Read: Strategic Management Cases

Case Study #12 Pixar

Case Study #20 Nintendo: Could the Switch Turn on Gamers?

Prepare a written SWOT analysis for each company using the information provided in the case - a bulleted format is fine. Use your own words and submit your paper in as a word document (.doc) in Canvas.

Be sure to watch sample SWOT Analysis Video on Starbucks.

Starbucks SWOT Analysis Video: https://www.youtube.com/watch?v=mR9eICQJLXA

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CASE12 PIXAR

CASE 12

PIXAR^*

In spite of its domination of Academy Awards for Best Animated Film since the category was introduced in 2001, Pixar has managed to win only once over the last three years. It was overlooked in 2018 for Incredibles 2, although the film broke all records for opening weekend box office revenue for an animated feature film. The $180 million that the film collected over three days was spectacular even by the standards that have been set by Pixar over the years (see Exhibit 1). But as with Finding Dory, the sequel to Finding Nemo that was released a couple of years earlier, the commercial success of the film failed to land the firm with an Academy Award.

EXHIBIT 1 Pixar Films Worldwide Rank 2018

All of Pixar's films released to date have ended up among the top animated films of all time based on worldwide box office revenues in millions of U.S. dollars.
Rank	Title	Year	Revenue($USmillions)
2	Incredibles 2*	2018	$1,243
4	Toy Story 3	2010	$1,065
6	Finding Dory	2016	$1,029
10	Finding Nemo	2003	$940
15	Inside Out	2015	$858
16	Coco	2017	$807
20	Monsters University	2013	$745
21	Up	2009	$735
27	The Incredibles	2005	$630
30	Ratatouille	2007	$620
34	Monsters, Inc	2002	$575
35	Cars 2	2011	$560
38	Brave	2012	$555
39	Wall-E	2009	$535
50	Toy Story 2	1999	$515
57	Cars	2006	$460
64	Cars 3	2017	$383
71	Toy Story	1995	$372
72	A Bug's Life	1998	$365
80	The Good Dinosaur	2015	$333

^*Still playing in theatres around the world (03/2019)Source: IMDB, Variety.

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This loss at the Academy Awards only added to the feelings within Pixar after the forced departure of John Lasseter, who had served as the firm's creative officer since its founding. Because of his influence on the firm, Lasseter had been heralded in the news media as a latter-day Walt Disney. A self-described Peter Pan, Lasseter had long been known for his jolly public persona and tendency to greet anyone in his proximity with lengthy bear hugs. He took a leave in 2017 following complaints about unwanted workplace hugging and then agreed to retire at the end of 2018. Some women had also complained that under Lasseter, Pixar had not offered much opportunity to women and minorities.

Despite the loss of Lasseter, Pixar is confident that it will continue to thrive as part of the Walt Disney Company. It was acquired by Disney in 2006 for the hefty sum of $7.4 billon. The deal had been finalized by the late Steve Jobs, the Apple Computer chief executive who had also served as the head of the computer animation firm. Disney CEO Bob Iger worked hard to acquire Pixar, whose track record has made it one of the world's most successful animation companies.

Both Jobs and Iger had been aware, however, that they must protect Pixar's creative culture while they also try to carry some of this over to Disney's animation efforts. In fact, Jobs had been convinced that Pixar's links with Disney would be mutually beneficial for both firms. In his own words: "Disney is the only company with animation in their DNA."¹ Lasseter, who had been overseeing all story development at Pixar had also denied any negative effects from Disney's acquisition of his firm. He had insisted that, in fact, Pixar's films were increasingly being subjected to higher standards because of its string of successes.

Ed Catmull, president of Pixar reiterated his firm's commitment to take whatever steps may be necessary in order to put out the best possible film. "Nobody ever remembers the fact that you slipped [up in] a film but they will remember a bad film" he said.² Catmull's remarks indicated that Pixar was dedicated to its lengthy process of playfully crafting a film to replace the standard production line approach that had been pursued by Disney. This contrast in culture is best reflected in the Oscars that the employees at Pixar have displayed proudly, but which have been painstaking dressed in Barbie doll clothing.

Pushing for Computer-Animated Films

The roots of Pixar stretch back to 1975 with the founding of a vocational school in Old Westbury, NY, called the New York Institute of Technology. It was there that Edwin E. Catmull, a straitlaced Mormon from Salt Lake City who loved animation but could not draw, teamed up with the people who would later form the core of Pixar. "It was artists and technologists from the very start," recalled Alvy Ray Smith, who worked with Catmull during those years. "It was like a fairy tale."³

By 1979, Catmull and his team decided to join forces with famous Hollywood director, George W. Lucas, Jr. They were hopeful that this would allow them to pursue their dream of making animated films. As part of Lucas's filmmaking facility in San Rafael, California, Catmull's group of aspiring animators made substantial progress in the art of computer animation. But the unit was not able to generate any profits and Lucas was not willing to let it grow beyond using computer animation for special effects.

In 1985 Catmull finally turned to Jobs, who had just been ousted from Apple. Jobs was reluctant to invest in a firm that wanted to make full-length feature films using computer animation. But a year later, Jobs decided to buy Catmull's unit for just $10 million, which represented a third of Lucas's asking price. While the newly named Pixar Animation Studios tried to push the boundaries of computer animation over the next five years, Jobs ended up having to invest an additional $50 millionmore than 25 percent of his total wealth at the time. "There were times that we all despaired, but fortunately not all at the same time," said Jobs.⁴

Still, Catmull's team did continue to make substantial breakthroughs in the development of computer-generated full-length feature films (see Exhibit 2). In 1991, Disney gave Pixar a three-film contract that started with Toy Story. When the movie was finally released in 1995, its success surprised everyone in the film industry. Rather than the nice little film Disney had expected, Toy Story became the sensation of 1995. It rose to the rank of the highest grossing animated film for the year, earning $722 million in worldwide box office revenues.

