reason to be in stores.
And now that you're in stores,
it 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 it's a pretty good bargaining position.
So during the 1960s,
Nintendo transforms itself into a Japanese toy company.
They are making things like the Ultra Hand,
which is like a extended grabber.
I know you did some research on this.
This is awesome.
So this guy Gunpei Yokoi in 1970 comes up with an idea
and we're like breezing through history here,
but we kind of have to, it's a hundred years.
So, you know, we went from 1949
with Hiroshi taking over to 1959
when the Disney comes in, flash forward down to 1970.
Yokoi comes up with this telescoping fake hand
basically as a gag and Hiroshi Yamauchi looks at it
and he goes, that looks like a winner.
Cause this guy, he's just so good at identifying things
that consumers are going to love.
And so they market as the Ultra Hand.
I mean, truly he made it as like a gag around the office.
They sell 1.2 million products of this Ultra Hand.
Of course, then they're all looking around and they're like,
oh, we should become a novelty toy company all out.
Like that's what we should do.
So they come up with, I think the 10 billion barrel maze.
They have a love tester device that they market.
They have a remote control vacuum
like 30 years before Roomba.
So they're just coming up with crazy toys in the lab
and bring it into market.
All these Zany gadgets.
And because they have this Disney sort of Damocles
that they can hang over retailers heads,
they know they're going to get the retailers
to carry all this stuff.
It's amazing.
So you mentioned Gunpei Yokoi.
He was a tech on the playing card assembly line
maintaining the machines within Nintendo.
And to your point about Yamauchi just has this sixth sense
for products and for talent.
He plucks them off the assembly line and says,
you are now the chief designer,
the chief engineer for Nintendo.
That's crazy.
Gunpei would go on to design the Game Boy
and the Virtual Boy.
He would run the Metroid series
and he would be the first boss and mentor
of one Shigeru Miyamoto.
Ooh, so amazingly now by the late sixties, early seventies,
Nintendo has become a toy company
and a very profitable one at that.
So Yamauchi starts investing in a whole bunch
of other stuff.
And one of the things he invests in
is failed bowling alleys.
What bowling was this incredible fad
that had taken Japan by hold in the late sixties.
And so all these bowling alleys got built,
but then society lost interest in them.
And so there are all these empty bowling alleys.
Yamauchi goes and buys up these bowling alleys
and he directs Gunpei to say like,
hey, come up with some gadgets that we can put in here
and we can attract people to these bowling alleys.
And they decide that they can use some of the technology
that Gunpei is building for toys
to make indoor shooting ranges, light gun shooting ranges,
like not laser tag, more like clay pigeons,
but like simulating shooting ranges
indoor in these former bowling alleys.
They do this, this goes pretty well.
This becomes another big thing.
So this is kind of random Nintendo
getting into indoor light gun shooting ranges,
but actually this becomes the critical thing
that pushes them into the video game market
for a bunch of reasons.
One, this gets Nintendo into the arcade business
because what else do you put in bowling alleys
and indoor shooting ranges, but arcade machines.
So Gunpei and Yamauchi and the rest of the company
start making their own arcade games
that they can put into their shooting ranges
and bowling alleys.
At first, these are electromechanical games like Sega,
but once Pong becomes a thing and comes over to Japan
and arcade video games, they get into it too
and Nintendo starts making their own arcade video games.
Two for Nintendo, these light gun ranges
that they start building, they become pretty good at it.
And they decide that they can export the technology
to North America and Europe.
So this is actually the first product
that Nintendo starts exporting out of Japan
is this technology, and they do it
using trading companies to start.
So they're not setting up their own
distribution internationally yet,
but they start building relationships
with American companies.
And three, and this is kind of just unbelievable here.
The light gun business gets them
into a relationship with Magnavox.
Remember Magnavox from the beginning of the episode?
Oh yeah, the Odyssey.
Specifically for the launch of the Odyssey in America.
So the Odyssey came with a bunch of peripherals
for use in the games on the console.
One of the peripherals was a light gun.
Whoa.
And who made the light gun for the Magnavox Odyssey?
Nintendo.
That is the most circuitous path to fighting their way
into American home video consoles, but it makes sense.
Right, you cannot script this any better.
Nintendo, who single-handedly in a minute comes in
and dominates not just the American,
but the worldwide market for home video game consoles
and builds this incredible juggernaut around the world.
They were right there,
part of the very first home video game console
launched in America by Magnavox.
Wow.
But in a way that sort of lets them observe this market
without having to push their chips in on this market.
Well, let's take the story from there.
So they build this relationship with Magnavox.
They see that the Odyssey, despite Magnavox's
having no idea how to market this thing,
is succeeding despite itself in America.
They're like, well, we're in the toy business
in Japan.
This thing might actually do decently here in Japan.
So they licensed the Odyssey from Magnavox
and Nintendo re-brands and starts distributing
the Magnavox Odyssey through its toy retailer channels
in Japan.
Oh, I had no idea that before the NES,
they had their own Japanese distribution
of a home video console.
This, all from these crazy light gun ranges,
this is what gets Nintendo into the video game business.
So they start selling the Odyssey in Japan,
and then pretty quickly,
they actually just license a bunch of the tech
from Magnavox and start making their own modified consoles.
So in 1975 is when they licensed the Odyssey.
The next year in 1976, they take a bunch of that tech
and they make their own Nintendo home video game console,
the very first one that they make, the Color TV Game 6.
And it's just kind of a Odyssey knockoff,
just more localized for Japan
and maybe a little better tech.
But the same thing,
it only plays a couple of simplistic games,
one of which is table tennis.
It becomes a huge hit, just like the Odyssey.
That Color TV Game 6 sells a million units in Japan.
Oh, wow.
So this is like transformative for Nintendo.
And what year is this?
1976.
Okay, so this is kind of before the success
of the US-based home console rush.
100%.
Nintendo is very early to the market,
just in their own unique way, isolated to Japan.
But they're learning everything along the way.
The next year, they follow the Color TV Game 6 up
with a new model, the Color TV Game 15,
plays 15 games instead of six games.
I was like, why are they calling it the six?
Okay. Yeah.
Because remember, these are not cartridge-based consoles yet.
You're not selling programmable software for them.
Huh.
So that sells another one million units.
And together, these consoles, like I said,
totally transform the company.
They're making much better margins on these things.
They can sell them for a higher sticker price
than the Ultra Hand and the other toys
that they're selling.
The shooting gun ranges, that's a fad
that goes the way of the bowling alley in Japan.
So this is what Nintendo becomes kind of inadvertently.
They become a Japanese video game business.
With a pseudo-importer reseller.
Yep.
That's crazy.
By the way, do you know how the light gun works
and why that was such a leap forward?
No.
So this was a very clever invention
by Nintendo's engineers.
You could imagine that the way a light gun,
the most intuitive way for it to work would be,
well, you take a regular gun that shoots bullets out of it,
and instead you make it shoot some kind of laser out of it.
But what that would require is for the TV,
the target to have a detector on it,
which you really don't wanna have to force that constraint.
That sounds really hard,
especially when you're trying to work with
a lot of different TVs.
Ironic that later,
Nintendo would force that constraint with the Wii.
Right, right, isn't that funny?
So they flipped it on its 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.
Oh, that's super cool.
There's like a one frame thing that happens.
And I think that you can still see this
in the early Duck Hunt games,
but basically the screen flashes one frame
where only the target is lit up
and the gun is the detector.
And if in the gun's sight,
it sees the set of pixels that are lit on the one frame,
then it knows it got a hit.
And if it doesn't detect those pixels,
then it's a miss.
No way, I always wondered how Duck Hunt worked.
I had no idea.
Yeah, pretty cool.
That's amazing.
So Nintendo, thanks to this relationship with Magnavox,
is in this incredibly privileged position
in this new industry.
They have a bird's eye view
into the American home video game industry
and they're learning all the lessons
from what's happening there.
They're also pioneering
and establishing themselves as the leader
in the Japanese video game industry.
So they're in a great spot through all of this.
They see come 1977,
when Atari and Warner Brothers
releases the VCS 2600 in America,
the Yamauchi even despite not being an engineer
is like clearly this is the future.
This piece of hardware,
not only is so much better
than all this dedicated stuff
that's like the Odyssey
and like what we've been doing that came before,
but the business model implications of this,
the razor and blades model,
the interchangeable cartridges,
selling software,
we gotta get into this game.
But they also see things are crazy over in America.
Everybody's rushing into this industry.
Yeah, they gotta be very judicious here.
It's a very attractive market to enter,
but they have to figure out a way to differentiate
and not make all the same exact mistakes
that everyone else is making
and rush in with crap products
that eventually people are gonna stop buying.
They have to figure out how to sell something interesting,
durable and unique.
So Yamauchi makes an incredibly foresighted decision here.
He says, we Nintendo need to build
a programmable home video game console
like the Atari 2600.
But whereas Atari and all these other American companies,
they're rushing their consoles to market.
This is, if not shoddy hardware,
like the development cycles for these consoles
are like maybe a year, a year and a half.
We have the luxury here in Japan
because there's not direct competition.
Let's take our time
and let's make something really amazing.
Yep.
Not to mention that by taking a long cycle development time,
they actually get the benefit of Moore's law.
They get to come out with something a few years later
that is much, much better.
Exactly.
So he starts a project in the late seventies
within Nintendo to develop their first programmable
ROM cartridge, swappable software, home video game console.
But he's willing to take a very long view
and he instructs the team,
I want this device that we produce
to be at least one year ahead of any competitors
on the market, anywhere in the world.
And I want us to be able to sell this thing
for the equivalent of $75.
And on top of that,
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 yeah, this is a razors and blades thing.
We're happy to subsidize.
So that we can sell more games.
He's like, we're going to do it all on hard mode
and we're just going to take years to do it.
Cause this is 77 when he's saying this,
the NES won't debut in the U S until 1985.
And not in Japan until 1983.
So it kind of reminds me of the old saying,
you can have high quality,
you can have cheap and good prices
and you can have something done quickly,
but you can only choose two out of three.
And so Yamauchi says the constraint I'm going to relax here
is time, which is what nobody else
in the video game market is doing.
So in 1977, what are they going to do in the meantime?
Well, R and D is super heads down and secretive
on building what becomes the Famicom and the NES.
Yup. Yamauchi splits Nintendo's R and D teams
from one singular team that's working on all
of their video game business into multiple teams.
And he takes the new team, the R and D two team,
and he dedicates them to this home console project.
It says you have years, you don't have unlimited budget,
you have a lot of constraints, but make this thing amazing.
The original R and D team, the R and 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 insanely profitable
for Nintendo for a couple of years.
I played one dedicated game per machine.
It actually comes from the calculator industry.
It's where they take this tech.
It becomes the spiritual forerunner 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 it anywhere.
You can play it on the go.
It does really well for Nintendo.
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 and D team.
Yep.
Also, they haven't forgotten about the arcade side
of the business too.
Yamauchi spins up a third R and D team
just to focus on making arcade titles.
Cause he also knows that software is going to be
really important for this eventual home console.
Yep.
They're basically saying we want to learn
what games are great.
And once we have a stable of those great games,
then we can unleash them on whatever
our next generation console ends up being.
But for now we kind of need to like create
a bunch of games in the arcades in cabinets
so we can know what the hits are going to be.
And I will say to know what the hits 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 oh crap button
where they're like,
we may not have any good games to put on this thing.
Fortunately, the console wasn't ready yet.
There's one more piece of the puzzle though.
And that's that he needs to get a foothold
in the American market so that they can get
distribution relationships there
and actually be able to enter it.
And ideally in his mind to be their own distributor.
Nintendo is really obsessed, especially at this point
in history with not getting commoditized
and not having to fork over 50% to this middleman
and then another 50% to that middleman.
It's like, no, no, no.
We need to get directly to customers.
Right, they've been using trading companies
to export the light gun tech and other things.
They want to set up their own distribution.
Begrudgingly, the Yamauchi family cycle
is going to repeat itself.
As much as Hiroshi hates it,
he knows the perfect person to set up Nintendo of America.
His son-in-law.
Who does not want to work in Nintendo.
Who definitely doesn't want to do it.
And whose wife, Hiroshi's daughter,
absolutely does not want him to do it.
Minoru Arakawa.
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All right, we're heading into the 80s.
It's gonna be Nintendo's decade.
Over there, they have a four-pronged strategy.
Bring me to radar scope, David.
I'm jonesing for it.
And listeners, unless you're like Nintendo history buffs,
you're like radar scope,
but radar scope would be the ashes from which
all of the phoenixes you know about rise.
