Nintendo's “Revolution” - MIT Sloan School of Management

Nintendo’s “Revolution” 

Sangbeom Kim, Ian Lamont, Hiroshi Ogasawara, Mansoo Park, Hiroaki Takaoka 

11-124 

October 18, 2011 

Satoru Iwata, president of Nintendo Corporation (Nintendo), strode from the conference room with a 

smile on his face. It was late 2004, and he was tremendously excited with what his engineers had just 

demonstrated — a video game controller that was not a variation of the joystick, but rather a stubby 

rod that a gamer could manipulate with one hand. Not only did it enable the creation of games that 

mimicked real-world movements like throwing, hitting, or aiming, Iwata believed it could help open 

up video games to a vastly different audience than the boys and young men who traditionally bought 

video game consoles. 

Expanding the gaming industry’s customer base was key to Iwata’s vision of a next-generation 

console codenamed “Revolution.” The idea was to bring tens of millions of new customers into the 

gaming realm, people who had never played video games before or saw them as mere toys. Iwata 

believed that a new take on gaming might even attract mothers — an influential household 

constituency, thanks to their influence over household spending 1 — through a combination of 

hardware design, game-play, and price. What better way to attract them than through a controller that 

had a form factor similar to a TV remote control? 

But Iwata’s enthusiasm for the controller prototype was tempered by a number of real-world 

considerations. First, no other company had ever released such a controller. How would the 

marketplace react to such a vastly different model? Second, many of the technologies that were 

required to make the rod controller work — such as wireless positioning — might never operate 

perfectly outside of the lab, in people’s apartments and homes. Third, any new Nintendo controller 

1 American Express Everyday Spending Index, via Ashish Rajan, “Convenience Drives Cards,” CardTrak.com, March 13, 2000. Accessed via 

http://www.cardtrak.com/news/2000/03/13/convenience_drives_cards in June 2011. 

This case was prepared by Sangbeom Kim, Ian Lamont, Hiroshi Ogasawara, Mansoo Park, and Hiroaki Takaoka (Sloan 

Fellows, Class of 2011). 

Copyright © 2011, Sangbeom Kim, Ian Lamont, Hiroshi Ogasawara, Mansoo Park, and Hiroaki Takaoka. This work is licensed 

under the Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 Unported License. To view a copy of this 

license visit http://creativecommons.org/licenses/by-nc-nd/3.0/ or send a letter to Creative Commons, 171 Second Street, Suite 

300, San Francisco, California, 94105, USA.

NINTENDO’S “REVOLUTION” 


had to be backwards compatible with games made for older Nintendo consoles like the GameCube, 

which used traditional two-handed controllers. 

Additionally, Iwata was very sensitive to the reaction of the gaming industry and the existing gaming 

population to a non-traditional product aimed at a non-traditional audience. Nintendo had a long 

history of video game success, epitomized by the popular Mario Bros. franchise invented by 

Nintendo’s game design guru Shigeru Miyamoto in the 1980s. However, the company’s last console, 

the GameCube, was unable to get sufficient traction after it was launched in 2001. In 2002, sales 

forecasts for the GameCube had been off by 44% and the company had been forced to cut revenue 

targets by ¥100 billion. 2 Gamers much preferred Sony’s PlayStation 2 console and Microsoft’s Xbox 

console, 3 which were characterized by flashy graphics and hardcore fighting and sports titles. Iwata 

needed a home run to put Nintendo back on its feet. Could the Revolution’s radical hardware design 

help turn the company’s fortunes around? 

History of Video Games 

1960s-1970s 

Video games have been around since the early 1960s. In 1962 MIT students Steve Russell, Martin 

Graetz and Wayne Witaenem developed Spacewars, the first video game. Spacewars marked the first 

time that computer graphics were used in a game. It quickly gained popularity among hackers and 

computer geeks, 4 but never had a mainstream audience, owing to the fact that most people did not 

have computer access. 

In the late 1960s, Alan Kay developed the Dynabook, an early personal computer, which was targeted 

at children. The Dynabook concept set the stage for both the PC and computer game revolutions in 

the 1970s. 5 The first game console was the Magnavox Odyssey, developed by engineer Ralph Baer as 

a side project in 1972. 6 The following year, U.S.-based Atari launched a simple table tennis game 

called Pong in the United States, which could be hooked up to a TV set. 7 It was a hit. In 1977, the 

company released a more sophisticated game console, the Atari 2600, which let users load different 

games into the system using rectangular cartridges. It was an even bigger hit, selling more than 30 

million units. 8 

2 David Teather, “Nintendo in Sales,” The Guardian, March 8, 2003. Accessed from 

http://www.guardian.co.uk/technology/2003/apr/08/business.onlinesupplement in December 2010. 

3 Ibid. 

4 MIT 150 Exhibition “Spacewar! Steve Russell, Martin Graetz, and Wayne Witaenem, 1961–1962.” Accessed from http://museum.mit.edu/150/25 in May 

2011. 

5 Pete Markiewicz, “Plyojump - Computer History.” Accessed from http://www.plyojump.com/classes/microcomputer_era.html in May 2011. 

6 Philip Likens, “Ralph Baer: The Magnavox Odyssey.” Accessed from http://deptof.com/?p=185 in May 2011. 

7 Pete Markiewicz, “Plyojump - Computer History - Computer and Console Games (1952-Present).” Accessed from 

http://www.plyojump.com/classes/computer_games.html in May 2011. 

8 Geoff Edgers, “Q&A: A Talk with Nick Montfort: Atari and the Deep History of Video Games,” Boston Globe, March 8, 2009. Accessed from 

http://www.boston.com/bostonglobe/ideas/articles/2009/03/08/a_talk_with_nick_montfort/ in December 2010. 

