W16600

NINTENDO: GAME ON!1

Parul Purwar and Andrew Delios wrote this case solely to provide material for class discussion. The authors do not intend to illustrate
either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying
information to protect confidentiality.

This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com.

Copyright © 2016, National University of Singapore and Richard Ivey School of Business Foundation Version: 2016-09-27

In September 2015, Tatsumi Kimishima was given the charge of leading Nintendo, one of the oldest gaming
companies in the world. Before assuming leadership of the company, Kimishima had been the chief
executive officer (CEO) of Nintendo of America for 13 years. He had been instrumental in sustaining the
competitive position of Nintendo in North America. Kimishima became the new president after the 2015
death of the iconic and charismatic game creator, Satoru Iwata, who was the fourth president. Now,
important decisions had to be made regarding Nintendo’s future positioning in the fast-advancing and fast-
changing globalized gaming market.

In 2015, Nintendo registered annual revenues of ¥550 billion (or US$4.57 billion),2 which was similar to
its 2002 revenue (see Exhibit 1). Instead of moving forward, the company’s growth was reversing. Nintendo
had to lay off staff, which was an unusual action in the history of this gaming giant. Of more concern was
that global console revenue decreased by 0.08 per cent (see Exhibit 2) in 2015. At the same time, Nintendo’s
revenue declined by 4 per cent. Moreover, mobile and online gaming had grown to account for 70 per cent
of global gaming revenues. The online gaming company Tencent had more than twice the revenue of
Nintendo in 2014 (see Exhibit 3). According to gaming market reports, Apple’s gaming revenues from its
App Store could double Nintendo’s revenues in 2015.3

Even though Nintendo was an Asian company, 65 per cent of its revenue came from the United States and
Europe (see Exhibit 4). The Asia Pacific region contributed 47 per cent to global gaming revenues (see
Exhibit 5). This percentage was expected to be 55 per cent in 2018 (see Exhibit 6). In 2015, China’s gaming
revenue had raced past that of the United States. By 2018, China was expected to contribute one-third to
global gaming revenues. Indonesia, Malaysia, the Philippines, Singapore, Vietnam, and Thailand were the
fastest-growing markets in Southeast Asia. These markets were new for Nintendo, which faced entry
challenges, including adapting to the high piracy rates present in some of these markets.

Nintendo, under its new president, Kimishima, had to contend with these large-scale changes in the global
gaming market. By not adapting to changing customer needs, Nintendo had recently lost the customer
loyalty it had once enjoyed, as was evident from the decline in the number of units sold. How much could
Nintendo revise its business model and strategies to move from the decline that had been part of this

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company for years? Could Nintendo connect with its customers as it had done in the past with Mario, Luigi,
Princess Zelda, Donkey Kong, and Pokémon?

NINTENDO

1889–1956

Nintendo (or 任天堂) had a long history in Japan. Although there was uncertainty about the origin of the
name and whether it meant “leave luck to heaven,” the company had been in operation since the 19th
century.4 Fusajiro Yamauchi founded Nintendo as a playing-card company. After the founding, Yamauchi
introduced new manufacturing techniques to Japan. By the turn of the century, Nintendo’s “Hanafuda”
cards were a must-have household game in Japan. In quest of more, Yamauchi started manufacturing the
first Western-style playing cards in Japan, with the intent of exporting them to markets outside of Japan.

Yamauchi did not have a son to take over the family business. He followed tradition in such circumstances
to appoint his adopted son-in-law, Sekiryo Kaneda, as the second leader of the company. Kaneda changed
his name to Sekiryo Yamauchi when he became the president of Nintendo in 1929. The key highlight of
Sekiryo’s 20-year tenure was his acquisition of a licence to use Disney characters to create a new market—
children’s playing cards. Sekiryo died suddenly of a heart attack in 1949. Hiroshi Yamauchi, his 22-year-
old grandson, became the third president of the company.

1956–2001

The young and enterprising Hiroshi decided to diversify the product offerings of Nintendo to recoup the
declining sales of playing cards. In 1966, after losing money in various ventures such as a taxi company, a
hotel chain, a TV network, and a food company, Hiroshi launched in 1966 a toy called Ultra Hand, an
extendable arm for children. This was Nintendo’s first breakthrough in the toy industry. Afterwards,
Nintendo developed several unique electronic toys but suffered setbacks as it learned to balance demand
and supply. Even so, Nintendo continued to grow. The company’s success came from developing
innovative and creative electronic toys, in an era that was characterized by wooden toys and dolls.

In 1974, Nintendo created a stir in the arcade gaming market with its introduction of Laser Clay Shooting
System, an arcade game simulator and image projection system. Soon after, Nintendo began to introduce
some of its popular gaming titles, including “Donkey Kong,” “EVR Race,” and “Radar Scope.” Given the
popularity and quality of these titles, the leading gaming device manufacturers—Atari and Magnavox—
signed licensing deals with Nintendo. In 1984, Nintendo launched the Nintendo Entertainment System
(NES), the first video game console targeted at families. Popular titles from the NES—like “Excitebike,”
“Super Mario Bros.,” and “The Legend of Zelda”—became household names within months. To create
these titles, Hiroshi divided the research and development teams into three sub-divisions and allowed a
healthy competition between the teams to invent novel games.

