What is Nintendo’s Moat?
- Always Experiment.
- Give unique and fun experiences to customers UX.
- Lateral Thinking
- Observe to Innovate
Nintendo’s Innovative Strategy
Nintendo has existed for over 135 years. It started as a playing card manufacturer of Hanafuda, founded by Fusajiro Yamauchi. [4] Today, in 2024, Nintendo’s market cap is 72 billion USD in the video game software and hardware console market. [5] One common highlight noted by many observers is its significant allocation of expenses to R&D. Nintendo spends 12.54% of its revenue on R&D alone. Nintendo puts significant financial capital into its R&D departments to retain its competitive advantage of unique and fun experiences.
For years, Nintendo has dedicated entire departments to its R&D. Notably, Nintendo Research & Development 1 has recently merged into Nintendo Entertainment Planning & Development. This strategic move has led to the creation of many popular series and the revitalization of legacy IPs. New releases from franchises like Mario, Animal Crossing, and The Legend of Zelda are testament to this effort. Releases from the Splatoon series, Fire Emblem, and Kirby further prove this effort of revitalizing IP customers love already.
One must wonder how a small card manufacturer from 1889 became one of the three dominant video game console manufacturers. They compete alongside Microsoft’s Xbox and Sony’s PlayStation series.
One of Nintendo’s earliest achievements was a response to a regulation by the Japanese government in the 1800s. The government banned playing cards with numbers and prohibited gambling. This led to a cat-and-mouse game with card decks constantly changing and evolving. Hanafuda cards emerged because they had no numbers just pictures of flowers, birds, and sunsets.
Nintendo was specifically created for producing Hanafuda, cards that are associated with gambling and Yakuza tattoos. [6] Even though Nintendo innovated with playing cards. They produced the first-ever plastic playing card [8]. Despite their efforts, the popularity of Hanafuda had declined going into the 1950-1960s. Thus, Nintendo had to innovate once again.
Nintendo’s Innovative Culture
To tie this back to Nintendo, there is a recurring theme. The company is constantly trying new things and experiencing failures i.e. Experimentation. This was evident even under the leadership of Hiroshi Yamauchi, the third president of Nintendo in 1949. Yamauchi attempted to expand Nintendo into various new industries, recognizing the decline and limitations of Hanafuda cards. His ventures included taxi services, love hotels, instant rice, collaborations with Disney, vacuum cleaners, and so on. [9]
However, all these endeavors failed.
The turning point came when Yamauchi noticed the potential in Gunpei Yokoi, an assembly line maintenance man. Yokoi was bored, his boredom led to this innovative. He had created a toy for his own amusement: a mechanical arm that extends and grab objects. Nintendo created it into a Toy and named it the Ultra Hand, it became a huge success. [17]
Yamauchi viewed this as the future of the company. Consequently, Yokoi was promoted from maintenance to the newly formed ‘Nintendo Games’ division as a product developer. [17] That is innovation where leadership can recognize the potential of employees.
Yokoi went on to develop a series of toys and games under his guidance. However, Nintendo’s foray into video games began with their new game ‘EVR race’ and ‘Wild Gunman’ in 1975. The latter incorporated a ‘light gun’. This Opto-Electronic Gun, developed with Yokoi’s input, evolved into the ‘Laser Clay Shooting System’.
https://nintendo.fandom.com/wiki/Wild_Gunman_(arcade)
Nintendo poured millions of Yen into the project until tragedy struck with the OPEC oil crisis in the 80s. This prompted Yokoi to develop a new design philosophy called ‘Lateral thinking with withered technology,’ leading to a downsized version known as ‘Wild Gunman,’ a ‘light gun’ arcade game. [17] This philosophy persists today, suggesting that we don’t need the latest technology to develop products. Instead, we can use well-known or niche technologies to expedite the creation process.