So Arakawa, Yamauchi's chosen son-in-law, begrudgingly,
who he sends over to set up Nintendo of America,
unlike other son-in-laws in the Nintendo family history,
has a bit of a different background.
So he's also from a very prominent, high society,
well-respected family in Kyoto,
but he left Japan and went to America for his education.
He went to MIT, where he was educated as an engineer,
and he fell in love with America.
And he may have fallen in love with the distance
from his father-in-law too.
The whole ocean in the way is pretty nice.
Well, this is before he met Yoko, his wife.
Oh, okay.
When he comes back to Japan,
he meets Yoko at a Christmas ball while Yoko's in college.
And Yoko wants nothing to do,
just like Hiroshi before her
wants nothing to do with Nintendo,
nothing to do with her father,
nothing to do with the family business.
And she's kind of taken by Arakawa,
in part because he loves America, he's so different.
Like there's no way that history's
gonna repeat itself here.
Right.
If I don't wanna be involved with Nintendo,
then this guy's probably that ticket.
He's my ticket.
So they get married and they move to Vancouver in Canada,
where Arakawa becomes a very successful
real estate developer.
Yoko loves it there.
They come back home to Kyoto to visit family,
and Yamauchi makes his pitch.
So Arakawa's intrigued,
but he's got a successful business of his own, right?
And he loves his wife.
His marriage is very important to him.
And he knows that if he accepts here,
he's gonna be in a real tough spot.
But Yamauchi says, hey, I'm not asking here.
You kind of need to do this.
And there's a little negotiation.
I think they strike an economic deal
that makes it very much worth Arakawa's time.
And Arakawa's strong belief is,
I have to be in America and do it my own way,
rather than me sort of starting
to take over the company in Japan.
This is part of the deal
that convinces both Yoko and Minoru to do this.
Yamauchi says, I'll let you run things your way in America.
Big concession.
But I know you live in Vancouver.
I want you to move to New York City
because New York City is where the toy industry
is headquartered in America,
and you gotta go build relationships there.
So they have a mandate to set up
Nintendo of America in New York, which they do.
And at first, there's no console yet.
They're not ready to enter the home video game market,
but they've got these arcade machines.
And so the way that they're gonna build up
Nintendo of America is through the arcade business.
They do the obvious first thing that makes sense.
They hire the guys who had been running
the trading company that was importing
Nintendo's arcade machines in the past.
And I think they were importing
used Nintendo arcade games from Japan
and like refurbishing them
and then selling them into US bars and arcades.
Like it was this very almost like gray market
way to acquire Nintendo's cabinets.
That was run by two young guys at the time
who were from Seattle, University of Washington alums,
Al Stone and Ron Judy.
That becomes the initial Seattle link
for Nintendo of America.
So they hire Stone and Judy
to sell Nintendo's arcade games
that they're producing back in Japan.
And to no one's surprise, they don't sell very well.
The games just weren't very good.
And there was pretty robust competition, of course,
as we talked about in the American market.
So Araka was like, guys, why are these not selling?
Ron and Al are like,
they're not selling because the games suck.
You need to call up Yamauchi-san and be like,
hey, send us some better product.
They say, you know, what is selling here?
We're now in 1978, 1979 in America.
What is selling is Space Invaders.
That's made by a Japanese arcade company, Taito.
Why don't you get the guys back in Japan
to make something like Space Invaders
and send it over to us?
So Minoru calls up Yamauchi and is like,
hey, can you send us something like Space Invaders?
Yamauchi doesn't really want to do it
because he's like, look,
you're supposed to be building relationships over there.
Can't you just use our games?
And Araka was like, no, no,
I really think this is going to sell.
I'm going to place a really, really big order.
I want you to send me 3,000 cabinets
of a Space Invaders knockoff.
Like, I really know that this is going to work.
Yeah, we are your boots on the ground.
We know this market, it has to work.
Yep, I'm putting my reputation with you on the line.
I know you don't know me that well as, you know,
a business partner yet,
but I really think this is going to work.
Yamauchi says, okay.
He directs the R&D 3 team to come up
with a Space Invaders knockoff, which they do.
They make radar scope.
It's innovative.
It has a different perspective.
It's not the top down Space Invaders.
It's got like a three quarters view quasi 3D twist
on the Space Invaders mechanic.
They start producing them in Japan.
Unfortunately, to make the games 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 Invaders mania 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 it will come with failures too.
But from this point forward,
they never try the fast follow clone copy thing again.
Totally.
So when the cabinets show up,
Nintendo of America can't sell them.
And they've got all this capital tied up in this inventory.
They only managed to sell about 1000 of the 3000 cabinets.
So they got 2000 radar scope cabinets
sitting in a warehouse in New Jersey
at the current headquarters
of Nintendo of America collecting dust.
So Minoru now needs to call up Yamauchi again.
It'd be like, you were right.
I'd be like, so about, you know,
when I kind of put my neck on the line
with these radar scope cabinets, I was wrong.
You can only imagine how this conversation went.
And he's like, oh, we gotta do something.
Like we can't, you know,
Nintendo of America is gonna go bankrupt
with all this inventory and these cabinets just 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 radar 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 motherboard
and leverage basically the assets we've got
to create a new game out of this thing?
Yup.
And things are so bad.
Yoko at this point is so pissed.
She takes the kids and basically moves back to Japan.
She's like, I can't believe this has happened.
Like we're out of here.
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
and a couple of buttons,
basically every game at the time is, okay,
use that to sort of move the gun
to where you're going to shoot it and then press shoot.
And then maybe you have a different button.
And so you're giving a pretty prescriptive order
and you're giving a pretty narrow set of things
you could turn this into.
Yup.
And less.
So Yamauchi is so pissed.
He can't take anybody off the console project.
Those are his best engineers
who could maybe pull some rabbit out of the hat here.
He goes to Gunpei and he's like,
my dumb ass son-in-law over in America.
I got to give him something.
Can you give me like a janitor or somebody
to like make a game here?
And Gunpei's like, I literally can't take any engineers.
And at the time, only engineers made games.
Like there was no game designer role.
It was just the engineers who made the games.
I can't give you engineers.
We do have this young kid who I brought onto the team
who is our design guy.
He's here to help with the hardware design.
He'd worked on the color TV game designs
of the hardware and some of the user interface.
He's pretty talented.
He's not an engineer, but he's been wanting to make a game.
I can give you that guy.
Yamauchi's 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 guy's name is Shigeru Miyamoto.
And this is how he comes to make his first video game.
Yes.
And if you don't know that name,
which I suspect 90% of you don't.
Oh, I suspect 90% of people do know that name.
That's the thing.
I'm really curious if people are like, this is Miyamoto.
Or if people are like, what the hell are you talking about?
And I think like, for those of you
who know your Nintendo history,
David just said, and this is how God is discovered.
But for those of you who don't,
this is how God is discovered.
The tablets come down from the Mount.
Moses brings them down, Miyamoto, Moses.
Well, the game that young Shigeru Miyamoto makes
to replace the radar scope software in these cabinets
is called Donkey Kong.
And Donkey Kong would itself go on
to earn hundreds of millions of dollars immediately.
In North America alone,
it totally saves Nintendo of America's skin,
earns $180 million the first year,
another $100 million the second year in arcades.
It becomes such an incredible franchise and IP,
which we'll get into in a second,
that just this game, the original Donkey Kong
has grossed over $5 billion alone in the decades
since on all the platforms it's been released.
David, the year that it was released in 1982,
it made more money than any film release that year,
except for E.T.
Even more importantly though,
I'm so curious what percentage of our audience
already knows this and what percentage doesn't.
The playable character that the game,
Donkey Kong is actually named after the villain,
the playable character in this game
is this very small, big headed, wearing a hat,
sort of innocent, nameless carpenter?
Yes.
Listeners, you might've thought that I was going
for Italian plumber named Mario,
but here we have Proto Mario,
we have Jumpman, Jumpman the carpenter.
So what's going on here?
Like I said, up until this point,
everywhere in America, in Japan,
the only people who made games were engineers.
And Miyamoto has this incredible quote about this.
He says, until Donkey Kong,
programmers and engineers were responsible for game design.
These were the days when engineers were even drawing
the pictures and composing the music themselves.
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 it technically competent
and something competitive
that would have enjoyable gameplay
for mostly to suck up quarters in arcades.
It's also a frickin' miracle that they work at all.
You think about the very early technology involved
to like layer on more hard things on top of
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 no, no, no, no, no.
Arrange the chips in a way that it works
and doesn't break quickly.
Miyamoto, on the other hand, he's not an engineer.
He's a designer and he thinks games can be an art form.
So when Yamauchi gives him the chance to make a game,
he's like, finally, I can bring my genius to bed.
He's not a self-conceded man,
I'm sure he didn't think of it that way.
But he has a very different vision for what a game can be.
Here's what David Chef, who writes Game Over,
which is a great book, writes about the conversation
that Miyamoto and Yamauchi have
when he gets assigned to make the game.
Miyamoto boldly told the Nintendo chairman
that he would enjoy creating a game.
However, he said, the shoot-em-up and tennis-like games
that were in the arcades at the time were unimaginative,
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 Kong, Jason and the Argonauts, even Macbeth.
And this is exactly what Miyamoto 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 Jumpman running around at the bottom
trying to save this nameless princess
from an ape that's throwing barrels.
Like, it's not a lot of story.
It's his girlfriend.
Oh, really?
Yeah.
Originally, it was not a princess.
Well, so here's the story that Miyamoto comes up with
for the video game.
A regular everyman, Jumpman, has a pet gorilla
who he keeps in his house.
He's not very nice to this pet gorilla.
He doesn't treat him very well.
So one day the gorilla escapes and kidnaps
our protagonist's girlfriend as revenge
for not being treated well.
Now, it's important.
The gorilla does not want to hurt the girl.
Oh, that's right.
Her name is just like lady, right?
Yeah.
Like they don't even name her.
She was Pauline in the American version.
Okay, yeah.
The gorilla, this is important,
does not want to hurt the girlfriend.
He actually likes her quite a bit.
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 skyscraper
and starts throwing barrels and construction equipment
down at the protagonist as he tries to chase him up.
And your goal as the player
is to reach the top of the construction site,
defeat the gorilla and save the girlfriend,
which is incredibly simplistic today,
but nothing like this had ever existed before.
And so like wonderfully innocent
and kind of convoluted too.
Like everything about that, you're like, what?
That worked.
That was the best story you could come up with.
Yup.
But despite its kind of wackiness and simplicity,
it's a classic three act story.
There's a beginning, dramatic tension is introduced,
there's a middle and a struggle,
and there's an end and a victory and a resolution.
Yup.
It's also worth saying,
Miyamoto came up with all this within the constraints
of what Radar Scope'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 ladders and avoiding the barrels,
using the same controls originally intended for Radar Scope.
So while Miyamoto, like you said,
not even the B team or the C team,
just the unknown team is working on this game
back in Japan. Team Wildcard.
Team Wildcard.
Arakawa is totally freaking out back in New York.
His wife has gone back to Japan, taken their kids.
He's like, all right,
I don't know if this is gonna pan out here,
but I know one thing.
If we're gonna save both the business
for Nintendo in America and my marriage,
we gotta leave New York.
We gotta go to the West Coast of America
because the shipping times,
that's what the fatal mistake that we made with Radar Scope
is we placed this huge order with a four month lag time.
We couldn't get any feedback.
We couldn't get any test machines into the market.
I assume they had to go through the Panama Canal.
I assume so, right?
You can't just put all this stuff on an airplane
and send it there.
So he says,
we gotta leave New York for business reasons.
We loved being in Vancouver.
We don't like New York.
We can't move to Vancouver
because we gotta be in the United States
for what we're trying to do here,
but we can move to Seattle.
Yup.
Nice and close to Japan.
Easy shipping times.
Easy drive to Vancouver.
Yoko can hang out with all our old friends back there.
This'll be great.
And Microsoft was seven, eight years old at this point.
And so, you know, they're starting to be some tech talent.
There's the former Boeing engineers.
Absolutely.
And it's even more perfect.
Our distribution guys who we hired and brought in house,
they're from Seattle.
It's perfect.
We need to move there.
So while all this is going on back in Japan,
they moved the company to Seattle.
They lease a warehouse space in Tequila.
For folks who don't know Seattle real estate,
Tequila is just south of the city, kind of by the airport.
It's very like industrial.
It's a great place for your video game warehouse.
Great place for your video game warehouse, exactly.
They ship the cabinets across the country by railroad
from New Jersey to Tequila.
They're all hanging out there.
Yoko and the kids come back.
They're like, okay, great.
