On July 6th 2016 the world became witness to a historic moment in mobile gaming.
The release of Pokémon Go broke all App Store records for popularity and perfectly demonstrated
how a single product going viral can change the entire world’s opinion of a company
overnight.
The company I’m talking about is Nintendo, and this week on Behind the Business we’ll
take a look at their surprisingly long history.
The story of Nintendo starts in Japan at the end of the 19th century.
This was time of great socio-economic change for the country, a period known as the Meiji
Restoration.
In 1868 Emperor Meiji fought and was victorious in the Boshin War, a two-year conflict between
imperial loyalists and the Tokugawa Shogunate, which was led by the 15th Shogun Yoshinobu.
The Shogunate was over two centuries old at that point and it was desperate to maintain
the isolationist feudal society of Japan.
With its demise came the end of Japan’s foreign relations policy known as Sakoku.
Under this policy, foreigners who entered Japan and locals who left would be put to
death, which greatly restricted Japan’s economic and societal progress.
When the Shogunate was abolished, Emperor Meiji began a series of radical policy changes
that transformed Japan from a closed feudal country into a modern industrial powerhouse.
One of the seemingly minor laws he enacted was the legalization of a particular form
of playing cards.
You see, the Shogunate was generally distrustful of most Westerners and considered them to
be a corrupting influence on Japanese society.
As a result, it had outright banned all playing cards due to their frequent use in gambling.
Emperor Meiji knew that regular people enjoyed playing card games just for fun, but he didn’t
want to appear like he was promoting gambling.
The best solution he came up with was to legalize Hanafuda cards.
These cards didn’t have any numbers on them, so they weren’t very convenient for gambling,
but they could still be used to play several different card games.
A deck of Hanafuda cards resembled a modern playing deck quite a lot:
they were divided by season into twelve groups, and each group contained four different cards
for a total of 48 cards per deck.
You could, of course, still gamble with these cards, and the Yakuza very much did so by
assigning each card a certain amount of points.
By the time Hanafuda cards were legalized, however, the popularity of card games had
decreased dramatically, and there were very few card manufacturers left in Japan.
One of the few producers left was a man named Fusajiro Yamauchi, who had founded his humble
card-making business in Kyoto in 1889.
His company was called Nintendo Koppai, and to this day the true meaning of
the word Nintendo remains unclear.
The generally accepted meaning is “to leave one’s fortune in the hands of fate”, but
due to the complex nature of Japanese Kanji, there are several other plausible definitions.
Fusajiro, of course, hadn’t kept any records on what the name really meant:
he was too busy trying to restore the popularity of Hanafuda cards.
At first his business wasn’t too great: his cards were pretty expensive, since he
made them out of mulberry tree bark and he painted all of them by hand.
Once the Yakuza realized how to use Hanafuda cards for gambling, however, Fusajiro’s
business flourished.
By 1907 his playing cards were the most popular ones in Kyoto.
That year Nintendo became the first Japanese business to produce regular Western-style
playing cards, which were once again made legal by the government.
When Fusajiro retired in 1929, Nintendo was selling cards across the entire country.
There was one small problem for Fusajiro, however:
he didn’t have an heir to continue the family business.
Now, in Japanese culture, when a family can’t find a suitable heir, they can legally adopt
an outside person.
Most often the adoptee is the husband of one of the family’s daughters.
This man becomes a mukoyōshi: a legal member of the family who adopts their surname.
Fusajiro did exactly that: he adopted his daughter Tei’s husband, who came to be known
as Sekiryo Yamauchi.
Nintendo greatly prospered under his leadership: He opened a factory with an assembly line
and a dozen new offices in major Japanese cities.
He also established a distribution subsidiary in order to insource Nintendo’s logistics.
After suffering a debilitating stroke in 1949, Sekiryo was faced with the same succession
problem of having no sons.
He too wanted to adopt his daughter’s husband, but the guy ended up leaving her a few years
earlier.
