All up in Nintendo’s Business

Among both the console manufacturers and video game developers in general, Nintendo stands apart. Not just in terms of their games or consoles themselves, although those are certainly a result of the way Nintendo stays askance. But rather Nintendo is just different in terms of the way the business is run; in its decisions and very culture. Sometimes, this sees them make some greatness, such as when they single-handedly pulled the entire video game industry out of the dark ages. Sometimes, this sees them make some really boneheaded decisions, such as when they decided that online gaming was just a passing fad. For like ten years.

But even with all the ups and downs this causes, it makes them a very interesting company. They intrigue the businessman part of me endlessly. Why do they do the things they do, even when it flies against all established knowledge? The fantasizing about that really appeals to the part of my brain that makes my heart skip a beat at the words “Six Sigma”. And you know, it’s been a while since I’ve done any business analysis. I think I might be jonesing.

So anyways, let’s take a look/wildly theorize at the things that make Nintendo the way they are. Now, as we’re doing this, I want to say that a lot of what I’m going to talk about next, particularly about the culture of Japanese companies, comes from things I learned from people who got their chops in the era where all the businessmen were scared Japan was soon going to dominate the world, so that might color my perspective a bit. Also, some of my classes were, like, really boring, so I may only be half-remembering some things. So, you know, don’t put any money on any of this. With that out of way, let’s dive into the business character of Nintendo.

The first thing in understanding what makes Nintendo tick is understanding where they’re coming from. I know this is going to blow you minds here, so hold on to the back of your skulls, but, see, Nintendo is a Japanese Corporation. And I don’t know if you realize this, but Japan has a different culture than we do in the rest.

Sorry, I might be going a little fast there. Go ahead, read that paragraph a few times, until you can wrap your head around those bombs I dropped. When you catch up, we’ll be here for you.

Let’s take a look at what that means. No matter where you are, corporations are publicly owned companies. People buy and sell stock in that company outside the control of the company itself. Stocks represent a portion of the ownership of that company with all that entails, including a share of the highest level decision making and a share of the company’s profits, delivered by means of the stock value increasing or by dividends paid out to shareholders.

Well, in theory, that’s how they work. In America, and most of the western world, stockholders take full advantage of this. There are movements out there to change the focus to something more long-term, but in general, stocks are owned by individuals or by funds on behalf of individuals, whose big aim is on getting returns on their investment, as quickly as possible. Corporate leadership is very accountable to their shareholders, and keeps them happy through short term gains in stock prices and by paying out dividends.

Japan is a little bit different. The primary holders and purchasers of company stock aren’t individuals, but other companies. They’ll buy stock for the purposes of either shoring up their own company value by increasing their capital assets, or for building relationships between companies. Stock tends to be held for a longer term, and the companies are not nearly so transparent with their stockholders, who don’t tend to exercise their decision-making rights nearly as much. These corporations rarely pay out dividends, instead just banking their profits for a rainy day. Overall, whereas western corporations are very focused on the needs of their owners, their shareholders, Japanese corporations will be more immediately focused on their group, those within the company.

So what’s the bottom line in all that? Japanese corporations are more about the people operating them than what they do. That’s why you can see companies like Konami completely collapse their games division and everything good they had going because their pachinko division is making them more money and that’s what the people working the company want to focus on. That’s why Mitsubishi can go from being a shipping company to being a company that makes ships to being a company that makes cars. That’s why Nintendo has existed for almost 100 years before they ever even started thinking about videogames and has made playing cards and toys and love hotels and the Seattle Seahawks all around their work in making videogames a thing that you and I can do today. Western companies don’t tend to see such constant shifts in their operational direction, they’ll focus on what they specialize in. People may come and go, but the company stays the same. Japanese companies shift directions just as a matter of doing business. It’s common for employees of an organization to be employees for life, so if there’s a bunch of people wanting to do something different, it may be better to do that internally than to do find a different company.

That’s no less the case with Nintendo. They’re a company with a lot of personality, and although the producers there have high standards for production, aside from that, that personality really shines through. We saw this most strongly in the Wii era. I don’t think this was why that whole ‘blue ocean’ strategy was decided on, where Nintendo provided a very unique experience seeking to bring in markets outside the core game purchasers, but as far as the games go, they were pretty open during that time that Miyamoto’s interests were changing as he aged, and that’s why games like Wii Music and Wii Fit were produced.

