Chuo University Speech(Nov 25th, 2011)
"The Structural Transformation of the Game Industry"

(Continued from previous page.)*

Let 's go back and see what was innovative about this. First and foremost, the business model, hammered out after many experiments, was innovative. They took a character from Donkey Kong, a very popular arcade game back then, and developed home video game, which was Mario. Initially, they were reformatting the arcade game titles for Family Computer, which also meant others could follow suit. As soon as the Family Computer started to record decent sales volume, game publishers who previously were supplying the arcade games, went ahead to develop the games for Family Computer. Nintendo did not want the others to intrude and make a mess in the market they created by taking risks. In addition, if the market were overwhelmed by games of poor quality, consumers will lose faith in home video games, which ultimately would work against the interest of the consumers. I think that was their thought process. Obviously, Nintendo is also very selfish. During the golden age of the game arcades, there were many piracy issues, and Nintendo is one of the war criminals. You can still watch the TV interview of the President at the time on YouTube. The interviewer asked, "isn't what you are doing a copy?" Former President, Mr. Yamauchi shamelessly responded, "Software is shared asset. Not allowing others to copy is such a narrow-minded perspective." If that is the case, the platform should be shared more widely. Anyway, Nintendo had to come up with a countermeasure. Generally speaking, device makers are constantly making changes on the hardware after the initial shipment. You probably can't tell because physically, it doesn't look different, but the structure inside is constantly tweaked. Just as a side note, it was interesting to see how the devices inside were getting smaller and smaller each time I opened up a PlayStation and saw the inside. Anyway, that was the same for Family Computer. However, the publishers were developing the games without Nintendo's approval, which caused glitches. I'm guessing that Nintendo observed that as an opportunity. Nintendo proposed that they will manufacture the mask ROMs which would come with their operability warranty, and would take on the distribution responsibility. It was a good deal for the publishers back then, on the basis that they can focus on the development work, and leave all the hassles to Nintendo, from procuring the IC chips which were in a relative shortage back then, to operation validation, and cumbersome distribution. The premium paid on top of the cost was the origin of royalty fee. Initially, the brand was managed impeccably, because Nintendo certified the game software, and the distribution was a monopoly. This gave a further push to the sales of Family Computer. The publishers all rushed in, and the whole ecosystem was enriched. The business model that fully capitalized on the network externality or the demand side economies of scale was formulated.

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