The first portable handheld game system with changeable cartridges—the Game Boy—was launched in
1989. Company revenue subsequently increased from $0.2 billion in 1981 to $2 billion in 1990. Even with
this success, Hiroshi continued to encourage his employees to innovate and grow the tradition of creating
novel ideas. In the 1990s, Nintendo was the clear leader in the worldwide console gaming arena, with over
90 per cent market share. In 2001, with the Game Boy Advance, Nintendo stormed across the console
gaming markets in Europe and North America. All the game developers, graphic designers, and game
creators were focused primarily on Nintendo platforms. Nintendo defined and created gaming’s standards,

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and people would queue up for hours for new Nintendo products. Not content to bask in its success, every
year Nintendo came up with a new technology that would redefine the gaming world. Interactive games,
optoelectronics, joysticks, and advanced computer graphics can be attributed to Nintendo. Even with the
launch of Sega’s Genesis add-on 32X (1994)5 and Sony’s PlayStation (1994), Nintendo remained the
undisputed leader in the video game console market.

In 2001, to counter the type of competitive threat posed by the Xbox and the PlayStation, Nintendo launched
the GameCube, a home video game console. In 2002, Hiroshi retired after a successful stint of 53 years.
Control passed to Iwata, the first non-Yamauchi family member. Even after retirement, Hiroshi remained
devoted to the company. He donated his entire retirement pension to Nintendo. Under the visionary
leadership of Hiroshi, Nintendo had transformed itself from a card game company to the market leader of
the video gaming market worldwide, led by its most memorable characters—Mario, Pokémon, and Zelda.

2002–2015

In 2002, when Iwata became the fourth president, he focused on reviving Nintendo’s market share in the
video gaming market. At the same time, the company ignored the growing online gaming market. Nintendo
failed to adapt to changing consumer needs with its continued focus on developing something new in the
video gaming market. Finally, in 2004, Nintendo registered optimism with the launch of the Nintendo DS,
a dual-screen handheld with touchscreen technology and backward compatibility with other Nintendo
products. However, the success of the Nintendo DS and its successor, the Nintendo DS Lite, was not enough
to translate into sustained growth in sales for the company.

In 2007, after the launch of the Wii and its revolutionary motion detection remote—the Wii Remote—sales
doubled for Nintendo. To leverage the high sales of the Wii, Nintendo acquired video game development
companies and quickly launched several new games. Nintendo crossed the ¥1 trillion mark in revenues for
the first time in 2008. It soon launched several advanced versions of the Wii to leverage a new market:
personal fitness through video games. Successive generations of the Wii were similar to the base model.
New-generation Wii consoles lacked the innovation associated with the launches of Nintendo’s new
products. Customers began to move away from Nintendo to Sony and Microsoft. Revenue in 2010 was
¥1,434 billion. But from 2010 on, it was a downward ride for Nintendo. By 2015, Nintendo’s revenue in
yen was similar to what it had been in 2002.

Nintendo’s focus over this period of declining revenues was on gaming software. Meanwhile, Sony and
Microsoft were improving the technology and aesthetics of their console hardware. Moreover, Sony and
Microsoft ensured that they had diverse games to cater to all types of audiences (children, youth, mature,
and aging). Further, with the success of Apple and other smartphones and tablets, developers had moved
away from consoles to smart device game development. Even so, Nintendo remained steadfast in its focus
on the traditional gaming market. New revenues were sought through incremental product innovations such
as the development of the Wii Fit series and health-related wearable technology. There was little success in
this area as the products usually did not develop beyond the prototypes.

In 2014, Nintendo reluctantly accepted the importance of the mobile gaming market and announced a
landmark partnership with DeNA,6 a leading mobile provider in Japan. The joint venture was aimed at the
development and operation of applications (apps) for smart devices and also at the joint development of a
new multi-device membership service for the global market. Late in 2014, Iwata died. Kimishima, then the
CEO of Nintendo of America, became the fifth president of Nintendo. He returned to Japan with the task
of reviving or reinventing this mainstay of the gaming market.

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COMPETITION

In the 2000s, the gaming market was growing rapidly, yet Nintendo faced stiff competition on numerous
fronts. As the past decade’s market leader in handheld and console games, Nintendo was in a position where
it could define the market. Yet with new market growth came changing consumer preferences and changing
tastes in gaming. Nintendo had not adapted quickly to these changes. Vertical expansion into the
development of gaming software moved the company away from its focus as a console maker. Gaming
software was important, yet Nintendo had not filed its first patent until 1996, which was two years after
Sony launched its PlayStation. Nintendo frequently ignored the copyright and trademark violations of its
characters, allowing itself to become a victim of piracy.

Sony’s PlayStation

Sony launched its first console, the PlayStation, in December 1994—ten years after the first gaming console
was launched. Sony’s entry came with the unintended help of Nintendo. In the early 1990s, Nintendo was
faced with tough competition from the Sega Genesis, which was Sega’s most famous console. To beat this
competition, Nintendo wanted to develop a console with CD-ROM functionality. To add that functionality,
Nintendo reached out to Super Nintendo’s internal developer, Sony. They agreed to create a Nintendo
PlayStation.7 However, the deal turned sour due to disagreements over the licensing terms. This was a huge
blow to Sony, as the news of the Nintendo PlayStation had been made public. Nintendo shifted its
partnership from Sony to one of Sony’s rivals, Philips.