EXHIBIT 2 Milestones

1986	Steve Jobs buys Lucas's computer group and christens it Pixar. The firm completes a short film, Luxo Jr., which is nominated for an Oscar.
1988	Pixar adds computer-animated ads to its repertoire, making spots for Listerine, Lifesavers, and Tropicana. Another short, Tin Toy, wins an Oscar.
1991	Pixar signs a production agreement with Disney. Disney is to invest $26 million; Pixar is to deliver at least three full-length, computer-animated feature films.
1995	Pixar releases Toy Story, the first fully digital feature film, which becomes the top-grossing movie of the year and wins an Oscar. A week after release, the company goes public.
1997	Pixar and Disney negotiate a new agreement: a 50-50 split of the development costs and profits of five feature-length movies. Short Geri's Game wins an Oscar.
1998-99	A Bug's Life and Toy Story 2 are released, together pulling in $1.3 billion through box office and video.
2001-04	A string of hits from Pixar: Monsters Inc., Finding Nemo, and The Incredibles.
2006	Disney acquires Pixar and assigns responsibilities for its own animation unit to Pixar's creative brass. Cars is released and becomes another box office hit.
2008	Wall-E becomes the fourth film from Pixar to receive the Oscar for a feature-length animated film.
2009	Up becomes the Fifth film from Pixar to receive the Oscar for a feature-length animated film.
2011	Toy Story 3 receives five Oscar nominations and wins two, including one for Best Animated Film.
2011	Steve Jobs dies, leaving Ed Catmull in charge.
2013	Brave becomes the seventh film from Pixar to receive an Oscar for Best Animated Film.
2015	Inside Out becomes the eighth film from Pixar to receive an Oscar for Best Animated Film.
2016	Piper received a nomination for an Oscar for Best Animated Short Film.
2017	Coco wins two Oscars in categories for Best Animated Film and Best Original SongPixar's ninth film to receive an Oscar for Best Animated Film.
2018	Incredibles 2 sets the record for best debut for an animated film of all time, eventually grossing over $1.2 billion dollars worldwide. The film has also received a nomination for the Best Animated Feature.
2018-19	Lasseter steps down after accusations of sexual harassment toward employees; Ed Catmull and Lee Unkrich announce their retirements; Pete Docter and Jennifer Lee become new chief creative officers of Disney's animation divisions.

Source: Pixar.

Within days, Jobs had decided to take Pixar public. When the shares, priced at $22, shot past $33, Jobs called his best friend, Oracle CEO Lawrence J. Ellison, to tell him he had company in the billionaire's club. With Pixar's sudden success, Jobs returned to strike a new deal with Disney. Early in 1996, at a lunch with Walt Disney chief Michael D. Eisner, Jobs made his demands: an equal share of the profits, equal billing on merchandise and on-screen credits, and guarantees that Disney would market Pixar films as they did its own.

Boosting the Creative Component

With the success of Toy Story, Jobs realized that he had hit something big. He obviously had tapped into his Silicon Valley roots and turned to computers to forge a unique style of creative moviemaking. In each of their subsequent films, Pixar has continued to develop computer animation that has allowed for more lifelike backgrounds, texture, and movement than ever before. For example, since real leaves are translucent, Pixar's engineers developed special software algorithms that both reflect and absorb light, creating luminous scenes among jungles of clover.

In spite of the significance of these advancements in computer animation, Jobs was well aware that successful feature films would require a strong creative spark. He understood that it would be the marriage of technology with creativity that would allow Pixar to rise above most of its competition. To get that, Jobs fostered a campus-like environment within the newly formed outfit similar to the freewheeling, charged atmosphere in the early days of his beloved Apple, where he also returned as acting CEO. "It's not simply the technology that makes Pixar," said Dick Cook, former President of Walt Disney studios.⁵

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Even though Jobs did play a crucial supportive role, it is Catmull that has been mainly responsible for insuring that the firm's technological achievements help to pump up the firm's creative efforts. He has been the keeper of the company's unique innovative culture, which has blended Silicon Valley techies, Hollywood production honchos, and artsy animation experts. In the pursuit of Catmull's vision, this eclectic group has transformed their office cubicles into tiki huts, circus tents, and cardboard castles with bookshelves that are stuffed with toys and desks that are adorned with colorful iMac computers.

One of Catmull's biggest achievements has been the creation of what is called the Pixar Braintrust (see Exhibit 3). This creative group of employees, which includes directors, meets on a regular basis to assess each movie that the firm is developing and offer their ideas for improvement. It is such an emphasis on creativity that has kept Pixar on the cutting edge. Each of their films has been innovative in many respects and has made the best possible use of computer animation. "They're absolute geniuses," gushed Jules Roman, co-founder and CEO of rival Tippett Studio. "They're the people who created computer animation really."⁶

EXHIBIT 3 Sample of Roles

Ed Catmull*	President, producer
Pete Docter	Chief creative officer, producer, director, writer
Jim Morris	Business manager
Brad Bird	Director, writer
Harley Jessup	Production designer
Bill Cone	Production designer
Ricky Nierva	Production designer, art director, character designer
Ralph Eggleston	Art director
Randy Barrett	Character designer, set designer, matte painter
Tia Kratter	Shading art director, digital painter
Bob Pauley	Character designer, sketch artist
Jay Shuster	Character and environment designer

^*Retired 07/2019

Source: Pixar.

Catmull has also been working hard to build upon this pursuit of creative innovation by creating programs to develop the employees. Employees are encouraged to devote up to four hours a week, every week, to further their education at Pixar University. The in-house training program offers 110 different courses that cover subjects such as live improvisation, creative writing, painting, drawing, sculpting, and cinematography. For many years, the school's dean was Randall E. Nelson, a former juggler who has been known to perform his act using chainsaws so students in animation classes have something compelling to draw.

