Nintendo didn't take hedgehog seriously

THE BALTIMORE SUN

KYOTO, Japan -- Pity the poor monopolist. Nintendo Corp.'s lucrative reign at the pinnacle of the video-game industry was marked by ruthless treatment of retailers, outside game writers and, many parents complained, consumers.

Though the company has emerged from a pile of antitrust and restraint-of-trade suits virtually unscathed, its spectacular rise by 1990 to near-total domination of the industry won it grudging admiration but few friends.

In Washington, the company's haughty behavior caused it to bear the brunt of anti-Japanese trade sentiment, especially when in early 1992 it tried to purchase a controlling interest in the Seattle Mariners baseball team, which it later reduced to a minority share to fend off criticism. In the marketplace, a host of new competitors came out of the woodwork to cash in on a toy craze that financially looked like a license to print money.

Nintendo's dominance of the industry it re-created from the ashes of an early 1980s crash also bred bad habits. Like monopolists in many industries, the company was blind to the new challenges in the market, content to stick to formulas that had won it initial success.

By the time Nintendo woke up to the challenge, Sega's Sonic the Hedgehog had become just as cool among kids as Nintendo's Super Mario, at least in the United States.

As a result, over the last four years, Nintendo has watched its once-impregnable position in the United States eroded by Sega Enterprises Ltd., which now controls half the U.S. market. Sega controls 60 percent of the European market but only 20 percent of the Japanese one, analysts estimated.

How did Nintendo, which once controlled 90 percent of the game industry, lose its monopolistic position? The company took two years to respond to Sega's 1989 introduction of faster, slicker and graphically more interesting machines based on 16-bit microprocessors, the computer chips that determine how much information a machine can change in a given instant.

Independent software producers -- game writers -- chafed under strict Nintendo licensing procedures, which forced them to buy proprietary blank game cartridges in advance, yet limited them in the number of titles they could write each year. The system put all the risk on the software producers.

While Nintendo, which also develops games, contended that the procedures were needed to hold down the number of bad games in the market, the outside software makers jumped at the chance to write games for another firm when the number of Sega machines in the market reached a critical mass.

History repeating itself

It now looks like history is about to repeat itself. Later this year, Nintendo's competitors will flood the market with even faster machines.

Sega is introducing its 32-bit Saturn game machine at the Tokyo toy show this month, with mass sales slated for the Christmas season.

It also will offer a CD-ROM add-on device that will turn its existing 16-bit machines into the equivalent of 32-bit machines, so parents won't have to buy an entire new machine.

Sony Corp. and Sanyo Electric Co., desperate to shore up profits, also plan to enter the game market.

Even firms in the United States are getting back into the act. (As with videocassette recorders, the video-game industry was invented in the United States but is now dominated by Japan.)

A new Silicon Valley-based company called 3DO Corp. this spring introduced a 32-bit "interactive multiplayer" that is being manufactured by Matsushita Electrical Industrial Co. in Japan. Its price tag, which has been cut to less than $500 from its initial $700, hasn't kept Matsushita from saying there are waiting lists to get the machines in Japan.

When will Nintendo come up with its entry in the sweepstakes to dominate the next generation of video games? The company says it will introduce a CD-ROM add-on device for its 16-bit machine next spring.

More important, it has a project -- code-named Project Reality -- to develop a 64-bit machine, one with the speed and capacity to give each game's video background movie-like quality.

In April, the company said this machine would be available next spring. In a recent interview at corporate headquarters, Nintendo Chairman Hiroshi Yamauchi said the company had pushed that back to fall of 1995, a full year after the new machines will be introduced by his rivals.

"It's not correct at all" to say Nintendo has been slow to respond to competitive challenges, Mr. Yamauchi said. "High speed and beautiful graphics are not what count in this business. What is most important is whether we introduce enjoyable and fun software."

Mr. Yamauchi, 66, inherited Nintendo (which means "leave fate to chance") from his grandfather, who began the company more than 100 years ago as a manufacturer of playing cards for a Japanese gambling game called hanafuda. He runs it with an iron hand, leaving little to chance.

Growth exploded in the 1980s when the company began making video games, beginning with games for bars and arcades and then rejuvenating the home video-game business.

That business self-destructed in the United States in the 1982-1983 recession, when retailers were stuck with thousands of unsellable Atari game machines. The U.S. division of Nintendo, based in Redmond, Wash., was built by Mr. Yamauchi's son-in-law, Minoru Arakawa.

With fewer than 1,000 employees in Japan -- the company relies on outside contractors for its manufacturing, none of which is done in the United States -- company sales peaked at $5.5 billion in the fiscal year ended March 31, 1993. After- tax income was $764 million, making Nintendo more profitable than most of Japan's fabled electronics giants, such as Sony and Matsushita.

But in the last year, competition and a saturated market for its 16-bit home machines finally caught up with Nintendo. Net income in the year ended March 31, 1994, plunged 34 percent, to $507 million, on a 15 percent sales decline to $4.7 billion. In yen terms, sales and profits fell 24 percent and 41 percent, respectively. It was the first downturn in the company's history.

Industry slowing

Some analysts suggested that the downturn reflects an industry that has peaked and may turn out to be a fad. Sega also reported sharply lower earnings last year, even though its sales stayed steady in yen terms (in dollar terms, sales increased 10 percent, to $4 billion, because of the appreciation of the yen).

"The whole industry is slowing," said Jeffrey Camp, an analyst at Jardine Fleming Japan Ltd. "They already have 75 percent saturation among teen-age boys. It doesn't matter if the new machines are faster. The question is whether they are more fun."

Mr. Yamauchi said Nintendo's initial strategy for heading straight for a 64-bit machine was based on the premise that a 32-bit machine didn't add that much more content for game players, who therefore wouldn't feel compelled to badger their parents to buy new machines.

Nintendo's concern for controlling its profit centers might be causing the company to miss out on other aspects of the interactive revolution. Sega has forged a cable linkup with Time Warner Corp. and Tele- Communications Inc. to rent game software, and it has created a special modem with AT&T; that allows game players to talk and play over phone lines. But Nintendo has resisted that trend and also has been the prime force behind laws that ban video-game rentals in Japan.

"For the cable operators, these ideas may be beneficial," said Mr. Yamauchi. "But for the creator or software publisher, there's a big question of whether it will be lucrative or not. If they are just rental, people don't have to pay a lot of money for the game."

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