Chapter 1: What is discussed at the start of this section?
I feel like I got to warm up physically before quiet episodes these days. It's like a marathon. My back does start to hurt by the end from just standing still the whole time.
Oh, me too. Me too.
I've actually stopped working out mornings before we record because I don't want to be too tired. Like I need my stamina.
Yeah. We should figure out like recording on the Peloton or something.
That'd be a breathy.
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 me down. Say it straight. Another story on the way.
Welcome to Season 12, Episode 4 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. We last left our Nintendo heroes in 1990 when they single-handedly revived the video game industry and captured 95% of the market share globally.
We did our seven powers analysis and determined the company had a better competitive position than basically any company in history, and the game was theirs to lose. But somehow, they did just that.
Indeed, they did. And then they won, and then they lost, and then they won, and then they lost, and then they won again.
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Chapter 2: How did Nintendo's market share change in the 90s?
But... Before we talk about all that, we first need to talk about one more giant success from Nintendo in the 1980s. A very small giant success that we intentionally left off in the last episode because it's going to be very, very important here in part two. And that is, of course, the Game Boy. Yes.
So we talked last time all about Gunpei Yukoi, Nintendo's effectively chief engineer and his genius behind building everything from the Ultra Hand to the light gun shooting range to mentoring Shigeru Miyamoto and everything he did for Nintendo. One of his first early successes that we kind of glossed over last time was the game and watch business.
Now, these were portable, dedicated, handheld video game systems, meaning by dedicated, each piece of hardware only played one game. There was a Donkey Kong game and watch. There was a Mario game and watch. There was a Zelda game and watch, even, of course, a Mickey Mouse game and watch. But each piece of hardware only played that one game.
It was also actually on the Game & Watch where Gunpei invented the D-pad that is, you know, on like every single controller.
Oh, I didn't realize that.
Yeah, that is where the D-pad was invented with the Game & Watch. Huh. Pretty freaking awesome.
And the Game & Watch actually sold a ton of units. I think 43 million units got sold before End of Life.
Yes, and this is the thing. Western audiences don't know that much about it because it was never that popular in the West. It was huge in Asia, though. Like you said, 43 million units, over a billion dollars in lifetime revenue from this product line, which back then in the 80s and kind of pre-NES, that was super, super significant for Nintendo. Now...
If you're thinking about this, given everything we talked about last time about technological and video game innovation and marvels that Donkey Kong and Mario were and the NES and how advanced it was, how the hell did Gunpei and Nintendo get Donkey Kong running on a portable piece of hardware in 1982 pre-NES? How did this come about?
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Chapter 3: What role did the Game Boy play in Nintendo's resurgence?
Gunpei, who remember was not involved with the development of the NES, Gunpei goes over to Yamauchi and says, hey, I think we can basically combine the NES and this old Game & Watch technology and make a similarly awesome portable cartridge-based console. And Yamauchi and the rest of Nintendo are like, well, yes, of course, if you could do that, that would be amazing.
Who wouldn't want to buy one of those things? But part of what made the NES so great was it was years ahead of all the competition and technology. Like, how are we going to do that in the portable era? So Gunpei's like, don't worry, Mr. Yamauchi, I've got it. I can make it all work. This device that I have in mind, it'll play awesome games. It'll have great battery life.
We can get it to market super fast. And get this, I'm pretty sure we can sell this thing even cheaper than the NES. Everybody's like, this is too good to be true. How are we going to do this? It's quite the promise. And he's like, here's the big reveal. It's going to be black and white. And not even black and white, but black and green. Yeah. So God bless Yamauchi.
That man was a visionary and he completely got it. And for a non-technologist, he understood technology better than anybody because he gives Gunpei the go-ahead on this. Everybody else at Nintendo is like, this is not going to work. You know, I know we're still in the 1980s here, but the 1980s are more advanced than you might think. Like black and white is like the 1960s.
Nobody wants black and white, especially in the video game market, which is supposed to be this advanced technology graphical market.
And to play games that they're accustomed to seeing in color. You're going to go downgrade Mario? Like, that's a terrible experience.
Right. Terrible, terrible idea. So internally, this project gets the nickname. I'm not exactly sure how to pronounce this, but it's either Dame Game or Dame Game. D-A-M-E-G-A-M-E, which basically means hopeless game. But nevertheless, they push ahead. And in April 1989, they released this device in Japan, followed shortly in the U.S. for $89.95. And this device, of course, is named the Game Boy.