In 1994, Sony countered by developing an innovative console called the Sony PlayStation. Sony leveraged
its graphics technology from its television division and its sound technology from its music division to help
develop the PlayStation. To create a game library quickly, Sony signed several licensing deals with various
North American and European software developers. The first PlayStation had a huge library of games with
three-dimensional (3D) visuals—a first at that time and with better processing speed. In the first three years,
Sony sold 30 million PlayStations worldwide and exceeded Nintendo’s business by ¥165 billion (or $1.45
billion). Sony’s success was echoed in the words of Bill Gates, then chairman of Microsoft, who was quoted
in Upside saying, “Our game designer likes the Sony machine,” when asked about the Sega Saturn.8

Sony launched the PlayStation 2 in 2000. The new PlayStation was highly praised by gamers across the
world for its real-time games with improved, advanced graphics. Also, some gamers claimed that the
processing speed was much better than that of any other console at that time. As part of its plan to keep
costs low in 2003, Sony outsourced hardware production to third parties in China while keeping the patents
and the technology in-house. Sony continued its strategy of leveraging its strengths from other departments,
drawing graphics technology and rendering techniques from its television expertise, audio quality and
rendering techniques from its audio devices, and attachments such as CDs/DVDs from its other product
lines. Further, Sony leveraged the characters from Sony Pictures’ vast library of motion picture characters
such as Ali Baba and from its Sony Pictures Animation unit with Smurfs. Finally, from its landmark
partnership with Disney Interactive, Sony could take advantage of popular characters such as Mickey
Mouse, Tarzan, Aladdin, Atlantis, and Peter Pan.

Sony launched the PlayStation 3 in 2006. This new PlayStation had a portable hard-drive and motion-
sensing technology. The main competitors at this time were the Microsoft Xbox 360 and the Nintendo Wii.
Sony had a 55 per cent market share at this time. Thereafter, Sony launched the PlayStation Portable in
2007, PlayStation Home service in 2008, PlayStation Plus in 2010, PlayStation Move controller in 2010,
PlayStation Vita in 2012, and PlayStation Mobile in 2012. It even launched a Music Unlimited service on

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PlayStation in 2013. In 2014, Sony launched the PlayStation 4, with second-screen streaming, which
enabled smartphones and tablets to interact with the console.

In 2012, Sony moved into the mobile gaming market with its Xperia smartphone. Sony leveraged its
Android partnership to gain access to a large customer and apps base. Sony created Android-based
television (TV) to make the gaming experience even better. With its high-definition content, advanced
audio module, real-time rendering of virtual landscapes, multi-core processors, extendable memory, and
inter-connectivity with its other devices such as TVs, audio systems, and smartphones, Sony became the
leader in the gaming sector, which included console gaming.

Microsoft’s Xbox

Microsoft was the first American company to launch a home video game console. Known as the Xbox, it
was released in North America on November 15, 2001 and was launched worldwide in 2002. Xbox faced
direct competition from Sony’s PlayStation 2 and Nintendo’s GameCube.

In its first year, Microsoft was able to capture a 9 per cent market share. Xbox was a bold move by Microsoft
because it was primarily a software company. This move was initiated to contain the high growth of its
chief rival Sony. In an interview, Joachim Kempin, who was vice president of Windows Sales at Microsoft
for 20 years starting in 1983, said:

The main reason was to stop Sony. You see, Sony and Microsoft… they never had a very friendly
relationship. And this wasn’t because Microsoft didn’t want that. Sony was always very arm’s
length with Microsoft. Yeah, they bought Windows for their PCs [personal computers] but when
you really take a hard look at that, they were never Microsoft’s friend . . . but as soon as they came
out with a video console, Microsoft just looked at that and said, “Well, we have to beat them, so
let’s do our own.”9

Besides the rivalry with Sony, Microsoft was worried because the computer gaming market was declining
with desktop operating systems not being the favourite platform for game developers. Also, with the
increase in Internet penetration, online gaming was becoming the second favourite platform for game
developers. To recoup revenue in the PC gaming segment, Microsoft committed to developing the Xbox.
This was reflected in Microsoft’s global Xbox marketing expenditure of $500 million in 2001.10

Given the strong position of Sony, Microsoft realized that the only way to quickly gain ground was to build
a large exclusive library of content. Unlike Sony, Microsoft decided to acquire gaming companies—FASA
Interactive (1999), Bungie (2000), Digital Anvil (2000), Ensemble Studios (2001), Rare Ltd. (2002),
Lionhead Studios (2006), BigPark (2009), Twisted Pixel (2011), Press Play (2012), and Mojang (2014).11
This gave Microsoft access to games. It also gave it access to the licensing deals that these companies had
signed with its rivals—Sony and Nintendo.