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Becoming Accomplished Storytellers

A considerable part of the creative energy goes into story development. Jobs had understood that a film works only if its story can move the hearts and minds of families around the world. His goal was to develop Pixar into an animated movie studio that becomes known for the quality of its storytelling above everything else. "We want to create some great stories and characters that endure with each generation," Jobs had stated.⁷

For story development, Pixar relied heavily on John Lasseter, who went by the title of vice-president of the creative. Known for his collection of 358 Hawaiian shirts and his irrepressible playfulness with toys, Lasseter had been the key to the appeal of all of Pixar's films. Lasseter would get very passionate about developing great stories and then harnessing computers to tell these stories. Most of Pixar's employees believed that it was this passion that allowed the studio to ensure that each of its films has been a commercial hit. In fact, Lasseter had been widely regarded as the Walt Disney for the 21st century.

When it was time to start a project, Lasseter would isolate a group of eight or so writers and direct them to forget about the constraints of technology. The group would bounce ideas off each other, taking collective responsibility for developing a story. While many studios try to rush from script to production, Lasseter took up to two years just to work out all the details. Once the script had been developed, artists created storyboards that connected the various characters to the developing plot. "No amount of great animation is going to save a bad story," he said. "That's why we go so far to make it right.⁸

Only after the basic story had been set would Lasseter begin to think about what was needed from Pixar's technologists. And it was always more than the computer animators expected. Lasseter, for example, demanded that the crowds of ants in A Bug's Life not be a single mass of lookalike faces. To solve the problem, computer expert William T. Reeves developed software that randomly applied physical and emotional characteristics to each ant. In another instance, writers brought a model of a butterfly named Gypsy to researchers, asking them to write code so that when she rubs her antennas, you can see the hairs press down and pop back up.

At any stage during the process, Lasseter would revisit potential problems that he might see with the story. In A Bug's Life, for example, the story was totally revamped after more than a year of work had been completed. Originally, it was about a troupe of circus bugs run by P.T. Flea that tries to rescue a colony of ants from marauding grasshoppers. But because of a flaw in the storywhy would the circus bugs risk their lives to save stranger ants?co-director Andrew Stanton recast the story to be about Flik, the heroic ant who recruits Flea's troupe to fight the grasshoppers. "You have to rework and rework it," explained Lasseter. "It is not rare for a scene to be rewritten as much as 30 times."⁹

Pumping Out the Hits

In spite of its formidable string of hits, Pixar has had difficulty in stepping up its pace of production. Although they may cost 30 percent less, computer-generated animated films do still take considerable time to develop. Furthermore, because of the emphasis on every single detail, Pixar used to complete most of the work on a film before moving on to the next one. Catmull and Lasseter then decided to work on several projects simultaneously, but the firm has not been able to release more than one movie in a year.

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In order to push for an increase in production, Pixar has built up its workforce to well over 1,000 employees. It is also turning to a stable of directors to oversee its movies. Lasseter, who directed Pixar's first three films, supervised other directors who are taking helm of various films that the studio chooses to develop. Monsters Inc., Finding Nemo, The Incredibles, Ratatouille, and Brave were directed by some of this new talent. But there are concerns about the number of directors that Pixar can rely upon to turn out high-quality animated films. Michael Savner of Banc of America Securities commented: "You can't simply double production. There is a finite amount of talent."¹⁰

To meet the faster production pace, Catmull has also added new divisions including one to help with the development of new movies and one to oversee movie development shot by shot. The eight-person development team has helped to generate more ideas for new films. "Once more ideas are percolating, we have more options to choose from so no one artist is feeling the weight of the world on their shoulders," said Sarah McArthur, who served as Pixar's vice president of production.¹¹

Finally, Catmull has been overseeing the development of new animation software, called Luxo. Luxo has allowed him to use fewer people to address various challenges that must be faced. During the production of Brave, for example, the animators had to make the curly hair of the main character appear to be natural. Claudia Chung, who worked on the film, talked about their reaction to various methods they kept trying: "We'd kind of roll our eyes and say, 'I guess we can do that,' but inside we were all excited, because it's one more stretch we can do."¹²

At the same time, Catmull also understands that the high standards of the firm cannot be compromised for the sake of a steady flow of films. This was evident in their decision to delay the launch of The Good Dinosaur a few years ago because they wanted to rethink the film in order to ensure it would work well. Everyone at Pixar remains committed to the philosophy of Jobs that every one of Pixar's films should grow out of the best efforts of the firm's animators, storytellers, and technologists. "Quality is more important than quantity," he emphasized. "One home run is better than two doubles."¹³

In order to preserve its high standards, Catmull has been working hard to retain Pixar's commitment to quality even as it grows. He has been using Pixar University to encourage collaboration among all employees so that they can develop and retain the key values that are tied to their success. And he has helped devise ways to avoid collective burnout. A masseuse and a doctor now come by Pixar's campus each week, and animators must get permission from their supervisors if they want to work more than 50 hours a week.

To Infinity and Beyond?

As Pixar moves forward, it will do so without the guidance of John Lasseter. However, everyone at Pixar understands that a large part of their success can be attributed to the talent the firm is able to recruit and train to work together. This leads to a continuous exchange of ideas and fosters a collective sense of responsibility on all their projects. "We created the studio we want to work in," Lasseter had remarked. "We have an environment that's wacky. It's a creative brain trust: It's not a place where I make my moviesit's a place where a group of people make movies."¹⁴

Lasseter has been replaced by Pete Docter, a 28-year Pixar veteran who directed three of its most successful filmsUp, Inside Out, and Monsters, Inc.and helped write the screenplays for Toy Story and Wall-E. Docter expressed confidence in the future of Pixar, stating: "Together, we will keep pushing animation in new directions."¹⁵ He will work alongside relative newcomer Jennifer Lee, who will take charge of the revered Walt Disney Animated Studios.

