Nintendo: The Console Wars

In the 1980’s Nintendo was on top of the world, with the NES achieving over 90% market share of home video games globally. So how did they fall ALL the way down to ~10% in just a few short console generations? And how did they then build themselves back up (and down and up again) to the top of the world again? Spoiler: it all hinged on one very small, yet very large and durable platform… the Game Boy. Fire up your favorite portable entertainment device and tune in for the epic story of Nintendo’s fall from grace and journey back to the top — capped off by our robust discussion of where they go from here, and whether this 130+ year old company may still (!) be misunderstood and mis-valued. Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Links: Our EA episode with Trip Hawkins https://www.acquired.fm/episodes/the-electronic-arts-ipo-with-trip-hawkinsMatthew Ball on why “Nintendo as Disney” is a flawed analogy https://www.matthewball.vc/all/onnintendoCrossroads Capital’s investor letters outlining their Nintendo thesis https://www.crossroadscap.io/investor-lettersEpisode sources https://docs.google.com/document/d/1uz7J2qyEqLrcbuU5LUrStt4aM2vPvRiIPmKJcLOmQ7s/edit?usp=sharingCarve Outs: Kara Swisher in Vanity Fair https://www.vanityfair.com/news/2023/03/kara-swisher-podcasts (and our old episode with her! https://www.acquired.fm/episodes/season-3-episode-4recode-with-kara-swisher)Hardcore History https://www.dancarlin.com (finally!)The Tetris movie https://www.imdb.com/title/tt12758060/Daryl Morey on Invest Like the Best https://www.joincolossus.com/episodes/50823211/morey-systems-thinking-in-sports?tab=transcript‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Rosenthal?

  I feel like I gotta warm up physically before acquired episodes these days. It's like a marathon.

• 0:06Ben Gilbert?

  My back does start to hurt by the end from just standing still the whole time.

• 0:09David Rosenthal?

  Oh, me too. Me too.

• 0:11Ben Gilbert?

  I've actually stopped working out mornings before we record because I don't want to be too tired. Like, I need my stamina.

• 0:17David Rosenthal?

  Yeah, we should figure out, like, recording on the Peloton or something.

• 0:22Ben Gilbert?

  That'd be a breathy.

• 0:23David Rosenthal?

  Yeah.

• 0:24Speaker 02

  Who got the truth?

• 0:27Speaker 02

  Is it you? Is it you? Is it you? Who got the truth now?

• 0:32Speaker 02

  Is it you? Is it you? Is it you? Sit me down, say it straight, another story on the way. Who got the truth?

• 0:40Ben Gilbert?

  Welcome to season 12, episode four of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert.

• 0:49David Rosenthal?

  I'm David Rosenthal.

• 0:50Ben Gilbert?

  And we are your hosts. We last left our Nintendo heroes in 1990, when they single-handedly revived the video game industry and captured 95% of the market share globally. We did our seven powers analysis and determined the company had a better competitive position than basically any company in history, and the game was theirs to lose. But somehow, they did just that.

• 1:15David Rosenthal?

  Indeed, they did. And then they won, and then they lost, and then they won, and then they lost, and then they won again.

• 1:22Ben Gilbert?

  Exactly. Today's story will be about the fall and how Nintendo managed to blow a 10-run lead in the bottom of the ninth. But like all great heroes, when faced with foes like Sega, Sony, Microsoft, and eventually even Apple, Nintendo's creativity and cleverness has kept them a major player, and certainly the most unique player in the video game landscape today. So David, as you mentioned, this is a weird story for us. Usually, the narrative on Acquired goes something like, revenues kept climbing every year, and now they're making more money than they ever had before. But with Nintendo, it's been a very cyclical road, and they actually lost money in long periods of time, like 2011 to 2018. And their greatest strengths are their greatest weaknesses all the way through.

• 2:06Ben Gilbert?

  So on the eve of the release of the Chris Pratt movie, Super Mario Brothers, we tell Nintendo's part two story today, from the console wars of the 90s forward. Well, before we get into it, we want to let you know about the latest over at ACQ2, which you can search in any podcast player. It's got some great episodes. The next one to drop will be with the CEO of Retool, David Hsu. He's a super contrarian founder and really interesting to just hear his take on startup wisdom generally. We've also gotten lots of emails from folks saying you really loved the Statsig episode with Vijay Raji. So that is a great one to check out, too. There's also the Slack. The Slack community has become a critical research tool for David and I since so many of you have insights and real

• 2:49Ben Gilbert?

  work experience in the areas that we are covering. If you are not in the Slack yet, that is definitely where the best discussion is happening on top of what we were able to learn before we recorded an episode, kind of about it all afterwards. So that is acquired.fm/Slack. And David, without further ado, please take us in. And listeners, as always, this is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only.

• 3:17David Rosenthal?

  It'll be very fun at the end of the episode to talk about whether we think Nintendo is a good stock to own at this point in time or not here in 2023. But before we talk about all that, we first need to talk about one more giant success from Nintendo in the 1980s, a very small giant success that we intentionally left off in the last episode because it's going to be very, very important here in part two. And that is, of course, the Game Boy.

• 3:49Ben Gilbert?

  Yes.

• 3:50David Rosenthal?

  So we talked last time all about Gunpei Yukoi, Nintendo's effectively chief engineer and his genius behind building everything from the Ultra Hand to the light gun shooting range to mentoring Shigeru Miyamoto and everything he did for Nintendo. One of his first early successes that we kind of glossed over last time was the game and watch business. Now, these were portable, dedicated, handheld video game systems, meaning by dedicated, each piece of hardware only played one game. There was a Donkey Kong game and watch. There was a Mario game and watch. There was a Zelda game and watch, even, of course, a Mickey Mouse

• 4:30David Rosenthal?

  game and watch. But each piece of hardware only played that one game. It was also actually on the game and watch where Gunpei invented the D-pad that is, you know, on like every single controller.

• 4:41Ben Gilbert?

  Oh, I didn't realize that.

• 4:42David Rosenthal?

  Yeah, that is where the D-pad was invented with the game and watch.

• 4:45Ben Gilbert?

  Huh.

• 4:46David Rosenthal?

  Pretty freaking awesome.

• 4:48Ben Gilbert?

  And the Game and Watch actually sold a ton of units. I think 43 million units got sold before it ended of life.

• 4:55David Rosenthal?

  Yes, and this is the thing. Western audiences don't know that much about it because it was never that popular in the West. It was huge in Asia, though. Like you said, 43 million units, over a billion dollars in lifetime revenue from this product line, which back then in the 80s and kind of pre NES, that was super, super significant for Nintendo. Now, if you're thinking about this, given everything we talked about last time about technological and video game innovation and marvels that Donkey Kong and Mario were and the NES and how advanced it was, how the hell did Gunpei and Nintendo get Donkey Kong running on a portable piece of hardware in 1982, pre NES? How did this come about?

• 5:38David Rosenthal?

  It would be through Gunpei's philosophy, which really becomes sort of the second core piece of Nintendo philosophy beyond the name of the game is the game. And Gunpei's technology philosophy is lateral thinking with a withered technology.

• 5:54Ben Gilbert?

  Because the NES still was cutting-edge hardware in many ways.

• 5:57David Rosenthal?

  Absolutely. It was years ahead of the competition. It had the first GPU architecture in a consumer-focused device. It was not withered technology. It was the opposite of that. So, sitting next to all of this silicon and PC and computing and graphics innovation that's happening in the 1980s that the NES took part in was another adjacent market and silicon ecosystem, which was calculators. So we've talked a little bit about the calculator industry on the show in the past on like our TSMC episode, specifically the history of Morris Chang and Texas Instruments. We got to cover TI at some point in the future.

• 6:39David Rosenthal?

  I think that was on our voting for LPs for next potential episode. But by the early 80s, the calculator industry was kind of like the PC industry is today, other than the Mac and Apple silicon. It was total commodity, very mature, cheap, completely understood technology, and you could make it for very, very low cost. It was also specifically dominated by Japanese semiconductor companies. Very convenient for Nintendo. So Gunpei just expanded his mind a little bit in what could be silicon technology powering video games. And he reached over and grabbed a bunch of mature technology from the calculator industry and voila, portable Donkey Kong.

• 7:23Ben Gilbert?

  And you know, with the LCD screen, it's basically the same type of screen. It's no more advanced of a processor doing simple math to decide whether the character moves left or right and summing points and things like that. It's a calculator.

• 7:36David Rosenthal?

  Nobody would mistake this for an arcade quality port of Donkey Kong, but it doesn't matter. People now can play Donkey Kong on the go. This is amazing. People love it.