Encouraged by the acceptance of the Xbox, Microsoft launched the Xbox 360 in November 2005. Even
though the Xbox 360 was new, the PlayStation 3’s processing speed and the freemium model of its online
gaming network gave the PlayStation 3 an edge over the Xbox 360. This was reflected in revenues—Sony’s
gaming revenue was five times that of Microsoft in 2005. Sony’s leadership in gaming did not deter
Microsoft. It continued to innovate and grow its gaming business. The Xbox One was launched in 2013
with a huge library of Internet games. It also provided interoperability with set-top boxes. To restrict the
sharing of games and protect games from piracy, Microsoft introduced strict digital rights management
(DRM) restrictions. However, due to criticisms from the gaming community, Microsoft had to relax its

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restrictions.12 Despite the acceptance of the Xbox in the gaming community, Microsoft was never able to
dethrone Sony in the casual gaming market (see Exhibit 7).

Even with its number-two position, Microsoft’s Xbox division reportedly lost as much as $2 billion.13
Microsoft’s overall operating margin declined from 38 per cent in 2011 to 19 per cent in 2015. This decline
can be partly attributed to Microsoft’s deviation from its core business of technology to other domains such
as gaming and mobile.

INTELLECTUAL PROPERTY

Nintendo had been a victim of piracy and had been vocal about it from the start. According to Japan’s
Computer Entertainment Supplier’s Association, Nintendo lost more than ¥112 billion to piracy in 2010.14
There had been 19.35 million illegal downloads of the top 20 Nintendo DS games, which accounted for
76.8 per cent of Nintendo’s lost revenue.

However, until recently, Nintendo had defined its business strategy based on fear of piracy rather than
fighting it head-on.15 In its letter to the director for intellectual property and innovation in 2014, Nintendo
stated that a good percentage of the illegal downloads were from Italy (1.4 million downloads) and Spain
(1.2 million downloads). Nintendo wanted the U.S. government to pressure other governments. In its letter,
Nintendo stated:

Bring criminal prosecutions against major infringers, including those facilitating piracy on the
Internet. The courts must impose stronger penalties against IP [Internet protocol] crimes, both
traditional forms of piracy and online piracy, to raise awareness and foster deterrence.16

In January 2014, Nintendo won a long battle in Italy in a specialized intellectual property court in Milan.17
PC Box, an Italian online distributor, had been selling independent software for Nintendo consoles by
circumventing privacy protection on Nintendo’s hardware. Having finally won the piracy battle in Italy,
Nintendo fought similar legal cases in other countries such as Brazil, Spain, Mexico, the United States, and
France.

Nintendo was not the only player to be impacted by piracy. Its rivals, Sony and Microsoft, had been hurt
by piracy earlier in their other lines of business such as music and PC software. Hence, both of them had
taken steps to file a combination of design and utility patents to protect their inventions. Microsoft filed its
first Xbox patent in 1998,18 a good two years prior to launching the Xbox. Sony filed its first patent in 1993,
18 months prior to launching the PlayStation. Meanwhile, Nintendo filed its first gaming patent in 1984,
which was ten years after it created the first handheld. In total, Nintendo had about 1,700 gaming patents
as compared to over 2,000 patents each owned by Sony and Microsoft.

The majority of Nintendo’s U.S. patents were utility patents that were focused on gaming hardware
(controllers, consoles, display technologies, and related components). The other patent categories were
storage technologies, wireless gaming, multi-player gaming technology, networked content distribution and
delivery, and on-demand gaming.19 Sony and Microsoft owned a broad category of both design and utility
patents across gaming platforms and software. Also, they owned patents (acquired or in-house) around
social networking and mobile technology. Nintendo had an abundance of character intellectual property
(IP), which was largely unused. Some of the major characters of Nintendo were Mario, Princess Zelda,
Luigi, Dr. Kawashima, Donkey Kong, and Pokémon. After witnessing the success of its competitors’ game
characters in theme parks, toyshops, and fast-food chains (such as McDonald’s), Nintendo decided to
change its policy. In the investor briefing in January 2014, Iwata said:

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We are planning to utilize Nintendo’s abundance of character IP more actively. I think the reason
that Nintendo is now considered to have this “abundance of character IP” is perhaps because of our
passive approach toward the character IP licensing business, which tends to have a high risk of
damaging the value of the character. In other words, we think that spending time to develop our
approach of having our characters appear mainly in our carefully selected games has created our
current fortunate circumstances.

To be more precise, we will actively expand our character licensing business, including proactively
finding appropriate partners. In fact, we have been actively selling character merchandise for about
a year in the U.S. Also, we will be flexible about forming licensing relationships in areas we did
not license in the past, such as digital fields, provided we are not in direct competition and we can
form win-win relationships.

By moving forward with such activities globally, we aim to increase consumer exposure to
Nintendo characters by making them appear in places other than on video game platforms.20

GAMING MARKET EVOLUTION

The 20th Century

The gaming world had evolved from being an all-consuming passion of a few to being a favourite pastime
of many. “Candy Crush” and “Angry Birds” became part of the everyday lexicon. In 2015, 26 per cent of
people in the world had played a game of any genre on one of the major gaming platforms—PC, mobile,
tablet, handheld, or TV console.21

This was a long step from the first gaming device, the Nimatron, created in 1940 by nuclear scientist Dr.
Edward Uhler Condon.22 It was built as an attraction for an amusement park. Neither the creators nor the
players realized the true potential of the device. Three decades later, Ralph H. Baer, in the United States,
created the “Brown Box”—the first-ever prototype of a game console.23 In 1972, Atari commercialized
arcade gaming.