Using cutting-edge technology can be prohibitively expensive, making maintenance and distribution challenging. The Nintendo Switch exemplifies this idea. Its hardware is outdated compared to competitors like the PS5 and Xbox. This is advantageous because its hardware costs are lower. Its price point is half that of its rivals. Its software performs excellently on optimized hardware systems. Nintendo is the only company to profit from its hardware sales. They don’t constantly race to adopt the latest technology. Instead, they explore old or niche technologies that their competitors often overlook. [17] This approach has been central to their innovation, from early leadership to the present. They wait for new technologies and markets to mature. Then, they capitalize on the remaining parts and take them in entirely new directions. For instance, Vision Pro is cutting-edge. Nintendo would not invest in it until it has fully evolved, this is similar their approach with ChatGPT interactions.
Because of Lateral Thinking Nintendo has a gained advantage over its suppliers. Many suppliers lack influence or power over the gaming console industry. Many are glass manufacturers, plastic suppliers, and secondary chips manufacturers. Labor is plentiful. With the notable exception of Nvidia GPUs, chip shortages in Semiconductors threaten the gaming console industry. This situation could make the industry play secondary to Apple, for instance. Nintendo has always used chips or hardware that is not the latest or cutting edge. This has given Nintendo the advantage of not being pigeonholed to specific suppliers like other manufacturers. Nintendo uses older versions of hardware that are well developed and supported. It is cheaper to implement and buy hardware that was surpassed by Moore’s Law.
This why Lateral thinking is so powerful. No one says you must have the latest and greatest hardware. However, the benchmarking philosophy has pushed competitors to lose money on every Xbox or PlayStation sold. Moore’s Law pushes ahead, and older hardware becomes less valuable or cheaper. However, due to Nintendo’s engineering philosophy, they maintain their competitive advantage. They use low-cost materials, which are easy to implement in manufacturing components. They also use differentiation to maintain that advantage.
Well let’s look at some by concepts by Porter, and apply them to Sony and Nintendo. Nintendo has 2 essential generic strategies describe by Porter to maintain its competitive advantage the
1) innovate to differentiate
2) Appeal boardly to the market
3) Win the overall cost leadership compared to PS5 and Xbox. A Nintendo switch is $250 compared to Sony at $599.99
Winning cost leadership and differentiation is really hard to achieve in any market. Differentiation implies cost and a higher price on the product. It’s games offers a unique experience that furiously defend through IP lawyers. I.E. Mario kart is a experience I cannot get anywhere else. If we look at Xbox and Sony (PlayStation) in the past 10 years they maintained a competitive moat by providing exclusive titles to their consoles such as Halo and God of War. Recently, Xbox shifted to a Live As A Service model. They now freely provide their IP for licensing fees on other platforms like PC, PS5, and even the Nintendo switch.
They gave up the “exclusive IP” moat because they saw the writing on the wall for themselves. They were not making any profits on hardware. It was all software for them. Xbox was benching marking against Sony directly in a race to the bottom. Sony had to double down on its unique exclusives and innovative DualSense Wireless controllers’ with haptic feedback where the PS5 has evolved into a entertainment system providing Netflix and Crunchyroll streaming services. On top of that I think Microsoft is so large as firm its competitiveness for Xbox products has lost sight of the Xbox’s long term competitive advantage. Only through acquisitions of software companies and game developers has Xbox has remain relevant and potentially AI can improve game experiences but I haven’t seen that application yet which is disappointing only hobbyist have applied the technology a glimpse into the future of gaming.
Nintendo through its innovation and Lateral thinking has maintain its competitive moat against competitor again because its a cost leader against substitutes. Substitutes are an offering amazing experience, I personally love PC gaming it was not until recently that I was reintroduced to console gaming by my fiancée who brought a PS5 and had a Nintendo switch. The thing about substitutes is that darn price point, PC gaming is expensive to the average person. To the average person the set up process for that technology is complicated to understand which can be huge barrier to entry, I had a friend recently build/buy a gaming PC and it intimidated him terribly he thought he broke it.There is also second hand market for gaming PC and the substitutes can co-exist pretty well with gaming consoles because the experiences on both platforms are just different, its easier to use a gaming controller versus a mouse and keyboard.