• 7:46Ben Gilbert?

  Huge deal.

• 7:47David Rosenthal?

  Legend has it that the way Gunpei came up with the idea for doing the game and watch in the first place was he was on the train in Tokyo and he observed a businessman, who was also on the train, who was just killing time by pressing buttons on his calculator and doing random things on his like business calculator. And I think that tells you a ton about the potential demand for on the go video entertainment in the 1980s.

• 8:15Ben Gilbert?

  Man, I'd say that was apocryphal, but that has literally happened to me where I pull out my phone and I'm up to date on my email. I'm up to date on Twitter. I pull down, no new tweets are coming in. So I'm like scrolling around on the home screen, doing nothing, opening and closing the same apps over again, just because it's entrancing.

• 8:30David Rosenthal?

  Now imagine no smartphone, no Twitter, no Instagram.

• 8:35Ben Gilbert?

  Seriously.

• 8:36David Rosenthal?

  What else are you gonna do? Like, how did people even live back then? Barbaric.

• 8:40Ben Gilbert?

  Newspapers, man.

• 8:42David Rosenthal?

  Newspapers, right. So time marches forward. Everything that we talked about in episode one on Nintendo comes to pass. The NES launches, achieves 95% global market share. Nintendo's on top of the world, et cetera, et cetera. While this is all happening, Gunpei, who remember was not involved with the development of the NES, Gunpei goes over to Yamouchi and says, hey, I think we can basically combine the NES and this old game and watch technology and make a similarly awesome portable cartridge based console.

• 9:22David Rosenthal?

  And Yamouchi and the rest of Nintendo are like, well, yes, of course, if you could do that, that would be amazing. Who wouldn't want to buy one of those things? But part of what made the NES so great was it was years ahead of all the competition and technology. Like, how are we going to do that in the portable era? So Gunpei is like, don't worry, Mr. Yamouchi, I've got it. I can make it all work. This device that I have in mind, it'll play awesome games. It'll have great battery life. We can get it to market super fast. And get this, I'm pretty sure we can sell this thing even cheaper than the NES. Everybody's like, this is too good to be true. How are we going to do this?

• 10:03Ben Gilbert?

  It's quite the promise.

• 10:04David Rosenthal?

  And he's like, here's the big reveal. It's going to be black and white.

• 10:09Ben Gilbert?

  And not even black and white, but black and green.

• 10:12David Rosenthal?

  Yeah. So God bless Yamouchi. That man was a visionary and he completely got it. And for a non-technologist, he understood technology better than anybody because he gives Gunpei the go-ahead on this. Everybody else at Nintendo is like, this is not going to work. You know, I know we're still in the 1980s here, but the 1980s are more advanced than you might think. Like, black and white is like the 1960s. Nobody wants black and white, especially in the video game market, which is supposed to be this advanced technology graphical market.

• 10:46Ben Gilbert?

  And to play games that they're accustomed to seeing in color, you're going to go downgrade Mario? Like, that's a terrible experience.

• 10:54David Rosenthal?

  Right. Terrible, terrible idea. So internally, this project gets the nickname, I'm not exactly sure how to pronounce this, but it's either Dame Game or Dame Game, D-A-M-E-G-A-M-E, which basically means hopeless game. But nevertheless, they push ahead. And in April 1989, they released this device in Japan, followed shortly in the US for $89.95. And this device, of course, is named the Game Boy. We talk about this all the time on acquired things that are in technology and our industry in the past that just seem so natural, we don't even think about them. Why did they call it the Game Boy? They called it the Game

• 11:37David Rosenthal?

  Boy to dig at Sony, who if they've made it, would have called it the Game Man.

• 11:42Ben Gilbert?

  Why?

• 11:43David Rosenthal?

  Because they had the Walkman.

• 11:44Ben Gilbert?

  Oh, no way. That's really why?

• 11:48David Rosenthal?

  Isn't this hilarious? It's so obvious when you think about it, but the Game Boy, it's like a Kleenex. It's like, oh, portable handheld gaming system. It's a Game Boy. This is Nintendo on the rise, looking over at their kind of like big brother in Japanese technology corporations at Sony and be like, we are beating you to the punch here on technology.

• 12:06Ben Gilbert?

  Oh, I love it. I had no idea.

• 12:07David Rosenthal?

  So freaking awesome. It obviously becomes a huge success. So the first Japanese production run of the Game Boy sells 300,000 units almost immediately. And the first US shipment of 1.1 million units also sells out immediately. And the killer app, especially in the US, driving sales is not a kid's game, but Tetris. And we won't tell the whole story. It's pretty amazing of how Tetris, the game, comes out of the communist Soviet Union and makes it on to the Game Boy in the US and becomes the most popular game of all time.

• 12:52David Rosenthal?

  But go watch the movie. I've heard that it's great.

• 12:55Ben Gilbert?

  It is. Yeah, I watched it this week. It's obviously a little overdramatized, but it is pretty crazy that, you know, talk about the name of the game is the game. A Soviet programmer invented this game that was then so obvious to everybody who looked at it that this thing was the perfect game, that there was this massive geopolitical mini-war over who could get the rights to this thing and all these different countries on all these different consoles. And Nintendo, we think of them as this very sort of nice and shiny company, making stuff for kids, but executing the steps they needed to take to obtain the license for Tetris is a wild story. The movie is awesome. The important thing that the

• 13:39Ben Gilbert?

  movie does a good job of underscoring is Minoru Arakawa. Deeply understood, once he saw a demo of Tetris for Game Boy, that this could expand the market beyond just games for little boys and teenage boys.

• 13:57David Rosenthal?

  This is not a kid's game. This is an adult's game.

• 14:00Ben Gilbert?

  Yes, and now we could sell Game Boys to everyone of all ages, everywhere, and not just as a toy.

• 14:07David Rosenthal?

  Totally. It's funny, I was laughing as you were saying all that, Ben, about, you know, image of Nintendo is this friendly, you know, cuddly company. I think we debunked that in part one pretty well.

• 14:16Ben Gilbert?

  Right, there's plenty of corporate espionage behind the Mario smile.

• 14:19David Rosenthal?

  Oh, yeah, plenty, plenty, plenty. But, yes, A, the Tetris story is amazing on its own, but B, like for our purposes here, and it really was Arakawa in the US who saw this at Nintendo of America, the opportunity, just like Gunpei saw with the businessman playing with his calculator on the train back in Tokyo, everybody loves games. It's not just kids. And if they can get this device that is easily adoptable and at a low enough price point by a broader market, Nintendo is just gonna crush it. So Nintendo of America, in their tradition, as we talked about in part one, they just have the most amazing advertising campaigns around the launch of the Game Boy

• 15:03David Rosenthal?

  at Father's Day. I don't know if it was 1990 or 1989, it must have been 1990. They come out with a campaign called Punish Your Father, and the whole thing is like, your dad has been stealing like the kid's Game Boy, and so for Father's Day this year, punish him by buying his own and stopping him from stealing the kid's Game Boy. This is so brilliant. They start buying ads in airplane magazines, and the ads say like, if you're reading this, you are obviously bored and you need a Game Boy and you need Tetris.

• 15:32Ben Gilbert?

  Oh, that's awesome.

• 15:33David Rosenthal?

  They're literally marketing it at business travelers.

• 15:35Ben Gilbert?

  Which makes sense. Seriously, you walk in an airplane today and who's playing Candy Crush? It's a lot of business travelers.

• 15:41David Rosenthal?

  Exactly. So, in the US, 46% of Game Boy players are adults. This is so different from the NES market. It becomes this business. This man status symbol and like, I remember this in my own life, like everything in these Nintendo ads actually happened in my family. Like my dad used to steal my Game Boy all the time. We had to go get him his own.

• 16:05Ben Gilbert?

  Did you have one of the original fat ones?

• 16:06David Rosenthal?

  Oh, totally. I was five years old when it came out, so I was exactly in the target kid demographic. And I think my dad, I was talking with him about this this weekend, he still plays the original Tetris cartridge.

• 16:20Ben Gilbert?

  What?

• 16:21David Rosenthal?

  Like an old Game Boy Advance at this point to this day.

• 16:24Ben Gilbert?

  Wow.

• 16:24David Rosenthal?

  This is how universal the appeal of this game and this system is. It's unbelievable. So Nintendo ends up selling 32 million Game Boys in the first three years, which is way more than the NES. That's roughly $3 billion in hardware sales alone. The Game Boy and then it's sort of quasi successor, but really the same platform, the Game Boy Color. They would go on to sell 118 million units worldwide, which is over double the NES. And the fourth highest selling console of all time, period.