Bars, restaurants, amusement parks, and casinos began to install arcade games to capitalize on this new
craze. The first wave of success was in the United States. Accordingly, non-American companies such as
Nintendo started to export their arcade products to the United States. Given the advanced technology in
Nintendo’s products, it became the preferred vendor in the United States. In 2015, North America
contributed 37 per cent of Nintendo’s overall revenue. With the popularity of the games in the United States,
graphic designers often used American city names and landscapes, which lured more customers both within
and outside the United States.

Programmed logic for automatic teaching operations (PLATO) designed the first multi-player game, which
was called “Empire.” People could play the same game on “Empire” simultaneously but on separate
screens. However, in the absence of the Internet, all the screens had to be physically connected to one
another. Between September 1978 and May 1985, there were over 4,000 hours of use logged per day on
PLATO.24

With growing consumer interest in North America, many consoles and games were being developed,
leading to confusion among consumers as to which was the best. Further, the pace of development became
so important that the quality of games and consoles suffered. Coupling these trends with the rise in the

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popularity of desktop computers led to the 1983 crash of video games in North America. Over the next two
years, the majority of gaming companies were either acquired or filed for bankruptcy.

Nintendo had the last word with its Nintendo Entertainment System (NES), which practically emerged as
the saviour of the console-based gaming industry. Hiroshi Yamauchi said in an interview, “Atari collapsed
because they gave too much freedom to third-party developers and the market was swamped with rubbish
games.”25

With the NES, Nintendo had arrived in the video game industry. To avoid the mistakes of Atari, Nintendo
tightened its third-party contracts and limited them to only five titles per year. Third-party games were
subjected to intense scrutiny and criticism. Further, to encourage the publication of leading-edge games,
Nintendo asked third-party developers for money upfront as an investment. If the game was a success, then
both the publisher and Nintendo benefitted. If not, Nintendo faced less financial downside than the
developer.

Within five years, Nintendo had emerged as the dominant player in North America, with 70 per cent of the
market’s revenue. Nintendo instituted an “Official Nintendo Seal” on all its products to solidify its
reputation and guard against customer confusion. This was also because it was one company that was a
one-stop solution for all gaming needs. This helped to restore customer faith and trust in video games,
thereby reviving the zeal for video games.

In the 1990s, increasing household computer penetration in the United States heightened the growth of PC
gaming. Microsoft introduced free games (“Solitaire” and “Minesweeper”) in its software. These games
were easy; anyone who knew how to use a computer could play them. This expanded the profile of gamers
from traditional, tech-savvy gamers to anyone with a PC. Disc operating system (DOS) became the most
popular platform for game developers.

Computers labs were opening in various schools and universities. Local area networks (LAN) in computer
labs helped make multiplayer gaming popular. The game “Quake” took multiplayer gaming to the next
level. It was a scenario-based game wherein players could play together or compete at the same time in the
same game. The game was most popular among pre-teen and teenage boys. Soon, gaming activity expanded
from being a pastime of schoolboys to a leisure activity of adults.

Even though Internet penetration was increasing worldwide through the 1990s, online gaming did not gain
significant traction until after the 2000s. The Internet became the “killer app” in the late 1990s, after which
most gaming companies started designing games for the Internet. However, unstable speeds and expensive
access to the Internet moderated the growth of gaming revenues. With the advent of Internet broadband,
both these problems were resolved, and online gaming grew exponentially. From 2005, casual games
popularized online gaming. When the Internet became affordable on mobile phones, coupled with the
emergence of smartphones, people wanted to play games while on the move.

Moving into the 21st Century with Mobile Gaming

Mobile games first became popular with “Snake,” a pre-installed game on Nokia handsets. In 1997, Nokia
recreated “Snake,” which was a popular arcade game.26 Taneli Armanto, the creator of the game, noted:
“When we created Snake for the Nokia 6110 in 1997, we wanted to give people an entertaining experience,
but we never imagined that it would become the classic mobile game. It showed people that you could
create a great game for a mobile phone.”

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The popularity of the game opened up a new challenge for game developers and designers. Given the
increasing popularity and simplicity of games on mobile devices, almost anybody could play. Next was the
strategy game “Bounce” on Nokia phones by Rovio Entertainment, which later became known as the
“Angry Birds” creator. Excited by the interest in games, Nokia developed a gaming phone, the N-Gage,
which had 3D graphics. It allowed people to play solo or connect their device via infrared to other N-Gage
devices to facilitate a multi-player environment.

With an affordable and stable Internet, mobile gaming began to take off. However, it was still not considered
serious gaming. Then came the iPhone, with its better visuals and audio and its App Store, which helped to
take mobile gaming to the next level. The App Store had a game for all ages and for all types of gamers.
The popularity of smartphones and online gaming exploded. The number of gaming companies multiplied.
These companies now had to ensure that the games could be rendered on mobiles and tablets while giving
a similar experience to a game played on a bigger screen. Mobile gaming continued to evolve. It was not
limited to smartphones; it included tablets and wearable devices.