Again the gaming console industry maintains that moat by being accessible to buyers and it being quarter the price of gaming PC on average, the Switch can be ~$250-299 some PC can go for ~750 > depending on the performance you want to get. Buyers especially in high interest rate environments and economically troubling times will be more price sensitive PC gaming and even mobile gaming could seem way to much in terms of cost for what the person receive. Buyers are always looking for alternatives, and lower prices, so if switch is $250-$299 we can see the PS5 price point at $599 makes a huge difference. This why each gaming console has formed its own niche that craters to different customers Sony’s PS5 and Xbox carters to a older teenage segment while Nintendo is brought by adults it’s also brought most commonly for children. As shown in this chart below we can see Switch and PS5 sales are out pacing Xbox sales.
Fun Comes First & Accessibility.
Another cornerstone of their innovative culture is the principle that fun comes first. Constantly experimenting in pursuit of ‘fun,’ Nintendo ensures that their games are enjoyable before even considering story or character development. [7] Nintendo’s initial foray into the video game console market was in the 1960s involved TV consoles, named ‘TV-Game,’ and in the late 1970s, they ventured into video game arcade machines. [4]
Then, its first ‘home video game system’ was called the Family Computer System, or Famicom, which was later rebranded as the well-known and successful home console, the NES or Nintendo Entertainment System. [4] Nintendo has led the way in new innovations in user interaction with the first ‘Hands Free’ controller. [12] This idea of accessibility for everyone and having fun with anything is a common cultural motif in Nintendo’s leadership approach.
Even recent leadership has focused on the ‘quality of life’ that it’s products provide to users, reflecting a user-centric design philosophy. [13]
Observing to Innovate
Nintendo was one of the first companies to create portable video games. They introduced the handheld ‘Game & Watch,’ an early precursor to the well-known Game Boy. This innovation was sparked by an observation made by Gunpei Yokoi. During a mundane train commute, Yokoi noticed a bored businessman idly mashing buttons on a pocket calculator. [17] This observation by Yokoi gave inspiration to the portable game console “Game & Watch.” It later inspired the development of the well-known Game Boy. Even Mark Zuckerberg, who made Facebook through a website called ‘course match,’ Zuckerberg observed user behavior. This observation led to the creation of Facebook. There is a connection between technology and psychology. A problem like a bored businessman on a train led to the Game Boy.
This is what sets innovative product developers apart. Yokoi turned ‘observed boredom into a product.’ [17] Nintendo’s creativity and innovation are distilled into its products, marking many firsts: touchscreens on the Switch, the attempt at virtual reality with the ‘Virtual Boy’ (which was a complete failure), analogue control sticks, wireless controllers and motion control for the Wii console, and portable gaming with the Game Boy. [14] The key to such innovations has been Nintendo’s ability within its R&D to foster collaboration between software and hardware development teams, aiming to create a better overall user experience in their continuous pursuit of fun.[14]
Nintendo’s Customer Touch Points
Nintendo announced and released their products at E3 for years. Recently, they pulled out of the event last year 2023. [10] but these E3 events has become a great touch point for its brand to engage with customers. For the past 30 years, Nintendo has made video game announcements and demonstrated its most innovative products at E3. This practice has long projected an image of a company constantly striving to improve and present new user experiences to its consumers.
This what it means to stay relevant and competitive in the market keep excitement going with consumers. A notable example is how it presented its latest IP release at Nintendo Direct E3 2021, where executives, directors, and developers showcased the latest innovations. [11] Additionally, on the backend, Nintendo has released a series of blog articles titled ‘Ask The Developer’, where specific games and their developers are interviewed directly to discuss the innovative aspects and user experience of their products.
What is Next for Nintendo?