• 17:00Ben Gilbert?

  Wow.

• 17:01David Rosenthal?

  Just amazing. And this was Nintendo's first taste and really the whole industry's first taste of massively expanding. What already was a huge gaming market.

• 17:12Ben Gilbert?

  Yeah. It also was at a completely different price point. I wasn't allowed to get a console, but my first video game system was a Game Boy Color because I think it was a little over a hundred bucks or something for the Color one. Versus around the 200 or more price point for the at home consoles.

• 17:29David Rosenthal?

  It takes both the kids gaming market and the casual adults gaming market that it creates. And marries those into one device and leaves the core gaming market to the home console.

• 17:40Ben Gilbert?

  Yeah.

• 17:41David Rosenthal?

  You would have been like exactly in the target demo for Pokemon when it came out.

• 17:46Ben Gilbert?

  Absolutely. You bet. I bought the translucent purple Game Boy Color so that I could get Pokemon Blue.

• 17:52David Rosenthal?

  Oh my God. Probably like 70% of people listening right now. Regardless of their age or that bucket, I mean, I bought Pokemon when it came out, even though I was a teenager at the time.

• 18:03Ben Gilbert?

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• 18:23David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 18:44Ben Gilbert?

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• 19:06David Rosenthal?

  In half, which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 19:24Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you. Okay, so we're in this era, Game Boy is flying off the shelves, but the NES is getting a little long in the tooth. And so how does the whole Super Nintendo thing work?

• 20:01David Rosenthal?

  Yeah, here's where we're gonna change gears. So Game Boy, another incredible smash success for Nintendo. But back on the home console side of things, we're entering some choppy waters here. So where we ended last episode, 1/3 of US households have an NES. Nintendo has roughly 90% global market share. They've got this amazing combination scale economy, network economy, distribution power. By the midpoint of the 8-bit generation in the NES, you know, it looks like Nintendo's moat is impenetrable. And the reality was,

• 20:42David Rosenthal?

  for the 8-bit generation, it was. There were other competitors on the market. The hardware side of the former Atari, remember Atari got split into two companies when Warner Brothers sold it off. The hardware side of Atari releases a new console, the 7800. It sells about a million units, like, okay, you know, also ran.

• 21:03Ben Gilbert?

  And the NES lifetime sold 62 million, just to put that in context.

• 21:07David Rosenthal?

  Sega, in response to the NES in Japan, they release a home video game console called the SG-1000. It does okay, but also only sells about a million units. They take the third revision of that console called the Mark III, and they export it to the rest of the world as a system called the Master System. It flops in the US, where they sell off the distribution rights to it to Tonka, like the Tonka Truck toy company.

• 21:35Ben Gilbert?

  No way!

• 21:36David Rosenthal?

  Tonka has no idea what to do with this thing.

• 21:39Ben Gilbert?

  And also, this underscores how much people thought of this as kids' toys. The peer set is Mattel and Tyco and Tonka.

• 21:49David Rosenthal?

  Hasbro, exactly. This is the toy aisle. Nobody understands this stuff in the US. But importantly, this quote unquote master system console from Sega does fairly well in Europe and in Brazil. And so it ends up selling between 10 and 15 million units worldwide. Again, no NES, but this is enough of a success from Sega to give them some hope. They're like, well, maybe we should continue investing in the home console business. And as we mentioned in part one, Sega at this point was primarily an arcade company. Did you know this? Sega was actually founded by Americans?

• 22:32Ben Gilbert?

  Yes.

• 22:33David Rosenthal?

  Even though it's a Japanese company, it was originally an American company?

• 22:36Ben Gilbert?

  Involved in like World War II military service in Hawaii? Is that right?

• 22:41David Rosenthal?

  Exactly. So Sega is a portmanteau of service games. And the company was started to make kind of like Nintendo, like gambling games or thinly disguised gambling games. And that morphs into arcade games for US military service bases around the world.

• 23:01Ben Gilbert?

  Crazy. I love how these companies evolve to sort of morph and survive over time.

• 23:06David Rosenthal?

  They know that they're not going to dethrone the NES in the 8-bit generation, but they think, maybe we can try and do what Nintendo did to get this huge advantage with the NES, which remember was just like Steve Jobs and the iPhone, we want to produce something that is years ahead of the competition. We might actually be able to leapfrog Nintendo here and do the same thing to them. And Sega actually has two advantages at this point in time that Nintendo does not have. One, Moore's Law has continued to progress since 1983, when the Famicom came out in Japan, and more advanced and cheaper processors

• 23:46David Rosenthal?

  are now available to everybody. Specifically, 16-bit processors are now cheap enough that you can put these in a living room quasi-kids toy home console. Nintendo obviously also had access to this technology, but sort of in a innovator's Dilemma type situation, they don't really have the motivation to pursue it because the NES is the gift that keeps on giving for them. Like they want to keep that console generation going as long as possible.

• 24:14Ben Gilbert?

  Right. It's like they do have to come out with something eventually, but if they can delay that eventually another year and no one forces their hand, that is very good news.

• 24:22David Rosenthal?

  Exactly. And Sega, again, because they were so successful in the arcade business and the arcade business moves so much faster than the console business. New technologies, new games, new game concepts are coming out all the time. They already have a pretty robust 16 bit arcade board that they've been using on some of their arcade hits at the time, like Shinobi or Golden Axe. Those were 16 bit games running on advanced arcade boards that Sega was producing.

• 24:51Ben Gilbert?

  And so what does it mean when you say the eight bit generation, the 16 bit generation, eventually we'll get to 32, 64?

• 24:58David Rosenthal?

  64 becomes part of the marketing, in fact, for Nintendo.

• 25:02Ben Gilbert?

  Yes. It basically means that the CPU for the machine can process eight bits at a time. And so that affects everything downstream, sound, graphics, processing power. It's basically the effectively bandwidth that the CPU has in order to process information concurrently.

• 25:20David Rosenthal?

  Right. And specifically, I remember at this time in the jump from eight bit to 16 bit processors, like the color palettes that the games could use. Like with eight bit processors, you couldn't even fit so many colors in there, but 16 bit processors, you could fit hundreds more different colors that could be used in the game, you know, stuff like that.

• 25:37Ben Gilbert?

  Yep. And of course, this stuff is exponential. So eight bits, what does that mean? Well, two to the eighth different combinations that are possible. So 256 different values in each chunk of data that it's processing. You could see how going from eight bit to 16 bit, which takes you from 256 different possible values to 65,536 different values. It is a sort of enormously forward.

• 26:02David Rosenthal?

  Right at this moment in time, it's this whole soup of factors that come together to really give Sega an opportunity to break into the market. Even though the NES is so dominant, older consumers, especially teenagers and adults, they value graphical performance and they're willing to pay for it. As long as they're good games to actually back it up. And so Sega is like, well. We've got a bunch of really good 16-bit games that we've made for the arcades. We can probably do this.

• 26:29Ben Gilbert?

  Yeah, it is interesting how much graphical capability mattered in those days. And it still matters today, but it kind of matters less. When you go from like almost photorealistic to even more almost photorealistic, it makes it more impressive and it makes it more interesting to look at on a 4K TV. But does it literally make it more fun than playing something on my Switch? Probably not, but back in those days, that's a huge leap forward.

• 26:57David Rosenthal?

  Totally. I mean, even like on the Switch and on the virtual consoles, I love going back and playing Super Nintendo games and Sega Genesis games, which you could do on the virtual console of the Switch, which is so fun. But going back to the NES era.

• 27:10Ben Gilbert?

  It's tough.

• 27:11David Rosenthal?

  I grew up with those games. I remember playing them and loving them. But like, I can go back to 16-bit games. 8-bit is pretty tough.

• 27:19Ben Gilbert?

  Yeah. And I'll say like, I still play my N64 Super Smash Brothers. That game is more fun than Super Smash on my Switch. So you do hit some point, I think around 64-bit graphics where like, more bits no longer equals more fun.

• 27:35David Rosenthal?

  So back to Sega here in 16-bit. In 1988, they launch a new console called the Mega Drive in Japan. That was in late 88 and then they turn around in early 1989 and launch it in the US. And they decide, of course, that the Mega Drive is probably not a good brand name for the US. And so they name it the Sega Genesis. A new beginning for Sega in America.

• 28:01Ben Gilbert?

  Yes.

• 28:02David Rosenthal?

  Surprisingly, it doesn't sell well in Japan, either at launch or really ever.