October 18, 2011 2



Japanese companies took notice. In 1977, Nintendo released a Pong knockoff called Color TV Game 

6 (“6” referred to the number of variations of the game that players could select). It sold more than 1 

million units. 9 In 1978, Taito launched an arcade game called Space Invaders. The game, designed by 

Tomohiro Nishikado, was one of the first video games to feature shooting, and helped expand the 

video game industry from a novelty to a global industry. 10 In 1980, Atari licensed the game from 

Taito, which greatly boosted the 2600 console’s sales and audience size. 

Global Expansion 

Atari’s business model — licensing titles, commissioning developers to write games, and developing 

other titles in-house — was not sustainable, especially as the 2600 console’s 1977-era technology 

became dated. As it faded in the early 1980s, Japanese companies took the lead in developing gaming 

hardware and software for both mobile and console systems. 

In 1980, Nintendo launched “Game and Watch,” which was the first handheld game device inspired 

by an LCD calculator and digital watch. 11 Later in the decade, the company would release the Game 

Boy, which dominated the hand-held gaming market for years. 

Nintendo’s console foray was even more successful. It developed the Famicom (short for “Family 

Computer”) in Japan in 1983. Titles such as Mario Bros. and a console version of the arcade hit 

Donkey Kong made the Famicom hugely popular in Japan. In 1985, Nintendo released the Famicom 

worldwide as the Nintendo Entertainment System, or NES. 12 (See Exhibit 1.) The NES console had a 

different exterior casing than the Famicom’s, but the components inside were nearly identical. It was 

a runaway success, selling 62 million units worldwide. 13 

Key to Nintendo’s success was the company’s control over third-party software developers. Nintendo 

encouraged third-party developers to create games for the wildly popular NES, as long as they agreed 

to produce no more than five games per year, and not produce titles for any other console system for 

two years. 14 Nintendo would manufacture approved titles on NES-compatible game cartridges and 

sell them back to developers, who would then market and distribute the games. The system 

encouraged the development of innovative new titles and more NES sales. By 1989, video games 

were a $3.4 billion market in the United States, and Nintendo claimed a 79% market share. 15 

9 Wikia Gaming, “Nintendo: Color TV Game 6.” Accessed from http://nintendo.wikia.com/wiki/Color_TV_Game_6 in June 2011. 

10 Tony Gray, “Hooked on Space Invaders,” The Sydney Morning Herald, September 9, 1980. 

11 Sally Solo, “The Best Toys Come in Square Packages,” United Press International/Times Daily, November 27, 1983. 

12 “Top 25 Video Game Consoles of All Time,.” IGN.com. Accessed from http://www.ign.com/top-25-consoles/ in December 2010. 

13 Ibid; Nintendo Co., Ltd.: Consolidated Sales Transition by Region. Accessed from http://www.nintendo.co.jp/ir/en/library/historical_data/index.html in June 

2011. 

14 J. Rader, “Background: Atari Games Corp. v. Nintendo of America Inc. U.S. Court of Appeals, Federal Circuit, September 10, 1992.” Accessed via 

http://digital-law-online.info/cases/24PQ2D1015.htm in June 2011. 

15 George Tibbets, “Nintendo Has Strategy to Keep its Lead in Toy Industry,” Associated Press/Pittsburgh Post-Gazette, December 25, 1989, page C18. 

October 18, 2011 3



Nintendo wasn’t the only company to profit. Several American game studios grew very successful 

businesses creating games using the Nintendo model until lawsuits from shut out developers and an 

antitrust investigation forced Nintendo to discontinue exclusivity requirements. 16 Nevertheless, the 

third-party developer model was established as an extremely profitable and effective way to sell 

games — and consoles. 

A Technological Arms Race 

Nintendo began to face strong competition from Tokyo-based Sega, which released a 16-bit console 

called Genesis in 1989. There was also growing competition from PC games, including new roleplaying 

titles such as Ultima, which took advantage of rapid advances in semiconductor technology as 

well as the huge distributed base of PCs running on Microsoft Windows. Additional PC technology 

enablers included 256-color VGA graphics cards and “Sound Blaster” cards for audio. 

Increasingly, games and game consoles began to compete on underlying technological advancements, 

enabled by exponential advances in computing technology. Blocky 2D graphics and limited sound 

effects had been replaced by slick 3D environments, stereo audio, and even high-quality CGI 

“cutscenes” that featured the voices of actors recorded in professional sound studios. 

Even though the modern consoles were roughly the same size as their late-1970s counterparts, the 

hardware inside the machines had drastically changed. A video game console was essentially a 

computer with a niche purpose: letting users play games. Just like PCs and all other computers, video 

game consoles had a central processing unit (CPU), which carried out the various processing 

functions necessary to play games, including starting a new game, loading a new level, calculating 

scores, processing inputs from the controllers, and displaying the results on the screen. The power of 

early console processors was measured in “bits,” or a binary digit (one or zero). The Atari 2600 had a 

4-bit CPU, while the consoles of the late 1990s used faster 64-bit CPUs. 

Modern consoles had an additional component, as well: graphics processing units (GPU), also known 

as graphics accelerators. A GPU was an extra processor that allowed the CPU to offload calculations 

and instructions required to render graphics on the screen. With powerful CPUs, GPUs, and sound 

cards, consoles could deliver more intense gaming experiences, including more realistic textures, 

weapons, backgrounds, characters, and monsters in 3D worlds. 

Diversification in the 1990s 

As the hardware race heated up, Nintendo and Sega continued developing consoles. A second 

Nintendo console, the Super Famicom, or Super NES, was launched in the early 1990s and sold 49 

16 L. Gordon Crovitz, “Rule of Congress Zaps Mario and Luigi With Killer Lawyers,” The Wall Street Journal, January 17, 1990. 

October 18, 2011 4



million units globally. 17 Starting in 1989, the company released a series of innovative and ultimately 

successful handheld gaming products. The Super Game Boy even had an adapter for earlier NES and 

Super NES cartridges. 