Under Docter's leadership, Pixar released Toy Story 4, one of its most anticipated films in the summer of 2019. It allowed the firm to show its stellar storytelling and dedication toward their work. The fourth installment of the world's first computer-animated feature film arrived after nearly a nine-year gap since Toy Story 3 and more than two decades after the original. Its release was delayed by problems with its development, leading to changes among the individuals who were involved with its story and screenplay. Nevertheless, it received both critical acclaim and success at the box office, pulling in over $1 billion worldwide. ¹⁶

However, Pixar now faces another transition since Ed Catmull, who spearheaded the firm's development, stepped down as president in July 2019. Catmull minimized the impact of his departure: "I have mixed emotions that come with the sadness that comes with stepping away from a group of people I love, but also with the utmost pride and pleasure that we now have at both Pixar and Disney the most dedicated and imaginative leaders that I have worked with."¹⁷

Think about how off-putting a movie about rats preparing food could be, or how risky it must've seemed to start a movie about robots with 39 dialogue-free minutes. We dare to attempt these stories, but we don't get them right on the first pass. This is as it should be.

-Ed Catmull from his book, Creativity, Inc, published in 2014

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CASE20 NINTENDO: COULD THE SWITCH TURN ON GAMERS?

CASE20

NINTENDO: COULD THE SWITCH TURN ON GAMERS?^*

The Nintendo Switch is a gaming console that comes with a pair of new and innovative controllers called Joy-Con Controllers, a hybrid of an attachable game pad and a controller that could be used separately for multiplayer game play. When it was introduced in 2017, Nintendo's management was highly optimistic about the Switch, and Nintendo believed that it could sell about 10 million units of Switch consoles within a year after the launch.¹As of January 2019, Nintendo's latest gaming console Nintendo Switch had exceeded 32 million units sold, and software sales for the console had reached 163.61 million units.²A pair of Joy-Cons was included in the $299.99 price tag of the Switch console. The Joy-Con came in two color options for customers to choose from, one grey and red/blue and the other grey and black. A more innovative feature in the new gaming console was that it could be transformed into a 6.2-inch high-definition on-the-go gaming screen if a user decided to move away from the TV.

The Switch console also marked the release of Nintendo Switch's very first epic game called "The Legend of Zelda: Breadth of the Wild," which could be played both on Switch and Wii U consoles for a price of $59.99. Nintendo of America's COO and president, Reggie Fils-Aime, said, "Nintendo Switch makes it easy for anyone to enjoy their games in the living room and then quickly take them on the go."³The new gaming console design meant that console-gaming was not only limited to one stationary TV anymore and could be experienced anywhere anytime.

The launch of Nintendo's Switch caught the attention of consumers and mostly received a positive response, but apparently the news did not impress the investors, leaving the company's stock tumbling. This may have reflected concerns regarding the battery life of the portable console, its price, and third-party support. Nevertheless, a flood of customer orders led to stock shortages in stores like GameStop and Toys R Us, among others. Addressing the stock shortage, Reggie Fils-Aime said, "our focus is making sure that the consumer who wants to buy a Nintendo Switch can buy a Nintendo Switch."⁴The initial plan had been to ship 2 million consoles. Nintendo decided to double the production to deal with the shortage and meet the strong demand. The stocks had surged high by mid-2018, a year after Nintendo Switch's launch. According toThe Wall Street Journal,to meet demand for one year out (ending April 2018), the company's management decided to manufacture 16 million Switch consolesdouble the yearly quantity of 8 million units, Nintendo's traditional production target.⁵

One of the key topics of discussion in the popular press was whether or not the Switch console defined the "next generation" of gaming. This echoed similar press concerns after the launch of Nintendo's previous console, the Wii U. Prior to the launch of the Switch, its predecessor the Nintendo Wii U console had been on the market for only a short while, with the addition of innovative controls and new game titles. Then there had been uncertainty among industry experts, such as Gabrielle Shrager of Ubisoft and Mikael Haveri of Frozenbyte, as to whether or not the improved power and new controller interface justified that system's being considered a "new"generation.⁶

The Wii U initially was launched with 50 available games and a new controller interface, termed the GamePad. While the GamePad offered a new take on the Wii's controls, the new console was still compatible with the same motion-sensing controllers of the original Wii. However, the Wii U console was not sold with these controllers included. Instead, it came with just one of the new GamePads. Incorporating traits from tablet devices, the GamePad integrated both traditional input methods such as buttons, dual analog sticks, and a D-pad (directional pad)and a touchscreen. The touchscreen could be used to supplement a game by providing alternative functionality or an alternative view of a scenario in a game. With the Off-TV Play function, the screen could also be used to play a game strictly on the GamePad screen, without the use of a television display at all. With the Wii U console turned on, the GamePad could be used to display the same picture on its screen as would be seen using a TV display. There were also nongaming functions, such as the ability to use the GamePad as a television remote. While Nintendo was the first of the competitors to release its new gaming console, there was no doubt that both Sony's PlayStation and Microsoft's Xbox would be close behind in releasing their own upgraded systems.

Although Nintendo is slightly behind in comparison to competitors, the company saw a significant improvement in its net sales after Nintendo Switch (seeExhibits 1and2).