• 28:08Ben Gilbert?

  It's really weird. I couldn't figure out why.

• 28:11David Rosenthal?

  Yeah, maybe just like Nintendo had such a lock on distribution and game developers and market share in Japan, that even like the quality arcade games that Sega was making wasn't enough for the Japanese market.

• 28:24Ben Gilbert?

  And when it launched in Japan, it didn't have Sonic yet.

• 28:27David Rosenthal?

  Exactly. Well, we will get to that. So it doesn't have Sonic in the US either. So even if you think you know the history of the console wars and the Genesis in America, or you lived it, as I did, I didn't remember this exactly as it happened. So initially, the Genesis is also a flop in America. It sells about 500,000 units in the first year, which, you know, like, again, is okay. But this isn't that much better than the old Master System here.

• 28:56Ben Gilbert?

  And Nintendo isn't necessarily viewing it as the competitive threat that says, okay, we need to release our next generation system ASAP. They're like, okay, cool. This one also isn't beating us. So I guess let's keep riding the sales of the NES.

• 29:10David Rosenthal?

  Right. Why would we change things? So the next year in 1990, Sega decides like, hey, we need to make a change here. And specifically, we need to make a change in Sega of America. So they install a new CEO, a guy named Tom Kalinsky. Now, if you're looking for an executive to come in and turn around your ailing video game console business to do things differently, you probably wouldn't go hire Tom.

• 29:42David Rosenthal?

  Tom, at this point, is a toy executive. He's in his late 40s. He knows nothing about video games. And his most recent job is he was the CEO of Mattel before being ousted by the board for underperformance.

• 29:58Ben Gilbert?

  And his big success was Barbie.

• 30:01David Rosenthal?

  Right. Yeah, this doesn't exactly scream like video games. Now, video games are part of the toy market, but Sega is trying to change this. They're trying to appeal to teenagers and older adults. Well, it turns out that actually Tom had a second act in him and ends up being the very best hire that Sega ever could have made. Because he shows up and he's like, guys, if our strategy is to literally do what the marketing slogan was at the time when he showed up, which is Genesis does what Nintendo don't.

• 30:33Ben Gilbert?

  Which is kind of great. Yeah.

• 30:35David Rosenthal?

  The problem, though, is they were doing like a piss poor job of executing on it. So even with this great tagline, the actual commercials that Sega was showing on TV were this really cheesy 80s jingle, I'm not even gonna try. Like, don't look it up. Like, they're just like weenie. So when Tom shows up, and surprisingly, coming from the toy industry, he's like, If we're gonna do this, we gotta go all out. We can't still like keep one foot in the toy industry here. We need to go full on punk rock, MTV, directly appealing to teenagers. None of this like 80s jingles in our commercials anymore.

• 31:14Ben Gilbert?

  No, it needs to be the, what everyone knows Sega and that sheen. And we need to pivot the whole company. Sega needs to be the aggressive video game company, full stop.

• 31:24David Rosenthal?

  Yes. So he presents to the Sega board back in Japan. He flies over to Tokyo and presents a four point plan of how exactly Sega of America is gonna dethrone Nintendo.

• 31:37Ben Gilbert?

  And it's great. The way he gets recruited for this, David and I both read this book, Console Wars, which is really fun. If you want the whole blow by blow on this, Tom actually gets recruited by the chairman of Sega. While he's on a family vacation in Hawaii on the beach, the chairman of Sega walks up to him and says, Tom Kalinsky. And for as compelling as the Nintendo story is, it's compelling because they won long term. For this brief moment of time, the Genesis era, I think Sega probably has an even more impressive narrative and sort of hero's journey with Tom Kalinsky.

• 32:11David Rosenthal?

  Oh, totally. We're gonna get into what they do, this four point plan, but it is freaking brilliant. I think this is the best example we've ever seen on the show of how to compete against an entrenched incumbent.

• 32:25Ben Gilbert?

  Yeah.

• 32:25David Rosenthal?

  They literally walk up to Nintendo and just punch them in the mouth. It's so great. So here's the plan. Point one, we need to preemptively start a price war. So we know that Nintendo is working on a new 16 bit system. They're just dragging their feet because they feel no sense of urgency here. We also know, given Nintendo's history, everything we talked about in part one, that they like to make money on their hardware. They want high hardware margins. So here's what we're gonna do. We think they're probably gonna price the Super Nintendo when it comes out at the equivalent of $250.

• 33:08David Rosenthal?

  We're selling the Genesis for 200 right now. We're gonna preemptively cut that to $150.

• 33:15Ben Gilbert?

  And this is perfect counter positioning. Nintendo's incumbent strategy is to make money on hardware. What are we gonna do? We're not gonna make money on hardware.

• 33:22David Rosenthal?

  Exactly. So we're going to preemptively put pressure on them to cut costs on the Super Nintendo. I don't think Tom and Sega even realized how important this would become. Put a pin in this. We're going to come back to this in one sec. This is a critical move.

• 33:38Ben Gilbert?

  Especially the preemptive. It's not just we're going to make it so they can't make money. It's that before they launch, we have to make them cost conscious.

• 33:46David Rosenthal?

  Number two, we need to change the pack in game, like the bundled game that the Genesis comes with in America. I had forgotten about this. The original pack in game was a arcade port called Altered Beast, which I think it was an okay arcade game. Like it wasn't that good. Like it wasn't as good as Golden Axe and whatnot, but it maybe had the worst American localized title ever. Like who's going to buy a game called Altered Beast?

• 34:15Ben Gilbert?

  Yeah. Altered doesn't really make you feel one way or another. It's sort of an uninspiring word.

• 34:21David Rosenthal?

  Yeah. Altered Beast. I don't even know what that means. So Tom's like, look, I know, you know, when you were recruiting me in my early time here, you Sega in Japan over there, you're working on a top secret quote unquote Mario killer game. And I know that your plan is to sell that separately from the system because you want to maximize revenue from this game that you know is going to be a pretty good seller. We need to take that and we need to bundle it in to the system here in America. I know we're going to lose money on this, but we gotta up our install base and we need a Mario killer that is going to be with every single Genesis. So that's point two. Point three, speaking of games, and this is also just a brilliant insight.

• 35:02David Rosenthal?

  He's like, we need to make American games for American audiences. And that means two things. One, we need to have our own Sega development studios here in America, which Nintendo doesn't have.

• 35:17Ben Gilbert?

  And never went on to have, right? I don't think there's a Nintendo game development studio in America still.

• 35:23David Rosenthal?

  Nope, the closest that they had was their second-party studio Rare, which they stupidly let get acquired by Microsoft when Microsoft is launching the Xbox. But Rare made Donkey Kong Country and GoldenEye 64 and lots of great games for the Super Nintendo and the N64. That was in the UK. They never had development studios in America. So Tom says Nintendo is missing a huge opportunity and so are we. We need to have our own studios here and we need to really embrace American third-party game developers, which Nintendo, they aren't embracing any third-party game developers.

• 35:58Ben Gilbert?

  Nintendo don't.

• 35:59David Rosenthal?

  Nintendo don't, exactly. And specifically, what this means, Sega at this point is locked in a heated negotiation, shall we say, with our buddy Trip Hawkins and Electronic Arts. As we talked about on our episode with Trip back a few years ago, Trip is just awesome.

• 36:18Ben Gilbert?

  He literally recounted this story for us.

• 36:21David Rosenthal?

  Totally. So more on that in a second. But Tom's like, we need to settle all of that contentiousness. It hadn't progressed to litigation yet, but we need to settle all that. We need to bring Electronic Arts into the Genesis fold and bring them into the home console market. And then the fourth point, as we alluded to, no more of this 80s jingles in our marketing. We're going to go directly, straight on after Nintendo with our commercials and our advertising. So naturally, given this brilliant plan of how to compete as an underdog, what do you think the Sega parent company board says to all of this? They reject it.

• 36:59David Rosenthal?

  As corporate boards want to do. But fortunately, Ben, like you said, the chairman at the time, Hayao Nakayama, he sides with Tom and he pushes through this plan and says, "Okay, I hired you to make your own decisions in America. I trust you in understanding the American market. You can go ahead and do this. We're not going to do this in Japan, but you can do this in America."

• 37:23Ben Gilbert?

  And this is kind of a career bet for Tom because this is probably his last act one way or another. If he fails, he goes out in spectacular glory. But if he succeeds, then this is probably his job for a while.

• 37:35David Rosenthal?

  And clearly, this market is enormous. Being CEO of Sega of America is a pretty great job if they succeed.

