NEWS ANALYSIS : Nintendo Made Big Error in Negotiating Game

Nintendo Ltd. apparently made a rare strategic error last year when it agreed to work with Sony Corp. in developing a new generation of video game technology. The company is now looking to an alliance with Philips Consumer Electronics Co. to help undo the damage.

Such a realization explains a sequence of seemingly contradictory announcements that emerged Friday and Saturday as the consumer electronics industry gathered for its biannual show in Chicago.

The story began Friday when Sony Corp. announced a deal with Nintendo to develop a new type of video game system based on compact discs. Compact discs, widely used for playing music, can store huge volumes of information. As a result, they can provide far better graphics and sound than Nintendo’s existing cartridge games.

Late this year, Sony plans to begin marketing a game machine called the Play Station that will play a new generation of compact disc-based games. It also will play Nintendo cartridges designed for Nintendo’s new 16-bit game system--all for “several hundred” dollars.

But Nintendo apparently had second thoughts when it realized that Sony had aggressive plans to develop game software of its own, based in part on characters from Sony’s Columbia Pictures and record company affiliates. Nintendo’s strategy has always been to keep tight control over the game software, but Sony will retain licensing control over any compact disc games that play on its machine.

“I don’t think Nintendo anticipated that Sony would compete with them head-to-head,” said Jonathan Seybold, a Malibu-based computer consultant and an expert on CD technology. “I don’t think they realized Sony would be so aggressive on software.”

On Saturday, Nintendo announced that it had reached an agreement with Philips to develop a different CD-based game technology. Philips is one of the inventors of the compact disc and a fierce rival--and sometime partner--of Sony’s.

Nintendo and Philips said they would work together to develop a low-cost CD game player that would be compatible with Philips’ CDI, a long-delayed home entertainment and education system.

The new Philips-Nintendo format, however, is not scheduled to be ready until late next year, and Philips does not get the right to include a Nintendo cartridge slot in any machine it might market. It’s also not yet clear whether Philips will build the CD player for Nintendo, or how big a development effort will be required to ready the new game format for market.

Philips and Nintendo apparently did not intend to make a joint announcement Saturday. Nintendo had scheduled a press conference to announce its new cartridge game system, but the prepared materials for that event do not mention Philips. But when Sony made its announcement Friday, Nintendo was forced to make some kind of response.

Olaf Olafsson, president of Sony Electronic Publishing, said he was very surprised to hear the Nintendo-Philips announcement. “The spirit of the (Sony-Nintendo) agreement was that Sony and Nintendo would work together in developing CD technology.”

Olafsson said the “spirit of the agreement has been violated” by Nintendo’s deal with Philips.

Nintendo Vice President Howard Lincoln acknowledged that the company had a deal with Sony but said Nintendo had now decided not to support the Sony format and go with Philips instead.

In accordance with the signed agreement, however, Sony will still be able to incorporate the Nintendo cartridge player into its new machine.

Olafsson speculated that the deal with Philips might simply be a negotiating ploy on Nintendo’s part, and left the door open to a revision of the deal with Nintendo.