This forced Sekiryo to instead give over Nintendo to his grandson, Hiroshi Yamauchi.
At the time Hiroshi was only 21 years old, a fresh law school graduate with no managerial
experience.
When Sekiryo died just a few months later, Hiroshi began a purge at Nintendo, firing
any relatives he had there as well as all senior managers.
He wanted to give Nintendo a fresh start, and although most of his grandfather’s employees
hated him, the company continued to expand under his leadership.
In 1959 he successfully negotiated a partnership with Disney to feature their characters on
Nintendo’s playing cards.
Prior to that Nintendo was mostly associated with gambling, but now they could start to
reliably sell cards to children.
This move was extremely successful and just one year later Nintendo had sold 600,000 of
these new card packs.
Hiroshi was eager to expand into other industries, and so in 1962 he took Nintendo public with
a listing on the Osaka Stock Exchange.
Using this newfound capital, Hiroshi experimented with various ideas:
In just three short years he had attempted to introduce a taxi service, a chain of love
hotels, a remote-controlled vacuum cleaner, and instant rice.
All of these ventures failed, and to top things off the popularity of playing cards had plateaued,
causing sales to decline.
By 1964 Nintendo’s stock price had fallen from 900 yen to barely 60 yen.
The company’s only saving grace was their decision to enter the toy market that same
year by introducing the Rabbit Coaster.
It was well received, but what really kickstarted Nintendo’s toy division was the Ultra Hand,
an extending plastic arm for grasping things.
It was created by Gunpei Yokoi in 1966.
He had been hired as an assembly line engineer at Nintendo just one year earlier and he had
made the Ultra Hand for his personal amusement, definitely not indenting for it to get sold.
Hiroshi immediately saw the toy’s potential though, and Nintendo released the Ultra Hand
just around Christmas.
It was a sensation, selling over 1.2 million copies by 1970, and it single-handedly saved
the company from bankruptcy.
As a reward, Gunpei was put in charge of Nintendo’s R&D division, and over the next decade he
would invent a bunch of other toys that cemented Nintendo’s position in the toy industry.
Gunpei was a big proponent of arcade games, and between 1974 and 1977 Nintendo would release
several arcade titles.
The success of these games convinced Hiroshi that Nintendo’s future was in electronic
games, and so in 1977 he hired Shigeru Miyamoto as a concept artist.
That same year, together with Gunpei they created Nintendo’s first television game
system in partnership with Mitsubishi Electric: the Color TV-Game 6.
It managed to sell over a million copies and it was Nintendo’s first step away from arcade
games and towards personal entertainment systems.
In 1980 Gunpei had another stroke of genius when he created the handheld Game & Watch
console.
These consoles came preloaded with a single game that couldn’t be changed, and they
were generally modelled after the Color TV-Game series.
The Game & Watch console was Nintendo’s best-selling product at the time, eventually
selling over 43 million units.
Hiroshi used its popularity to launch Nintendo of America, the company’s branch in the
United States led by Hiroshi’s son-in-law.
Despite the success of Game & Watch though, Nintendo were struggling to make a name for
themselves outside of Japan.
This was mostly due to the fact that the majority of their arcade games were in fact just clones
of other previously released titles.
One arcade game called Radar Scope was doing so bad that it barely sold a third of its
intended units, forcing Hiroshi to think of a way to repurpose them.
He tasked Gunpei and Shigeru with redesigning the game, but the designer duo decided to
make an entirely new game from scratch.
One year later in 1981 they created Donkey Kong, a title that would eventually become
one of the most recognizable arcade games in history.
It featured the hero Jumpman, who had to save his girlfriend Pauline from the clutches of
the evil ape Donkey Kong.
It was considered the first true platformer game due to the addition of jumping as a game
mechanic.
The Nintendo of America branch was woefully unprepared for the massive demand that Donkey
Kong would receive.
The company at the time had barely 5 employees, and they were already a month behind on their
office’s rent.