• 37:43Ben Gilbert?

  Yep.

• 37:44David Rosenthal?

  So what happens? Let's go through each of these points. Point one, the preemptive price war. Oh, boy, was this important. So Nintendo was, as everybody knew, working on the Super Famicom slash Super NES. It would come out in Japan in late 1990 and in the US in late 1991, two years after the Genesis. When they launch it, they launch at 25,000 yen in Japan and 199 in the US, which even that was $50 more than Sega had cut the price of the Genesis to. More importantly, though, than Sega being cheaper than Nintendo from day one,

• 38:29David Rosenthal?

  is that Nintendo was planning originally to include backward compatibility in the Super Nintendo so that it could also play NES games. When I read about this in the research, I was just like, oh, my God, they blew it.

• 38:44Ben Gilbert?

  Which that is, of course, the right strategic move to leverage the fact that you already have tens of millions of people that are Nintendo customers. You want to come out with something that makes sure they remain Nintendo customers. But your competitor dropped the price, so you decided to cut something. And the thing you cut is the thing that makes it so you no longer take advantage of the fact that you have this huge install base.

• 39:08David Rosenthal?

  That would have given you a stair step into the new generation. Totally. So Nintendo estimated that including backwards compatibility in the Super NES would add about $75 to the bill of materials.

• 39:21Ben Gilbert?

  Whoa.

• 39:21David Rosenthal?

  And.

• 39:22Ben Gilbert?

  That's huge.

• 39:23David Rosenthal?

  Yeah. And so rather than come out with the Super Nintendo priced at $250 or $275 or $300, because the Genesis had already been preemptively cut to 150, they're like, oh, we really can't do that. Let's cut out this $75 cost and come out at 200. Hard to say if this was a mistake on Nintendo's part or not. They kind of had to do this. Certainly, the mistake was not pushing their advantage and coming out with the Super Nintendo earlier. They absolutely could have. They let the Genesis beat them to market, and then this preemptive price war forces them to take what really would have been their best built-in advantage for the new generation of porting the existing

• 40:07David Rosenthal?

  install base over to the Super NES and just kind of hit reset on the whole industry, which is crazy.

• 40:14Ben Gilbert?

  It's funny. Strength leads to strength. If Nintendo had just been aggressive and obsoleted themselves, they would have probably been in a great position. But instead, they sat back. They sort of tried to play defense. They tried to give enough running room to their NES to keep making good money as long as possible. Then it left this opening for Sega to come in and pull this move. And then suddenly Nintendo no longer has an advantage to leverage. It's like the classic football prevent defense thing. Well, prevent defense prevents you from winning. You gotta keep being aggressive and playing offense.

• 40:51David Rosenthal?

  It reminds me of, I think, my favorite company values sheet of all time, which is the legendary Nike corporate values. So good. I think it's number two is we're on offense all the time.

• 41:04Ben Gilbert?

  Yes.

• 41:05David Rosenthal?

  Yeah. You don't win by playing the prevent defense.

• 41:08Ben Gilbert?

  Nope. Absolutely not.

• 41:10David Rosenthal?

  And I think we could maybe give some leeway to Nintendo here in that this was all happening for the first time. People didn't totally understand console business dynamics yet. I mean, if you fast forward to today, Sony and Microsoft not only always have backwards compatibility in each new console they release, they also do forwards compatibility. So like new games for a couple of years that are coming out for the PS5 or the Xbox Series S and Series X, those games will also be playable on the previous generation hardware. Now, you couldn't do that back in the day, but this is so important

• 41:50David Rosenthal?

  to feathering in each new console generation that literally billions of dollars of engineering across not only hardware, but software titles are invested in this today. Nintendo didn't know that, but this becomes a huge, huge mistake.

• 42:05Ben Gilbert?

  Yep.

• 42:06David Rosenthal?

  Okay, so that's one. Point two, the pack-in game. Obviously, this is Sonic the Hedgehog. Sonic is just the most perfect example ever of counter positioning and brand.

• 42:18Ben Gilbert?

  Yes, totally.

• 42:20David Rosenthal?

  So if you think about what Nintendo's real strength is in games that we talked about so much on the last episode, it's these amazing stories and not narrative, but story-driven fantasy worlds that you can get lost and explore in. You know, that's what Mario is. That's what Zelda is even more. That's what Metroid is. But you know what that style of game is, besides being amazing, it's also really slow. And that is the opposite of Sega's DNA, which is all in the arcades. That is fast, and nothing is faster than it.

• 43:03David Rosenthal?

  Like, I want to know what kind of drugs the people were on that came up with Sonic the Hedgehog. I think it was an internal competition within Sega of Japan.

• 43:11Ben Gilbert?

  It was. It was a employee pitch. Yeah.

• 43:13David Rosenthal?

  Yeah. What would lead you to come up with a trash-talking, supersonic, blue hedgehog?

• 43:21Ben Gilbert?

  That originally had fangs and an electric guitar.

• 43:25David Rosenthal?

  That's right. Also, like, a human girlfriend that was not wearing much clothing, I think, originally.

• 43:31Ben Gilbert?

  Yes, scantily clad, human girlfriend.

• 43:34David Rosenthal?

  Yes, and the best and the worst of the 1990s, but mostly, especially with the final version of Sonic, just freaking awesome. It doesn't get any better than that.

• 43:43Ben Gilbert?

  So Mario is family-friendly and kind of slow and open to exploration, and Sonic is not only fast, but aggressive. The whole brand of Sega kind of adopted the brand of Sonic on its means of competing against Nintendo.

• 44:01David Rosenthal?

  Totally. So remember how we talked about in the, I think it was maybe the 1990Q survey, that Mario was more recognizable than Mickey Mouse?

• 44:13David Rosenthal?

  Well, by the 1993 Q survey, Mario is still more recognizable than Mickey Mouse, but Sonic is even more recognizable than Mario by American consumers, which is like

• 44:25Ben Gilbert?

  Wow.

• 44:26David Rosenthal?

  just ridiculous. A couple of years later, like, that is how successful Sonic was. And this was part of Kalinsky's genius, it was bundled in with every Genesis console. So Sega's giving up on the incremental $50, $60 a pop revenue that they could get from Sonic the Hedgehog, but this really drives Genesis console sales.

• 44:49Ben Gilbert?

  Hmm.

• 44:50David Rosenthal?

  Okay, point three, we need American games for American audiences. So Nintendo, at this point in time, is basically making two types of games. They're making the timeless works of art, like we were just talking about, the Marios and the Zeldas and the Metroids. And they're also making super quirky Japanese stuff. What they are not making is super quirky American stuff. And specifically, they're not making American sports games. Now, they are making sports games. They make Punch-Out!, they make Excite Bike, they make a bunch of baseball games, third parties make games, the developer Tecmo famously makes Tecmo

• 45:33David Rosenthal?

  Bowl, you know, an American football game. So like, they're out there, but these games don't capture the actual American experience of these sports.

• 45:42Ben Gilbert?

  They're sort of cartoon approximations of something based on a sport, but it's not like you're playing Madden.

• 45:49David Rosenthal?

  Exactly. And we talked about this a lot with Trip Hawkins on our episode with him, but that's what was so game-changing about EA's John Madden Football. It was 11-on-11, real football with real playbooks. Like, if you ever played football, or if you were a student of the game, or if you watched the NFL every Sunday, you know, it was still a rudimentary video game by today's standards, but this was actually like simulating the game of football in a way that nothing coming out of Japan really ever could.

• 46:21Ben Gilbert?

  Hmm.

• 46:22David Rosenthal?

  Now, that first version of Madden came out in 1988 for the Apple II. Cause Electronic Arts at this point in time was a PC game publisher. They weren't in the console business at all. They didn't want to play ball with Nintendo and the ridiculous licensing terms that Nintendo had. And they're right in the middle of these negotiations with Sega. Because Trip and EA had famously gone out and reverse engineered the Genesis in a clean room. And he had these grand plans of he was gonna make his own Genesis cartridges, not pay any royalties to Sega. And then he was gonna take his program to other third parties and like completely end around Sega altogether.

• 47:05Ben Gilbert?

  Which he had to sort of negotiate from that point, but they were ready to do. Like they actually did the unbelievable engineering feat of in a clean room environment, reverse engineering the way to make games work on the system.

• 47:19David Rosenthal?

  Totally. So you can imagine why Sega, the parent company, would be and were really, really pissed at Electronic Arts and not want to play ball with them. But Kalinsky's like, no, no, we gotta settle this. We gotta embrace them. If we can get Madden on the Genesis and not on Super Nintendo, this is gonna be huge for us. So they do, and Sega basically completely bends over backwards to EA to accommodate them.