And then the ROMs show up with the replacement game
for Radar Scope with Donkey Kong.
They plug them in.
They all huddle around.
They start playing and they're like, WTF, what is this?
We're scurried.
It's super different.
They weren't really told what to expect.
They basically get these conversion kits
that show up via freight 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 really great recognizable IP to help with sales,
that Nintendo actually had some preexisting relationship
with the owners of the Popeye IP.
Yes, they were working on a Popeye license
with King Features.
Yes, this wasn't gonna be like Jumpman and Lady
and Donkey Kong.
Is a nonsensical name for a gorilla.
Right, this was gonna be Popeye
and that was gonna be Olive Oil instead of Lady.
And that was gonna be Brutus,
the kidnapping character that would sell well
to an American audience.
And this thing arrives with these brand new characters
that no one's ever heard of and they're like, crap.
We are totally screwed.
So Stone and Judy threatened to quit.
They're like, well, this is not gonna go anywhere.
But they've got this kid.
They've got hired a couple of kids in Seattle
to work in the warehouse, move stuff around,
get it chipped out.
And there's this one kid named Howard Phillips working there
who's just a total arcade nut, loves video games.
He plays it in the warehouse and he's 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're like,
this is not the type of thing that is selling well.
Once you start playing it, you're like,
oh, everything about it is thoughtful.
It doesn't get boring right away.
The music is continuous and recognizable
without getting repetitive.
There's random variables.
So you can't just beat it 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 Miyamoto set out to do.
Yup, and not only does it have that narrative and art,
it's exactly what you're describing.
This thing is really fun.
If you pick up and play it, you can intuit really quickly
how it works, how to play it,
and you can just start having fun.
There's a maxim in the video game industry
that a great game is easy to play, but hard to master.
And that is exactly what this is.
Yup, so Phillips in the warehouse is like,
really please me, he's like, guys, this is really good.
And they're like, okay, well,
let's take it to a couple bars around Seattle
and just set it up and see what happens.
And just like Pong back in the day,
this thing becomes a quarter magnet.
Phillips's intuition was right.
None of the senior guys, none of the older guys,
Aracawa, Stone and Judy, they didn't get it,
but the kids did.
And on the back of that, Phillips ends up becoming
Aracawa's kind of most trusted advisor about games.
And he becomes Nintendo's game master.
He becomes a hero in Nintendo power,
all of this, like a national celebrity.
It's incredible.
The Nintendo of America management though
does decide one thing.
They're like, we get okay that there's this narrative
revolution here with this game.
I don't think it's gonna work here
if we call the protagonist Jumpman.
We need to give him a little more of an identity than that.
And so they're casting about trying to decide
what to name this character.
And by the way, I should say I was shocked
that Donkey Kong predated Mario.
His name is not on the cover art
in the very first game he appears in.
Of course he doesn't have a name, but yeah.
So the legend goes that as they're debating this,
the landlord of their warehouse in Tequila,
either shows up or sends a letter.
It's unclear.
Shows up because they were way behind on rent
because this fricking company didn't make any money.
Demands the rent because they're late.
And the way I know he shows up
is because he starts jumping around and ranting and raving
and waving his arms in the air.
And he's like super animated and they can see him there.
And he's got this big bushy mustache.
He's this Italian guy named Mario Sigali.
And this is how Super Mario gets his name.
Amazing.
Totally amazing.
They named the girlfriend Pauline,
I think it was either wife or girlfriend
or one of the guys working at the company
at Nintendo of America at the time.
Yeah, so they named her Pauline
because the warehouse manager
who was taking a lot of the heat from Mario Sigali
and directing it away from the Nintendo guys
and sort of like taking the hits for them,
his wife was named Pauli.
So they named the character Pauline after her
as a thank you to him.
Nintendo has a history of doing this with their characters.
Well, one more thank you naming of a character
is gonna come up in just a second here.
So the game sells like wildfire.
Like we said, all the 2000,
former radar scope machines fly out of the warehouse.
They order more,
like they end up selling thousands and thousands of this.
It expands the TAM of who plays video games too.
That's the other thing.
It's like, it's not just for boys anymore.
It's not just teenage boys anymore or people in bars.
Irony of ironies.
Taito, the Japanese company that made Space Invaders,
they call up Yamauchi and they're like,
hey, we're like the really good
Japanese arcade game manufacturer now.
You've made this hit arcade game.
Can we buy the rights to it from you
to distribute it for Nintendo around the world?
We'll pay you a ton of money for it.
Yamauchi is kind of inclined to sell
because remember he doesn't really care
about the arcade business.
He really just wants to set up Nintendo of America
to get the distribution arm
for the console that's coming.
But he lets our our Kawa make the final call.
Our Kawa says, nope, we're going to keep it.
We're going to distribute it in-house at Nintendo of America.
Of course that ends up being totally the right decision
and kind of re-earns Yamauchi's trust from him.
It's like a multi-billion dollar correct decision.
Multi-billion dollar correct decision.
The other hilarious thing that happens is MCA universal
and the legendary Sid Scheinberg who we talked about
with Michael Ovets over at MC universal.
Of course he's what's going on with Donkey Kong.
And he's like, I'm going to make some money on this.
He's like, wait, wait, wait, wait, wait, big gorilla thing
all the way at the top of a building named Kong.
It sounds like King Kong, which I think I own the rights to.
This is my circus and this is my monkey.
I think we talked about this with Michael,
but this is where it comes out in the court case.
Sid would refer to the legal arm of MCA universal
and their legal suit activities as a profit center
for the company.
God.
He filed suit against Nintendo of America
for infringing on his King Kong trademark.
Nintendo led by Seattle lawyer, Howard Lincoln
who would go on to succeed,
our cow as the president of Nintendo of America.
And I think Howard Lincoln was the personal lawyer first
of the two guys who ran the import distribution business.
That's right.
So Lincoln sets Nintendo of America up
with a great antitrust lawyer to fight off MCA,
which is a crazy decision.
Like they should have just settled with MCA.
Right?
Tiny companies that are not doing well getting sued
by very dominant global entities like MCA universal.
You roll over.
Yup.
Lincoln sets up Nintendo
with a great antitrust lawyer, John Kirby.
And he and Lincoln together team up
and they fight off Sid Scheinberg and MCA universal
and they end up winning in court the case.
And it hinges on they discover
that universal doesn't actually have the trademark
for King Kong.
Because it was public domain.
Exactly.
And they knew it too.
Scheinberg knew it.
Yeah, that's the thing.
And the judge slaps him across the face.
He's like, you guys knew you were in the wrong here.
You've been suing this company
and all their partners just to try to be extractive.
Even though you know you don't have a case.
I can't believe you followed up with this.
This is where the profit center language comes out.
Yup.
They're wrong on a bunch of vectors too.
They're like, wait, wait, wait.
One's a gorilla, one's an ape.
And then the other argument that John Kirby finds
because John Kirby flies to Japan
and starts interviewing a bunch of people at Nintendo
to try and like mount the argument of like,
they didn't know, of course,
they didn't reference King Kong IP.
And he's in Japan and he's looking around
and he's like, wait, in Japan,
they use Kong to describe big monkeys generally.
That's like a word that's commonly used.
And so he uses that too.
He's like, this thing was invented very quickly
by this small team in Japan using common parlance.
And so the judge just serves MCA universal.
He's like, you guys are dicks and you knew it
and you were wrong and you owe all their legal fees.
Amazing.
Which is not normally what happens
when MCA universal goes to court.
And so as a thank you,
Nintendo goes to John Kirby a few years later and says,
we've got this great game in development
and we're gonna name the protagonist after you.
And that is how Kirby got his name.
Great smash character.
Yes.
Oh yeah.
A lot of jumps.
Okay, so we're at this point in time
where Donkey Kong sold like gangbusters.
They know they've got a hit on their hands.
There's potential for these characters
to really embrace their own storylines.
And there's strong incentive by Nintendo,
the parent company in Japan to really flush this all out
because they've got the Famicom nearing release.
And so they're trying to figure out
is this thing that Miyamoto came up with on a lark,
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 this to be like the centerpiece
of our launch of our console?
Which they do.
So Miyamoto makes a couple more games.
He makes the sequel, Donkey Kong Jr.
That also does really well.
He makes an actual Popeye game.
They finally get the license kind of in the same vein.
That's a footnote in history.
And then in 1983, he makes the first dedicated Mario game,
Mario Brothers as an arcade game.
Super Mario Brothers, right?
Well, no, they're different games.
Mario Brothers was an arcade game that Miyamoto made
and that's what introduced Luigi.
And you had two plumbers.
This is what canonically made them plumbers.
The setting was underground and they had green pipes
and that's how they became plumbers.
Side note, when they came out with this game,
the Mario Brothers, people were like, oh, wait,
the Mario Brothers.
So Mario is the last name and Nintendo confirmed it.
And so they're like, wait,
so that guy's name is Luigi Mario
and that guy's name is Mario Mario.
And Nintendo was like, correct.
And I think they've maybe changed their stance
on that over time, but.
Amazing.
What a Nintendo of Japan thing to do.
I love it. Yes, exactly.
But yes, it's clear that Miyamoto'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 Yamauchi completely understands this
just like he understood with Kumpa Yokoi
that 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 apply to game designers
that there are very few Shigeru Miyamoto's out there
and the value of what they make is worth many,
many multiples of what every other game designer
out there makes.
So after Miyamoto proves that he wasn't just a flash
in the pan, Yamauchi creates a fourth R&D division
within Nintendo, puts Miyamoto in charge
and the sole purpose of this new R&D four unit,
which would later become the legendary entertainment
analysis and development group within Nintendo.
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,
they're sort of zigging where everyone else is zagging,
where a lot of other game designers at this point in history
are starting from a place of,
we need to make a game that's in this category
or other people have made this game and it is successful
or games that are great today involve this set of things
that everybody thinks you need for a game.
And what the team that Miyamoto is leading is saying,
we are on a quest to be inspired and find fun.
And then we will build exactly the right window dressing
around that fun, that real kernel,
that core mechanic that we love and no more.
We don't need to do any of the other stuff on top of that.
If it's fun and if it continues to be fun
and it's super replayable,
then our mission is accomplished.
And it is a very, very, very different approach
to how other people were designing games.
Yes, exactly.
Yamauchi has this great quote about Miyamoto
and the Nintendo philosophy
of what makes for a great game designer.
He says, an ordinary man cannot develop good games
no matter how hard he tries.
A handful of people in this world can develop games
that everybody wants.
Those are the people we want at Nintendo.
It's just so wild that Yamauchi,
he's never played a game in his life.
And that is actually true.
We haven't really harped on this yet,
but like this guy led Nintendo through its heyday,
invented the modern Nintendo,
found the talent to design and market all these games
and never played any of them.
Yes, but he totally intuitively grasped
all these principles that would just come to define
not just the video game industry,
but all technology industries.
Yeah.
Amazing.
And that's funny.
That quote is less about fun and what defines fun
and their philosophy on building
and more about like most people don't have what it takes
and Miyamoto has what it takes
and we've got Miyamoto, so good luck.
Well, it's true.
I mean, I think fun and that brand of fun
is the Miyamoto and Nintendo style of game design.
There are other brands of game design.
I mean, folks like over at Square and Enix in Japan
with the Dragon Quest series and the Final Fantasy series,
Hironobu Satchiguchi,
who was the father of the Final Fantasy series
would probably have a very different take on that,
but he's equally a genius.
Like there are these few people
who are just the very best in the world of what they do
and nobody else can match them.
So we're now in 1983
and all the pieces are coming together.
Nintendo's got the games.
They've got the IP.
They've got the creative genius in Miyamoto running R and D4.
They've got the distribution network
that they've always had in Japan
and now they've got it set up in North America as well.
And the technology is just about ready.
So the R and D2 team has accomplished something
nobody else can or would for years in the industry.
Yep.
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 Nintendo story.
The way they do it, it takes them years to come up with
is they realize that the brute force way
of accomplishing the year plus ahead of the competition
directive that Yamauchi gave them
would be to get the fanciest, fastest,
most Moore's law enabled ahead of the curve
processor out there.
But that would kill the bill of materials.
That would make it way too expensive.
Yep.
So they come up with this incredible innovation.
They realize, okay, we're constrained on cost.
We can only use cheap off the shelf,
at this point dated technology for the CPU of this machine.
And up until now, the CPU was everything.
The CPU was the brain of the computer.
We're in the eighties, even through to the nineties.
Remember, Intel's marketing and like the PC industry
and the CPU was so important.
What the Nintendo 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 spreadsheets.