They run their business relationships that way as well. Their leadership has high standards. Back in the NES era, you saw them apply those same standards to other companies as well. They didn’t have the direct control, sure, and a lot of it was to protect their own games for the system, but they still required certain factors in place for them to accept games on their system. That’s also part of the reason why they only allowed publishers to release a certain quantity of games per year, which a lot of developers rankled under, to keep a flood of garbage from hitting the system. The Silicon Knights debacle I wrote about some time ago made it clear how Nintendo works with their second parties at the least; high standards, demanding management, because they absolutely want a certain level of quality about it.

Their leadership’s big on retaining control for themselves. Again, this was something companies rankled under early on, with those content restrictions in place throughout the NES and SNES eras. Even as their falling market share lost them the business capital they would need to maintain this control, they still grasped onto it as much as they could, such as using a proprietary media format for the Gamecube that publishers could only get from Nintendo, and requiring certain consistent aspects of marketing in all early Wii games. Even when it’s bad for them, such as when the way they implemented their control crippled the Wii’s online store, placing such limitations and requirements on businesses that few were willing to develop for it in the face of more flexible and lucrative options on the other consoles. It wasn’t until they hit the Wii U, when Nintendo had the lowest amount of business capital they have ever had, that they’ve pulled back on that control and allowed some more flexibility and openness with those they work with. After several console generations of limited third party support, and as the market demands much more than first party support, especially these days, that shift may come too late.

And another part of that personality that shines through, Nintendo really doesn’t like using innovations that don’t come from them. They explored it for a time, what with their early experiments with Sony that Nintendo never followed through on, leading to Sony to take their project themselves and beat Nintendo with it. You’ve seen this in their hesitance to pick up CD formats, in their much delayed and troubled rollout of online features for games, their not diversifying into mobile gaming until well after that became standard practice among their peers, etc. To be clear, Nintendo does not fear innovation. In fact, Nintendo’s much more of a risk-taker, both in games and in hardware, than most any other video game company out there. Every single console of theirs has had some sort of controller innovation the rest of the industry has snapped to pick up, just for example. But the only trust their own innovations. They thought online gaming was a mere fad, back in the day, for blazes! They don’t pick up on market trends, and they don’t take knowledge from the successes and failures of other companies. This is one of the things that have led to their products being so unique, and has certainly helped them to maintain the consistent level of quality that comes with a Nintendo product, but that’s also led to some decisions on their part that, well, you just have to shake your head and go “Why?” Nintendo is a leader, not a follower, to the extreme, and it works really well for them when they’re breaking new ground. Not so much in areas where the industry’s moved past them, and they can seem a little stuck in the past because of it.

So Nintendo’s more beholden to its employees than those who own the company, and that’s where it all comes from? Well, no. That’s part of it, but there’s a number of other factors here. One more of them is just the nature of competition and business survival.

Nintendo has been around over a century. Nintendo has been king of the roost several times in it’s life. Even just as recently as the early New Ten’s, Nintendo was the at the top of the list of video game companies in terms of revenues received. And it’s a Japanese corporation, so remember it’s owners don’t generally take any cut of the profits.

What that means is that Nintendo has bank. They have Scrooge McDuck swimming pools filled with cash. They have so much money behind them, they can survive for decades without making a profit. The Wii U era has really not been kind to Nintendo’s finances, and the value of the yen against the dollar has really been playing havoc with their value, both up and down, but the takeaway is that Nintendo has around $5 billion. Just sitting there. In their account. You know, in case somebody needs a snack. On a rainy day. On top of that, they’re in control of around $11 billion in assets. Which in business terms, is the stuff that they can turn into cash. We are all lucky Nintendo has not turned to evil, because if they wanted to, there’d be no volcanic lairs left for the rest of us.

So their shareholders don’t want immediate returns. Nintendo’s survival does not hinge on a good year, or even a good decade. So they can take a long game. It’s okay for them to have those Wii Us and those Virtual Boys, as long as they have those NES’s and those Wii’s along with them. Especially as their handhelds are always successful, and can really buoy the business.

