Case Study: Sony

Kyoto, Japan-based Nintendo began as a playing-card manufacturing company. After diversifying into various kinds of electronics in the 1970s, Nintendo entered the home video game market in Japan in 1983 with its Famicom system. In an effort to avoid the quality issues that had plagued other game consoles, Nintendo focused on producing fewer, but higher quality games. The Famicom could display 52 colors at a resolution of 256x240 pixels, superior to the competition of the day. Launched at 24,000Y ($100), the Famicom cost 50% less than the closest competitor.

All games that were produced for the Famicom (known as the Nintendo Entertainment System in the United States) had to go through Nintendo's approval process in order to receive the Nintendo "Seal of Quality". A security chip was installed into every console to ensure that only Nintendo-approved games could be played on the system. Manufacturing of the Famicom was subcontracted out to numerous companies. Wary of giving any one manufacturer too much information about the overall production process, Nintendo used up to 30 different suppliers and completed final assembly of the system at its own production facility.

Due to its popularity, Nintendo licensed out the development of games. Nintendo charged licensees 20% of the 6,000Y ($30) wholesale price for every game sold. In addition, licensees had to pay the manufacturing costs of the system in advance, with a 10,000 unit minimum order. Once Nintendo entered the U.S. market, in 1985, the minimum order was raised to 30,000 units. Nintendo also added an exclusivity clause that prevented licensees from producing games on competing consoles for two years. Companies such as Namco, one of the first licensees, complained that Nintendo's monopoly over the market was hurting the industry, but eventually backed down and agreed to Nintendo's terms.

Nintendo had a tight grip on retailers as well, requiring them to place orders, take delivery, and pay in a matter of months, as opposed to the year time-frame they were used to. The company also exercised strict inventory management, quickly removing games that were not selling well and, at times, restricting supply to maintain the appearance of scarcity. Atari filed a number of lawsuits against Nintendo contending the company used monopolistic practices to shut out competitors including withholding merchandise from retailers that sold competitors' products or attempted to discount the price of the system.

By 1990, with hit titles such as Super Mario Bros. and The Legend of Zelda, Nintendo represented more than 90% of the U.S. home console market. Approximately 30 million NES units had been sold, about one for every three American households.

Nintendo's next system, the Super Nintendo launched in September 1991, did not capture the market like its predecessor. Super Nintendo's lack of backwards-compatibility prevented Nintendo from taking full advantage of its existing catalog of games. Meanwhile, Sega, another Japanese home console manufacturer, had successfully entered the U.S. market two years earlier with the Sega Genesis console and effectively fought Nintendo to a draw. Strong internal game development at Sega coupled with relatively favorable terms for software licensees (in comparison to Nintendo) paved the way for an extremely competitive library of titles for the Sega Genesis.

By the mid-1990s, Sega was the least of Nintendo's worries as Sony entered the video game market with a bang.