We can pair a cheap CPU with a secondary processing unit
within the machine that they dub the PPU,
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 onto something
like incredible in history that just everybody overlooked.
I think this might be the first example
of a dedicated GPU in a piece of hardware.
Oh, interesting.
I wonder if that's right.
A programmable GPU.
So let's unpack this a little bit.
The Atari 2600 had a CPU that did most of the work
and then it also did have another chip
that interfaced with the television
and Atari called this the TIA,
the Television Interface Adapter.
But there was no memory on this TIA chip.
It was literally just there to like draw the graphics
that the CPU was outputting to put on the television screen.
The PPU that Nintendo designs and develops
is its own programmable chip that sits next to the CPU
within the NES and it has eight bytes of memory
and it's dedicated to processing the graphics
that get output on the television.
So that has specialized circuitry
both for doing the backgrounds of the games
and for processing the sprites,
so which are the like characters,
the movable items on the screen.
And I think this was the first example
of a machine and an architecture in history
where like the workload was split up like this
because it was a decade later when NVIDIA came around
and invented the GPU.
Which is farcical.
Of course they didn't.
But now it would be until that time
when people would think about using this architecture
in computers, in PCs.
But in this subset of the computing market,
it was Nintendo.
I think you're right.
I mean, I can't think of a counter example
off the top of my head
or where a counter example would even exist.
Right, that's what I thought about too.
I'm like, I can't think of anything else.
And again, like it is technically true
that the Atari and other consoles had chips
that handled the graphics output from the CPU
but they weren't programmable.
They didn't have onboard memory
and they weren't doing any of the processing of the graphics.
The PPU at the NES is actually doing a lot of work
and it all came about as this,
necessitated by this constraint
that Yamauchi put on the team of like,
this has got to sell for less than a hundred bucks.
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 seasoned technology,
that it's about inventiveness.
I think the literal translation is withered technology.
Withered technology.
You know, it's not about using the state of the art chips.
It's not about using the most expensive hardware.
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 PPU.
Well, it actually was the Game & Watch.
Gunpei Yokoi's work on the Game & Watch,
which he's the author of this philosophy within Nintendo.
And that's what led him to that.
He's like, oh, we'll take this calculator technology
and apply it to games.
And we can use this kind of lateral technology
to make something fun while keeping the cost down.
But it's the same thought here.
I mean, the CPU that they end up using in the NES
is a slightly customized,
but basically off the shelf MOS technology 6502,
which by this point in time is like a very standard
off the shelf CPU used in thousands of applications
around the world.
It's like how the switch processor is like a circa 2014
Android phone chip.
And a crappy one at that.
Huh, okay, so they already were fully embracing the idea
that we actually don't need the most expensive hardware
to create the most fun experiences.
Yeah, and in this case, it was really interesting
in that the NES had graphical capability literally years
beyond any of its competitors.
But it did it with cheaper technology.
And that was the amazing innovation.
And that enabled a bunch of things,
most importantly at the outset for the Famicom and NES,
it meant that this new console would be able
to have totally 100% accurate ports of arcade games.
When arcade games would come to other home consoles,
like the Atari 2600, they had to be dumbed down a little bit
because the hardware like couldn't handle it.
When you're making an arcade cabinet,
you can have dedicated customized chips and systems
and circuit boards for that game,
which allow you to do better graphics, more fancier stuff.
That if you're then trying to bring it to something
like the 2600, you're gonna have to make
a bunch of compromises.
The NES was able to have the best ports
of Donkey Kong, Mario Brothers, the Nintendo titles,
but then the third party titles too.
Right.
So interesting.
I mean, it makes a lot of sense
with the way that cartridges work too,
because unlike CDs, where in the modern era,
you're reading a game off of some media,
loading it into memory and then executing it
on the hardware of the actual platform of the console,
in the cartridge era, the circuitry was in the console.
And so everything kind of like loads instantly
because you were literally playing the game
on the hardware within the cartridge.
And it's this perfect marriage of the circuitry
in the cartridge and the circuitry in the console itself
that creates exactly enough resources
to play that game and nothing more.
Yep.
The wild innovation technology-wise
that comes out of Nintendo in this time is just incredible.
They do stuff like later in the Famicom and NES life cycle.
I think with Super Mario 3,
the NES is kind of like old in the tooth.
The Genesis is out at this point
and like the graphics aren't industry leading
like they used to be.
They start putting computing chips on the cartridges
to help the console because it like marries together
in the same system when the cartridge is in the console.
They do some similar stuff with Zelda.
Okay. So take us to 1983.
Take us to launching the Famicom in Japan.
So on July 15th, 1983, after years of work,
Nintendo finally launches the Famicom,
the family computer Famicom for short in Japan.
Because they had broader ambitions than gaming.
Right. They had zany stuff.
They thought like, oh, this is so powerful.
What we can do with these two chips,
we're gonna give it a keyboard.
We're gonna like be a Trojan horse into the home.
Like all the stuff that Sony would do
sort of stupidly later.
Nintendo originally wanted to do that.
They ended up cutting all of it to save costs.
They still don't get the machine under $100 in Japan.
It retails for 14,800 yen,
which is like 110, 120 bucks at the time,
but still way below any of the competitors on the market
and way, way, way better.
The first shipments in Japan immediately sell out.
They sell 500,000 units when they launch.
Then there's actually, they have to do a recall.
There's a fault in the motherboard
because it's such a like complex system
and they hadn't worked out all the kinks
when they launched it.
It's kind of like the famous Tylenol case.
They do a nationwide recall.
They recall every Famicom system in Japan.
And they don't just replace the one broken chip.
They strip out the entire motherboard
and replace every motherboard on every single unit
to show people like we're really serious about quality.
Yup.
And so starting from the summer of 1983 in Japan,
right as the video game industry is dying in America,
this rocket ship of Nintendo
and the Famicom just takes off in Japan,
they sell over the next two years,
every single unit they can make.
They had placed a 3 million unit order with Ricoh,
the Japanese semiconductor manufacturer.
Ricoh manufactured them?
Oh my God.
And Nintendo became by far their biggest customer.
Huh.
I used to have a Ricoh camera.
That's right.
So they did a deal with Ricoh
to manufacture the CPU and PPU tandem system together.
And the only way they could get the price down far enough
to hit the price point they wanted at retail
was to place a 3 million unit order up front,
which was like crazy at the time.
Totally.
It was 3 million units over two years.
They couldn't make them fast enough.
They sold out the whole thing.
It was incredible.
God, Nintendo got so lucky
that the Japanese market wasn't saturated
the same way that the US market was.
They launched into like the very best conditions
in Japan they could of frankly,
not a lot of competitive consoles at that moment.
Yup.
So over the next few years,
the Famicom would go on to sell
almost 20 million units in Japan.
In Japan in the eighties,
there were only 38 million households.
So they get an almost 50% penetration
into the Japanese market.
Whoa.
Isn't that wild?
Wow, that is crazy.
It just becomes this enormous juggernaut in Japan.
But meanwhile, of course,
the big Kahuna market is the US.
There's 90 million households in the US
at the time in the eighties
and not just 90 million households.
There are plenty of other countries
that have 90 million households.
There are 90 million US households
that mostly 100% of them have a television,
were used to playing arcade games,
knew about the home video game market
from everything that had just happened.
Has the highest GDP per capita in the world.
And could afford to buy a console,
especially a relatively cheap console like the NES.
You know, not 100%,
but 70%, 80% of the US market could afford this.
Yup.
Wow, that's crazy.
So by 1983, like everything's all set up,
ready to go in America.
Yamauchi's like, all right, let's go.
And like, you gotta be wondering,
like, should we pull the trigger?
This is like a crazy moment to decide like,
yes, let's launch.
Let's flashback two hours before the Nintendo story.
And remember the state that the United States was in,
they just went from $3.2 billion,
being the home gaming market size to $100 million.
And they're burying games in concrete,
in landfills and smashing them up
and throwing away consoles.
And this is 1983.
So it's the exact same moment in Japan
that somebody, I don't know exactly who
and exactly what the story is,
but somebody is deciding to pull the trigger and say,
Yamauchi, take the Famicom and make an American version of it.
Yes.
So Arikawa is like, I hear you.
I don't think this is the right time.
So that's the crazy thing.
This is the thing that I think I couldn't tell
between reading stories from the US perspective,
stories from the Japanese perspective.
Do you have a sense of how that dynamic went?
I read so many versions of this.
So a lot of this is my speculation.
I can't 100% say for sure that this is exactly what happened,
but this is kind of how I imagine
based on everything I read.
I think Yamauchi wanted to do it.
I think Arikawa did not.
And I think Yamauchi overruled Arikawa and said,
fine, if you're not gonna do it,
we're gonna partner with somebody who will.
Even though you set up everything to be in-house
with Nintendo, set up this whole Nintendo of America,
the distribution, we went through all this.
You proved yourself with Donkey Kong,
even though I saved you,
but I wanted to sell it to Taito and you said that was wrong.
I want to get this in the US so badly,
I'm gonna go around you.
Nintendo goes to Atari.
Remember, we talked about this with Nolan Bushnell
and he was like, yeah, I wasn't involved.
That was really dumb.
Cause he had already left Atari at this point
and it was owned by Warner's.
Yamauchi goes to Atari and says,
Nintendo of America is not gonna launch the Famicom.
I want you to launch the Famicom now in the US.
And they basically have a deal done.
They negotiated, this is gonna be,
Atari under Warner's knows that their hardware,
the 2600 at this point is dead.
It can't compete with the NES.
They also know the market is totally going sideways.
So they're like, sure, worst case scenario,
we can just sit on a competitor
and tie up Nintendo and not launch this.
Best case scenario,
this is the Atari Nintendo Entertainment System.
Wow.
So what happened?
They basically have a deal done.
They are all set to sign it
at the summer CES conference in June of 1983.
So Yamauchi directs Arquawa and Howard Lincoln
to go down to LA and meet with Atari and Warner Brothers,
start the initial negotiations.
They do that.
It goes well and out, I'm sure.
Arquawa's like, I can't believe this is happening.
Then the Atari folks fly out to Japan
and meet with Yamauchi.
They get a deal basically agreed to in principle
where Atari is gonna distribute the Famicom,
not just in North America,
but everywhere in the world, except for Japan.
And they're gonna pay Nintendo a per unit royalty fee.
Nintendo would still get to sell the game cartridges.
So it actually wouldn't have been like a terrible deal
because all the money and all the profits
are in the game cartridges.
But still, like talk about history changing on a knife point.
This would have been Atari's business.
Yeah, and Nintendo wouldn't have had
the direct relationship with certainly not customers,
but not even retailers.
Retailers wouldn't have built the brand.
All the IP, we're gonna get into all the amazing stuff
that really Nintendo of America drives.
Oh, it would have been an Atari branded Famicom?
Yup.
Whoa.
So they're all set to sign this at the June CES show
in Chicago in 1983, so summer 1983.
But by this point in time, the crash is already underway.
And Atari and Warners are keeping these negotiations going
just to keep Nintendo tied up,
but they know that they can't actually follow through
and like deliver on this partnership
because in the second quarter of 1983,
Atari reports a $283 million loss
as part of Warner's earnings in 2Q 1983.
In the third quarter, so after CES,
that goes up to a $536 million quarterly loss
at the Atari division.
A year before, I think like we said
at the top of the episode,
Atari had been half of Warner Brothers' entire revenue
and 60% of its operating income.
And now it's reporting a $536 million quarterly loss.
So like the other shoe is about to drop.
They have no power.
They can't do anything at this point.
It's just a charade.
So this probably would have happened.
This definitely would have happened
if the timing were different.
But well, maybe it would have, maybe it wouldn't have.
You know, I think, I don't know 100% for sure,
but I think Arakawa was like,
yo, 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 going to happen here.
So maybe it wouldn't have, like if things were different,
maybe he and Nintendo of America
would have let it from the beginning.
And in a sense, Arakawa was right.
The fact that they didn't release what became the NES,
the US version, which is a little bit of modified
from the Japanese one for another two years.
In one very key way, it's modified,
which we'll get into in a sec.
Two years later is a much better time to launch this system.
Much better.
And in the intervening two years,
all the revenue and profits that Nintendo of Japan,
Nintendo co-LTD, the parent company was making,
allowed the whole company to be in a much better position
to whether the investment they were going to have to make
to re-educate the American market when they do launch.
And just to put some numbers on that
for the first couple of years of the Famicom in Japan,
not only are they selling every piece of hardware
that they can make,
every console that they sell has a,
what comes to be known in the industry as an attach rate,
the number of games that are sold with it,
going up to like 11 or 12 games per console,
not per year, but for the life of the console.
