Nintendo in 8-Bit Video Games

Power Play (A): Nintendo in 8-bit Video Games

Analyze the industry structure of the video game industry.

The 8-bit Japanese and American home video game market in the late 1980s could be defined as a monopoly characterized by high concentration (Only one firm had around 95% market share), high barriers to entry and a differentiated product.

Porter's Competition Framework

Industry Rivalry (Low) - Nintendo had sold systems to 1/3 of Japanese and American families obtaining 95% market share. Its product was a highly technological differentiated game system, given only Nintendo-approved cartridges were able to run on the system secured by a chip. Nintendo managed to ensure cost savings by subcontracting manufacturing which kept retail prices lower than early competitors.

Threat of Entry (Low) - Development costs amounted $500,000 per game title and several million more in marketing expenses. But the highest barriers to entry were found in the monopolization of cartridge production through licenses and the protection of the system against unlicensed cartridges. Also, legal barriers were in place due to patents and copyrights of the system, game figures and cartridges. There is also evidence that Nintendo monopolized some retailers threatening them to stop selling them if they sold other game systems. Among their monopolized retailers was Wal-Mart. Strong retaliation could be expected from Nintendo if a retailer failed to comply with their demands, if a game developer infringed its licensing agreement or if a new entrant infringed one of its patents.

Threats of Substitutes (Low) - The closest substitutes to home video games were home computers and coin-operated game machines. Game machines were only found outside home therefore couldn't be enjoyed as regularly and comfortably as a home game. Computer games lacked the image quality and the controls allowing multiplayer game, which reproduced the feeling of the games. Computers were also more expensive.

Supplier Power (Low) - Even though all its components were supplied to 30 subcontractors, Nintendo went on to become most of its supplier's largest customer. For example it accounted for Ricoh's 60%-70% of semiconductor sales. Suppliers, especially leading chip-makers, competed for Nintendo. Regarding the game developers, Nintendo reserved the right to choose them, to approve their games and forced them to manufacture the cartridges with them. Evidence of their diminished power was Nakamura's, head of Namco, frustration when Nintendo changed his licensing agreement. Limited number of titles per licensee to control quality, as they reflect on Nintendo not the software producer.

Buyer Power (Low) - Having monopolized the home video game market, retailers were at Nintendo's mercy to be able to sell its system. Competition between buyers is high. Nintendo's system is unique, they have carefully controlled number of products shipped (restricting the supply to build-up demand); removed products as they waned in popularity; focused advertising on individual titles; controlled content (excess of violence or sexual references). While this is somewhat limiting it is also a win-win in that it incentives the licensee knowing that titles are going to be hits.

It is also not in the interest of retailers to backward integrate and produce their own systems. Evidence of Nintendo's power over its buyers were the diverse suits filed against Nintendo regarding supply restrictions to increase price and demand, and threats to retailers if they carried other systems or discounted its systems and games.

Powers of Complements (High) - The system's complements are the cartridges. Purchasing the system is only half of the story; games are needed to use it. Average customers in Japan purchased 12 games and in America 9. Nintendo dominated the game's producers as discussed before. It enforced restrictive developer licenses and maintained strict control over their manufacture and distribution.

What has been Nintendo's strategy? How did Nintendo appropriate value from the industry?

Nintendo's is a company that has successfully controlled its competition, suppliers, distributors and product flow. Its strategy has been one of attaining a competitive advantage in a technology-intensive industry by securing and timing its innovation, and taking advantage of licensing and outsourcing.

Nintendo benefited from its basic knowledge to manufacture home video game system's acquired through Magnavox's license to invent a new arcade game on a less powerful home machine. It innovated by enhancing the existing competitor's graphics and action, and lowered their costs on initial hardware thru cheap chip buys for dedicated hardware technology. Initially they tweaked existing older technology versus making a large investment in newer technology. To achieve the low cost by manufacturing established technology, Nintendo limited the spec (e.g. 8kb RAM size vs. 16kb of Atari or 512kb of standard PC in 1983), but added unique value such as improved graphic quality. This attitude of Nintendo hasn't been changed until today's Wii. It diffused its innovation through licensing agreements, which enabled mass adoption with demand for its games outstripping supply. And protecting it from imitation through legal and technological barriers. Property rights along with the complexity in its system's security chip played and important role in protection from imitation.

Since Nintendo could clearly establish property rights on its innovation, it was able to substitute its need for complementary resources and capabilities through licensing and outsourcing. Outsourcing was not only in manufacturing but also in product development and design.

This allowed the cartridges for its systems to be produced and commercialized more quickly than by doing it itself, thereby increasing demand for its system. Alliances and outsourcing permitted access to cutting-edge technology from chip manufacturers at a lower cost.

Timing innovation was also important for Nintendo. They could be considered Atari's followers. This enabled them to learn from Atari's failures to protect its innovation and access external complementary