Video game merchandising: contenders take an aim at Nintendo - Nintendo Company Ltd

Discount Store News, Jan 7, 1991 by Frank M. Viollis

VIDEO GAME MERCHANDISING

Contenders Take Aim At Nintendo

In the high energy world of video entertainment, it's not all fun and games. Just ask the people at Nintendo. Thanks to tight quality controls, customer consciousness and aggressive marketing, they have taken hold of an industry that a few years ago was teetering on extinction, and turned it into their own, multibillion dollar kingdom. However, as with any empire, there are always competitors knocking at its gates.

Since its entry into the U.S. home video game arena in 1985, the Kyoto, Japan-based Nintendo Co. has captured 80% of the domestic market (an even higher percentage in Japan). Its retail revenue for 1990 is expected to be approximately $4.1 billion (yielding an estimated pre-tax profit of over $1 billion). It is further estimated that by the end of this year, Nintendo will have secured a firm foothold in nearly 30% of all U.S. households (which roughly translates into more than 20 million homes).

"It's a software business," said Donald Coyner, Nintendo U.S.A.'s advertising manager. "We knew that when we introduced the NES [Nintendo Entertainment System] in New York in 1985. As we expanded to the rest of the United States in 1986 [the year Nintendo sales accounted for $300 million of the industry's $400 million total] we were convinced that consumers hadn't given up on video games. They were just bored at what was out there. We changed all that. We brought back quality."

It's this battle cry for quality software that has become Nintendo's claim to fame, as well as a point of controversy within the industry.

No one questions, or disagrees, with Nintendo's desire to offer the game-playing consumer the best product available. It's Nintendo's business practices that have drawn fire from its competitors, as well as from the Federal Trade Commission (which is currently reviewing the business records of Nintendo and several of its largest licensees for possible infringement of anti-trust laws). These practices include:

* Manufacturing and pricing controls; * Exclusive and restrictive licensing; * Product modification intended to restrict product use.

From the beginning, Nintendo has argued that only under its watchful eye could the quality it demanded be assured. The company has maintained absolute control over the manufacture and pricing of the NES machines and all NES software, whether or not Nintendo designed it.

However, in October 1990, Nintendo announced for the first time that it would extend manufacturing responsibilities to 53 of its 56 software licensees. This came as something of a shock, given Nintendo's long-standing prohibition. However, it was a timely decision, not only because of the government's recent inquiries, but also because this manufacturing `bottleneck' had previously forced some distributors to wait as long as four to five months for orders to be filled (during calendar year 1990 Nintendo reduced this backlog to as little as two months). It is unlikely that this move will spell any reduction in the prices of the software, either at the wholesale or retail level.

"Nintendo's pricing will never change," argued Dennis Wood, senior vp/general counsel, Atari Games, Corp., "not as long as Nintendo continues to exercise the kind of control it always has. Even though (licensees) are manufacturing the product, the licensees will still have to come back to (Nintendo) for the lock-out chip, and for quality testing. Nintendo will still regulate the quantity manufactured. And, on top of that, (Nintendo) is insisting on a 20% royalty on all wholesale income. Essentially, nothing has changed."

Though others may find fault with Nintendo's constricted manufacturing concepts, its licensees, who are forbidden by contract from designing software for anyone else, do not.

"Our relationship with Nintendo has been advantageous to us both," said Sam Goldberg, vp of marketing for Long Island-based Acclaim Entertainment. "We've got a lot of titles out there, and more on the way. The quality is high. Nintendo is very careful about the way it puts the product together. We're very satisfied with our relationship." The reason is obvious.

Acclaim, one of the first American software manufacturers to embrace Nintendo's licensing agreement (shortly after being established in 1987), has just reported that its net income for fiscal year 1990 was $141.1 million. As with all Nintendo software licensees, this growth is due almost entirely to its relationship with Nintendo.

The idea of exclusive software licensing is not new. Texas Instruments tried it with its ill-fated `TI 99/4' home computer back in the early '80s. However, TI failed to get it off the ground. The companies they approached, which were all American, balked at the idea of such an exclusive arrangement, fearing that it might generate an overall loss in their market share. Nintendo learned from TI's mistake and in early efforts approached only Japanese software designers.

"The Japanese accepted the idea, and worked well with it," said G. Shawn Glisson, sales and marketing vp for Oregon-based HAL America. "They viewed the approach more like a `family' effort than did the Americans, who could only see it for its competitive value."