Micropayments had been successful in monetizing online games such as “Candy Crush,” “Farmville,” and
“Angry Birds.” Now, the gaming companies could gain revenues with in-app purchases, in-app advertising,
and mobile advertising. Even though the majority (around 90–95 per cent) of mobile gamers were “free-
riders,” mobile gaming revenue in 2015 was one-third of total gaming revenue. It was expected to grow to
$44.2 billion by 2018.

Nearly 95 per cent of gamers were mobile in 2015, with 50 per cent of mobile gamers situated in countries
in the Asia Pacific region. China’s mobile gaming revenue was 17 per cent more than that of the United
States. China’s mobile gaming was expected to grow at a compound annual growth rate of 50 per cent until
at least 2018. The prevalence of mobile broadband and advanced telecommunications networks (fourth
generation (4G) and beyond) provided the bandwidth for developers to consider games involving virtual
reality and video streaming, as well as casual, on-the-move games.

DECISION

Nintendo had been a market leader once, with a 90 per cent share of the gaming market. Those days were
long past, with its financial performance changing commensurately (see Exhibits 8 and 9). In 2015,
Nintendo was struggling to maintain its 10 per cent market share. In its 125 years of rich history, there had
been several instances when the company evolved and emerged a leader in a new market segment. The
gaming segment had changed in many ways since the 1980s and 1990s, with mobile gaming being the
newest and most significant trend. With that said, the traditional gaming segment still existed as a possible
viable niche, though it was likely set for a long period of slow decline. Geographically, the bulk of the
market was shifting from North America to Asia, principally China, but with other attractive markets within
Asia.

Nintendo faced these trends as a traditional gaming company with a rich history of success. Nintendo as a
company was a valuable brand in itself. It had developed a good number of famous characters from its
games, many of which were household names. Nintendo faced many questions in its effort to successfully
form a strategy in this new environment. Should the company compete in hardware, software, or both?
What platforms should be its focus, if any? Were there ancillary revenue streams that the company could
focus on, similar to other companies that had licensed their character IP? Alternatively, was it possible to
create a corporate model similar to Legoland’s or Walt Disney’s?

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EXHIBIT 1: NINTENDO’S HISTORICAL REVENUE (¥ BILLION)

Revenue ( ¥ ) Revenue Growth (%)
 ¥2,000 100%
 ¥1,800 80%
 ¥1,600
60%
Revenue (Billion ¥)

 ¥1,400
40%

% Growth
 ¥1,200
 ¥1,000 20%
 ¥800 0%
 ¥600
‐20%
 ¥400
 ¥200 ‐40%
 ¥‐ ‐60%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: “Historical Data,” Nintendo, accessed July 21, 2016, www.nintendo.co.jp/ir/en/library/historical_data/index.html. The
numbers were converted to US$. However, it is important to study the case in yen. For instance, in 2002, revenue is ¥555
billion, and in 2015 it is ¥550 billion. When these numbers are converted to US$, using the average conversions for the
respective years, then the revenues are $4.44 billion in 2002 and $4.56 billion in 2015. To minimize influences of exchange
rates over time, numbers are converted to US$, but trends are analyzed in yen.

EXHIBIT 2: GLOBAL GAMING REVENUE (US$ BILLION)

Mobile (Phone/Tablet) Console (TV/Handheld) Computer Gaming

$50
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
2013 2014 2015 2016 E 2017 E 2018 E

Source: Created from data provided by Newzoo, a game research and insights company. The data can be accessed at “Global
Report: US and China Take Half of $113BN Games Market in 2018,” Newzoo, May 19, 2015, accessed July 21, 2016,
https://newzoo.com/insights/articles/us-and-china-take-half-of-113bn-games-market-in-2018.

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EXHIBIT 3: TOP EIGHT GAMING COMPANIES BY REVENUE (US$ BILLION)

2013 2014

12

10

0
Tencent Sony Microsoft Nintendo Activision EA Apple Google
Blizzard

Source: As all the companies are public companies, all the numbers have been taken from the published investor relations
documents of the respective companies. All the numbers have been adjusted for the financial year ending in March.

EXHIBIT 4: NINTENDO REVENUE BREAKDOWN BY REGION (¥ BILLION)

Japan Europe US Rest of Americas Others

50%

40%

30%

20%

10%

0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Nintendo’s annual reports can be found at “Annual Report,” Nintendo, accessed July 21, 2016,
www.nintendo.co.jp/ir/en/library/annual/index.html. All the numbers have been adjusted for the financial year ending in March.

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EXHIBIT 5: GLOBAL GAMING REVENUE BY REGION (2015)

Europe, the Middle  North America
East and Africa 26%
23%

Latin America
4%

Asia Pacific
47%

Source: Created from data provided by “Global Report,” US and China Take Half of $113BN Games Market in 2018,” Newzoo,
May 19, 2015, accessed July 21, 2016, https://newzoo.com/insights/articles/us-and-china-take-half-of-113bn-games-market-
in-2018.