But not all of Nintendo’s gaming efforts were successful. In 1995, Nintendo attempted to capitalize 

on a craze for early virtual reality technologies. It announced the first 3D graphic video game console, 

called Virtual Boy (Exhibit 2). The Virtual Boy used a head-mounted display to give users an illusion 

of depth in a simple monochrome virtual world. It was an ambitious project, but met with lukewarm 

reception in the market. 18 

Sega launched its 32-bit Saturn console in 1995, 19 but it did not fare well against the crop of 

graphically superior systems that were entering the market around the same time. 20 In 1996, Nintendo 

announced the Nintendo 64, the company’s last home console to use cartridges (Exhibit 3). Later, 

Nintendo switched to a MiniDVD-based format for the GameCube. The Nintendo 64 sold about 5.5 

million units in Japan and 33 million units worldwide 21 — an impressive feat, but not nearly as 

powerful an impact as Sony’s PlayStation. 

Sony entered the market on the software side with its Famicom game called Captain ED in 1989. 22 

Initially, there was strong internal resistance to entering the video game business. Some in the 

company assumed that being associated with a toy would ruin the Sony brand. But an insightful Sony 

executive, a former engineer named Ken Kutaragi, had another idea. In 1990, Kutaragi proposed that 

Nintendo partner with Sony to co-develop a CD-ROM-based console that leveraged Sony’s CD- 

pressing technology. Nintendo and Sony started work on the console, but Nintendo later backed out, 

fearing it was too risky to work with a potential competitor. Sony started to develop its own CD- 

ROM-based console, and in 1994 released the 32-bit PlayStation. Sony engineers managed to 

overcome the limitations of earlier systems by pricing the PlayStation lower than the previous CD- 

ROM-based game consoles like the NEC PC Engine. 23 The PlayStation’s superior system 

performance, affordable price, and wide array of games were enough to turn the market upside down. 

It was the prelude of a new era in the console industry. 24 

Not all new competitors fared so well. In the mid-1990s, 3DO, an American company, developed a 

32-bit console called the 3DO Interactive Multiplayer, and licensed the technology to three 

17 “Top 25 Video Game Consoles of All Time,” IGN.com. Accessed from http://www.ign.com/top-25-consoles/ in December 2010. Nintendo Co., Ltd.: 

Consolidated Sales Transition by Region. Accessed from http://www.nintendo.co.jp/ir/en/library/historical_data/index.html in June 2011. 

18 Mike Cameron, “Virtual Boy Is a Virtual Snore,” The Spectator, September 21, 1995, page 11. 

19 “Top 25 Video Game Consoles of All Time,” IGN.com. Accessed from http://www.ign.com/top-25-consoles/ in December 2010. 

20 Ibid. 

21 Nintendo Co., Ltd.: Consolidated Sales Transition by Region. Accessed from http://www.nintendo.co.jp/ir/en/library/historical_data/index.html in June 2011. 

22 “Captain Ed,” Gamespot GameFAQs. Accessed from http://www.gamefaqs.com/nes/579469-captain-ed in May 2011. 

23 “SNES CD-ROM Console Information,” Console Database. Accessed from http://www.consoledatabase.com/consoleinfo/snescdrom/ in May 2011. 

24 Lev Grossman, “Ken Kutaragi: Gutenberg of Video Games,” Time, September 27, 1993. Accessed from 

http://www.time.com/time/subscriber/2004/time100/artists/100kutagari.html in December 2010. 

October 18, 2011 5



manufacturers: Panasonic, Goldstar, and Sanyo. It initially received strong reviews, but the $699 price 

was too high and there weren’t enough games. The effort failed. 25 

Another American company that attempted to follow the licensing route was Apple, which partnered 

with Japanese manufacturer Bandai on the Pippin. The Pippin console, which launched in 1996 in 

Japan, North America, and Europe, ran on an Apple operating system but was an utter failure. It was 

later rated by PC World magazine as one of the “worst tech products of all time,” owing to its high 

price ($600) and limited game selection. The product was withdrawn from the market in 1997. 26 

Besides the console wars, several technological trends also shaped PC gaming during the 1990s, 

including the introduction of faster processors and graphics cards as well as the spread of network 

connections via the Internet and local-area networks (LAN). First-person shooter titles such as Doom 

and Quake could be played over a LAN or Internet connection, and featured sophisticated 3D 

graphics. Another genre that began to gain steam was online role-playing games, such as Starcraft 

and the continuation of the Ultima series from the 1980s. By the late 1990s, sales of video games 

rivaled movie ticket sales. 27 

Market Dynamics 

Competitive Trends in the Early 2000s 

By the early part of the 2000s, video games were firmly entrenched in youth culture. A report 

published by the Pew Internet and American Life Project noted that in 2002, 60% of U.S. residents 

aged six and older played video games and more than 221 million games were sold. 28 

Clearly, games were a big business. Nintendo had fared well, outliving all of its early console 

competitors (Sega’s last console was the Dreamcast, released in 1999 29 ). But, Sony and Microsoft, 

two relative newcomers, threatened Nintendo’s future in console gaming. 

By this time, Sony dominated with its PlayStation 2 (which could play DVDs as well as game titles). 

Launched in 2000, it was designed to be backwards-compatible with all games from the original 

PlayStation console. 30 This meant it launched with a massive base of players, which expanded to 24 


26 Dan Tynan, “The 25 Worst Tech Products of All Time,” PCWorld, May 26, 2006. Accessed from http://www.pcworld.com/article/125772- 

6/the_25_worst_tech_products_of_all_time.html#pippin in December 2010. 

27 P.J. Huffstutter, “Now Video Games Are as Big as the Movies,” Los Angeles Times, May 10, 1999. Accessed from 

http://articles.latimes.com/1999/may/10/news/mn-35703 in June 2011. 