In an effort to appease the landlord, Hiroshi’s son-in-law renamed the game’s protagonist
after him, thus transforming Jumpman into Mario.
Just two years later in 1983 Nintendo would release another hit arcade game, Mario Brothers.
It was a spinoff of Donkey Kong, and in addition to Mario it also featured his brother, Luigi.
The game greatly expanded upon the Mario franchise and it eventually led to the creation of over
a dozen different sequels.
That same year Nintendo outdid themselves again by releasing the Famicom system, their
first cartridge-based game console.
Hiroshi had managed to negotiate favorable deals with his suppliers, which allowed him
to sell the Famicom system for barely ¥14,800, greatly undercutting his competitors.
The console was very well received, selling 500,000 units in its first two months, but
soon it became apparent that one of its cheap components was in fact faulty.
This caused a large number of Famicoms to freeze consistently, making them totally unplayable.
Hiroshi made the tough decision of ordering a total recall, a move that cost him over
half a million dollars, but nevertheless saved the company’s reputation.
This act of good will was soon rewarded when a great opportunity opened up for Nintendo
of America.
The rise of the personal computer, led by the IBM PC from 1981, caused a massive slump
in the video game industry between 1983 and 1985.
From a high of 3.2 billion dollars, the industry’s revenue had declined to barely 100 million
over the course of two years, bankrupting several major video game publishers.
This was exactly the opening Nintendo needed, and in 1985 they rebranded the Famicom console
and released it in the United States as the Nintendo Entertainment System.
To accompany the new system Nintendo also released Super Mario Brothers.
The game built upon its predecessor by introducing the Mushroom Kingdom and Mario’s arch nemesis,
Bowser.
It was the first title of the wildly popular Super Mario franchise, which has to-date sold
over 310 million copies.
The very next year in 1986, Nintendo released another iconic video game: the Legend of Zelda.
It was a pioneering game in many regards: it was one of the first games to feature an
open-world environment and it laid the groundwork for the development of the RPG genre.
That year also saw the release of the first Metroid game, a mix between an action adventure
and a platform-shooter.
It is notable for its non-linear open-world gameplay and for the fact that it features
the first female protagonist in any mainstream video game.
In 1989 Nintendo released the Game Boy, a hybrid combining the portability of the Game
& Watch console and the cartridge system of the NES.
It too was developed by Gunpei, who is also responsible for the console’s iconic directional
pad, the cross which functions as the Game Boy’s main navigational tool.
The flagship game of the console was Tetris, which up until that point couldn’t be played
on a portable gaming system.
As you can imagine it became an instant seller and spawned an entire series of consoles that
lasted all the way up until 2006.
In 1990 Nintendo replaced the NES with the Super Nintendo Entertainment System, which
became the best-selling console of the fourth generation.
In 1992 they released Super Mario Kart, the first go-kart racing game in the 11-title
series that has sold over 100 million copies.
Nintendo made their first big mistake in 1995 by selling the Virtual Boy, a virtual reality
console developed by Gunpei.
You can probably imagine how absurd it was to try to make a virtual reality headset with
1990s technology, but Hiroshi was convinced the Virtual Boy would work.
It was a total flop, selling barely 140,000 units in North America despite Nintendo spending
over 25 million dollars on marketing.
One year later in 1996 Gunpei left Nintendo, for “personal reasons”, and then in 1997
he got hit by car.
Despite his departure though, 1996 wasn’t a bad year for Nintendo:
in fact, it can be considered one of their best years, because on February 27th 1996,
they released the first Pokémon games: Pokémon Red and Green.
From its humble start with 151 Pokémon, the franchise has since expanded to feature seven
generations of games, 19 TV-show seasons, and 19 anime movies.
The initial release of Pokémon was very spectacular, but by that point Nintendo’s competitors
were already catching up.
During the fifth generation of gaming consoles, the Nintendo 64 from 1996 fell behind Sony’s
PlayStation from 1994.