EXHIBIT 6: REGIONAL CONTRIBUTION TO GLOBAL GAMING REVENUE FORECAST

2015 2016 E 2017 E 2018 E

30%

25%

20%

15%

10%

5%

0%
China Rest of Asia US Europe, Latin America Canada
the Middle East and Africa

Source: Based on “Global Report: US and China Take Half of $113BN Games Market in 2018,” Newzoo, May 19, 2015,
accessed July 21, 2016, https://newzoo.com/insights/articles/us-and-china-take-half-of-113bn-games-market-in-2018.

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EXHIBIT 7: WORLDWIDE VIDEO GAME SALES

Year Nintendo Sony Microsoft

Console Units Sold
(millions)
2011 36.21 28.70 13.30
2012 28.47 24.80 13.81
2013 23.73 23.50 10.00
2014 16.31 18.70 11.50
2015 12.59 21.20 12.30

Gaming Revenue
(US$ billions)
2011 12.78 10.90 4.49
2012 8.10 10.06 5.72
2013 6.54 7.28 5.66
2014 5.43
9.92
7.57
2015 4.56 11.52 6.57

Source: Nintendo, Sony, and Microsoft company filings. Nintendo and Sony’s fiscal year ends March 31 and Microsoft’s fiscal
year ends in June. The sales of Microsoft’s Xbox have been calculated accordingly. Filings can be found at “Investor
Relations,” Microsoft, accessed July 21, 2016, www.microsoft.com/en-us/investor; “Investor Relations,” Sony, accessed July
21, 2016, www.sony.net/SonyInfo/IR; and, “Investor Relations Information,” Nintendo, accessed July 21, 2016,
www.nintendo.co.jp/ir/en/index.html.

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EXHIBIT 8: NINTENDO CONSOLIDATED FINANCIAL STATEMENTS (¥ MILLION)

FY 2014 FY 2015
Liabilities
Current liabilities
Notes and accounts payable - trade 47,665 58,464
Income taxes payable 14,803 16,529
Provision for bonuses 2,183 2,220
Other 90,999 67,018
Total current liabilities 155,652 144,232
Non-current liabilities
Net defined benefit liability 18,558 25,416
Other 13,760 15,739
Total non-current liabilities 32,318 41,155
Total liabilities 187,971 185,387
Net assets
Shareholders’ equity
Capital stock 10,065 10,065
Capital surplus 11,734 11,734
Retained earnings 1,378,085 1,409,764
Treasury shares (270,958) (270,986)
Total shareholders’ equity 1,128,927 1,160,578
Accumulated other comprehensive income
Valuation difference on available-for-sale securities 13,628 16,671
Foreign currency translation adjustment (24,274) (9,804)
Total accumulated other comprehensive income (10,645) 6,866
Minority interests 157 110
Total net assets 1,118,438 1,167,556
Total liabilities and net assets 1,306,410 1,352,944

Source: “Annual Report 2015,” Nintendo, accessed July 21, 2016, www.nintendo.co.jp/ir/pdf/2015/annual1503e.pdf. The
financial year ends in March (e.g., FY 2015 means April 2014–March 2015).

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EXHIBIT 9: NINTENDO FINANCIAL STATEMENTS (¥ MILLION)

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

Net sales 1,838,622 1,434,365 1,014,345 647,652 635,422 571,726 549,780

Operating income
555,263 356,567 171,076 (37,320) (36,410) (46,425) 24,770
(loss)
Net income (loss) 279,089 228,635 77,621 (43,204) 7,099 (23,222) 41,843

Net assets 1,253,931 1,336,585 1,281,861 1,191,025 1,227,520 1,118,438 1,167,556

Total assets 1,810,767 1,760,986 1,634,297 1,368,401 1,447,878 1,306,410 1,352,944

Capital adequacy
69.2 75.9 78.4 87.0 84.7 85.6 86.3
ratio (%)
Return on equity
22.5 17.7 5.9 -3.5 0.59 -2.0 3.7
(%)
Net cash provided
by operating 287,800 160,337 78,103 (94,955) (40,390) (23,114) 60,293
activities
Net cash provided
by investing (174,363) (12,728) (154,038) (164,392) 89,104 (20,084) (105,394)
activities
Net cash provided
by financing (227,654) (133,847) (102,456) (39,823) (12,873) (127,163) (11,916)
activities
Cash & cash
equivalents at end 894,129 931,333 724,366 407,186 469,395 341,266 281,539
of period

Source: “Annual Report,” The financial year ends in March (e.g., FY 2015 means April 2014–March 2015.)