28 Steve Jones, “Let the Games Begin: Gaming Technology and College Students,” Pew Internet & American Life Project, July 6, 2003. 


30 Richard Stenger and Daniel Sieberg, “PlayStation 2 Makes Its North American Debut,” CNN.com, October 26, 2000. Accessed from 

http://edition.cnn.com/2000/TECH/computing/10/26/ps2.main.story/ in July 2011. 

October 18, 2011 6



million within three years as new titles were built for the PlayStation 2’s superior graphics. 31 Sony 

was also battling Nintendo in mobile gaming. In 2004 the two companies released new handheld 

gaming systems. The Sony PSP was a portable device that had the most advanced graphics available 

for a portable gaming device. However, the Nintendo DS took a different approach to gaming, 

featuring two screens with more cartoon-like effects and simple game scenarios. While the PSP 

attracted attention from hardcore gamers, the DS was a hit with children, thanks to its easy-to-learn 

game-play and popular titles such as New Super Mario Bros. 

Meanwhile, Microsoft was attempting its own aggressive push into gaming. In the 1980s and 1990s, 

Microsoft’s gaming efforts centered on support for PC game publishers and its own Flight Simulator 

franchise. That changed with the launch of the original Xbox in 2001. The Xbox went head-to-head 

with Sony’s PlayStation 2. Both consoles competed for hard-core gamers on hardware performance 

and graphics — popular titles like Madden and Half-Life 2 tried to immerse players in realistic 3D 

environments, and depended on heavy-duty processing power and a constant stream of new titles to 

keep players hooked. In-game scenarios were getting longer and more sophisticated and, like their PC 

counterparts, they let players perform a wide range of functions using various combinations of input 

buttons on the controller. The games were clearly aimed at a hard-core audience of regular players. 

Although Microsoft had never disclosed how much it spent developing the Xbox, analysts estimated 

it lost $2 billion to establish the console in the market. 32 In terms of the two consoles’ installed bases, 

Sony had a market share of 66% while Microsoft had just 22%. 33 Squeezed in-between these two 

aggressive competitors, Nintendo had to think through how to fight back. 

In 2001, Nintendo released the GameCube console (Exhibit 4). It was housed in a plastic cube about 

the size of a lunchbox. Inside, it featured an IBM-designed “Gekko” processor and ATI “Flipper” 

GPU, and had an optical disc drive. 34 While adequate for basic 3D games and Mario Bros., the 

hardware failed to measure up to the PlayStation 2 or the Xbox. Nintendo dismissed the criticism, 

saying that the simple design and emphasis on fun-to-play software like Metroid Prime and Legend of 

Zelda was an asset, and would help attract new gamers who were turned off by long, complex console 

games. Indeed, the GameCube’s software, toy-like feel, low-powered hardware, and cheap price 

($200 at launch) appealed to families with younger children. However, many serious gamers derided 

it for its poor hardware specs and lack of compelling software. 35 It sold nearly 22 million units 

31 Davide Dukcevich, “Monday Matchup: PlayStation 2 Vs. Xbox,” Forbes, December 22, 2003. Accessed via 

http://www.forbes.com/2003/12/22/cx_dd_1222mondaymatchup.html in June 2011. 

32 David Becker and Joe Wilcox, “Will Xbox Drain Microsoft?” CNet News, March 6, 2001. Accessed from http://news.cnet.com/Will-Xbox-drain- 

Microsoft/2100-1040_3-253654.html in June 2011. 

33 Davide Dukcevich, “Monday Matchup: PlayStation 2 Vs. Xbox,” Forbes, December 22, 2003. Accessed via 

http://www.forbes.com/2003/12/22/cx_dd_1222mondaymatchup.html in June 2011. 

34 “Nintendo’s GameCube Technical Overview,” Dreamcast Technical Pages. Accessed from http://www.segatech.com/gamecube/overview/index.html in June 

2011. 

35 “Top 25 Video Game Consoles of All Time,” IGN.com. Accessed from http://www.ign.com/top-25-consoles/16.html in December 2010. 

October 18, 2011 7



worldwide before being discontinued. 36 By comparison, the PlayStation 2 sold an estimated 130 

million units. 37 

Two-Sided Networks 

The video game industry was a classic example of a business based on network externalities. The 

more consoles that were sold, the more independent gaming studios were incented to develop new 

titles. This in turn increased console sales. Console makers could also sell their own titles, a tactic that 

had worked very well for Nintendo and its Mario Bros. and Pokémon franchises. 

As the video game market was growing, hardware was typically sold at a loss right after launch in 

order to build a customer base. Once the customer base was established, software could be sold at a 

higher price and/or volume to make a profit. Average console costs dropped over time, as 

manufacturing scaled up, component costs declined, and the learning curve kicked in. Sony lost an 

estimated $100-$160 per PlayStation 2 when it was first launched, but reportedly made up for the loss 

with profits generated by selling game titles and accessories. 38 Microsoft also sold consoles at a loss, 

in order to establish a presence in the new industry. 39 

But the positive feedback loops required to make a successful console were hard to maintain. 40 First, a 

constant stream of new game titles was required to preserve the value of the console hardware, and 

convince gamers not to switch. If a platform failed to preserve a steady stream of new titles, negative 

feedback loops would kick in as gamers and developers abandoned the platform. Second, game 

development had become far more complicated in terms of game-play scenarios and technology 

requirements. In 1996, a typical PlayStation game cost $1 million to develop and sold for $49. By 

2003, PlayStation 2 and Xbox games still cost $49, but development costs had risen to between $5 

million and $7 million per game. The high costs meant console companies, major game publishers 

and independent studios had to rely on a high degree of collaboration. These requirements dissuaded 

smaller studios from producing lots of titles, which created an additional drag on the network 

externalities that powered successful platforms. Third, independent game studios did not want the 

console market dominated by only Sony and Microsoft, as it reduced their bargaining power in profitsharing 

negotiations. This dynamic was actually a boon to Nintendo — many third-party publishers 

wanted to help Nintendo with its next console effort, which served as an additional positive network 

effect for Nintendo. 