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EXHIBIT 1Income Statement

	Year Ended March 31
	2018	2019
	(Millions of yen)	(Millions of yen)	(Millions of dollars)
Net sales	1,055,682	1,200,560	10,914
Cost of sales	652,141	699,370	6,357
Gross profit	403,540	501,189	4,556
Selling, general and administrative expenses	225,983	251,488	2,286
Operating income	177,557	249,701	2,270
Non-operating income
Interest income	9,064	13,131	119
Foreign Exchange gains	-	5,426	49
Share of profit of entities accounted for using equity method	10,318	6,949	63
Other	4,126	2,807	25
Total non-operating income	23,509	28,315	257
Non-operating expenses
Sales discounts	-	-	-
Foreign exchange losses	766	-	-
Loss on redemption of securities	794	440	4
Other	150	221	2
Total non-operating expenses	1,710	662	6
Ordinary income	199,356	277,355	2,521
Gain on sales of non-current assets	821	1	0
Gain on sales of investment securities	490	0	0
Reversal of loss on litigation	1,929	-	-
Total extraordinary income	3,240	1	0
Impairment loss	-	4,622	42
Loss on disposal of non-current assets	366	278	2
Loss on sales of investment securities	2	0	0
Loss on valuation of investment securities	-	682	6
Loss on litigation	1,138	-	-
Total extraordinary losses	1,507	5,584	50
Profit before income taxes	201,090	271,772	2,470
Income taxes - current	56,977	88,137	801
Income taxes - deferred	3,167	(10,932)	(99)
Total income taxes	60,144	77,204	701
Profit	140,945	194,568	1,768
Profit attributable to non-controlling interests	1,354	558	5
Profit attributable to owners of parent	139,590	194,009	1,763

*1 USD = 112.3095 JPY as of March 31, 2019

Source: Financial Morning Star.

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EXHIBIT 2Balance Sheet

	Year Ended March 31
	2018	2019
	(Millions of yen)	(Millions of yen)	(Millions of dollars*)
Assets
Current assets
Cash and deposits	744,555	844,550	7,677
Notes and accounts receivable - trade	69,829	78,169	710
Securities	243,431	238,410	2,167
Inventories	141,795	135,470	1,231
Other	66,405	48,453	440
Allowance for doubtful accounts	(87)	(82)	(0)
Total current assets	1,265,929	1,344,972	12,227
Non-current assets
Property, plant and equipment
Buildings and structures, net	36,094	37,592	341
Machinery, equipment and vehicles, net	1,450	1,575	14
Tools, furniture and fixtures, net	3,915	4,015	36
Land	41,812	38,223	347
Construction in progress	653	143	1
Total property, plant and equipment	83,926	81,550	741
Intangible assets
Software	11,487	11,962	108
Other	2,533	2,128	19
Total intangible assets	14,020	14,090	128
Investments and other assets
Investment securities	198,538	167,134	1,519
Deferred tax assets	37,094	57,992	527
Net defined benefit asset	7,931	7,056	64
Other	15,503	17,536	159
Allowance for doubtful accounts	(30)	(29)	(0)
Total investments and other assets	259,037	249,690	2,269
Total non-current assets	356,984	345,331	3,139
Total assets	1,633,748	1,690,304	15,366
Liabilities
Current liabilities
Notes and accounts payable - trade	138,015	59,689	542
Income taxes payable	43,390	62,646	569
Provision for bonuses	3,217	3,891	35
Other	93,452	118,781	1,079
Total current liabilities	278,076	245,009	2,227
Non-current liabilities
Net defined benefit liability	16,609	15,068	136
Other	15,487	15,427	140
Total non-current liabilities	32,097	30,496	277
Total liabilities	310,173	275,505	2,504
Net assets
Shareholders' equity
Capital stock	10,065	10,065	91
Capital surplus	13,742	12,069	109
Retained earnings	1,564,240	1,556,881	14,153
Treasury shares	(250,679)	(156,755)	(1,425)
Total shareholders' equity	1,337,369	1,422,260	12,929
Accumulated other comprehensive income
Valuation difference on available-for-sale securities	16,402	17,665	160
Foreign currency translation adjustment	(34,736)	(30,214)	(274)
Total accumulated other comprehensive income	(18,334)	(12,548)	(114)
Non-controlling interests	4,540	5,086	46
Total net assets	1,323,574	1,414,798	12,861
Total liabilities and net assets	1,633,748	1,690,304	15,366

*1 USD = 112.3095 JPY as of March 31, 2019

Source: Nintendo Annual Report 2018.

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Background

Although Nintendo dated back to 1889 as a playing-card maker, Nintendo's first video-game systems were developed in 1979 and known as TV Game 15 and TV Game 6.⁷In 1980, Nintendo developed the first portable LCD video game with a microprocessor. In 1985, Nintendo created the Nintendo Entertainment System (NES), an 8-bit video game console. The original NES was very successful, as its graphics were superior to any home-based console available at the time. As a result, more than 60 million units were sold worldwide.⁸The NES set the bar for subsequent consoles in platform design, as well as for accepting games that were manufactured by third-party developers.

When competitors began developing 16-bit devices, such as Sega's Genesis system and NEC's PC Engine, Nintendo responded with its own 16-bit system, the Super Nintendo Entertainment System (SNES). The Super Nintendo was released in 1991 and, when purchased, came with one gameSuper Mario World. In 1996, Nintendo released Nintendo 64. The Nintendo 64 was the company's third-generation video game console and was named after the 64-bit processor. During its product lifetime, more than 30 million Nintendo 64 units were sold worldwide.⁹

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The Nintendo 64, like its predecessors, used cartridges to play its games, but at the time the competing Sony and Sega systems were using CDs for game storage. Cartridges could store 64 megabytes of data, while CDs could store around 700 megabytes. Also, CDs were much cheaper to manufacture, distribute, and create; the average cost of producing a Nintendo 64 cartridge was $25, compared to 10 cents to produce a CD. Game producers passed the higher expense to the consumer, which explained why Nintendo 64 games tended to sell for higher prices than Sony PlayStation games. While most Sony PlayStation games rarely exceeded $50, Nintendo 64 titles could reach $70. To increase profits and to take advantage of the programming possibilities of the larger storage space, many third-party game developers that had traditionally supported Nintendo platforms began creating games for systems that used a CD platform (such as the PlayStation).¹⁰

In 2001, Nintendo released its GameCube, which was part of the sixth-generation era of video game systems. These systems included Sony's PlayStation 2, Microsoft's Xbox, and Sega's Dreamcast. Although the GameCube did not use cartridges, Nintendo began producing its games using a proprietary optical-disk technology. This technology, while similar in appearance to CDs, was actually smaller in diameter and could not be played using a standard CDplayer.