And I couldn't actually find what the retail price
of Famicom cartridges were in Japan at that time,
but let's assume they were comparable to the US,
which would be kind of seven to 10,000 yen,
kind of like half-ish of the price of the console.
If you're selling 12 games at half the price of the console,
you're making another 6X the console revenue
at like 80% gross margins.
God, that's crazy.
It's just a cashflow spigot.
And that attach rate is high even relative
to like the big consoles today.
Like I think PlayStation and Xbox,
it's different with the subscription stuff today,
but target like a seven or eight game attach rate.
What did you say, 11 game attach rate?
11 to 12, yeah.
Yeah, it's nuts.
Totally nuts.
Even more importantly though,
building up to an eventual US launch,
it's during those couple of years from 1983 to 1985
that Miyamoto and R&D 4 start churning out
an existing library of just amazing games.
So Duck Hunt, Super Mario Brothers,
which is the first Mario game like we know it today.
Absolute smash hit side-scroller platformer, yes.
You know what it is, The Legend of Zelda,
which actually was the launch game
for the Famicom Disk System in Japan,
which is, we won't get into it here,
but The Legend of Zelda was the best thing
to come out of it, let's put it that way.
So Super Mario Brothers for a long time
was the top selling video game in history.
Over the lifetime of that title,
it sold over 60 million copies,
obviously across multiple platforms, not just the NES.
Of just Super Mario Brothers, one.
Super Mario Brothers, one.
Wow. 60 million copies.
Duck Hunt sells 28 million copies.
Later Super Mario Brothers 3 would sell 24 million copies.
Keep in mind listeners,
there are 90 million households in the US.
Right.
So these individual games,
this is the point we were making earlier
that Yamamuchi understood.
They're making billions, billions of dollars per game.
You know, that takes Miyamoto and a small team
at this point in time,
somewhere between six months and a year
to make these games.
Well, there are some games that take four or five years.
Right, right, right.
But even in just those two years from 1983 to 1985,
Duck Hunt Super Mario Brothers Legend of Zelda
launched during those two years.
Actually Zelda might've been a little bit later,
but like the billions and billions of dollars,
like incredible.
So when they're finally ready to launch in the US in 1985,
they've got so much firepower to bring to bear here.
Yeah.
So they do a few things differently
when they're developing the NES.
They take away the word computer,
which is sort of an important nod to,
you know, we wanted this thing to do all sorts of stuff,
to just have check stocks and weather.
And I even think it did some of that in Japan by this point.
I think 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 US and they're like,
this is an entertainment system.
Congratulations, you've just bought the very best way
in the world to play video games.
And for the US version, the NES also had
removable controllers, they were hardwired in
on the Famicom in Japan.
And in the US, an important difference,
the cartridges had a lockout chip.
Ah 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, what we've basically talked about
for Nintendo of America is they were a distributor.
They were a regulatory arm, they had to pay payroll
and they had to do that in US dollars for US 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 US.
But like, they aren't doing a lot of product specific work.
Or business model or yeah, Yamauchi definitely thought
of Arkawa and Nintendo of America,
despite him being his son-in-law,
because he was his son-in-law,
just thought of them as like
my American distribution network, yes.
But here's where things start to change.
So Yamauchi did know and had learned
from the Atari third party licensing business model
that we talked about with Activision and all that,
that that was an incredible cashflow stream
and point of power.
He knew that even he wasn't gonna be able to get
all of the elite game designers in the world
to come work for Miyamoto and Nintendo,
but he did know that he could get all
of the elite game designers in the world
to publish on the Famicom.
So he sets up third party licensing in Japan.
The first two licensees are Namco,
the Japanese arcade game company that made Pac-Man
and Hudson.
The first games that those companies,
they were established companies, especially Namco,
like were big existing companies,
video game companies in Japan,
before publishing on the Famicom,
it transforms their business
when they publish their first titles
as third party licensees with Nintendo.
Konami, which is another Japanese game developer
that listeners might recognize,
once they start publishing in Japan on the Famicom,
their revenue goes from $10 million a year
to $300 million a year.
This is how powerful what they built is.
All right, so this is how consumers
want to play video games.
So if you make a video game,
you should probably figure out a way
to go to market on this.
This is the power of a platform
and a network effect in the video game console business.
Yamauchi gets all this.
The terms that he sets up for the initial licensees
in Japan, he just copies the Atari business model.
They pay Nintendo a 20% royalty
on their revenues from the games.
And that's it.
I mean, great cashflow stream for Nintendo, wonderful,
all that, but they could be doing so much more.
And indeed the next set of licensees in Japan,
Nintendo ups the cut to 30% that they take
and says, oh, by the way,
only we can manufacture the cartridges.
You gotta buy the cartridges from us.
You can't make them yourself too.
And we're gonna make a profit on that too.
So like, good.
Which at this point is just contractual.
It's not a technical limitation.
Yes, exactly.
And there's also no legal structure
that they've set up in Japan
that prevents anyone else from sort of unofficially
making and publishing games for Nintendo.
And so a gray market emerges of developers who say,
we're gonna make Famicom games,
but not work with Nintendo and sell them ourselves.
And famously one specific company from Taiwan
called Hacker International starts making
both pornographic games and gambling games,
super ironic given Nintendo's origins.
And Nintendo meanwhile has drifted like very Disney,
very Apple and their family friendliness.
And so this is so like antithetical.
Strict censorship, like all of this stuff
that we think of Nintendo today has,
they've been in the toy business for decades at this point.
By the way, this sounds hard to do.
Like you have to figure out how to manufacture
the like correct sized plastic
and the correct motherboard
with all the correct pin connectors.
Like if you don't have a factory setup
to make Famicom cartridges,
creating that sounds really hard.
But the economic incentive to do so is worth it.
This market is so big.
So companies like Hacker International
are making tons of money selling their own cartridges
directly and not paying a dime to Nintendo.
And meanwhile they've got this brand problem
that's emerged and all this stuff.
And like, if they're not careful,
even though the Famicom is so advanced and so superior,
you're not gonna end up with the same thing
as happened in America in 1983 with a video game crash,
but you're gonna have some of the same problems
if you don't control the ecosystem
of publishing around your platform.
So Nintendo of America,
when it comes time to launch
what would become the NES in the US,
they come up with maybe the most genius
inversion of all time.
One, they say we should engineer a lockout chip
that you were referring to
into the hardware and the software.
It's actually unclear to me
if that idea came from Japan or from America,
but the Japanese engineers implemented it.
And this is a specific chip in the console
that needs to handshake with specific chips in the cartridges
for the new systems in America
that will lock out any not official Nintendo approved
cartridges from playing in the console.
I don't know if it's actually how it works,
but it's effectively a Nintendo signed cryptographic thing.
So it's like, unless you actually go through Nintendo
to make sure you get the specific chip
with the specific cryptography and put it in the cartridge,
it's not gonna run on them.
Yep, totally.
And actually later versions of the Famicom in Japan
would also include a lockout chip on them.
So they try and retroactively also bring this
to the Japanese market.
But Nintendo America is like,
obviously a lot of people in the ecosystem
are gonna hate this.
What if we market 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 Nintendo are on your side.
We're gonna make sure that doesn't happen here.
This is our seal of quality.
The Nintendo seal of quality that we are promising
to you, our customers,
that only the very best highest quality software
and hardware peripherals are gonna 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.
Side loading is the worst thing ever.
I watched Craig Federiki give a talk on stage
in Lisbon two years ago,
talking about how side loading or external app stores
would be the worst possible thing.
And Apple generates tens of billions of dollars a year
from the 30% of everything that runs through their app store.
And they stole it all from Nintendo of America.
It is to the number,
the same thing that Nintendo was getting with that 30%.
So, so, so good.
And they don't, Nintendo of America doesn't stop there.
They're so audacious with what they do,
but they could get away with it
because nobody cared in America.
It was a dead industry.
And also they had a great device.
Like again, the iPhone parallel here,
Steve Jobs always said,
this is five years ahead of the competition.
I think that ended up being around it maybe a year or two,
but like basically right.
The Famicom was five years ahead
of the competition in consoles.
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 the hell 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 Nintendo of America here.
And really, I think Howard Lincoln is behind a lot of this.
They say, we're going to go further.
Any third party that makes games for the NES 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 on the platform.
They're just like flagrant here.
They just like, oh, the DOJ is never going to come for us.
Which they didn't, I don't think.
No, they did in Europe.
I think they got in trouble for this,
but somehow they escaped 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 NES can't just offload a ton of crap on the system.
They have to pick their five best games
and that's all they can do any year.
And Nintendo is going to just like,
if they feel like someone's game is crap,
there's not going to prove it.
No chips for you.
Exactly.
And then the third thing that they built
into the Nintendo of America licensing program,
your games that you publish on the NES
have to be exclusive to the NES for at least two years,
which doesn't matter right now
because there's no viable competition, but will become.
And the Sega would come out.
Very important, very soon.
Yeah, dirty.
Or clean.
Nintendo would say clean.
Yes, they would.
We are keeping our platform clean.
So Nintendo of America and Nintendo Japan finally align
that they're going to launch in North America
for the 1985 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 epicenter
of the toy industry.
So they managed to get relationships
with both FAO Schwartz and Toys R Us
and Toys R Us would become huge.
Of course, it's already national at this point,
the biggest toy chain in America.
It's based in New Jersey.
So it's very strategic to launch in New York.
They convinced the retailers to carry them.
And this is where the next set of innovations
come from Nintendo of America.
Partially, I think this was necessity
because the retailers, even though they know
this is an incredible product, they're skeptical.
Like it's not obvious that this is going to work.
Consumers are way, way, way down
on home video games at this point, even still in 1985.
Nintendo says, we will come merchandise this
within your stores for you.
We'll 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 us space in your stores.
How very Louis Vuitton.
Yeah, exactly.
This is I think the first store within a store in America.
Literally, they come in and they set up
the Nintendo displays and they do everything.
Eventually this would evolve and become the world
of Nintendo.
That is the way that if you were a kid or parents
in the eighties and nineties, and you bought
Nintendo products in a toy store,
you bought them at the world of Nintendo store
within the Toys R Us or the Target
or the Babbages or whatever.
And all of that, that experience was controlled
by Nintendo of America.
Fascinating.
And of course they could put all sorts
of other ancillary merchandise in there,
Mario backpacks, t-shirts, blah, blah, blah, what have you.
God knows, did they put Mario on backpacks and t-shirts?
Oh boy, did they ever.
So they managed to sell 50,000 units
during the Christmas season in New York,
which is not a grand slam success by any means,
but like that they even sold that much.
That'd be about $5 million in total sales.
Again, like not a lot, but given that the whole industry
had shrunk to a hundred million dollars in sales
that they could sell 5 million in one Metro market
in one holiday season.
To take 5% of the US's market share
just in that one holiday season, that one Metro, not bad.
Not bad.
It's funny when you said 50,000, I was like,
so it flopped when it launched.
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.
So throughout 1986, they start rolling out more Metros
throughout the US.
They take a kind of rolling thunder approach,
which we're gonna get to in a minute,
also becomes the next innovation from Nintendo of America.
Can you imagine this today if they rolled out the switch
like city by city, so antiquated.
So antiquated, but so brilliant,
which we'll get into in a sec.
They sell a million units throughout all of 1986.
So like, okay, we're now like in real business.
1987, it's officially available nationwide.
They sell 3 million units in 1987 and 10 million game packs.
So like at this point, they're already basically coming close
to parody with Japan, which is incredible,
given that the whole industry was dead
two years ago in America.
Yep.
But the strategy and how they roll out to retail
is brilliant.
Remember, it was oversupply that killed the market before.
And you're trying to bring a market back from the dead.
Like what will kill a market is when you have supply
and demand out of whack where there's way more supply
than demand.
Even though there's just a trickle of demand for video games
at this point in America, Nintendo of America leans
into it.
And they say to retailers after that first New York City
test launch, we only have a very small amount
of product available.
They ration the product.
I think they fill 50% of every order.
And this is an unofficial, never written down anywhere
for fear of the DOJ, but like a unofficial policy
of Nintendo of 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 NES and a video game console
goes from being like on the markdown,
collecting dust in a bin somewhere to the hot thing.
You better show up at 6 a.m. to get it on the shelf.
You got to stand in line.
Like it becomes this super hard to get.
It's everything we talked about in the LVMH episode.
This object of desire that is very difficult to get.
They also take a page out of Disney's book
and they keep most of their game catalog out of production
most of the time.
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.
Yup.
So Yamauchi actually brings a lot of these innovations
from Nintendo of America back to Japan.