36 Nintendo Co., Ltd.: Consolidated Sales Transition by Region. Accessed from http://www.nintendo.co.jp/ir/en/library/historical_data/index.html in June 2011. 


38 “The Game of War,” Red Herring, October 14, 2001. Accessed from http://www.redherring.com/Home/2699 in June 2011. 

39 David Becker and Joe Wilcox, “Will Xbox Drain Microsoft?” CNet News, March 6, 2001. Accessed from http://news.cnet.com/Will-Xbox-drain- 

Microsoft/2100-1040_3-253654.html in June 2011. 

40 Tom Loftus, “Top Video Games May Soon Cost More,” MSNBC, June 17, 2003. Accessed from 

http://www.msnbc.msn.com/id/3078404/ns/technology_and_science-games/ in December 2010. 

October 18, 2011 8



Periodic Market Cycle 

The video game industry had a five-year hardware cycle. Once a new game console was released, 

new game titles would be launched on their own cycles over the five-year period. Many were one-off 

titles that were nominally successful or, in some cases, lost money. Others were popular and 

generated sequels every two or three years. Some, such as popular sports titles, had new releases or 

expansion packs every year. 

Since there were a limited number of developers or game publishers, early mover advantage existed 

for console manufacturers. And once software developers devoted resources to building game titles 

for one hardware platform, it was difficult for them to switch to another platform owing to different 

staffing or technical requirements. Furthermore, once gamers invested in one console, they were less 

likely to switch consoles owing to the additional cost. 41 These factors made it difficult for new 

hardware manufacturers to enter the market. 

By the end of 2004, the competition was starting to approach the end of their respective five-year 

cycles. Sony and Microsoft would be launching replacements for the PlayStation 2 and Xbox in time 

for the 2005 holiday shopping season. 42 Following this same five-year hardware cycle, Nintendo 

would have a new console hitting the market in 2006. 

A History of Nintendo Management 

The Playing Card Era 

Nintendo was established in 1889 by Fusajiro Yamauchi to produce handmade playing cards 

decorated with drawings of flowers, famous people, and other objects (Exhibit 5). The name of the 

company, when rendered in the Chinese script used in Japan, meant “luck-heaven-hall.” The 

company began selling ‘Hanafuda’ cards in two shops, one located in Osaka and the other in Kyoto, 

where Nintendo company headquarters are still located. The cards were a success, and the company 

rapidly expanded. It was run by Yamauchi’s extended family for more than 100 years. 

At first, the company concentrated on the card business. But in 1959, with a young CEO named 

Hiroshi Yamauchi at the helm, Nintendo cut a licensing deal with Disney to have Disney characters 

printed on Nintendo’s playing cards, thus giving them a brand new look. 43 In 1963, Yamauchi 

shortened the Nintendo Playing Card Company’s name to Nintendo Company Limited, 44 signaling 

41 Tom Loftus, “Top Video Games May Soon Cost More,” MSNBC, June 17, 2003. Accessed from 

http://www.msnbc.msn.com/id/3078404/ns/technology_and_science-games/ in December 2010. 

42 Ina Fried. “Digging Profits Out of Xbox,” Cnet.com. August 10, 2005. Accessed from http://news.cnet.com/Digging-profits-out-of-Xbox/2100-1043_3- 

5827110.html in December 2010. 

43 Chris Kohler, “This Day in Tech: Success Is in the Cards for Nintendo,” Wired, September 23, 2010. Accessed from 

http://www.wired.com/thisdayintech/2010/09/0923nintendo-founded/ in June 2011. 

44 “Nintendo History,” Nintendo.co.uk. Accessed from http://www.nintendo.co.uk/NOE/en_GB/service/nintendo_history_9911.html in June 2011. 

October 18, 2011 9



that the company would not limit itself to playing cards, and that it would soon enter other business 

domains. And so it did. 

Surviving as a Toy Company 

In the early 1970s, Nintendo ventured into other businesses, including food and toys. One unexpected 

success in the late 1970s was Nintendo’s “Ultra Hand,” an extendable robotic arm designed by 

Gunpei Yokoi, an assembly line maintenance engineer working at Nintendo. Yamauchi saw that 

Yokoi had great ideas and engineering talent, and transferred him to product development where he 

came up with innovative products like a baseball throwing machine and a puzzle game. Eventually, 

Yokoi oversaw Nintendo’s early video game efforts, including the arcade version of Donkey Kong 

and the Game Boy. 45 

Nintendo Management Under Hiroshi Yamauchi 

Nintendo’s modern organizational structure was strongly influenced by the management style of the 

former president and CEO, Hiroshi Yamauchi, who led the company from 1950 to 2002. He was a 

member of the founding family. 46 

A charismatic leader with a strong vision of what the company could become, Yamauchi drove other 

family members from Nintendo’s board soon after he became president and CEO. Nintendo was 

originally a family-owned and -managed company but Yamauchi thought it was necessary to change 

its culture. 47 

Yamauchi was a hands-on leader, apt to make quick decisions according to his vision for the 

company. He was always thinking of ways in which the company could please its customers, and 

welcomed the introduction of new ideas, experimentation, novel processes and products — including 

food, toys, and, eventually, video games. This attitude extended to other companies in the Nintendo 

ecosystem, as one engineer later described: “Nintendo is always trying to do something new and 

different. This message has been spread not only within Nintendo, but to other companies as well. As 

a result, our development partners have naturally tended to present us with new technologies and 

ideas.” 48 

Yamauchi established a flat organizational structure at Nintendo. He wanted employees to focus on 

customer value, and he believed an organization free from bureaucratic rigidity was best suited to 

providing it. Decisions were to be made quickly. Notably, Nintendo under Yamauchi promoted a risktaking 

culture, which was unusual for a large Japanese company. Therefore, when Iwata became 

45 Lara Crigger, “Searching for Gunpei Yokoi,” The Escapist, December 25, 2007. Accessed from 

http://www.escapistmagazine.com/articles/view/issues/issue_129/2744-Searching-for-Gunpei-Yokoi in December 2010. 