When Nintendo released the Wii video game console in 2006, it was already in the midst of a very competitive market. The previous generation of video game consoles consisted of the Sega Dreamcast, Sony PlayStation 2, Nintendo GameCube, and Microsoft Xbox. These systems were all released between 1999 and 2001 in the United States, and although the GameCube sold more systems than did the Sega Dreamcast, it fell into third place behind the PlayStation 2 and the Xbox. The PlayStation 2 sold more than 115 million units worldwide, more than twice the combined unit sales of the GameCube and Xbox (21 million and 24 million, respectively).

By 2019, Nintendo had gone beyond its Nintendo 3DS and Wii U, and was banking on Nintendo Switch to beat the competition. But it was accompanied by rumors of a PlayStation 5 that was set to release in 2021. In May 2018, Sony Interactive Entertainment CEO John Kodera told reporters, "We will use the next three years to prepare the next step, to crouch down so that we can jump higher into the future." This came shortly after he remarked that the PS4 was entering the "final phase of its life cycle."¹¹

The TermWii

In 2006, Nintendo released its direct successor to the GameCube, the Wii (pronounced "we"). There were many reasons cited as to why the nameWiiwas chosen, but perhaps the most compelling reason was that "'Wii' sounded like 'we,' which emphasized that the console was for everyone. Wii could be remembered easily by people around the world, no matter what language they spoke. No confusion."¹²Initially the system was known by its code name, Revolution, but later the name was changed to Wii. Nintendo stated that it wanted to make the Wii a system that would make anyone who tried it talk to his or her friends and neighbors about it.¹³

The Making of the Remote

The original Wii was created to establish a new standard in game control, using an innovative and unprecedented interface, the Wii Remote.¹⁴The Wii Remote was what made the Wii unique. The remote acted as the primary controller for the Wii. Its motion-sensor capabilities allowed the user to interact with and manipulate objects on the screen by moving and pointing the remote in various directions. The Wii Remote was the size of a traditional remote control, and it was "limited only by the game designer's imagination."¹⁵For example, in a game of tennis it served as the racket when the user swung his or her arm, while in a shooting game it served as the user's gun. Not only did the remote serve as a controller, but it also had a built-in speaker and a rumble feature for even greater tactile feedback and game involvement.Exhibit 3shows the Wii and Wii Remote.

EXHIBIT 3Wii Console and Remote

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Jill Braaten/McGraw-Hill Education

The second part of the Wii Remote innovation was the Wii Nunchuk. The Nunchuk was designed to perfectly fit the user's hand, and it connected to the remote at its expansion port. The Nunchuk had the same motion-sensing capabilities that the remote had, but it also had an analog stick to help the user move his or her characters. The ambidextrous nature of the Wii controllers was something seldom seen in other game controllers; the Wii controllers permitted the user to hold the remote and Nunchuk whichever way felt most comfortable.¹⁶In addition to the analog stick, the Nunchuk had two buttons that gave the user quick access to other game functions. Thus, the Nunchuk offered some of the benefits of a standard game controller coupled with the high-technology motion sensors of the remote. Users could hold a Nunchuk in one hand and the Wii Remote in the other while playing the Wii Sports boxing game and be transported into the boxing ring with on-screen opponents. The game controls were intuitive for jabs and punches. (However, a missed block did not hurt as much as if one were really in the boxing ring.)

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While the Wii U was still compatible with the original Wii controllers, Nintendo revamped the controller usability when designing the Wii U. The new GamePad sold with the Wii U allowed the user to be more in touch with the game and provided more depth by offering multi-perspective capabilities on the Pad's screen. While using the TV display, players could now multitask within a game by using a variety of functions on their controller and could even play using solely the GamePad, with no TV display necessary. With the game console turned on, players had the option of using the GamePad as their main viewing screen, without the need for a TV monitor display (seeExhibit 4).

EXHIBIT 4Wii U GamePad Controller

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Stefano Tinti/Shutterstock

Nintendo Switch Features

Nintendo Switch came with a portable game console with a built-in screen, a pair of Joy-Con controllers, Joy-Con Straps, a Joy-Con grip, and a Nintendo Switch dock. The controllers' straps were detachable from the grip to be used with the portable screen to turn the Switch into a portable video game. The 6.2-inch detachable screen console came with a standard USB plug for charging. Along with the traditional method of playing games by using buttons, the Joy-Cons could also be used for motion-sensitive games just like their predecessors. Nintendo also offered an additional controller called Nintendo Switch ProController, which could be bought separately at a price of $69.99; it had the same features as Joy-Con, but looked like a traditional gaming controller. This was not the first time Nintendo had surprised the market with such a new design. For instance, the company had done it in the past when it introduced motion-sensitive controllers. However, this time, in a way, Nintendo had combined the GamePad controller with the Wii U console to design the Switch. Gamers could play games by attaching the Nintendo Switch dock with the TV or could convert it into a portable handheld game by attaching the controller straps with the 6.2-inch high-definition screen (720p), which also included a kick-stand to be placed on a flat surface and multi-touch features for various compatible games to enhance the gaming experience. The gamers could also take a screenshot of the game they played using a capture button on the left Joy-Con, which users could then share with their friends or put on social media. Similar to the past Nintendo controllers, both Joy-Cons included the motion controls (seeExhibit 5).