We talk about this all the time on Acquired. Things that are in technology, in our industry, in the past that just seem so natural we don't even think about them. Why did they call it the Game Boy? They called it the Game Boy to dig at Sony, who, if they made it, would have called it the Game Man. Why? Because they had the Walkman.
No way. That's really why?
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Chapter 4: How did Gunpei Yokoi innovate with the Game & Watch?
It becomes this businessman status symbol. And I remember this in my own life. Everything in these Nintendo ads actually happened in my family. My dad used to steal my Game Boy all the time. We had to go get him his own. Did you have one of the original fat ones? Oh, totally. I was five years old when it came out. So I was exactly in the Target kid demographic.
And I think my dad, I was talking with him about this this weekend. He still plays... the original Tetris cartridge on like an old Game Boy Advance at this point to this day. This is how universal the appeal of this game and this system is. It's unbelievable. So Nintendo ends up selling 32 million Game Boys in the first three years, which is way more than the NES.
That's roughly $3 billion in hardware sales alone. The Game Boy and then its sort of quasi successor, but really the same platform, the Game Boy Color, they would go on to sell 118 million units worldwide, which is over double the NES and the fourth highest selling console of all time, period. Wow. Just amazing.
And this was Nintendo's first taste and really the whole industry's first taste of massively expanding what already was a huge gaming market.
Yeah. It also was at a completely different price point. I wasn't allowed to get a console, but my first video game system was a Game Boy Color because I think it was a little over $100 or something for the color one versus around the $200 or more price point for the at-home consoles.
It takes both the kids' gaming market and the casual adults' gaming market that it creates and marries those into one device and leaves the core gaming market to the home console. Yeah. you would have been like exactly in the target demo for Pokemon when it came out.
Absolutely. You bet. I bought the translucent purple Game Boy color so that I could get Pokemon blue.
Oh my God. Probably like 70% of people listening right now, regardless of their age or that bucket. I mean, I bought Pokemon when it came out, even though I was a teenager at the time.
Yep. All right, listeners, now is a great time to thank one of our favorite companies that has become a core part of our workflow for Acquired, Anthropic, and their latest breakthrough model, Claude Sonnet 4.5.
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Chapter 5: How did Nintendo innovate in casual gaming?
Nintendo totally discovers slash invents casual gaming.
They 100% do. I mean, this is my dad and millions of dads around the world playing Tetris in the 80s and 90s. It really, like Nintendo codifies this and embraces it best with the DS. This is Brain Age. Brain Age were these like mind training games that were targeted at older people and like grandparents. It's Nintendogs, which is Miyamoto's dog raising simulator. That's right.
That's like really popular with women and older women as opposed to most video games. And it turns out that this category, which nobody knew existed until Nintendo accidentally found it. And then they didn't even like truly embrace it until the mid 2000s. This is actually the biggest gaming category of them all.
By far. And it's incredible because the modern instantiation of casual gaming, certainly the largest, is mobile free-to-play casual gaming. And Nintendo sort of invented it before mobile and before free-to-play.
Totally. So Brain Age 1 and 2 combined sell 34 million copies on the DS.
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Chapter 6: What factors contributed to Nintendo's fall in the home console market?
Nintendogs sells almost 25 million copies. Tetris, all the way back on the Game Boy, sold 35 million copies. Now, most of those are bundled in the US. These are billion-dollar franchises within Nintendo that nobody thought about for decades. It's kind of crazy. Yep.
So we asked the question, how is Nintendo screwing up so royally on the home console side while they're succeeding so spectacularly on the handheld side? I think it's one that the kids and the casual segments were viewed as these kind of ghettos for a long time that no serious company and certainly nobody like Sony or Microsoft would go after and go compete with.
Wrongly so, by the way. And the people who would have competed with them were Atari and Sega, and both were basically defunct by this point.
So Nintendo had this lane wide open because everyone else who's trying to come into the industry is coming after the core gaming segment or the serious gaming segment or the high ARPU, the high average revenue per user, people that are buying $60 DVD discs to play.
