Question: Analyze and record problems and their Core elements from the case below.

Nintendos Revolution Sangbeom Kim, Ian Lamont, Hiroshi Ogasawara, Mansoo Park, Hiroaki Takaoka

Satoru Iwata, president of Nintendo Corporation (Nintendo), strode from the conference room with a smile on his face. It was late 2004, and he was tremendously excited with what his engineers had just demonstrated a video game controller that was not a variation of the joystick, but rather a stubby rod that a gamer could manipulate with one hand. Not only did it enable the creation of games that mimicked real-world movements like throwing, hitting, or aiming, Iwata believed it could help open up video games to a vastly different audience than the boys and young men who traditionally bought video game consoles.

Expanding the gaming industrys customer base was key to Iwatas vision of a next-generation console codenamed Revolution. The idea was to bring tens of millions of new customers into the gaming realm, people who had never played video games before or saw them as mere toys. Iwata believed that a new take on gaming might even attract mothers an influential household constituency, thanks to their influence over household spending1 through a combination of hardware design, game-play, and price. What better way to attract them than through a controller that had a form factor similar to a TV remote control?

But Iwatas enthusiasm for the controller prototype was tempered by a number of real-world considerations. First, no other company had ever released such a controller. How would the marketplace react to such a vastly different model? Second, many of the technologies that were required to make the rod controller work such as wireless positioning might never operate perfectly outside of the lab, in peoples apartments and homes. Third, any new Nintendo controllerhad to be backwards compatible with games made for older Nintendo consoles like the GameCube, which used traditional two-handed controllers. Additionally, Iwata was very sensitive to the reaction of the gaming industry and the existing gaming population to a non-traditional product aimed at a non-traditional audience. Nintendo had a long history of video game success, epitomized by the popular Mario Bros. franchise invented by Nintendos game design guru Shigeru Miyamoto in the 1980s. However, the companys last console, the GameCube, was unable to get sufficient traction after it was launched in 2001. In 2002, sales forecasts for the GameCube had been off by 44% and the company had been forced to cut revenue targets by 100 billion.2 Gamers much preferred Sonys PlayStation 2 console and Microsofts Xbox console,3 which were characterized by flashy graphics and hardcore fighting and sports titles. Iwata needed a home run to put Nintendo back on its feet. Could the Revolutions radical hardware design help turn the companys fortunes around?

History of Video Games 1960s-1970s

Video games have been around since the early 1960s. In 1962 MIT students Steve Russell, Martin Graetz and Wayne Witaenem developed Spacewars, the first video game. Spacewars marked the first time that computer graphics were used in a game. It quickly gained popularity among hackers and computer geeks,4 but never had a mainstream audience, owing to the fact that most people did not have computer access.

In the late 1960s, Alan Kay developed the Dynabook, an early personal computer, which was targeted at children. The Dynabook concept set the stage for both the PC and computer game revolutions in the 1970s.5 The first game console was the Magnavox Odyssey, developed by engineer Ralph Baer as a side project in 1972.6 The following year, U.S.-based Atari launched a simple table tennis game called Pong in the United States, which could be hooked up to a TV set.7 It was a hit. In 1977, the company released a more sophisticated game console, the Atari 2600, which let users load different games into the system using rectangular cartridges. It was an even bigger hit, selling more than 30 million units.

Japanese companies took notice. In 1977, Nintendo released a Pong knockoff called Color TV Game 6 (6 referred to the number of variations of the game that players could select). It sold more than 1 million units.9 In 1978, Taito launched an arcade game called Space Invaders. The game, designed by Tomohiro Nishikado, was one of the first video games to feature shooting, and helped expand the video game industry from a novelty to a global industry.10 In 1980, Atari licensed the game from Taito, which greatly boosted the 2600 consoles sales and audience size.

Global Expansion

Ataris business model licensing titles, commissioning developers to write games, and developing other titles in-house was not sustainable, especially as the 2600 consoles 1977-era technology became dated. As it faded in the early 1980s, Japanese companies took the lead in developing gaming hardware and software for both mobile and console systems.

In 1980, Nintendo launched Game and Watch, which was the first handheld game device inspired by an LCD calculator and digital watch.11 Later in the decade, the company would release the Game Boy, which dominated the hand-held gaming market for years.

Nintendos console foray was even more successful. It developed the Famicom (short for Family Computer) in Japan in 1983. Titles such as Mario Bros. and a console version of the arcade hit Donkey Kong made the Famicom hugely popular in Japan. In 1985, Nintendo released the Famicom worldwide as the Nintendo Entertainment System, or NES.12 (See Exhibit 1.) The NES console had a different exterior casing than the Famicoms, but the components inside were nearly identical. It was a runaway success, selling 62 million units worldwide. 13

Key to Nintendos success was the companys control over third-party software developers. Nintendo encouraged third-party developers to create games for the wildly popular NES, as long as they agreed to produce no more than five games per year, and not produce titles for any other console system for two years.14 Nintendo would manufacture approved titles on NES-compatible game cartridges and sell them back to developers, who would then market and distribute the games. The system encouraged the development of innovative new titles and more NES sales. By 1989, video games were a $3.4 billion market in the United States, and Nintendo claimed a 79% market share.