EXHIBIT 5Switch Console and Joy-Con Controller

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Dmitry Loshkin/123RF

Switch supported the Nintendo eShop, an online game store that could be used to download games from different publishers and developers. Switch also supported the games by third-party publishers including Electronic Arts, Activision, and Ubisoft, among others. The user interface of the Switch software was a UI design. The home screen displayed several different icons, including icons for featured games, settings, controllers, albums (screenshots, videos), Nintendo eShop, and options. Users could make different player profiles to sign in to maintain exclusive game progress similar to what most people do using their personal computers. The top right corner of the screen showed battery status along with the time.

Prior to Nintendo Switch, the company had introduced Amiibo figurines that depicted popular Nintendo characters, and each contained a wireless antenna and flash memory. They allowed consumers to include digital versions of their favorite characters in compatible video games. Nintendo's first round of Amiibo characters were Mario, Peach, Yoshi, Donkey Kong, Link, Fox, Samus, Wii Fit Trainer, Villager, Pikachu, Kirby, and Marth. By 2019, the company had introduced a number of new games for Nintendo Switch including The Legend of Zelda: Breadth of the Wild, Super Mario Maker 2, Pokmon Quest, and a few others. In March 2019, it released the updated version of its latest game, Yoshi's Crafted World.

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In the past, Nintendo had hoped to penetrate the segment and boost sales of its Wii U console and 3DS handheld in the process. However, in 2017, the company combined both Wii U console and 3DS into a single gaming platform that was Nintendo Switch. The results for the fiscal year ended December 31, 2018 show a very positive trend in global hardware sales for Nintendo Switch, which sold a total of 32.27 million units during this fiscal year.¹⁷

Demographics

According to Nintendo, one of the key differences between the Switch and competitors' systems was the broad audience that the Switch targeted. Many of the Switch games could be played by people of all ages and experience, and the Switch's Joy-Cons were easier to use than the complicated controllers of the Sony PlayStation 4 or Microsoft's Xbox One. Nintendo's TV commercials for the Switch showed people playing the Switch at home by connecting the game console to TV and outdoors by connecting the Joy-Cons with the portable screen. According to the company, the Switch offered something for both the advanced gamer and the person who had never played a video game before. The advanced gamer would enjoy the remote's unique features, whereas the novice gamer could use the remote as his or her hand and would not need elaborate instructions on how to play a new game straight out of the box.

Although the Nintendo games were easily played by a greater range of ages and featured improved graphics, the company's competitors Xbox and Sony were offering 4K resolutions, best in the market at the time. While Nintendo hoped to target people of all ages, it had long been seen as a system that made video games for children, as evident from its Mario, Zelda, and Donkey Kong series. However, despite the limitation of this reputation, the innovation and uniqueness of its game play were enough to lure the masses, and sales were excellent.

Success, of course, bred competition. Upon seeing the success of the movement-sensing Switch, Microsoft and Sony moved quickly to release competing systems. Microsoft released its Kinect for the Xbox, while Sony released the Move for the PlayStation. Both the Move and Kinect used camera systems for their motion detectors, but in different ways. Move's camera sensed the movement of the light-up Move controller, whereas Microsoft's Kinect sensor tracked skeletal motion, eliminating the need for a controller.¹⁸While it was inevitable that gamers would have their favorite of the bunch, the relevant point was that it didn't take long for Microsoft and Sony to catch up to Nintendo. They moved forward to the new generation(s) of gaming quickly, maintaining an even playing field among competitors for gamer interaction and motion detection.

In the Game Developers Conference (GDC) 2019, Nintendo, along with its other competitors, witnessed another player in the marketGoogle. Google unveiled Stadia, a cloud gaming service that streams games from the cloud to all types of devices including the Chrome browser, Chromecast, and pixel devices.

Gaining the Interest of Game Developers

As evident from the history of game consoles, game developers had tried to make games more and more complex with each new generation of systems. This meant that more money was invested in the production of each subsequent generation of games. Because game developers were spending more money on developing games, they were at great financial risk if games did not succeed. Thus, many developers felt more secure in simply creating sequels to existing games, which restrained innovation. The Switch's innovative controller, the Joy-Cons, now required a rethinking and reengineering of the human interface by game developers and programmers. Another issue with developing games for the Switch was that its graphics were not quite as good as those of the PlayStation 4 and Xbox One, and therefore game developers had to be more creative and develop special Switch editions of their games.

Many game developers used virtual-machine software in developing new games. It was believed that game developers could develop games for the Switch and then make them for other platforms on the basis of the same programming, thereby reducing production costs. However, while the Joy-Con distinguished itself from its competitors, it created a hurdle for developers. When developers created a game for the PlayStation, they could create the same game for the Xbox and vice versa. When developers created a game for the Switch, however, it required significant rework to deploy the title for the other platforms. Converting a title from the Xbox or PlayStation also required significant work to modify the game to incorporate code for the Joy-Con's special features.

While this uniqueness had served Nintendo well in the past, the Joy-Con's incompatibility with the likes of Microsoft and Sony limited the selection of games immediately available to the Nintendo Switch's audience. The selection of games had to be fulfilling enough to keep Nintendo's audience happy, without leaving them feeling like they were missing out on games available only on the other platforms.

The Competition

If the launch of Nintendo's Switch was a foray into the fierce competition among such existing models as Xbox One and PS4, Switch's competitors were offering many features that Nintendo did not. The price of $299 for the basic Switch included a portable game console with a built-in screen, a pair of Joy-Con controllers, Joy-Con Straps, a Joy-Con grip, and a Nintendo Switch dock. The price of the PlayStation 4 was also $299 (500 GB edition), and the new Xbox One was $229. At a base price of $299 the Switch was intended to compete with the upper echelon of the next generation of gaming consolesunlike the low-cost position of the original Wii. Apart from pricing, there were many differences among the performance specifications of Switch in comparison to its fiercest competitors (for examples, seeExhibits 6and7).