So they alter the terms of the licensing agreements
with third parties.
They go even further in Japan and true Yamauchi style.
They can only make three games a year in Japan
instead of five games in the U.S.
They add the exclusivity clause.
Like we said, they change the hardware
on future Famicom models to add a lockout chip.
They have so much control over every player
in the ecosystem.
It's so Disney-like.
And then finally in 1988,
Nintendo of America still has their retail strategy,
shall we say, but it blows through the roof.
They sell 7 million NES units in 1988,
which is way more than Japan
and 33 million game packs in America in 1988.
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 1988
is 10 times the entire market size
for home video game consoles four years before.
1989 and 1990, they sell about another 10 million units
of the hardware each year,
such that by the end of 1990,
one third of American households,
30 million American households have an NES.
And in the annual Q ratings in America,
which aren't as much of a thing anymore,
but I had to be reminded of it.
It's a measure of recognizability of celebrities
and brands in America.
In 1990, Mario has a higher Q rating
among American kids than Mickey Mouse.
Whoa, isn't that wild?
That is wild.
And this is where they just start running away with it.
In 1990, this is when they have 95%
of the video game market, right?
In the US.
Yes, this is like the peak.
This is Nintendo at the peak of their power.
The Sega Genesis, the Mega Drive in Japan
had launched in 1988 in Japan and 89 in America,
but it's a flop at first.
It takes them a couple of years to figure out the marketing
and how to compete against Nintendo.
So Nintendo is just-
An unabated path.
Unabated path, firing on all cylinders.
They do things, just these incredibly innovative things.
They launch a 1-800 toll-free line for game counselors.
This is incredible.
Do you know my personal story with this?
No.
So my wife's mom worked in Redmond
in the correspondence department for Nintendo,
and they had two groups.
One is the game counselors,
and this is like super hardcore, like you take a test.
There's a great Netflix documentary
that describes it called High Score.
And it interviews, it's got footage
of a bunch of people in the game counselor group
right after they take their test,
and they are on the phone talking people through levels
and kids are calling up.
And yeah, my mother-in-law
worked in the correspondence department.
The letters.
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,
to illustrate and validate the point
that this was a little boy thing for a long time
and teenage boy thing.
Basically all the letters are from little kids,
mostly little boys,
and they're just asking for help
and thanking Nintendo for making great games.
And it's just this unbelievably heartwarming thing,
but it also gave Nintendo
such a direct relationship with customers.
They eventually do make the phone line,
I think it's the Nintendo Power to Line, paid.
But in the beginning, it's free.
Think of it, this is crazy.
They're offering game counseling advice,
like help with games.
For free.
For free, this is an 11 star experience.
Not only are we gonna 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 every single one,
so they had 80 people regularly on staff,
but during the holiday season,
it would be like three, 400 people
that they would staff up to to handle all the calls.
This also tells you about the margins
that they were making on the software.
I asked my mother-in-law about it last night
as I was getting ready for the episode
and she said it was a pretty amazing place to work
because, as you can imagine,
I don't think her logic was because it was so profitable,
but the fact that it was so profitable
and it was such a central part of the country's zeitgeist
trickles into the culture where everyone's doing well,
everyone's having fun at work,
the work itself is fun,
it's such a family-safe, clean brand
that there's only upside to every interaction
that you're having.
So it's funny, right?
This is a subsidiary of a Japanese company.
So it's not like anybody working there has equity
in what's happening.
Right.
And in fact, they were all paid at or below market,
but as one example of the money floating around,
at one point, Nintendo of America
buys a bunch of properties in Hawaii
and basically creates their own internal resort
for Nintendo of America employees
that you could book to go take your family to Hawaii
and stay in the Nintendo-owned properties.
And then we'll talk about this a little bit more next time,
but they buy the Seattle Mariners.
Can we talk about that?
This is a very profitable enterprise.
Pretty amazing perks to get to work there.
You end up with free game systems and free games
and you are a cool parent.
So this is one half of the amazingly innovative
direct relationship with customers
that Nintendo of America comes up with.
The other half is Nintendo Power.
And it's crazy.
I mean, like doing the research for this,
there are issues of Nintendo Power
that sell on eBay today for thousands of dollars.
The amount of brand affinity that this creates.
Well, I used to buy so much of next episode
is gonna be about Pokemon,
but I used to buy Nintendo Power
for the maps of the Pokemon levels
to be able to show you where you need to go walk
to unlock something and where different Pokemon are found.
And the idea that you're taking a pretty small screen.
I mean, in my case, it was the Game Boy Color,
but back in the Famicom days,
it was still a pretty small snapshot
of the world on the screen.
And to be able 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.
And of course there's editorial
and of course there's like secrets that they divulge.
But I think this thing built up
a pretty significant readership.
Six million circulation.
Crazy, right?
So here's what they do.
Everybody who mails in the warranty card for an NES
automatically gets added to the Nintendo Fun Club,
fan club.
So they're getting all the addresses and names
of every single one of their customers directly.
Nintendo's had a marketing Peter Maine
and then Gail Tilden
who worked in the marketing department
came up with all this stuff
and Gail ended up running Nintendo Power.
So for the first kind of year of the NES in the US,
they send out the Fun Club newsletter for free once a quarter
to everybody who registers.
And then they realized like,
what, this could be so much more.
So Gail starts an actual magazine, Nintendo Power.
They send in the next mailing to everybody.
They say, hey, you can subscribe for $15 a year
to a monthly magazine.
They instantly get a million and a half subscriptions.
It's the fastest magazine to reach a million
subscription circulation in the US in history
and becomes one of the largest magazines in the country.
And so all this is amazing.
So they, I think they eventually raise the cost
to $20 a year.
They get 6 million subscribers.
So that's 120 million a year
in high margin subscription revenue coming to Nintendo.
Drop in the bucket.
What it's way, way, way more valuable for though,
not just the relationship with the customers,
it's for selling games.
Oh, amazing.
So the game previews, they use Nintendo Power
to just juice all of the Nintendo 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.
It's one of the greatest businesses
that's created of all time.
The Nintendo Power strategy reminds me so much of the NFL
with NFL films and the NFL print division.
Absolutely.
Not only are you doing what the NFL did,
which is building hype around your media properties
and all around all of your intellectual property,
you are going one level further as we just talked about
where you actually have a direct relationship
with the customer.
I mean, they built a 6 million plus CRM
of people who bought Nintendo
that they otherwise wouldn't have had
their contact information,
but now they have a new way to market stuff to them.
Yep.
It's just this incredible story.
So here's the craziest thing
that I was trying to like contextualize some numbers.
Remember how I said in 1989,
Nintendo's sales were 10 times the market bottom.
Yep.
At that a billion dollars of revenue
relative to the a hundred million low point.
Well, two years later in 1990,
Nintendo did almost 3 billion in revenue,
which was the entire industry market size
at its peak before the fall.
Nintendo's revenue alone in 1990
is the same as the entire industry in 1983
at the height of the mania.
Yeah, just incredible.
I don't know if it first happened that year in 1990.
It may have.
The only thing I read and that I know for sure is that
by 1992, Nintendo's profits,
so not their revenue,
but their profits surpassed all of the major movie studios
and television networks combined.
Isn't that wild?
It's so insane.
So the NES,
and I think it's probably about time to start tying a bow
on the NES story here,
would eventually sell 62 million consoles worldwide.
I think we should save the Super Nintendo Game Boy
and the whole battle with Sega
as the beginning for part two.
What do you think?
Yes, that was my intention all along.
There's plenty of analysis to do just on part one here.
This is the perfect place to leave it
because here we are by the end
of the NES Famicom generation.
Nintendo has revived,
rescued this industry from Death's Door,
built one of the most impressive monopolies 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 gonna be the perfect place
to start the next episode is how they fall
and then how they come back.
Yup, agreed.
It's also worth pointing out a little bit at this point.
So for fiscal 89, just to put some numbers around this,
they did 1.84 billion in revenue
and 217 million in earnings.
So they're doing 12% 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&D they had,
just how hard it was to manufacture
a lot of this physical stuff.
At this point in 89, they were heads down
on two future generations of console,
actually three, including the virtual boy.
So there's a lot of like real expense in the business,
even though they're blowing the doors off 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 sloshing around that they were using,
but also all the international entities.
I believe, I don't have the stat at my fingertips,
but I believe operating margins
were more in the 30 ish percent range.
So still not like tech companies today, but good.
Right, 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 hide those hundreds 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 this tree of story.
And I'm curious if you found them,
because one is like incredibly up your alley.
This is my favorite part of every episode
when you try and stump me.
I think so too.
So we talked about 1983 being a really crazy year for gaming.
There was a company started in 1983
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 it's not Slack,
because that happened later.
Obviously it's not Slack.
Let's see.
Electronic Arts was started in 1982 by Trip Hawkins
and Izzy Gaming Company, so you're not talking about that.
Yup.
And it might be more fair to call it
a game distribution company than a game developer.
Again, it didn't really happen,
so it's hard to say what it exactly would have been.
You're also not talking about Netscape,
which started as, obviously Mark Andreessen
and Jim Clark of Silicon Graphics
and University of Utah fame,
which started with the initial business plan
of building software for the N64.
But you're getting much warmer.
Okay, okay.
1983.
The original company name was Control Video Corporation.
It's probably not helpful, but-
This is the problem when you become a parent,
is your mental acuity, just like,
if I were a couple years younger,
we wouldn't be having this stage of the conversation.
I already would be, but I gotta cry, uncle.
I'm gonna keep giving you a hint,
because you're gonna 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,
and we did not paint it in a great light.
And it is not Silicon Valley based.
It's East Coast, Virginia based.
Wow, I can't believe I'm still blanking on this.
I'm hoping there's listeners
like screaming into their AirPods right now.
It is- Here's the question,
how much of this are we gonna cut in post-production?
It is AOL.
Oh my goodness.
So it started as Control Video Corporation in 1983.
There was one product,
an online game service called GameLine
for the Atari 2600.
And it had an amazing amount of very prescient technology.
The ability to temporarily download a game,
cache it locally on device and keep track of high scores.
It would work by connecting a telephone line
and GameLine would eventually go through
some corporate restructuring
and eventually emerge six years later
as America Online.
Wow.
I can't believe I missed that.
Here's a crazy total aside.
When I was in business school in Stanford,
the years 2012 to 2014,
the AOL building in Palo Alto
was still a central hub of things.
So Stardex, the Stanford incubator
that I was part of when I was there,
was actually based out of the AOL building
at that point in time.
Isn't that wild?
Even at that point in time,
AOL still had its tendrils in Silicon Valley.
Wow.
Okay, I've got another one.
And I'm just gonna start telling the story.
Score so far, Ben won, David zero.
Well, I don't know.
I have all the stats in front of me.
I don't know if there's me one.
No, this is a game that we're doing in the Nintendo episode.
We got to keep score.
All right, so hit your buzzer when you have a guess.
So in 1990, right where we ended our story,
a small game developer approaches Nintendo
to show off that they had ported
the first level of Super Mario Brothers 3.
Come on, that's too easy.
Carmack and Romero.
This is a crazy story.
Do you know what id's first name was
before they shortened it to id Software?
I mean, you just read the book, so this isn't fair.
No, I actually got this, I'm sure it's in the book,
but from research for this episode
that I had completely forgotten.
I do not know.
When I looked at video of what you were talking about.
What is it, like SMB3-DOS or something?
No, it's related to it.
It's ideas from the deep.
Oh, cool.
So what happened was John Carmack,
one of these geniuses that Yamuchi
was identified and talking about,
had engineered, and I understand this so much better now,
having done the NES episode.
This is why what Carmack did at id was so incredible.
He had developed in software a way for generic PCs
to do side-scrolling graphics like the NES.
This was incredible because the reason the NES
could do this was because of the picture processing unit,
the PPU that we talked all about.
Regular PCs only had a CPU, they couldn't do this.
Carmack wrote software that enabled it,
and then they famously made a demo version
of Super Mario Brothers 3 for the PC
and showed it to Nintendo.
And we didn't talk about Super Mario Brothers 3,
but 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 it came out and just was like even better
than everybody thought it could be.
Yeah, three was amazing.
But so you can find video, we'll link to it in the show notes,
you can find video that came out decades after the fact
of the actual id demo that Carmack coded up.
Like it was lost.
I think somebody found it on an old machine
at some point in time recently.
And so there's like YouTube,
like you can go get video of watching it play,
it's amazing, it's so incredible what Carmack did.
But the background of it,
so they have the background of the desktop,
they have it in a window playing on a PC.
Huh, which you still can't do
unless you're running a Nintendo emulator
on your computer.