• 47:47Ben Gilbert?

  Which is the right move, by the way.

• 47:49David Rosenthal?

  Absolutely.

• 47:50Ben Gilbert?

  The pie massively grows by this game seeing the light of day on Sega exclusively. Versus if they enter litigation, it's like, okay, let's divide up a small pie. No, absolutely not. The answer in this moment where this is rapidly expanding market and a fight to the death between Sega and Nintendo is no side quibbles. Figure it out, move forward, launch the product, everybody makes money.

• 48:15David Rosenthal?

  Totally. So Sega's original program and their program for other third parties was $10 licensing fee per game unit. For EA, they give them a $2 licensing fee per game unit capped at a million units. So EA will never pay Sega more than $2 million on any game. Very, very different. But like you said, Ben, this is just an enormous win. So that first year, that first version of Madden that comes out on the Genesis, EA and Sega's prediction is that it'll sell 75,000 copies. It ends up selling 400,000 copies.

• 48:50Ben Gilbert?

  Oh, my God.

• 48:50David Rosenthal?

  That is just a huge hit for them. And this is the exact kind of thing that is not on Nintendo and soon to be the Super Nintendo. EA eventually does bring Madden to the Super Nintendo, but they have a separate studio working on it. They've got the A-team working on the Genesis version, and they've got the B-team working on the Super Nintendo version. So the Genesis versions were always better. And I remember this as a kid. This is a big reason I was lucky I had the Super Nintendo and the Genesis. Like, I wanted Sonic, but even more, I wanted really good Madden games.

• 49:23Ben Gilbert?

  Oh, wow. I didn't realize, because these days, you know, the Xbox and the PlayStation versions are like, I think, equivalent. If there's any hardcore Madden fans out there, they're probably gonna come at me with, no, it's way better in this, that, or the other way. FIFA, kind of the same thing. But I didn't realize there was such a difference then.

• 49:38David Rosenthal?

  Yeah, back in the day, they were actually made by different studios. And there were some things about the Super Nintendo architecture that limited the frame rate that it could run at. So like, basically, it was always better on the Genesis.

• 49:49Ben Gilbert?

  And it's worth saying, point one, in eliminating the backwards compatibility, it made Nintendo have to fight Sega on an even playing field. It didn't mean Sega was gonna win. It meant even playing field that negated their advantage of large previous install base. Point two and three are the games, you know, you've got with point two, Sonic being faster, brighter, more exciting than Mario. When you see them head to head, which Sega was making sure that you saw them head to head, Sonic seems like a much more interesting game that you kind of want to buy, regardless of the fact that you have loved Mario the last few years.

• 50:21David Rosenthal?

  On the surface, it is much more compelling.

• 50:24Ben Gilbert?

  Yes. And of course, with Madden, now they have even more advantage. So the scales are really starting to tip towards Sega here.

• 50:30David Rosenthal?

  So point four, punching Nintendo in the mouth. Kalinsky goes out and brings on a guy named Steve Race, who had masterminded Reebok's resurgence against Nike in the 80s with the pump sneakers. Remember that?

• 50:46Ben Gilbert?

  Oh, yeah.

• 50:47David Rosenthal?

  That was Steve Race's brainchild. And Kalinsky tells him to just go wild on the marketing. Steve would go on to leave Sega and become the first president of Sony Computer Entertainment America for the launch of the PlayStation. But before that, he would pretty much, single-handedly yank Sega and really the whole video game industry. I mean, this really sets the stage for the PlayStation. Out of the toy world and into full-on media, technology, the MTV generation. This is Sega and his work. So they go out, they hire the Goodby Silverstein ad agency, and they come up with the "Welcome

• 51:32David Rosenthal?

  to the Next Level" campaign, which was just so great and had the trademark way that all of the ad spots ended with the Sega scream.

• 51:43Ben Gilbert?

  Yep. There's also some pretty amazing jujitsu here around the idea that you've graduated from Nintendo. That's cool that you used to do that and like that was for babies and now you're a real grown up and it's time to graduate to real grown up system.

• 52:02David Rosenthal?

  It worked on every level. It was so great. So they premiere the campaign during the 1992 MTV Video Music Awards. What a perfect marriage of everything here. Literally like, you know, the same VMAs where many years later Kanye would take the mic from T-Swift. This is like not the toy aisle here. This is pop culture at its pinnacle. They also invent the term blast processing. If folks remember this, the Genesis has blast processing and that's what makes Sonic fast. It's a completely made up marketing term. There was something in the development manual, like somewhere for the Genesis about something that maybe could be translated as blast processing, but like it didn't actually do anything.

• 52:48Ben Gilbert?

  Apple's been hot on this recently. What is the A12 Bionic, the neural engine, and marketing terms for something highly technical such that it doesn't actually describe the technical thing that it's doing. Or another Apple example is the retina display. Once they start marketing the retina display, it doesn't matter if their competitors have something that's just as many pixels per inch. Like, it's not a retina display, but that's completely meaningless.

• 53:15David Rosenthal?

  It all goes back to the Genesis. It's got huge font on the actual console in, I think it's gold letters in Japan and silver letters in America that say 16 bits on the console itself. It's amazing.

• 53:29Ben Gilbert?

  I love it. I mean, that is their competitive edge.

• 53:32David Rosenthal?

  Totally. One of my big takeaways from this whole series is just how much Apple took from the video game industry in their marketing.

• 53:40Ben Gilbert?

  Hmm.

• 53:41David Rosenthal?

  Steve and Tom and the team at Sega also do super innovative stuff that really just brings the industry forward into the modern era. Before this era of Sega, there weren't actually release dates for video games. When new Nintendo games would come out, they'd just start showing up at retailers and not even on the same day, just like some regions of the country would get them before others. There was no organization. Tom and Steve and the marketing department at Sega of America, they're like, nope, this is the movies. We are doing worldwide release days for our games, and they're going to be just like movie premieres. We're going to have celebrities. We're going to have big marketing events. The date is going to be plastered all over everything.

• 54:24Ben Gilbert?

  Totally. I mean, there's millions of people that know May 12th, 2023 is going to be Zelda Tears of the Kingdom. This has become the way that you market video games.

• 54:34David Rosenthal?

  And that all started with Sega of America. Specifically, it started with Sonic 2, where they had Sonic Tuesday.

• 54:42Ben Gilbert?

  Oh.

• 54:43David Rosenthal?

  The launch day. Oh, so hokey, but this was hugely innovative. The other thing that Sega of America does in their marketing, and Ben, you all love this, is they literally do the Pepsi challenge. So they take trucks, like 18-wheelers, and they outfit them with Super Nintendo's and Sega Genesis's in the back, and they drive them around to malls across America. And they invite kids in to play head-to-head, Sonic versus Super Mario World, and then they ask them which game they prefer after like five minutes of playing. So the first five minutes of Sonic are really good. The next couple hours, not as good.

• 55:24Ben Gilbert?

  Right. And this is an amazing trick. It's the same thing that all the TV manufacturers do. They gamma up and contrast up and brightness up all the TVs when they're in the store, and you get mesmerized by the one that's got the most insane Christmas light colors on it. And then you take it home and you're like, ugh, this is kind of terrible for watching, you know, The Dark Knight Rises, or whatever. And it turns out that when you're comparing things side by side, there are things that appeal to you that are actually not the best long-term option.

• 55:54David Rosenthal?

  Totally. So they keep track of all of this. And low and behold, seven out of 10 kids in America prefer Sonic to Mario. And of course, Sega trumpets that in like the Wall Street Journal and all of the investor press and like everything. It's amazing.

• 56:11Ben Gilbert?

  And so at the same time, it's Sega's genius and the fact that they like showed up to play, but also Nintendo keeps dropping the ball. I mean, the games that they're shipping for the Super Nintendo are like, again, very conservative, very like, we're gonna try to maintain our lead. You play the Mario game for it, you're like, okay, yep, it's Mario again. And like, it's nice, you know, I like Mario, but this isn't new. I don't really understand necessarily why this even needed to be 16-bit.

• 56:42David Rosenthal?

  Right. Super Mario World is an amazing game, but is it that much different from Super Mario Brothers 3 on the NES? No. Like, it's got Yoshi. Yoshi is no Sonic.

• 56:56David Rosenthal?

  So all of these four points by themselves, would any one of them have dethroned Nintendo? Certainly not, but all four of them working in concert and Sega's just amazing execution. By God, they do it. So it's tough to tell exactly because both companies, Nintendo and Sega, were highly incentivized at this time to be creative in what they were reporting as their console sales data, shall we say?