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ENDNOTES
1
This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives
presented in this case are not necessarily those of Nintendo of America or any of its employees.
2
¥ = Japanese Yen. All dollar amounts in the case are in US$ unless otherwise stated.
3
Dean Takahashi, “Mobile Games to Overtake Console Revenues in 2015—and Apple’s Revenue Could Double Nintendo’s,”
VB, October 22, 2014, accessed July 21, 2016, http://venturebeat.com/2014/10/22/mobile-games-will-overtake-console-
revenues-in-2015.
4
Brian Ashcraft, “‘Nintendo’ Might Not Mean What You Think,” Kotaku, September 28, 2010, accessed July 21, 2016,
http://kotaku.com/5649625/nintendo-might-not-mean-what-you-think.
5
Dave Beuscher, “Sega Genesis 32X,” WebCite, accessed August 17, 2016, www.webcitation.org/6Sac1Ebdv.
6
“Announcement of Business and Capital Alliance between Nintendo Co., Ltd and DeNA Co. Ltd.,” Nintendo, March 17, 2015,
accessed July 21, 2016, www.nintendo.co.jp/ir/pdf/2015/150317e.pdf.
7
Emil Protalinski, “This Is the Rare PlayStation Console Built by Sony and Nintendo,” VB, July 3, 2015, accessed July 21,
2016, http://venturebeat.com/2015/07/03/this-is-the-rare-playstation-console-built-by-sony-and-nintendo.
8
Eric Griffith, “The Story Behind the Xbox,” PCMag, November 21, 2013, accessed July 21, 2016,
www.pcmag.com/article2/0,2817,2427357,00.asp.
9
Jason Mick, “Ex-Microsoft Exec: Sony’s PlayStation Worried Gates, Convinced Him to Make Xbox,” DailyTech, February 7,
2013, accessed July 21, 2016, www.dailytech.com/ExMicrosoft+Exec+Sonys+PlayStation+Worried+Gates+Convinced+
Him+to+Make+Xbox/article29857.htm.
10
Charles Herold, “Game Theory; Console Shootout: The Sequel,” The New York Times, November 8, 2001, accessed August
17, 2016, www.nytimes.com/2001/11/08/technology/game-theory-console-shootout-the-sequel.html?pagewanted=all.
11
Justin McElroy, “Microsoft’s Checkered History of Gaming Acquisitions, from Bungie to Minecraft,” Polygon, September 15,
2014, accessed July 21, 2016, www.polygon.com/2014/9/15/6153109/microsoft-minecraft-acquisitions.
12
Keith Stuart, “Xbox One DRM Restrictions Dropped after Gamer Outcry,” The Guardian, June 19, 2013, accessed July 21,
2016, www.theguardian.com/technology/2013/jun/19/xbox-one-drm-second-hand-restrictions-abandoned.
13
Adam Hartung, “Microsoft Should Consider Getting Out of Gaming,” Forbes, February 18, 2014, accessed July 21, 2016,
www.forbes.com/sites/adamhartung/2014/02/18/microsoft-should-give-xbox-one-to-nintendo/#40723b025b65.
14
Brian Ashcraft, “The Most Pirated Nintendo DS Games Are...” Kotaku, June 9, 2010, accessed July 21, 2016,
http://kotaku.com/5558896/the-most-pirated-nintendo-ds-games-are.
15
Leo Sun, “3 Ways Nintendo’s Fear of Piracy Shaped Its Business,” The Motley Fool, February 12, 2014, accessed July 21,
2016, www.fool.com/investing/general/2014/02/12/3-ways-nintendos-fear-of-piracy-defined-its-busine.aspx.
16
“Re: 2014 Special 301 Comments on Piracy of Nintendo Video Game Products,” Nintendo, February 7, 2014, accessed
July 21, 2016, www.regulations.gov/#!documentDetail;D=USTR-2013-0040-0034.
17
“Judgment of the Court (Fourth Chamber),” InfoCuria—Case-Law of the Court of Justice, January 23, 2014, accessed July
21, 2016, http://curia.europa.eu/juris/document/document.jsf?docid=146686&doclang=EN.
18
US Patent & Trademark Office, Patent Full Text and Image Database, accessed July 21, 2016,
http://patft.uspto.gov/netahtml/PTO/search-adv.htm. All the patents mentioned here have been searched on the USPTO
database. The patents mentioned here are from 1976 to February 2016.
19
Farhan Mustafa, “Nintendo Owns a Broad U.S. Patent Portfolio, but Lacks Social and Mobile Gaming IP,” PatentVue,
September 10, 2013, accessed July 21, 2016, http://patentvue.com/2013/09/10/602-nintendo-patent-portfolio.
20
“Corporate Management Policy Briefing/ Third Quarter Financial Results Briefing,” Nintendo, accessed July 21, 2016,
www.nintendo.co.jp/ir/en/library/events/140130/03.html.
21
“Global Games Market Will Grow 9.4% to $91.5BN in 2015,” Newzoo, April 22, 2015, accessed July 21, 2016,
https://newzoo.com/insights/articles/global-games-market-will-grow-9-4-to-91-5bn-in-2015.
22
“Nimatron: An Early Electromechanical Machine to Play the Game of Nim,” HistoryofInformation.com, accessed July 21,
2016, www.historyofinformation.com/expanded.php?id=4472.
23
“Ralp H. Baer Brown Box Prototype Game Console,” TheGameConsole.com, 2016, accessed July 21, 2016,
www.thegameconsole.com/ralph-baer-brown-box.
24
David R. Woolley, “PLATO: The Emergence of Online Community,” Thinkofit.com, 1994, accessed July 21, 2016,
http://thinkofit.com/plato/dwplato.htm.
25
“What Was the Great North American Game Crash of 1983?” BugSplat, accessed July 21, 2016,
www.bugsplatsoftware.com/great-video-game-crash-1983.
26
Levent Ozler, “Snake Creator Receives Special Recognition From Mobile Entertainment Forum,” Dexigner, June 16, 2005,
accessed July 21, 2016, www.dexigner.com/news/4785.

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