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EXHIBIT 6Game Systems Comparison, 2019

Feature	Switch	Xbox One	PS4
CPU: Cores	4x ARM Cortex A57	8x AMD Jaguar	8x AMD Jaguar
CPU: Clock speed	1,020MHz	1,750MHz	1,600MHz
CPU: Cores	256 Nvidia CUDA	768x AMD Shaders	1152 AMD shaders
CPU: Docked speed	768MHz	853MHz	800MHz
CPU: Undocked speed	307.2MHz	N/A	N/A
HDR	No	Yes (One S)	Yes
Memory	4GB	8GB	8GB
Storage	32GB flash (microSD-expandable)	500GB HDD	500GB HDD
Physical game formats	Game Card	Disc	Disc
USB ports	2x USB2, 1x USB3.0	3x USB 3.0	2x USB 3.1 (gen1)
Video output	HDMI	HDMI	HDMI (HDR supported)
Audio ports	None	Optical	Optical
Networking ports	None	Gigabit Ethernet	Gigabit Ethernet
Power consumption	Unknown	~125W	~140W

Source: Passingham, Michael. Nintendo Switch vs Xbox One and PS4 - How do they compare? Trusted Reviews, December 17, 2018.

EXHIBIT 7Game Controllers Comparison, 2019

Feature	Joy-Con pair	Switch Pro	Xbox One	PS4	PS4 Move pair
Control buttons	18 touchscreen	18	17	17 touch	18
Analogue sticks	2	2	2	2	2
Vibration	Yes	Yes	Yes	Yes	Yes
Wireless	Yes	Yes	Yes	Yes	Yes
Battery capacity	525mAh (each)	1300mAh	N/A	l000mAh	1520mAh (each)
Battery life	20h (official)	40h (official)	Variable	~7h	~10h
Motion controls	Yes	Yes	No	Yes	Yes
IR camera	Yes	No	No	No	No
Removable batteries***	No	No	Yes	No	No
Play and charge	Yes*	Yes	Yes**	Yes	Yes
Headphone jack	No	No	Yes	Yes	No

*With optional Charge Grip

**Play-and-charge kit available

***Without voiding warranty

Source: Passingham, Michael. Nintendo Switch vs Xbox One and PS4 - How do they compare? Trusted Reviews, December 17, 2018.

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Microsoft Xbox One

In 2019, Microsoft was investing in new services like Mixerwhich blurs the line between watching and playingand Game Pass, a new unlimited subscription service.¹⁹The company released Xbox One S and Xbox One X in August 2016 and November 2017, and investing aggressively in content, community and cloud services across every endpoint to expand usage and deepen engagement with gamers. The latest Xbox One X was available at two different prices: $150 for the 500-GB model and $399 for the 1-TB model, as of 2019.

One of the important features of the Xbox One was Xbox Live. This feature allowed individuals to play online against other users around the world. Thus, Microsoft had created a community of individuals who were able to communicate with one another by voice chats and play against each other in a video game. In 2019, Xbox live had 57 million monthly users. Another service offered by Xbox Live was the Xbox Live Marketplace, which enabled users to download movies, game trailers, game demos, and arcade games. It was estimated that more than 70 percent of connected Xbox users were downloading content from the Xbox Live Marketplace, totaling more than 8 million members.

Microsoft introduced Kinect for Xbox One in 2014, which was based around a webcam-style add-on peripheral for the Xbox One console. It enabled users to control and interact with the Xbox One using gestures and spoken commands, without the need to touch a game controller. Kinect allowed the Xbox One to seethe user and act according to the user's motions and gestures. This took the concept of the Wii and pursued it to its natural culmination, making the user the game controller. Kinect used software technology that enabled advanced gesture recognition, facial recognition, and voice recognition. Some critics believed that the concept used by Kinect had potential far beyond games and might even become a new way of controlling computers of all kinds. It automatically identified who one player was and paused when the player left its vicinity, so it was not hard to imagine this ingenuity controlling all kinds of devices, such as a PC, smartphone, or tablet.²⁰Microsoft also released Xbox One S following the release of Xbox One. The Xbox One S was more compact in design, lighter in weight, had slight performance and graphic improvement, and supported better HDMI connectivity options. However, these changes were not so significant that critics would count Xbox One S as a next generation Xbox.

Sony PlayStation 4

In April 2019, Sony unveiled the details of its upcoming consolePlayStation 5. PlayStation lead system architect Mark Cerny spoke about the PS4's successor. While mentioning that the next-gen is backwards-compatible, Cerny also revealed that it is not an all-digital device, and will accept physical discs.²¹The last console, PlayStation 4 was released in November 2013. As of 2019, it is available at two different prices in two variations: PlayStation 4 Pro was priced at $400 with 4K resolution, and PlayStation 4 was priced at $300 with Blu-ray video quality. The PS4 included 8 GB of GDDR5 memory, which enabled rapid performance. Also, a player could use the loading power of this memory to power down the PS4 mid-game and then later turn it back on and within seconds be playing again right where he or she left off. The PS4 supported Blu-ray discs, DVDs, and HDMI output, as well as analog and optical digital output. In comparison to the PS4, the next console is set to house an AMD chip that has a CPU based on the third-generation Ryzen. It will have eight cores of the seven-nanometer Zen 2 microchip. Although the console will support 8K, displaying at this resolution will be dependent on TVs catching up.

Sony launched the PlayStation Virtual Reality headset in October 2016 that was developed by Sony Interactive Entertainment. Although PlayStation VR had a price tag of $400, it was the only one of its kind at the time of release, hence the company was able to charge the high price. It was a step up in gaming technology as PlayStation VR could be used with PS4 console that could mirror the television screen in a virtual reality view for the user. PlayStation VR could be used with PS4 DualShock controllers as well as with