And so, you know, then to the other side of how are they allowed to screw up so badly in the home side? I don't want to say it doesn't matter, but it kind of doesn't matter. So Nintendo's revenue and operating profits more or less stay flat from the NES era all the way through to the mid 2000s, even though the home console business basically just gets like doused in gasoline and lit on fire.
But the handheld side completely replaces it. Nintendo's kind of always doing a solid four to five billion in revenue a year, call it, and maybe half a billion to a billion dollars in operating income. Like there's no gun to their head.
Yeah, so handheld, very good business for Nintendo. And when you couple that with a generation of home console that is also a good business for Nintendo, when they absolutely knock it out of the park and define a brand new form factor and a brand new way to play games that has mass, mass audience, then they do the most revenue in the company's history. And that's going to be the Wii.
And we're going to get to that. Now is a great time to thank good friend of the show, ServiceNow. We have talked to listeners about ServiceNow's amazing origin story and how they've been one of the best performing companies the last decade. But we've gotten some questions from listeners about what ServiceNow actually does. So today, we are going to answer that question.
Well, to start, a phrase that has been used often here recently in the press is that ServiceNow is the quote-unquote AI operating system for the enterprise. But to make that more concrete, ServiceNow started 22 years ago focused simply on automation. They turned physical paperwork into software workflows, initially for the IT department within enterprises. That was it.
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Chapter 7: How did the Wii revolutionize gaming for Nintendo?
ServiceNow was named to Fortune's World's Most Admired Companies list last year and Fast Company's Best Workplace for Innovators last year. And it's because of this vision. If you want to take advantage of the scale and speed of ServiceNow in every corner of your business, go to servicenow.com slash acquired and just tell them that Ben and David sent you. Thanks, ServiceNow.
All right, so the Wii. There's a little bit of a lead up to the Wii, which is some leadership changes. Satoru Iwata comes in and succeeds Hiroshi Yamauchi as president of Nintendo LTD, the parent Japanese company. And right around this same time in 2003-ish, Reggie Fils-Aimé works his way up the ranks and comes in as the president of Nintendo of America.
And so you've got this pretty awesome tag team of leadership that is ready to do something very different. And the GameCube comes out, they sort of know right away, this is a miss. They're still doing everything that you sort of think they would do to try to occupy the time until they have something really great.
But they're already foreshadowing very early that, yep, yep, yep, we hear you developers and gamers, like we need to be doing something different.
And they're learning from the DS, which they just launched and became this enormous success. They're like, ooh, maybe these people want to play games at home too.
Totally. So there's this great keynote in 2004 where Reggie comes out on stage. He's introducing himself and he says... I'm Reggie. I'm about kicking ass, taking names, and we're about playing games. And then they have this whole keynote of kind of the most hardcore Nintendo I've ever seen. It's almost like a dark in your face. They don't know who they are as a company.
It kind of reminds me of Luke Skywalker at the beginning of Return of the Jedi. Like, you're really not sure which way it's going to go. Could be dark, could be light.
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Chapter 8: What is the significance of Nintendo's IP strategy today?
But what you do see is them starting to really embrace some things. So they start talking about the DS and they're showing off the backwards compatibility. It looks kind of funny, but you can put in a Game Boy game and it kind of sticks out in a way that is clearly awkward.
But they know that this is an important thing because they have this massive install base of people that had all these Game Boys and Game Boy Advance and everything over the years. So, OK, we're embracing that check. You also see them talk about everything they sort of can in the GameCube.
But then Reggie invites Satoru Iwata out on stage in from Japan to talk about this revolution that is coming for home gaming.
That's right. The codename for the Wii was Project Revolution.
Yes. And they really start sort of just foreshadowing how they really want to change everything again and how it's an exciting time to be working with Nintendo as developers because everything is just about to be so different and truly a revolution. They laid this groundwork a whole year before they even announced the name Wii.
Yeah, and I think almost two years before the Wii actually comes out.
I think that's right.
Yeah. The Wii is such an enormous success on basically every level, but it really is the triumph, now fully across all of Nintendo as a company and all their product lines, of the Gunpei Yokoi lateral thinking with withered technology maxim. Infrared motion sensing, which is what the Wemo uses, is an incredibly novel technology to bring to video games.
But it's a well-understood, quote-unquote, withered technology. Like TV remotes have been using this for decades.
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