An emulator, yeah, yeah.
I guess it was 3.1 maybe at that point in time,
Windows 3.1.
It was DOS based.
Oh, it was DOS based.
Well, there was whatever the GUI was
that they had on top of it
because they had a GUI to play that game.
So the background wallpaper of the GUI
just said IFD, IFD, IFD, IFD,
and rose across the screen.
I'm like, what the hell is IFD?
And then I figured out it was ideas from the deep.
Oh, that's awesome.
So here's how the story goes.
So he invents in an unbelievably genius way
on this architecture,
a way to do the side scrolling Mario thing.
And they approached Nintendo
and he's like, look at this market opportunity
I've discovered for you.
Can we be the developer of Nintendo's entry onto the PC?
Mario on PC.
And Nintendo thinks about it and they say no
because we only want Mario to be available on the NES
to promote console sales,
which of course is the right decision.
Of course.
So they turned down the short-term money
to promote long-term stability.
But id would then go on to rip Mario out
of that PC side scroller
and turn that into Commander Keen.
So Carmack and Romero would then of course
go on to create Wolfenstein 3D, 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 are wild.
Like the Atari NES, Doom by Nintendo.
The internet being AOL on Atari devices.
Right.
We're not gonna talk about it on this episode
but Netscape being an N64 information
super highway based technology platform.
It's crazy.
All right.
Well, let's get into analysis here.
Let's do it.
Should we start with powers as usual?
Yeah, let's do it.
So for folks who are new to the show,
as always we run each company we analyze
through Hamilton Helmers,
wonderful seven powers framework
where he identifies seven ways by which a company
can earn persistent differential profit margins
versus its competitors in any given industry
AKA have power in its industry.
The seven powers are counter positioning,
scale economies, switching costs,
network economies, process power,
branding and cornered resources.
All right, let's get into it for Nintendo.
Well said.
Far and above number one in my opinion is scale economies.
We have done all but name it.
Not network economies.
Well, it's a good question.
Keep going with scale economies, I agree.
The reason scale economies jump to mind is
we just keep talking about it on this episode
without naming it.
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 pure play scale economy
that a game was worth way more on Nintendo
for the NES's distribution
than it was worth anywhere else.
And so if you're a developer,
it almost doesn't matter how bad the terms are
with Nintendo, you have to build for Nintendo
because there's more money there
because it's amortized across so many different users
of the platform that it's 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 network effect.
The more users you have on your install base,
the more attractive you are to developers,
the more and better 10X, 100X developers
you have developing for your platform,
the more likely you are to attract more users.
It's a 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 sort of pay it back in a bigger way.
And so because you have more customers to spread it across,
that fixed cost investment is more valuable to you, Nintendo,
than it would be to your nearest competitor.
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
where it's both as a fuse together.
If Nintendo was acquiring the games,
then it would be pure play scale economies, but they're not.
They're convincing developers to build on their system.
Yes, but there is a strong component
of scale economies here too.
I think you're onto something that these are linked
because it's all about the hardware R&D cycle.
Because you have to invest an enormous fixed cost
of both money and for everybody now,
but at the first for Nintendo's 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 advantage
on the hardware platform,
then you can get the network economy effect going
of consumers and developers.
Yeah, interestingly enough,
Nintendo historically hasn't done a great job
of leveraging a large install base
to advantage them with the next platform.
We'll talk about this next episode,
but like their success in the N64 did not carry through
to the next generation with GameCube.
They were sort of starting from zero again.
It started even before then.
We'll talk about this a lot more in the next episode,
but an incredible self-inflicted wound
that Nintendo is part of killing their dominance.
They didn't have backward compatibility
at every early generation.
The Super Nintendo was not backwards compatible with the NES.
The N64 was not backwards compatible with the Super Nintendo.
The GameCube was not backwards compatible with the N64.
They completely whiffed on this really important lesson.
And so console R&D is actually not a scale economy
because you don't have the benefit of all the people
that bought your old console
to amortize the cost of your new console across
because you don't know how many people
are gonna buy the new console.
And so I think that's something they've sort of woken up to
with the Switch, again, foreshadowing here,
but to the extent where the next big console
that Nintendo comes out with is a Switch
and is Super Switch compatible,
then they actually start entering the scale economies game
where they can make the biggest, best piece of hardware
if they can get more people paying a sort of subscription.
Well, that they can port their existing user base over to the...
Yes.
They first start doing it with the Wii,
which not coincidentally is their big comeback.
The Wii could play GameCube games.
We're getting ahead of ourselves.
Definitely we are.
But you're right.
I think there's sort of some scale economy,
some network economy here,
but we're both describing the same phenomenon.
You know, it's interesting.
I remember back from my days at GSB at Stanford,
one of my favorite professors,
a professor named Susan Aithy,
who then later would join the rover.com board with me
and I get to intersect with her there.
A wonderful, wonderful person, incredibly smart.
She was, in addition to being a professor at GSB,
the chief economist at Microsoft.
And a lot of her work was on Xbox
and the video game industry.
Oh, that'd be such a hard spreadsheet to make,
to figure out.
Oh, totally.
Her academic specialty is network effects.
Like everything she did was network effects
and video game consoles and software
is like the textbook classic definition
of the two-sided network effects.
And I remember reading all about it in her class.
Like I was like, oh, this is so cool.
Yeah, so no question to me
that both network effects and scale economies
are huge sources of power for Nintendo here.
Miyamoto definitely has process power.
Yup.
And he's a cornered resource for Nintendo.
There's 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 weeding out things that aren't fun.
That is absolutely process power.
Cause I bet it would be really hard for him to write it down.
And I'm sure a lot of people listening to this know by heart
all of the games that Miyamoto has made,
but for folks who don't, we mentioned a couple,
but like, I mean, he is the Beatles of video games,
like solely 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 it was in the nineties
when Paul McCartney was touring in Japan.
He's contacted Nintendo.
He wanted to meet Shigeru Miyamoto.
Like he had such like reverence for him,
but all the Mario games, Mario 64,
which revolutionized the industry,
the first true 3D game, Legend of Zelda,
A Link to the Past on the Super Nintendo,
The Ocarina of the Time on N64,
Breath of the Wild now for Switch.
Did he design Breath of the Wild?
Well, so he's the head of Nintendo's game.
So he's the producer.
He's the producer now on the Zelda series
and there are other directors below him,
but like it's all his process power.
By the way, New Breath of the Wild,
or what do they call it?
Tears of the Kingdom comes out next month.
Which is, I have a confession to make.
I've never been the biggest Zelda fan.
Like I like them.
I played them and I thought Breath of the Wild was great.
It's just not my total like style,
but I mean, they're people who named their children Zelda.
A lot of people who named their children Zelda
after the video game.
And you and I both talked to some games industry people
preparing for this episode.
And from real core gamer type people,
it's amazing how much reverence they have
for Breath of the Wild where like everyone just looks at it
like, wow, how did they manage to pull this off?
Cause 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'd been totally overdone, oversaturated.
The market was sick of them.
And here along comes Nintendo and Miyamoto
and completely reinvisions and re-energizes the genre.
So back to the powers.
Is there counter positioning in the way
that Nintendo created cabinet games
or maybe in the general concept
of we're not about the fastest and newest?
Absolutely.
I think there's plenty of counter positioning
all throughout Nintendo history.
And I think there's several examples here
in this chapter of the story or these chapters of the story.
One with narrative driven games and Donkey Kong.
Two though with the Famicom and the NES relative
to especially the rest of the American video game industry.
It's like, we're about a small number of high quality games
not a large number of crappy games.
Yup.
Again, this will show up in the next episode
not this one, but switching costs.
A hundred percent.
If Nintendo had a viable competitor in the late eighties
there'd be switching costs, but there weren't.
And so that'll show up in the Sega battle
of once you pick a side, you're sort of dug into that side
at least for the next six, seven years.
And for the majority of the market
in both America and Japan,
families are only gonna buy one console system
that they're gonna buy all their games on.
Like there is a subset of the market
that is gonna buy both the Super Nintendo
and the Sega Genesis, but that's a small subset.
Like today, most households are gonna choose
between the PlayStation and the Xbox.
And it's interesting that Nintendo
is a third alternative thing,
but yeah, a hundred percent switching 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 IP.
I don't know that that's branding though.
The definition of branding is
if you receive two identical objects
and you're willing to pay more money
to buy from the firm with branding power.
Great point.
And IP is a cornered resource, not branding.
The reason you buy something from Nintendo
is all sorts of reasons, but not because it says Nintendo.
Their 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 your friends don't have it,
so you can't play online.
There's lots of differentiation.
It's not like a banker insurance company
where everybody's competing in a commoditized way.
And so brand really matters.
Two thoughts.
I think Nintendo does have brand power,
but I think it is the weakest of the seven that it has.
I'll just incredible.
I think it has all seven.
But the brand power I think is a smaller piece of the story
and it's brand power around the seal of quality,
and especially with parents.
And in this era, if I buy my kids a Nintendo system,
I can be very sure that there's not gonna be
excessive blood and guts.
There's not gonna be sexual content.
There's not gonna be profanity.
I think that's definitely branding
because of the Genesis brands against that.
Yeah, that's true.
They counterposition there.
I guess 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 would pick since they're less differentiated.
But Nintendo's wildly differentiated in the IP
that is on their platforms and nowhere else.
I mean, at a minimum, I think they score super strong
on six out of seven powers during this era.
Yeah.
The corner resource being the IP process power
we talked about with Miyamoto,
network economies and scale economies
probably being chief among these switching costs for sure,
counter positioning, yes.
Like, wow, have we ever covered a company like this?
No, I don't think so.
I don't think so either.
And it reflects in what happened.
Like they had 95% global market share
in this enormous industry.
Yeah, and perfect timing.
All right, playbook.
We've talked about a lot of these,
so I don't wanna just revisit some.
I wanna bring up some that I think are kind of new.
So Mario as a character,
and I pulled this out of the Super Mario book
from going deep on that franchise,
is so perfect because he's so universal.
It's story driven, but there's not that much personality.
So anybody can sort of see themselves in Mario.
Whereas if you're playing more of a core game
and you're like, or even an RPG of any sort.
Oh, RPGs.
Yeah, absolutely.
Your experience, a story that's unfolding before you
as an observer.
It's like reading a book.
Right, but in Mario, you know,
there's not enough depth to Mario 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 again, just to how powerful Nintendo was as a platform,
they also had all of the great opposite kinds of games,
the dragon quests, the final fantasies,
you know, the hardcore story driven RPGs.
Yeah, Mario is also fun every time.
You don't get sick of the music.
The levels were easy to play, but hard to master.
Most of the levels only had small tweaks
between that stage and the next stage,
but somehow it still felt fresh and 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 Mario for 150 hours
and it would still feel fresh and new every time.
And that's an extremely difficult thing.
That is why Miyamoto is such a genius.
Yeah, he does this genius thing
of incredible world building,
especially starting with Super Mario Brothers of like,
you're in the mushroom kingdom.
And like it's this incredible fantasy world,
but it's story driven, not narrative driven.
So like you can create your own narrative within the world.
You know, it's funny that the Pop IIP stuff didn't work out
cause like it was their first choice to use Pop IIP,
but by not getting it, they ended up creating
this unbelievably valuable franchise with Mario.
And I pulled some numbers.
You mentioned 385 million Super Mario games
were sold cumulatively.
And so that gets beat by Tetris, Pokemon, Call of Duty
and GTA in terms of like total franchise copies sold ever.
But Mario, if you sort of pop up a level
and include Mario Kart and Mario Party,
that's 826 million copies of Mario games sold,
which definitely makes it the best-selling franchise
of all time.
Yeah, wow.
It's so valuable.
And in fact, Nintendo leaned into this.
This is another sort of clever thing.
They did not allow licensing of other characters.
If you wanted to license a Nintendo character
for a backpack or a lunchbox
or one of the other 10,000 things
people have licensed Nintendo IP for,
for the longest time,
they would only grant you a Mario license
because they wanted to build a mascot.
They wanted to build so much IP and brand value
into the Mario character that he became Mickey Mouse.
Interesting.
So they concentrated the effort
as opposed to having Kirby 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,
it doesn't feel strange because Mario just means Nintendo.
It doesn't mean side-scrolling plumber character,
which was another clever creative decision
where he's just like, oh, he's the Nintendo mascot.
And sure, he's got a game of his own,
but 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 it makes it so that he can be super universal
as the mascot.
Yeah, great point.
There's one more in this train of thought.