46 “Nintendo History,” Nintendo.co.uk. Accessed from http://www.nintendo.co.uk/NOE/en_GB/service/nintendo_history_9911.html in June 2011. 

47 Takura Kura, “The Success and Failure of Nintendo,” Doushisya Business School, December 2006. 

48 Kou Shiota, Nintendo, “Using State-Of-The-Art Technology in Unprecedented Ways,” Wii.nintendo-europe.com, December 2006. Accessed from 

http://wii.nintendo-europe.com/163.html in December 2010. 

October 18, 2011 10



president of Nintendo in 2002, the company was prepared to compete in a fast-moving, uncertain, and 

competitive environment. 49 

Iwata’s Influence 

Iwata, an experienced game developer and former president of game studio Hal Laboratory, became 

president of Nintendo in 2002. Even though he was not a member of the founding family, Yamauchi 

believed Iwata was the right leader to take Nintendo into the new millennium. 50 

After becoming CEO, Iwata pushed for several changes in Nintendo’s organizational culture. First, he 

asked Nintendo executives to think about what made initiatives succeed or fail. In his mind, the 

process was more important than the result. He pressed executives and employees over why certain 

business results had occurred. Even if sales were great, executives couldn’t sit back and bask in their 

success —Iwata would demand to know the factors that had led to the positive outcome. 51 

This emphasis on understanding led to improved communication across departments. The company’s 

strategy became better understood among the 1,300 rank-and-file employees, which resulted in more 

autonomy across the organization. 52 

Coming from outside of Nintendo, Iwata made it a rule to talk with staff and persuade them of his 

vision for the company. This practice created a culture of discussion in an organization that had 

previously been managed in a top-down way. This culture of discussion reinforced coordination 

among the company’s software and hardware divisions, which had been established during the 

development of the Nintendo DS. This culture proved beneficial as the Revolution project got 

underway. 53 

Revolution 

While Hiroshi Yamauchi would never have been able to participate in the highly technical 

discussions that took place during earlier console development projects in the 1980s and 1990s, Iwata 

relished rolling up his sleeves for the Revolution project and diving into the problems with his top 

lieutenants and engineers. (See Figure 1 for a description of the core product team.) “We 

brainstormed with each other from square one,” Iwata recalled. “We were all running into the same 

walls, and we made the critical decisions together. I talked with a lot of people, such as Takeda-san 

and Miyamoto-san, along the way at each juncture.” 54 

49 Takura Kura, “The Success and Failure of Nintendo,” Doushisya Business School, 2006. 

50 “The Stars of Asia: Satoru Iwata,” BusinessWeek, July 8, 2002. Accessed from http://www.businessweek.com/magazine/content/02_27/b3790605.htm in June 

2011. 

51 Kouji Sasaki, “Interview with Satoru Iwata,” Nikkei Business, November 27, 2006. 

52 “Turning the Tables: Asking Iwata,” Wii.nintendo-europe.com. Accessed from http://wii.nintendo-europe.com/165.html in December 2010. 


54 “Turning the Tables: Asking Iwata,” Wii.nintendo-europe.com, December 2006. Accessed from http://wii.nintendo-europe.com/165.html in December 2010. 

October 18, 2011 11



Figure 1 Revolution Core Product Team 

Genyo Takeda General Manager, Integrated Research and Development Division 

Shigeru Miyamoto General Manager, Entertainment Analysis and Development Division. 

Miyamoto was a legend in the industry for his software development work and 

design for games such as Donkey Kong and early NES titles such as Super 

Mario Bros. He had also worked on titles for the GameCube, including Legend 

of Zelda. 

Kou Shiota Integrated Research and Development Division, Product Development 

Department, Development Group No. 2. Shiota’s specialty was semiconductor 

design. He, too, had worked on the GameCube. 

Kenichiro Ashida Integrated Research and Development Division, Product Development 

Department, Design Group. Ashida was a long-time Nintendo employee who 

had worked on the Super NES, Nintendo 64, and GameCube, and for the 

Revolution was responsible for the design of the console, controller, packaging, 

and logos. 

Akio Ikeda Integrated Research and Development Division, Product Development 

Department, Development Group No. 5. Ikeda had developed several games in 

the past that had used accelerometers and innovative interfaces. 

Junji Takamoto Integrated Research and Development Division, Product Development 

Department, Development Group No. 3. Takamoto was responsible for all 

hardware parts on the Revolution with the exception of the circuit board. 

As planning began on Nintendo’s next-generation gaming console in the months following the release 

of the GameCube, the team began to think about the core concepts that would underlie the project. 

Takeda described the typical development process for a new console: 

As soon as we complete one system, we start thinking about the next one. Needless to say we 

don’t design new components or technologies from scratch. Rather, we have to base our designs 

on existing technologies. In the world of technology, there are so-called Roadmaps (overviews of 

proposed technologies/products) that are used by each industry in order to make general forecasts 

about where semiconductor technology is heading, as well as the evolution of disc and wireless 

technologies. Engineers and developers normally refer to these Roadmaps while developing 

hardware. 55 

However, some Nintendo executives and engineers had begun to question the importance of 

traditional hardware preferences, such as faster processors, slick graphics, and sophisticated 

55 “Using State-Of-The-Art Technology in Unprecedented Ways,” Wii.nintendo-europe.com, December 2006. Accessed from http://wii.nintendo- 

europe.com/455.html in December 2010. 

