Video Game Maker Nintendo Is Facing New Challenges


Nintendo’s Peter Main, marketing vice president of one of the most successful marketing machines in America, doesn’t think he should have to apologize for Nintendo’s failure to meet its sales targets last year.

After all, he points out, Nintendo sales grew 27% to $3.4 billion in 1990, its new hand-held game player is selling well and the company is poised to roll out a new, higher-tech version of its basic home game-playing system. The football-field-long Nintendo exhibit at the Consumer Electronics show--replete with colorful ballons, dancing girls and thousands of enthusiastic game developers and customers--certainly conveyed the impression that the company is still on a roll.

But Main’s job is getting more complicated. Competition, primarily from Japanese rivals Sega and NEC, is getting stiffer. Sales of the home-game system have been falling. The company remains under fire for its restrictive licensing policies, and some parent organizations and educators charge that video-game playing isn’t good for children.


Even more frightening for everyone in the video game business, the second half of 1990 saw an unprecedented oversupply of Nintendo software and rampant price cutting--chilling reminders of the monumental collapse of the pre-Nintendo video game business in 1983. While few expect another disaster, a shakeout could be looming.

And, as Main understands better than most of his competitors, Nintendo is no longer a consumer electronics company selling gadgets. Rather, it’s an entertainment company that relies on popular characters and hit games for its success. As anyone in Hollywood could testify, the hit business is risky.

“It’s terrific to have 80% of the game business, but the market we’re competing in is a lot bigger than video games,” Main says. That will become even more the case as Nintendo tries to reach beyond its core market of 12- to 14-year-old boys and bring more women and adults into the sales mix.

At the same time, Nintendo faces a sharper challenge from other video game companies. Sega, a strong player in Japan and in the coin-operated video game business in the United States, has gained a foothold with a game system that uses 16-bit computer technology. That gives the machine clearer graphics and better color than the 8-bit Nintendo, and Nintendo won’t match that capability in the United States until late this year.

Sega has also launched a color hand-held game to compete against Nintendo’s black-and-white Game Boy machines. Al Nilsen, director of marketing for Sega’s Genesis machines, says the company has 24% of new video game hardware shipments, though it lags far behind in total sales because it doesn’t have Nintendo’s huge installed base of game software.

NEC has launched a similar challenge, selling both a 16-bit home game machine and a color hand-held system. NEC’s big selling point is that the two systems are compatible, so software purchased for one will work on the other.

NEC is also offering a compact-disc option on its home system, which provides interactive video capability and far greater information storage capacity, giving game developers a whole new set of capabilities to play with. Atari is also challenging Nintendo with a color hand-held system.

The competitors have their work cut out for them in winning more market share. Nintendo will spend some $135 million on advertising in 1991, against $26 million for NEC and $15 million for Sega.

“It takes an awful lot of spending to change the retail market share,” noted Bing Gordon, senior vice president of Electronic Arts, which develops game software for Sega, Nintendo and home computers. And neither company has yet to produce a hit character to rival Teenage Mutant Ninja Turtles or Mario Brothers.

The arrival of Nintendo’s new machine in the second half of the year will also put some pressure on the competition, though it holds some risks for Nintendo as well. On the one hand, it will give Nintendo the technical capabilities of the NEC and Sega systems, and stimulate sales among Nintendo loyalists who want to upgrade.

On the other hand, the technology transition undercuts one of Nintendo’s greatest strengths: its huge library of popular games. Main emphasized that the Super NES system would be launched along with a collection of games, but Nilsen of Sega says his company will have over 100 titles for its 16-bit game by then, while Nintendo will have perhaps two dozen.

Although Nintendo will still sell and support the 8-bit machines, the company evidently plans a rapid migration of new customers to the new system. Main would not discuss details of the marketing plan, but he noted that, in Japan, the Super NES sells for about $160, against $100 for the old machine.

Still, the biggest fear among all the manufacturers--and among the retailers and third-party software developers who have ridden the video game boom--is that the game business will suddenly collapse as a result of market saturation and the fickle nature of entertainment tastes.

It has, after all, happened before. In 1983, what was then a $3-billion video game business dominated by Atari vanished virtually overnight. The disaster was widely attributed to a proliferation of inferior game products and resulting customer dissatisfaction.

Few believe that history will repeat itself.

“I don’t think we’ll see things falling off a cliff,” said Andy Eddy, executive editor of Video Games & Computer Entertainment magazine. “Maybe we’ll have a bit of a shakeout, but the market is much better seeded with technology now.”

Eddy and others note that the old Atari equipment didn’t have nearly the power of today’s game machines, and thus the variety of games was much more limited.

“Last time around, there wasn’t a clear progression of hardware,” said Emil N. Heidkamp, senior vice president of Konami, the largest third-party developer of Nintendo games. “Now there’s a very straightforward approach, and the kids know what’s coming.”

Still, Heidkamp conceded that he had excess inventory of 15% to 20%, and many observers have pointed to the widespread discounting of Nintendo game titles as a sign that the boom is coming to an end. Main calls it a normal maturation of the market, with less-popular titles selling more cheaply, but retailers are nonetheless nervous.

Nintendo and the other game companies, though, have one trick up their sleeves that could be important if game sales dip: nongame applications for their systems. All the firms may market software to convert the hand-held games into “personal organizers,” for example, and several already offer a tuner makes them into mini television sets.

And Nintendo has for more than a year been toying with a strategy for creating a network to link Nintendo machines, which have a special port for plugging in a computer and keyboard. Main said any such network would focus on entertainment rather than home banking or other common computer-communications applications, but he declined to be more specific.

NEC, which unlike the other companies comes to the video game industry from the computer business, appears to be betting heavily on the future convergence of games and computers. “Entertainment is what gets the home computer in the door,” says Ken Wirt, general manager of NEC’s home entertainment division. “The direction is toward multimedia computing.”

Nintendo, though, prefers to compare itself to Walt Disney Co. rather than International Business Machines or Apple Computer. And if it can maintain anything near its recent success, the most important U.S. entertainment company owned by a Japanese firm may not, in the future, be located in Hollywood.

* VIDEO GAMES VERSUS MOVIES: Video game revenue may surpass motion picture revenue this year, Nintendo says. D4