And this'll be, I think, a big theme of the next episode,
but the fact that Nintendo platforms
are first and foremost for 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 deem it a good game
or whatever other finicky belief that they have
that it's not Nintendo 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 juice 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 IP
that I think they would be delighted
just making the NES and the SNES and the Game Boy
and it's only ever their games on it.
And the way that that has compounded 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 IP
in the entire world.
And in second place is Pokemon
and they own a third of that.
I think it was probably accidental at first
but then once they realized the value of what they had,
they were super protective of it.
Yup.
Well, and with Pokemon too,
we'll again talk about this more next time
but they only own a third of the IP
but they own Pokemon only being on Nintendo platforms
to your point.
Correct, yeah.
It's very Bernard or no, it's control more so than economics.
All right, what do you got?
The one big playbook theme that I want to talk about,
Peter Main, who we mentioned
was Nintendo of America's VP of Marketing.
And he along with Gail Tilden and others
were really responsible for like the core of the innovation
that came from the American side of the business.
He codified what ultimately became the company's
sort of unofficial slogan besides like,
do everything to be a monopoly
without using the word monopoly
but we'll put that aside for a minute.
The phrase he comes up with is,
the name of the game is the game.
And I think this is like such a key
to understanding Nintendo and so applicable elsewhere.
And specifically, I think like all great personal
and corporate encapsulations,
it's both a hundred percent true
and a hundred percent ridiculous and not true.
And so what he means and what Nintendo 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 a hundred percent true.
Like that is what matters.
And that's part of Yamauchi's true genius
was as a complete outsider recognizing
that like the Shigeru Miyamoto's,
the Gunpei Yokoi's are like the key
to making all this work, right?
At the same time though,
the reason it's utterly ridiculous and doubly ridiculous
because Peter Mayan coins it,
he does everything besides make the games.
And that is so important too.
Like it really comes down like product and distribution.
Both are really important.
Well, also like the best CMO's party line
is our product is just so amazing it sells itself.
That's exactly what you hear there.
But I think Nintendo is such a perfect case study of this,
of like this dichotomy and they're both so true.
Nintendo has the best products, the best IP, the best games.
They also, especially in this era
had the best distribution channels,
the best relationships with their customers,
the best control over their ecosystem.
The best strategy generally.
The best strategy, right.
And man, when you can marry both of those,
that's when you get 95% global market share.
This was my sort of final question
and my the playbook themes that I had written down
that I wanted to pose to you.
What other businesses ever have had 95% market share?
Or maybe the interesting one might be like
what businesses today,
because this isn't like a narrowly scoped market.
This 95% represents global video games.
You know, it's not like a 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 I think Apple and iOS, not of revenue, but of profits.
Apple and iOS have something, you know,
on the order of that of global market share
of smartphone profits.
Smartphone profits, yep.
The other one that's like close,
but I think is more around 85 to 90% is search,
US-based search engine usage.
I mean, I guess at a certain point,
Facebook had something like that of social networking
across all of their family of products.
The day before Instagram launched.
What, the day they acquired Instagram?
Yeah, that's true.
And WhatsApp, like during that heyday.
And the most interesting thing is like
all the examples we're naming
are under heavy regulatory review and pressure.
And another one that I was gonna raise
is Microsoft's share of the operating system market.
You know, that probably was something like 95% also.
Or Microsoft Office too.
And every single one of these
have gone under significant DOJ concerns.
And Nintendo 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, it is a much smaller market.
In 1990, they were only doing 3 billion in revenue.
It's not like these companies
that are doing 100 billion in revenue.
I think there's this really weird dynamic with Nintendo,
which is why I'm so happy we're doing this episode.
That it's just kind of overlooked
and underappreciated as a business story.
Yes.
Partially for the reasons you're saying,
partially because it's a Japanese company.
And so there's this like weird bicultural thing.
And the belief that it's so hits driven
makes people think like, oh, well, it's probably,
whatever market share they've accumulated
surely isn't durable.
Yup.
But yeah, like, and even there's such great books
as we said at the top of the episode out there
and work and documentaries on Nintendo,
but there are ones from a business perspective,
but they're not like, nobody's covering Nintendo
like people are covering Apple.
No, everyone's covering Nintendo for the nostalgia
of the character development and the fan service.
Right.
And yet the business story is just as good.
Yeah.
All right.
I, even though we killed it,
want to do grading on this episode.
I'm curious if your game,
I think Baron ball is stupid since we know the history
from 1990 to 2023.
So like, let's actually grade.
Oh man.
That would be really interesting to do
if we could go back in time and not know what happened next,
but obviously we can't do that.
That's true.
Would we think that like Nintendo was going to take
over the world and expand beyond gaming?
Probably.
Would we think that gaming would go
from a $3 billion market to a 120, 150,
whatever it is billion dollar market now?
That would have been a tough prediction to make.
I bet we would think what Jim Clark
and Mark Andreessen thought,
which is that Nintendo is going to become the computer.
The window to the internet.
And we would not at all have predicted
that just gaming itself was the thing
and would become $150 billion market.
We would have said it'd be $150 billion market
but of something else.
Right.
Oh, that's a good point.
Cause it's, you're out on a limb
if you try to make the prediction in 1990
that gaming becomes $150 billion market.
Totally.
But it's a nice little hedge to be like,
oh, I totally think Nintendo could address
$150 billion opportunity,
but it'll be a bunch of stuff.
It's almost like all the people in 2016,
when asked about crypto, they were like,
oh, I'm not so sure about Bitcoin,
but I think the blockchain
is going to be a fundamental technology.
It's like, it's the way to hedge.
And you're like, well, I don't know exactly
what the AI use cases are yet,
but I'm sure it's going to be huge.
Yup.
Okay. That was kind of a fun like.
What would have happened otherwise? Yeah.
Okay. But greeting.
Greeting.
So I suppose the interesting thing
is to take it from a shareholder perspective
in call it the late 60s, early 70s through 1990.
Let's just say the 20 year span from 70 to 90.
Yup.
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 US
and all these decades that have happened since then.
But it seems like the market cap in 1990 of Nintendo
is in the like 15 billion-ish category,
which by today's standards, of course, seems quite small.
And we're like $15 billion companies are inconsequential
and stacked up against big tech.
Right. But was huge back then,
especially because there was all this weirdness
of having to buy a Japanese listed company and whatnot.
And like most of the global capital markets
are not based in Japan.
Right.
But one question I did have is in your notes,
do you have any in the 70s, any revenue figure?
Cause we know that it was around 3 billion in 1990.
I do not.
I got to imagine it was inconsequential
compared to what it would become.
Yeah.
So the framing is it rounds to zero
and then 20 years later,
it goes to 3 billion in revenue, 15 billion in market cap.
From a market addressability 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 went in and they captured 95% 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 have executed it any better.
Oh, and they own the customer relationships
and they own all the IP
and they have immaculate control over the whole thing.
But I was thinking about it
and the reason I don't think it is an A plus
is because of the fall that will happen
at the beginning of the next episode,
which is like they kind of blew a lead
where they were up by 10 runs in the bottom of the ninth.
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 gonna grow from three billion to a hundred plus billion
over 30 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, and I think had some really unforced
own goal errors there along the way.
Like Nintendo very much could have embraced
backward compatibility on each of their console cycles.
Nintendo very much could have embraced the CD format
and failed spectacularly at both of those.
Yeah, so I guess I'm an A and I would be an A plus,
but for the fact that we do know the future
and we do know that they weren't as positioned
as well as the numbers would 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 errors or black swan events
or the world sort of changes in ways
that you absolutely could not have predicted
by just looking at numbers.
Yeah, it's so hard.
I mean, I'm absolutely inclined to agree with you
given that we know what happens next.
On the other hand,
if you purely scope it to this period of time,
like these guys executed 10 out of 10
during the 1970 to 1990.
Complete masterclass in business strategy and execution.
Yeah.
I mean, like we were saying earlier,
we've never covered a company that scored so high
on so many of the powers.
All right, give me your grade, David.
I hear your argument.
I love it.
That's the reason we're doing it in the second episode,
but I'm gonna give them an A plus for 1970 to 1990.
There you have it.
There we are.
Carve outs.
Carve outs.
By the time this 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 not,
everything everywhere all at once was exceptional
and I highly recommend it.
Oh yeah, you've told me before that that was amazing.
Really good.
Have I recommended it on the show?
Am I double carve outing?
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 indie 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 filmmaking.
It is unbelievably VFX heavy,
which you don't expect from the first 20 minutes.
You're gonna start watching this movie and be like,
what do you mean that this is unbelievably VFX heavy?
But it was done by a four person team
and it's like a completely different take on VFX.
It's not like avatar of the way of water.
Let's go spend $250 million to create a film.
I think it's like a $25 million 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 some of it?
I imagine.
I'm not sure.
I'm not sure.
I gotta watch more YouTube videos like behind the scenes.
Which is funny, right?
Like we spent a lot of time on this episode.
Of course, the natural comparison is video games
versus music and movies for like, it's all converging.
Yeah.
Well, but there is a key difference with video games,
which you pointed out earlier, which is like,
it is a different part of your brain
in terms of am I experiencing the media?
Is it coming at me passively
or do I have to be active in the media?
Oh yeah, totally agree.
I think there will always be separate industries,
but like the tools and the technology are converging.
My carve out slash outs are two related ones.
Michael Lewis interviews, for whatever reason,
I got like on a kick of listening to Michael Lewis.
And I just love Michael Lewis so much.
And I went back and I listened to,
I think either you or I have before had as a carve out
his interview with Tim Ferriss a couple of years ago,
which is so great.
That got me on a kick of seeing what else is out there.
You know, he definitely has his like,
everybody does his quiver of stories that he pulls out.
So you listen to a few and you're like,
okay, I've heard you talk about this like 16 times.
But I found one that I'm so glad I did.
Deep cut on YouTube.
It's a three hour interview on C-SPAN on book TV.
I think it's even on C-SPAN too.
I have no idea why Michael did this,
but it was from a couple of years ago
and it's by far the longest one out there.
And like, he goes like three clicks deeper on everything.
It was just fascinating to hear all like
the real deep cut Michael Lewis stories.
I thought I had listened to all of his interviews,
so I can't wait to listen.
I've got YouTube premium, which is amazing.
So I've been listening to it in podcast form,
like without the video,
while I go on runs and walks and stuff.
It's the only way to live.
Only way to live.
Oh, I can't believe I went so many years
without YouTube premium.
Yeah, what is it?
10 bucks a month?
It's a pretty easy 10 bucks 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'd be more inclined to pay attention.
Right.
It's not like these are like high quality brand,
acquired style, like ads where you want to hear about,
I mean, YouTube ads or YouTube ads.
It's like, oh, Sprite.
I guess I had you drink Sprite, huh?
Nevermind that I haven't drank a sugar soda in 15 years,
but sure, show me another Sprite ad.
Right.
All right.
Anyway, listeners, we'll give you the rest
of your fifth hour back, fourth hour back, whatever it is.
Thank you for coming on the journey with us.
You can join the revamped, reinvigorated,
acquired LP program and become a limited partner.
Oh, since we're at the end of the episode,
I thought about doing this earlier,
but I thought, let's just get right into the,
into 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 LPs in the audience
in helping us choose topics that we cover on the show
was inspired by my favorite video game podcast,
which does this.
Yeah. The great folks over at resonant arc.
They are a video game book club podcast.
So they play video games like a book club
and they choose a game to cover and their Patreon,
the key benefit of being their Patreon is you can vote
on the next game that they cover.
And I was like, that's brilliant.
We should do that on acquired.
It is brilliant.
So LPs, I would say maybe like a week
after this episode comes out, keep an eye out for an email
polling you on David and I have a short list
of the next episode that we will do.
We're curious to hear your feedback.
We'll put a free forum field in there too.
And also we're 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 out for an email on that too.
If you are an LP acquired.fm slash LP to join,
go check out ACQ two.
We have the deuce 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 episodes
and chock full of it even more.
So search ACQ two in the podcast player of your choice.
No space, I don't know, we may change that,
but as of right now, no space just like ESPN two, our muse.
And yeah, we're pumped to launch that.
Join the Slack, almost 15,000 folks strong.
We just passed 15,000.
15,000 then.
Gotta update my script.
Smart, thoughtful people.
Talk about this episode.
Get some merch, acquired.fm slash store.
Wow, we have like lots of things.
I know.
We're like a small media empire.
The acquired Slack is like our version of Nintendo power
and the power line.
There we go.
We need to produce a Nintendo power.
All right, I'm cutting this off.
Listeners, thank you.
We'll see you next time.
We'll see you next time.
Who got the truth?
Is it you?
Is it you?
Is it you?
Who got the truth now?