And they’ve been deliberately taking a long-term view because of it. Nintendo has made some really floppy business moves. Nintendo hit on success, huge success, with their Blue Ocean strategy with the Wii, but have found that to be unsustainable on a grand scale moving into the Wii U. And to be frank, the Wii U had really not been kind to Nintendo. They lost a lot of that good old social capital with the rest of their fellow software companies in the Wii era already, but that well nearly bottomed out in the Wii U era. To say nothing of the financial losses there. Yet they still fully supported that thing anyways. They kept earnestly making games for it, had some high profile presentations around those games, kept onboarding new products, and held off on bringing a successor to it too early. And now that the successor’s been revealed, it’s clear they’re still keeping up with at least parts of the strategy that had not served them well with the Wii U. And there’s a reason for that; they’ve spent the Wii U era building towards this next console, and even if the Switch isn’t a success, they may well keep that momentum going towards whatever console is beyond that. When it was clear that the Wii U was not going to be a success, and that Nintendo couldn’t turn it around the way they did the 3DS, they still kept supporting that console. As full as they could. And sure, if it was as successful as Sony and Microsoft have been seeing, we may not be having the Switch coming out so soon, but even so, they still gave it a good run. And they did so because if they didn’t, they may as well bow out of the console race. If they did not support the console the whole way through, people would rightly lose faith in their future consoles. Those all-so-important early adopters would do so at a far greater risk. So you’d have less people buying early, more taking that wait-and-see approach or just not being interested, which puts less value for businesses to make games for the consoles, which then feeds into the cycle of lack of value that the Wii U’s been in for most of it’s life. Standard business knowledge will say that if something’s not working and you can’t make it better, maybe it’s time to close it down and move on. That’s what Sega did with the Dreamcast. That’s what Sony did with the Vita. That’s what Nintendo themselves did with the Virtual Boy. But that wouldn’t work for Nintendo’s consoles. For the Switch and beyond to have a chance at success, they had to keep the Wii U going. They stuck with the failure and they’re keeping some of its features because they’re confident that at some point in the future, they’ll be able to build success out of it. They’ll get themselves a new NES or SNES or Wii.

Of course, looking back on Nintendo with all the benefit of hindsight is the easy part. The difficulties in discerning the company’s character lies in looking forwards. And honestly, that’s where analysts everywhere falter. Even the one’s who aren’t nearly as sexy as I am and actually get paid to do this stuff. That’s not to say I’m not going to try, though.

Probably the most interesting thing to me about the Switch is that they’re continuing with elements their Blue Ocean strategy with it, even after that, you know, didn’t work out so well with the Wii U. Outside of a few releases, Nintendo wasn’t still actively trying to court the non-gaming market much with the Wii U after they didn’t show much interest in it. It looks like they’re doing the same here, dipping their toes in the water with 1-2-Switch, but otherwise, building most of their games for the people who are, you know, actually likely to buy them. In addition, they’re still building the Switch as an alternate sort of system to the PS4 and the Xbox One, going by their hardware and games lineup. Something that provides that whole different experience. But they’re focusing that more on their primary market, the committed gamer, going by the lineup they’ve got for it thus far. And that speaks to me more that they’re trying to position their product as a supplementary for the people who’re already gaming on other consoles, rather than being intended as a mainline console themselves.

Put another way, I don’t think that Nintendo’s trying to build themselves up to hold the most market share once again this generation. Now, Nintendo’s not wrong to differentiate their consoles. I don’t know that the gaming industry, the way it is nowadays, can truly support three consoles that are pretty much the same, the way we were seeing things the PS2 era. So setting themselves as a somewhat less direct competitor, when done well, could be a good business decision. Moreover, it can be foolish to play for the top business spot or bust. Business is not a sport. It’s not a situation where you have to be on top or your worthless, especially when you have as much in reserve and as little to fear from hostile takeovers as Nintendo does. It’s about making a profit. Nintendo’s already proven they don’t need to be top dog to be successful. They didn’t rule the roost with the N64 or Gamecube, but those generations still brought in some respectable, if sometimes troubled, amounts of income. And that’s really the baseline there, that’s what they need to go for. And that’s what I believe they are seeking. They aren’t looking to take back the real estate that Sony and Microsoft hold. They’re looking to buy a smaller house next to them. It really reads to me that they’re positioning themselves as something someone would buy in addition to one of the other current gen consoles, rather than as a replacement for them.