• 57:27Ben Gilbert?

  Right, this is when you have to really tease out the sell into the channel numbers versus the sell through the channel numbers.

• 57:33David Rosenthal?

  Yes, but as best as I can tell, I think it is basically fair to say that every year that they're competing head to head on the market, the Genesis and the Super Nintendo, the Genesis outsells the Super Nintendo in America. You can certainly quibble with that. The data is not perfect, but take a step back, even if it's 50 50. We went from Nintendo having like, for all intents and purposes, 100% of the market.

• 58:00Ben Gilbert?

  Yep.

• 58:01David Rosenthal?

  Neck and neck with the Genesis. Nintendo basically fights to a draw. It's not like the Super Nintendo was a failure. It was a success, but corporate wise for Nintendo, this is a huge failure. They basically have given up half market share to this new entrant in one generation.

• 58:21Ben Gilbert?

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• 58:35David Rosenthal?

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• 58:49Ben Gilbert?

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• 58:59David Rosenthal?

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• 59:16Ben Gilbert?

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• 59:32David Rosenthal?

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• 59:49Ben Gilbert?

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• 59:58David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you.

• 1:00:09Ben Gilbert?

  So what exactly made it so that the Sega Genesis Advantage wasn't a durable thing that they sort of kept winning with?

• 1:00:18David Rosenthal?

  Yeah, it's a long and sad story, but basically, Kolinsky and Sega of America and the parent company and the board back in Japan massively disagree on how and when to launch the Sega Saturn, the next 32-bit console generation. That conflict and that mismanagement becomes a total disaster and it starts a downward spiral for Sega with the failure of the Saturn. And then they follow it up really quickly with the Dreamcast. That also never really gets traction. Dreamcast was actually an awesome console and very innovative on a lot of fronts, but they just start bleeding cash. They end up exiting the hardware business.

• 1:01:00David Rosenthal?

  And the company basically goes bankrupt and has to get acquired by a Pachinko manufacturer called Sammy. It's really sad.

• 1:01:07Ben Gilbert?

  Brutal. They now make games for Nintendo platforms.

• 1:01:11David Rosenthal?

  Well, and the great outcome of that is that you can play Genesis games on the virtual console on the Switch. So, good for consumers.

• 1:01:18Ben Gilbert?

  The story feels abrupt, but I remember it feeling abrupt when it happens, too.

• 1:01:22David Rosenthal?

  Yep. A story for another day, but for our purposes here in the Nintendo story, the point is that Nintendo has now fallen and they've fallen pretty hard. There were a couple other self-inflicted Nintendo wounds around this time, too. Starting in 1988, they actually get embroiled in two separate antitrust lawsuits with each of the successor Atari entities, both the hardware side and the game side. They win both of these, but this really hurts Nintendo's brand image. It kind of comes out to the American public through this, that what we know from doing Part One Nintendo corporate-wise is not really this family-friendly, gentle, kind company. There's a great quote from Howard Licken

• 1:02:06David Rosenthal?

  in Game Over about this lawsuit. He says, "I thought to myself, 'You have no idea what you've taken on Atari. We are a tiger who will skin you piece by piece.'" Obviously, he doesn't say that publicly, but this isn't really good for Nintendo's image. Fun side note on this, the Atari Games case is actually the start of the video games career for the then-baby lawyer Mitch Lasky of Benchmark and GameCraft Podcast fame.

• 1:02:37Ben Gilbert?

  Oh, no way!

• 1:02:39David Rosenthal?

  Yeah, super fun. Mitch talks about that on GameCraft. They're just so arrogant at this point in time.

• 1:02:44Ben Gilbert?

  They're arrogant and they're getting beat up.

• 1:02:46David Rosenthal?

  Yep, and then they do even more dumb stuff. So Nintendo sues Blockbuster during this time for renting their games, which is just really dumb. Like, what's a really good marketing for games? It's renting them and letting people try them. And what are American consumers really gonna hate you suing them to stop that? They also sue the maker of the Game Genie, which is one of my favorite video game artifacts from this period.

• 1:03:10Ben Gilbert?

  And the Game Genie was the thing that let you like enter weird cheat codes and modify the games and stuff. This just shows another example of Nintendo's belief that they know better than anyone else what makes a game fun and you are not to modify their game rules at all because Miyamoto will come down from the mountain and tell you what is fun or not.

• 1:03:29David Rosenthal?

  So true, so true. It's also, we would be remiss, I think, if we didn't point out too, that all this was happening during the incredibly ugly and sad era of Japan bashing in the US that we talked about a little bit on the Sony episode. You and I were kids, so thankfully didn't really experience this, but I remember people in my parents' generation just saying like really awful things about Japan and Japanese companies at this time. And there was this real worry in the US, especially in the business community, that as Japan's economy was ascending so rapidly, that Japanese companies would come take over all of American media and movie studios and stuff like that.

• 1:04:08Ben Gilbert?

  Yep. We talked about this a lot on the Sony episode.

• 1:04:11David Rosenthal?

  And this culminates for Nintendo in another well-intentioned, but really self-inflicted wound debacle, where they buy the Seattle Mariners, which really was well-intentioned. The owner at the time was gonna move them to Florida, and Nintendo kinda as a goodwill gesture for how good the people of Seattle and Washington State had been to Nintendo of America, steps in as like a white knight savior to buy the Mariners and keep them in Seattle. Major League Baseball tries to blackball them from buying the team because they're like a weird foreign company.

• 1:04:47Ben Gilbert?

  It's also a company buying a team. I mean, that's not really, sports team ownership in the US is owned by individuals.

• 1:04:53David Rosenthal?

  So kind of again, well-intentioned, but probably ill-advised move on Nintendo's part at this point in time. And don't win a World Series despite having Ken Griffey Jr., Alex Rodriguez, Randy Johnson, but they do make a Super Nintendo game out of it. That's pretty damn good.

• 1:05:11Ben Gilbert?

  There you go.

• 1:05:12David Rosenthal?

  So anyway, by the end of the 16-bit generation, Nintendo's fall is pretty precipitous here. And the magnitude of it is actually kind of hidden initially because of Sega's subsequent total implosion and even bigger fall with the Saturn and then the Dreamcast, but- Nintendo is really irreversibly weakened from this era. So we talked about the numbers, how in a single generation, they go from 90% global market share to basically 50. But more importantly, strategically, like the net result of this is that a lot of the things that made the NES so powerful in the market are completely negated by the

• 1:05:56David Rosenthal?

  end of this. So first and most importantly, the whole years ahead of the competition, hardware advantage, that's gone. They're now behind the competition. Two, they lost control of the third-party developers. They had this incredible lock on the third-party ecosystem with the NES. Now developers like Electronic Arts and others are saying, well, look at Sega and look at these other new folks like Sony who are going to enter the ecosystem. I can make more money with less drama on their platforms. Screw you, Nintendo.

• 1:06:27Ben Gilbert?

  And less drama and often better economics. They're willing to cut special deals with me that you're not.

• 1:06:32David Rosenthal?

  Exactly.

• 1:06:33Ben Gilbert?

  And in many cases, they have more advanced capability. So it's an easier platform to program for.

• 1:06:38David Rosenthal?

  And then maybe worst of all, Nintendo's brand value just takes a huge hit in this generation. And we've talked about this, you know, as we've gone along here, but to put a fine point on it, older kids and teenagers no longer play Mario, or at least they don't want to admit that they do. Sonic doesn't become the long-term replacement, but Tomb Raider does, Halo does, Grand Theft Auto does, Call of Duty does. Nintendo ironically gets kind of trapped in the toy aisle ghetto for the next 20 years.

• 1:07:11Ben Gilbert?

  All right. So we're through the Genesis era. We've unfortunately seen basically the end of Sega, but there's another sort of adult-oriented gaming firm that's gearing up in the shadows right now to come aggressively at Nintendo and expand the gaming market even further, and that is Sony. So take us to the PlayStation.

• 1:07:36David Rosenthal?

  So the whole 16 bit generation story for Nintendo that we just told was really one of arrogance, bordering on stupidity and self inflicted wounds for Nintendo. But ultimately, they were competing against at best, a roughly equal footed competitor in Sega and really an underdog. Sega did not have the financial firepower, the technological firepower that Nintendo did. It was like amazing that they came from out of where they did and battled Nintendo to a draw.

• 1:08:14David Rosenthal?

  That's not going to happen in this generation.

• 1:08:17David Rosenthal?