October 18, 2011 12



controllers. Even before the Revolution project, Miyamoto worked on a game called Animal Forest, 

which was launched for the Nintendo 64 console in 2001. He deliberately designed it to be easy to 

play and appeal to a wide range of people. Takeda had also considered non-traditional gamers in his 

earlier work on the GameCube, which had a controller with an extra large “A” button for 

inexperienced gamers. In 2003, Takeda proposed that the Revolution project should depart from the 

technological roadmap, believing that the performance arms race, which drove Sony and Microsoft’s 

console efforts, was ultimately futile for Nintendo: 

After speaking with Nintendo’s development partners, I became keenly aware of the fact that 

there is no end to the desire of those who just want more. Give them one, they ask for two. Give 

them two, and next time they will ask for five instead of three. Then they want ten, thirty, a 

hundred, their desire growing exponentially. Giving in to this will lead us nowhere in the end. I 

started to feel unsure about following that path about a year into development. 56 

Iwata and the team began to discuss how best to approach the challenge of developing a console that 

would increase the population of gamers beyond its traditional customer base. Certain elements from 

the GameCube, including the CPU and GPU, could be upgraded for the Revolution, but other 

elements would have to be completely redesigned, based on new product concepts. By 2003, the team 

had identified several basic concepts for the console: 

• The Revolution was not just a toy for children. The console had to be familiar enough to be 

played by all family members, right in the living room. 

• It had to be designed in a way that it would be acceptable to mothers, as they have control 

over the living room in most households. This meant a small, polished design. 

• The console should be inexpensive compared to rival products – namely, Sony PlayStation 

and Microsoft’s Xbox. Ideally, the price should be less than 10,000 yen (about $100). 

• Software should be easy enough to play so that every family member can play, even for a 

short time. 

• The console would need to stay on for 24 hours, consume little electricity, and make little 

sound. 57 

There were other requirements, as well. Besides appealing to mothers, Nintendo had to entice 

partners, particularly developers. Further, the Revolution had to be backwards compatible with older 

GameCube games and even games from earlier Nintendo consoles, such as the Nintendo 64. This 

56 “Using State-Of-The-Art Technology in Unprecedented Ways,” Wii.nintendo-europe.com, December 2006. Accessed from http://wii.nintendo- 


57 Ibid; “Wii Remote: Taking Control Back To The Drawing Board,” Wii.nintendo-europe.com, December 2006. Accessed from http://wii.nintendoeurope.com/164.html 

in December 2010; “The Big Ideas Behind Nintendo’s Wii,” BusinessWeek, November 16, 2006. Accessed from 

http://www.businessweek.com/technology/content/nov2006/tc20061116_750580.htm in November 2010. 

October 18, 2011 13



would help the Revolution launch with a back catalog, and would also appeal to loyal Nintendo 

customers who had invested in GameCube games. 58 

This new approach to console design was extended to the controller. Designer Kenichiro Ashida 

explained the evolution of his thinking about the controller: 

I felt strongly that this would be a console that I, too, could enjoy. More specifically, I felt that it 

might be time to reconsider the entire game-play style of grasping the controller with two hands, 

sitting glued to the TV until morning. Of course, I’m not rejecting that intense style of play, but I 

did feel that taking the whole idea of grasping the controller with two hands back to the drawing 

board offered a glimpse of the future. 59 

The rest of the design team, right up to the CEO, was supportive of the new approach. Iwata, as 

someone who had started developing computer games on a programmable calculator when he was a 

teenager, appreciated evolutionary steps in game-play and hardware design, and encouraged the team 

to think creatively. However, there were limits to how far the team would go, as Miyamoto noted: 

This was good in the sense that it allowed us to consider ideas such as not using hands at all, or 

even putting the controller on your head. Of course, going too far in that direction would just lead 

to something that is different just for the sake of being different. An eccentric design like that 

might work well for some games, but could never be used as a standard, making it a difficult 

choice for a console’s primary controller. So we wanted to come up with a bold and daring design 

that would be within the bounds of reason. 60 

Takeda formed a special controller development team. He believed that the controller was not just a 

console peripheral, but also an intermediary between man and machine, and even an extension of the 

human body. As the controller would be the most frequently used part of the console, the controller 

development team aimed to create a simple and comfortable controller, which everyone would like to 

touch. 61 

The team created a series of prototypes. Early designs were molded out of clay or Styrofoam. The 

more promising designs were turned into plastic prototypes with working buttons. One prototype had 

a touch panel like the Nintendo DS. Another featured a mouse-like pointing device. There was also a 

track pad, and even a hat-like controller that allowed gamers to play without using their hands. The 

team constantly experimented with the designs, but decided a pointer-based controller was the best 

way to go. 

58 “Wii Remote: Taking Control Back To The Drawing Board,” Wii.nintendo-europe.com, December 2006. Accessed from http://wii.nintendo- 


59 Ibid. 

60 Ibid. 


October 18, 2011 14



But within the team, there were debates about what the controller should look like. 62 Console gaming 

had been based on a two-handed experience since the first joysticks were developed in the 1970s. One 

pointer-based design was a two-handed controller with a pointer in the middle. This prototype was 

named “Gunbai,” after the referee’s fan in Japanese Sumo wrestling. However, Miyamoto was 

interested in a one-handed device — perhaps something that resembled a familiar device like a 

mobile phone — that was easy to use and not intimidating to new gamers. Iwata seized upon the idea 

of something that looked like a TV remote control. Eventually, Ashida and his staff drew up a rodshaped 

pointer, and a demonstration unit was prepared. 63 

Decision Point 

Iwata eagerly entered the conference room and looked at the new rod-shaped device on the table. He 

had tried pointer-based prototypes before, but this single-handed design appealed to him: “From the 

moment I picked it up, it just felt right. I had handled other pointer devices before, but they are not 

normally responsive and leave you feeling more frustrated than relaxed. The pointer idea itself was 

also good, but in this case it was the sense of control, the finish of the product, that was particularly 

good.” 64 

But some members of the team had reservations. Ashida reminded the group of the need for the 