Which brings us to the games. No matter what you may say about the viability of people buying an extra console for the unique experiences and capabilities it provides over the others, it really does come down to the games. The system will live or die on the games. And honestly, that’s probably where Nintendo’s the weakest. They have made, and still make, some of the best games on the market. But for most to commit the $300 asking price to it, they’ll want more than just Nintendo supporting the console. They’ve shown some third party support out there, but it doesn’t look like the big names are going to be coming soon after launch. Which leads to that problematic wait-and-see cycle, where consumers wait to see what developers make for it before they buy, and developers wait to see how many consumer pick it up before they make anything, and the whole project never gets kickstarted.

If any developer is going to be able to break out of that cycle, it’s Nintendo. Both on the strength of their first party games, and on the arrangements they’re able to make. Just look at last cycle. Say what you will about the Wii U’s launch, but I feel it was a great stroke getting the support of Platinum Games in there, giving them some really high quality titles early on in the system’s lifecycle that also carried a bit of that edge for the type of buyers that don’t like playing with cartoons no matter how good they are. Here, they’ve already booked SMT V, Xenoblade II, No More Heroes 3, but they need more. These are big things among niche markets, and the first two contribute a long ways to the reasons I’m probably going to end up picking up a Switch, but I don’t know how far those alone and Nintendo’s first party offerings are going to be carrying with their target audience. Still, for the Switch to start rebuilding Nintendo’s position, it has to be more than just a Nintendo machine.

I know what you heard, but that person lied to you; there were tons of good games for the Wii. My Wii library is almost as large as my PS360 one, and I think there are fewer of the games in there that consistently make me groan when I’m playing them. That said, the Blue Ocean strategy had some weaknesses. The big one was that although it was great for hardware sales and built a much larger install base than it’s competitors, they just weren’t buying games for it. As a result, developers weren’t putting their prime efforts towards the Wii. The Wii got more niche titles, experimentals, and games design for some very specific tastes. Which again, wasn’t all of a bad thing, but it does set the framework for why support for the Wii U was so weak, especially after the size of that install base was so reduced. But I don’t believe the Blue Ocean strategy is available any more, or at least would not have as much reward. The market’s changed. Gaming on phones and tablets has increased, and the nongamers Nintendo courted last time would largely have more access to one of those machines.

Nintendo deliberately makes less powerful consoles. One of the strengths of that is that they’re much cheaper to develop for, which is why the Wii got all those great experimental and niche games. However, when the install base drops, well, Nintendo’s already got a machine out there that’s much cheaper than even their consoles to develop for, and has many more people already owning one, in the DS line. In some ways, Nintendo may be their own biggest competitor, in that market forces are driving third parties towards their handhelds rather than their consoles. Given how consistently successful their handhelds are, it would be a very risky decision for them to cease support of the 3DS with the rise of the Switch. Moreover, Nintendo has always had trouble in courting third party developers. I think their business character plays a lot in that, with their need for control and high demands, but there’s also the simple fact that when you’re developing for a Nintendo machine, you’re also competing with Nintendo’s games. And Nintendo’s games, as I may have mentioned, are very, very good, and carry a lot of weight in the market. Even so, for the Switch to be a success, Nintendo needs to overcome these challenges and really get the third parties on board.

That may take some steps. The price of the Switch seems to be more than most expected, especially noted by the drop in Nintendo’s stock price after that was announced. The console itself doesn’t seem to be too pricey to produce, but the accessories that come with it drive that cost up. And when other, competing consoles offer more power for the same or less, Nintendo will really need to have the games for it to justify the accessories and the price of the machine as a whole. Yes, the Wii U launched for the same price, so nobody should really be surprised, but still, it does put Nintendo in a more challenging marketing position. The price drove people away from the 3DS when it was first released. Nintendo was able to take steps to improve it’s position later, but it doesn’t seem to have been easy. They may need to be prepared to shift their plans on the Switch as well.

In any case, Nintendo has an uncertain future on their hands with this new console. Maybe it will blow everyone away the way the Wii did. Maybe it’ll follow in the footsteps of the Wii U. Nintendo’s not poorly positioned to move it towards the former, but there’s a lot of factors both in and out of their control at play. They have new leadership now, which is an excellent chance to make those changes they need to really get this console going. I’m looking forward to watching them in the future.

Man, I really didn’t mean to write an essay here. I mean, seriously, that’s a lot of words mostly stream-of-consciousnessed onto the page. If you made it to these words, thanks for reading all that! I appreciate it.