Nintendo is now pursuing the development of the Switch 2, which is rumored to be released in 2025. [14] However, Nintendo’s current president, Shuntaro Furukawa, has downplayed this, stating that they are constantly researching and developing. [16] In the 2024 Q&A for investors, it was mentioned that Nintendo has applied its IP to movies, mobile apps, and theme parks. This initiative aims to ‘invigorate’ the video game platform business within the Switch ecosystem.” [16]
What can we learn from Nintendo
- Have a mission or design philosophy like “design for fun.”
- Collaborate between departments and internationally with other companies.
- Seek out the potential in employees promote and direct them for opportunity.
- Give small teams a chance to experiment and innovate.
- Realize that your IP can sometimes extend beyond its current industry.
Work Cited
[3] Porter’s Generic Competitive Strategies (ways of competing) https://www.ifm.eng.cam.ac.uk/research/dstools/porters-generic-competitive-strategies/
[4] Laurie Takeda. “The History of Nintendo: the Company, Consoles And Games” ART 108: Introduction to Games Studies (2020).
[5] Google. (2024). Nintendo ADR (NTDOY) stock price. Retrieved February 25, 2024, from https://www.google.com/finance/quote/NTDOY:OTCMKTS?sa=X&ved=2ahUKEwirsvmE5caEAxV8kIkEHYJKDykQ3ecFegQIMhAg
[6] UnmissableJAPAN.com Hanafuda Retrieved February 25, 2024, from http://www.unmissablejapan.com/etcetera/hanafuda
[7] Chung, Y. (2019, November 4). Nintendo Mindset and Culture. Medium. Retrieved from https://jadechung414.medium.com/nintendo-mindset-and-culture-335481135346
[8] Before mario. (2020, June). Nintendo’s washable playing cards from the 1970s. Retrieved from http://blog.beforemario.com/2020/06/nintendos-washable-playing-cards-from.html
[9] Faller, C. (2003, September 12). Nintendo history lesson. Digg. Retrieved from https://web.archive.org/web/20180505151700/http://www.n-sider.com/contentview.php?contentid=34
[10] Bailey, K. (2023, January 30). Exclusive: Xbox, Nintendo, and Sony Won’t Be Part of E3 2023. IGN. Retrieved from https://www.ign.com/articles/xbox-nintendo-sony-skipping-e3-2023
[11] Nintendo of America. (2021). Nintendo Direct – 06.15.2021. Retrieved from https://www.nintendo.com/us/nintendo-direct/06-15-2021/
[12] Good Trouble Games. (n.d.). Accessibility Spotlight: The Nintendo Hands-Free Controller. Good Trouble Games Blog. https://blog.goodtrouble.games/accessibility-spotlight-the-nintendo-hands-free-controller
[13] GameSpot. (n.d.). Nintendo president — We are not just a video game company. Retrieved from https://www.gamespot.com/articles/nintendo-president-we-are-not-just-a-video-game-company/1100-6419254/
[14] Stuart, K., & MacDonald, K. (2018, April 25). Nintendo’s Secret Innovation Lab: ‘Ideas Are Cheap, Execution Is Key’. The Guardian. Retrieved from https://www.theguardian.com/games/2018/apr/25/nintendo-interview-secret-innovation-lab-ideas-working
[15] Murty, M. (2024, February 8). Nintendo Switch 2: 2024 Launch Rumors Dismissed by President Shuntaro Furukawa. IGN. Retrieved from https://in.ign.com/nintendo-switch-2-unofficial-name/201860/news/nintendo-switch-2-2024-launch-rumors-dismissed-by-president-shuntaro-furukawa
[16] Nintendo Co., Ltd. (2024). Nine Months Financial Results Briefing for Fiscal Year Ending March 2024 (Online) Nintendo Co., Ltd. Q&A Summary (English Translation of Japanese Original). Retrieved from https://www.nintendo.co.jp/ir/pdf/2024/240207e.pdf
[17] Locke, H. (2012, September 25). Promoted blog: Gunpei Yokoi remembered. Destructoid. Retrieved from https://www.destructoid.com/promoted-blog-gunpei-yokoi-remembered/