Revolution to be able to play GameCube games as well as popular titles dating from Nintendo’s NES 

from the 1980s. Most of these games required two-handed play. On top of that, they also had to 

consider the traditional gamer audience. Despite all of the attention on the “mom” crowd and other 

new audience segments, Nintendo needed to convince serious gamers to give the Revolution a 

chance. The team knew that overseas gamers preferred first-person shooters and other action titles 

that worked well with two-handed controllers. 65 

In addition, Ashida pointed to game developers, who had their own ideas about innovation: “There 

were also requests from the development teams for Metroid and other software titles asking for a new 

kind of controller that uses both hands, that can offer a new type of game-play.” 66 

Iwata knew that the team was taking a big gamble with a new controller design. While they had 

brainstormed and experimented extensively, the company refused to bring in focus groups to test out 

the designs, partially out of fear of leaks. As a result of this decision, the company would only know 

user reaction after the Revolution’s launch. 

62 “Wii Remote: Taking Control Back To The Drawing Board,” Wii.nintendo-europe.com, December 2006. Accessed from http://wii.nintendo- 


63 Ibid. 

64 Ibid. 

65 Ibid. 

66 Ibid. 

October 18, 2011 15



Besides user reaction, there was also the question of how the proposed one-handed rod could be used 

with older Nintendo console games that had been designed for two-handed controllers. Backwardscompatibility 

with the older games was required, to give an incentive for the existing customers who 

owned them to upgrade to the new console. How could the Revolution’s rod controller be modified 

for two-handed action? 

Iwata and his team had little time. At the 2005 E3 gaming exposition in Los Angeles, Nintendo 

planned to announce the Revolution, and maybe even demonstrate the console and controller. 

Industry buzz was pointing to both Microsoft and Sony announcing their own next-generation 

consoles at E3. Would Nintendo be able to deliver? 

October 18, 2011 16



Exhibit 1 Nintendo Famicom/NES 

Source: Jennifer Boriss/DoNotLick, http://www.flickr.com/photos/donotlick/4352297340/. 

October 18, 2011 17



Exhibit 2 Nintendo Virtual Boy 

Source: kafka4prez, http://www.flickr.com/photos/kafka4prez/59373076/sizes/m/in/photostream/. 

October 18, 2011 18



Exhibit 3 Nintendo 64 

Source: Ciro Duran/cirofono, http://www.flickr.com/photos/ciroduran/3109883260/. 

October 18, 2011 19



Exhibit 4 Nintendo GameCube* 

*GameCube accessories include bongo drums, used for titles such as Donkey Kong Jungle Beat. 

Source: freespamfree, http://www.flickr.com/photos/7524204@N07/1767205224/. 

October 18, 2011 20



Exhibit 5 Hanafuda 48 Cards 

Source: http://commons.wikimedia.org/wiki/File:NintendoCards.jpg, accessed December 2010. 

October 18, 2011 21



Appendix 1 Most Popular Game Types (% of games sold in U.S., 2004) 

Genre Console games PC games 

Action 30% 4% 

Sports 18% 5% 

Shooter 10% 16% 

Children & family entertainment 10% 20% 

Racing 9% N/A 

RPG 9% 10% 

Fighting 5% N/A 

Strategy N/A 27% 

Adventure N/A 6% 

Source: NPD Group. , cited in “Computer and Video Game Software Sales Reach Record $7.3 Billion in 2004; Final U.S. Sales 

Data Indicates 8 Games Sold Every Second of 2004,” Business Wire, January 27, 2005. 

Appendix 2 Top-selling U.S. Console and Portable Games, 2004 

Name Console Units (million) 

1 Grand Theft Auto: San Andreas PS2 5.1 

2 Halo 2 Xbox 4.2 

3 Madden NFL 2005 PS2 3.2 

4 ESPN NFL 2K5 PS2 1.5 

5 Need for Speed Underground 2 PS2 1.4 

6 Pokémon FireRed (with adapter) GameBoy 1.2 

7 NBA Live 2005 PS2 1.2 

8 Spider-Man 2 PS2 1.1 

9 Halo: Combat Evolved Xbox 1.1 

10 ESPN NFL 2K5 Xbox 1 

Source: “NPD: $9.9 billion worth of console games sold in 2004.” GameSpot, January 18, 2005. Accessed from 

http://www.gamespot.com/xbox/action/halo/news/6116499/npd-99-billion-worth-of-console-games-sold-in-2004 in August 2011. 

October 18, 2011 22



Appendix 3 Production and Sales Information, FY 2004 

Production 2003 2004 

Electronic entertainment products 

(Hardware) 

Handheld 128,902 200,502 

Console 171,730 14,368 

Others 39,156 24,835 

Subtotal 339,789 239,707 

(Software) 

Handheld 129,830 119,746 

Console 107,204 94,727 

Subtotal 237,034 214,474 

Other Products 704 1,506 

Total 577,528 455,687 

Sales 

Electronic entertainment products 

(Hardware) 

Handheld 132,246 185,175 

Console 101,554 54,366 

Others 41,453 49,679 

Subtotal 275,254 289,220 

(Software) 

Handheld 123,369 132,911 

Console 99,325 86,262 

Royalty income and contents income 3,978 3,015 

Other 476 881 

Subtotal 227,149 223,070 

Other Products 1,730 2,513 

Total 504,135 514,805 

Source: Nintendo Co. Ltd., Consolidated Financial Statements, May 27, 2004. 

October 18, 2011 23

Nintendo's “Revolution” - MIT Sloan School of Management

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