The huge success of the fighting game Super Smash Brothers from 1999 helped Nintendo stay
ahead, but they once again failed to improve in the sixth generation.
Nintendo’s GameCube from 2001 barely sold 22 million units, compared to Sony’s 153
million PlayStation 2s.
The introduction of Microsoft’s Xbox console also hurt Nintendo’s market share.
In 2002 Hiroshi finally stepped down as president of Nintendo and he was succeeded by Satoru
Iwata.
Satoru was the former president of HAL Laboratory, the company which had produced the Kirby and
Super Smash Brothers series.
He realized that the competition between Nintendo and Sony had become so stiff that it was no
longer worthwhile to compete.
Instead Satoru followed a Blue Ocean strategy, wherein Nintendo would reclaim their lost
market share through differentiation and low pricing.
The culmination of his efforts came in 2004 with the release of the Nintendo DS console,
which replaced the Game Boy series introduced in 1989.
The Nintendo DS was in many ways a design masterpiece, featuring two separate screens,
the bottom one being a touchscreen, and built-in wireless connectivity.
In its first month alone the Nintendo DS sold 1.2 million units, and it has since become
the second best-selling console of all time with over 150 million sales.
The Nintendo DS was exactly what the company needed to restore its financial situation.
Satoru then focused on producing Nintendo’s next home console.
In line with his Blue Ocean philosophy, he wanted to avoid direct competition with Sony
and Microsoft, who were knee-deep in trying to one-up each other with expensive hardware.
Instead of catering to hardcore gamers, Satoru envisioned a console that would be appropriate
to everyone, and in 2006 he fulfilled his idea by releasing the Nintendo Wii.
It’s unique remote controller set it apart from its competitors and the casual crowd
really liked it.
Although there were few games available for it initially, game developers eventually caught
on and in the end the Wii sold over 100 million units.
Combined with the Nintendo DS, Nintendo had produced the most sold consoles of the seventh
generation, both for the home and handheld categories.
In the current eighth generation though, the situation for Nintendo is mostly a mixed bag:
In 2011 they released the Nintendo 3DS, whose most prominent feature is its autostereoscopy:
the ability to display 3D images without the user wearing glasses.
It has totally trumped its biggest competitor, Sony’s PlayStation Vita, whose high price
was unjustifiable to most people.
In the home console market, however, Nintendo have recently fallen behind.
The PlayStation 4 is way ahead of the Wii U in terms of sales, and although Nintendo
have reinvented their main game controller, they have failed to deliver on a lot of crucial
features.
So far it seems that this generation’s crown will go to Sony, and it’s up to Nintendo
to figure out how to overtake them in the next round.
Perhaps Nintendo’s most famous recent achievement has been the success of Pokémon Go, the augmented
reality mobile game that has taken the world by storm.
It was produced by the American developer Niantic, who was in 2015 spun off from Google
during their restructuring into Alphabet.
Following the spin off Niantic announced they would be receiving a 30 million dollar investment
from Google, Nintendo and the Pokémon Company, in which Nintendo owns a 32% stake.
Although Pokémon Go has earned a record-breaking 35 million dollars in its first two weeks
alone, a large part of that money won’t be going to Nintendo.
Apple alone get to keep 30% of the revenue generated on iOS devices, and about 65% of
what’s left will be going to Pokémon Go’s other stakeholders.
Any rational investor wouldn’t really think Nintendo would benefit all that much, and
the company announced exactly this in a recent public statement.
And yet, over the two weeks since Pokémon Go was released, the value of Nintendo’s
stock more than doubled.
That’s right, Nintendo’s market capitalization increased by 17 billion dollars over two weeks
based solely on the expectations for Pokémon Go, in which they only have around a 30% stake.
It’s pretty crazy, and it pretty much confirms that the stock market is anything but rational.
I hope you enjoyed the story of Nintendo.
If you did hit that like button, subscribe and check out my other videos for the stories
of more cool companies.
Tell me in the comments which company you’d like me to feature next, and as always, stay
smart.