Nintendo wasnt the only company to profit. Several American game studios grew very successful businesses creating games using the Nintendo model until lawsuits from shut out developers and an antitrust investigation forced Nintendo to discontinue exclusivity requirements.16 Nevertheless, the third-party developer model was established as an extremely profitable and effective way to sell games and consoles.

A Technological Arms Race

Nintendo began to face strong competition from Tokyo-based Sega, which released a 16-bit console called Genesis in 1989. There was also growing competition from PC games, including new roleplaying titles such as Ultima, which took advantage of rapid advances in semiconductor technology as well as the huge distributed base of PCs running on Microsoft Windows. Additional PC technology enablers included 256-color VGA graphics cards and Sound Blaster cards for audio.

Increasingly, games and game consoles began to compete on underlying technological advancements, enabled by exponential advances in computing technology. Blocky 2D graphics and limited sound effects had been replaced by slick 3D environments, stereo audio, and even high-quality CGI cutscenes that featured the voices of actors recorded in professional sound studios.

Even though the modern consoles were roughly the same size as their late-1970s counterparts, the hardware inside the machines had drastically changed. A video game console was essentially a computer with a niche purpose: letting users play games. Just like PCs and all other computers, video game consoles had a central processing unit (CPU), which carried out the various processing functions necessary to play games, including starting a new game, loading a new level, calculating scores, processing inputs from the controllers, and displaying the results on the screen. The power of early console processors was measured in bits, or a binary digit (one or zero). The Atari 2600 had a 4-bit CPU, while the consoles of the late 1990s used faster 64-bit CPUs.

Modern consoles had an additional component, as well: graphics processing units (GPU), also known as graphics accelerators. A GPU was an extra processor that allowed the CPU to offload calculations and instructions required to render graphics on the screen. With powerful CPUs, GPUs, and sound cards, consoles could deliver more intense gaming experiences, including more realistic textures, weapons, backgrounds, characters, and monsters in 3D worlds.

Diversification in the 1990s

As the hardware race heated up, Nintendo and Sega continued developing consoles. A second Nintendo console, the Super Famicom, or Super NES, was launched in the early 1990s and sold 49 million units globally.17 Starting in 1989, the company released a series of innovative and ultimately successful handheld gaming products. The Super Game Boy even had an adapter for earlier NES and Super NES cartridges.

But not all of Nintendos gaming efforts were successful. In 1995, Nintendo attempted to capitalize on a craze for early virtual reality technologies. It announced the first 3D graphic video game console, called Virtual Boy (Exhibit 2). The Virtual Boy used a head-mounted display to give users an illusion of depth in a simple monochrome virtual world. It was an ambitious project, but met with lukewarm reception in the market.18

Sega launched its 32-bit Saturn console in 1995,19 but it did not fare well against the crop of graphically superior systems that were entering the market around the same time.20 In 1996, Nintendo announced the Nintendo 64, the companys last home console to use cartridges (Exhibit 3). Later, Nintendo switched to a MiniDVD-based format for the GameCube. The Nintendo 64 sold about 5.5 million units in Japan and 33 million units worldwide21 an impressive feat, but not nearly as powerful an impact as Sonys PlayStation.

Sony entered the market on the software side with its Famicom game called Captain ED in 1989.22 Initially, there was strong internal resistance to entering the video game business. Some in the company assumed that being associated with a toy would ruin the Sony brand. But an insightful Sony executive, a former engineer named Ken Kutaragi, had another idea. In 1990, Kutaragi proposed that Nintendo partner with Sony to co-develop a CD-ROM-based console that leveraged Sonys CDpressing technology. Nintendo and Sony started work on the console, but Nintendo later backed out, fearing it was too risky to work with a potential competitor. Sony started to develop its own CDROM- based console, and in 1994 released the 32-bit PlayStation. Sony engineers managed to overcome the limitations of earlier systems by pricing the PlayStation lower than the previous CDROM- based game consoles like the NEC PC Engine.23 The PlayStations superior system performance, affordable price, and wide array of games were enough to turn the market upside down. It was the prelude of a new era in the console industry.24

Not all new competitors fared so well. In the mid-1990s, 3DO, an American company, developed a 32-bit console called the 3DO Interactive Multiplayer, and licensed the technology to three manufacturers: Panasonic, Goldstar, and Sanyo. It initially received strong reviews, but the $699 price was too high and there werent enough games. The effort failed.

Another American company that attempted to follow the licensing route was Apple, which partnered with Japanese manufacturer Bandai on the Pippin. The Pippin console, which launched in 1996 in Japan, North America, and Europe, ran on an Apple operating system but was an utter failure. It was later rated by PC World magazine as one of the worst tech products of all time, owing to its high price ($600) and limited game selection. The product was withdrawn from the market in 1997.26

Besides the console wars, several technological trends also shaped PC gaming during the 1990s, including the introduction of faster processors and graphics cards as well as the spread of network connections via the Internet and local-area networks (LAN). First-person shooter titles such as Doom and Quake could be played over a LAN or Internet connection, and featured sophisticated 3D graphics. Another genre that began to gain steam was online role-playing games, such as Starcraft and the continuation of the Ultima series from the 1980s. By the late 1990s, sales of video games rivaled movie ticket sales.