  Cause now the big boys are coming. And we talk about these often unacquired of self inflicted wounds. This may be the worst self inflicted wound of all time, what Nintendo does here. Because as we talked about on the Sony episode, the PlayStation was supposed to be the Nintendo PlayStation.

• 1:08:42Ben Gilbert?

  Yes.

• 1:08:42David Rosenthal?

  And somehow this partnership that Nintendo had been working on with their fellow Japanese technology and consumer electronics giant Sony to enter the CD medium and the 32 bit era. Somehow that went from being a beautiful partnership to basically almost signing their own death warrant. So at the June 1991 Consumer Electronics Show, there's big expectations. Nintendo and Sony are all set to announce the CD ROM add on for the Super Nintendo

• 1:09:23David Rosenthal?

  system to bring the CD format to Nintendo powered by Sony, the Sony and Nintendo PlayStation. They're all set to announce it. And in fact, Sony does announce it at their press conference. And then the very next day.

• 1:09:41David Rosenthal?

  Nintendo turns around and in their press conference doesn't mention it at all. And instead trumpets their major CD-ROM technology partnership with Sony's arch rival, Philips. They betray Sony. They stab them in the back.

• 1:09:58Ben Gilbert?

  So much hubris.

• 1:10:00David Rosenthal?

  So much hubris, like dumb decision to do this period. Even dumber decision to do it this way.

• 1:10:07Ben Gilbert?

  To let them whip in the wind publicly like that?

• 1:10:10David Rosenthal?

  And they just light a fire under exactly the company that you do not want to light a fire under at this point to come and destroy you.

• 1:10:20Ben Gilbert?

  And to illustrate how much bigger Sony is, I mean, in 94 is when the Sony PlayStation would launch, they were doing 38 billion in revenue. And at that point in time, Nintendo was a $4 billion revenue company. So Sony is the much bigger beast here.

• 1:10:38David Rosenthal?

  Yeah. Now, look, this partnership that they were working on with Sony, it's unlikely that it ever actually would have worked out because there's just like too much money at stake. The video game market is too attractive. Despite the fact that Sony didn't enter the portable market with the Game Man and Nintendo stuck it to them with the Game Boy, like the Bad Blood goes way back here. And the reason that Nintendo pulls out of the partnership is they couldn't come to terms on how they were going to split the royalties on software revenue. Which as we talked about in part one, like that's where all the economics are in the business. It's a razor and blades.

• 1:11:15Ben Gilbert?

  Right. Which is actually quite rational.

• 1:11:17David Rosenthal?

  There is not really a viable alternative history where the Nintendo PlayStation came out. There is a viable alternative history where like Sony waited a little longer to enter the market and they didn't have as much burning hatred for Nintendo as Nintendo generated here. So that happened at the 1991 CES. Ken Kudragi goes off and within Sony Music builds the PlayStation franchise and Steve Race comes over from Sega and gets involved on the American side. The PlayStation finally comes to market at the end of 1994 in Japan and 1995 in America.

• 1:12:00David Rosenthal?

  And it's an amazing console. It's CD-based. It's got incredible power. It's much easier to develop for. They've got all of Sony's both technological and financial firepower behind it.

• 1:12:17Ben Gilbert?

  And it's a 32-bit system on par with the Sega Saturn?

• 1:12:21David Rosenthal?

  Yes, it's a 32-bit system. So just blows away the Super Nintendo on every dimension here. Much more storage availability for games and game developers by using the CD format. Much more powerful processor. It's clear that this is gonna be a big investment from Sony here and they're gonna be a big player in the industry. Nintendo, again, probably in hubris, tries to compete directly with Sony here in response. So they go off and they partner up with legendary Silicon Valley company, Silicon Graphics,

• 1:13:01David Rosenthal?

  SGI, as we talked about on the Andreessen series back in the acquired Canon, to build the N64. They're gonna leapfrog the 32-bit generation and go right to 64 bits with the N64. But, one, it comes out too late. So the 64 doesn't come out until 1996, after the PlayStation has already had a year-plus to be on the market and establish both the install base lead and the third-party developer network. Two, the N64 famously uses cartridges again instead of CDs.

• 1:13:40Ben Gilbert?

  They have a very particular way they love doing things.

• 1:13:44David Rosenthal?

  They do, they do.

• 1:13:46Ben Gilbert?

  Which I think was partially an anti-piracy thing. They cared so much about stopping piracy that they were willing to hamstring developers into needing to use a much more constrained format in the cartridge than CDs because they thought, ah, well, CDs are just gonna get pirated and we don't have as many mechanisms to prevent that.

• 1:14:02David Rosenthal?

  Yep. And then the third part of this, yes, the N64 was a very powerful 64-bit system, but it required very expensive silicon graphics hardware to develop for that the PlayStation did not. So like, really, the whole thing is just a giant FU to third-party developers who already hate Nintendo. So at this point, everybody pretty much abandons Nintendo for the Sony platform. The N64 would sell 33 million units in its lifetime. That's about half of what the NES sold versus the PS1's 102 million units.

• 1:14:43Ben Gilbert?

  Wow.

• 1:14:43David Rosenthal?

  So Nintendo just gets the floor wiped with them by Sony here, which was obviously predictable.

• 1:14:50Ben Gilbert?

  And the N64 ended up being a fantastic console to play Nintendo first-party games on.

• 1:14:57David Rosenthal?

  Yes.

• 1:14:57Ben Gilbert?

  And they even more than ever before entrenched that that is what our company is all about. I mean, Super Mario 64, Mario Kart 64, Super Smash Brothers, Star Fox.

• 1:15:10David Rosenthal?

  Goldeneye.

• 1:15:11Ben Gilbert?

  I mean, these are all first-party titles. The only one that wasn't is Goldeneye, and that was Rare, which was a very close relationship with Nintendo.

• 1:15:19David Rosenthal?

  Yep, that was a second-party title. Nintendo owned at that point in time, something like 25, 30% of Rare, and Rare developed exclusively for Nintendo platforms. So that's the N64 PlayStation. And then in the next generation, the wheels just totally come off the bus. Sony and the PlayStation 2 goes on to become the best-selling console of all time.

• 1:15:43Ben Gilbert?

  Still, to this day, the PS2 has sold more units than any other console, including the Game Boy, including the Nintendo Switch.

• 1:15:51David Rosenthal?

  Everything. They sell 155 million PlayStation 2s. My God, did I love my PS2. I mean, remember Pimp My Ride? People were putting PS2s in cars. That was the ultimate rapper status symbol.

• 1:16:07Ben Gilbert?

  This was the console that I got after my bar mitzvah, when I was finally allowed to have like a real console, not just a Game Boy. And it is the last console I owned until I bought a Switch a month ago. And I've had an N64 that I bought as sort of like a novelty thing to play Smash after I graduated college, but like that, not a real thing. The PS2 is totally the workhorse system that I grew up on as a teenager.

• 1:16:32David Rosenthal?

  I mean, this is Sony at its absolute pinnacle in the like pre-internet era. It was their consumer electronics expertise. It was bringing DVD players to the living room of homes around the world for the first time.

• 1:16:49Ben Gilbert?

  Right. It was a DVD player and a game system in one for the price of just a game system.

• 1:16:55David Rosenthal?

  I mean, for God's sakes, there was all this FUD I remember in the media at the time when it was launched in the American media about, should we allow Japan to export these things? Because what if adversarial nations to the US get a hold of these and use them to build missile guidance systems? I mean, the PS2 was a literal supercomputer at the time. And this is the other huge advantage that Sony had over Nintendo and anybody else except Microsoft that we'll talk about in a second, which was they could afford to subsidize the crap out of this thing. So the PlayStation 2 launched for $2.99 in the US. I don't actually know what the bill of materials was, but it cost way more than $2.99 for Sony

• 1:17:38David Rosenthal?

  to make every one of those, but they had so much capital that they could take that loss and then make it up on the software library over time. For the high-end consoles, this is how the business works to this day between Sony and Microsoft.

• 1:17:51Ben Gilbert?

  Yep.

• 1:17:52David Rosenthal?

  For Nintendo, oh God, it's such a sad story.

• 1:17:55Ben Gilbert?

  Their answer is the frickin' GameCube.

• 1:17:57David Rosenthal?

  The GameCube, the poor GameCube. Uh, I actually have like a really fond memories of the GameCube, but this was just the epitome of Nintendo was like a kid that was really cool in middle school and then got awkward in puberty and in high school gets stuffed in a locker.

• 1:18:15Ben Gilbert?

  They had no idea who it was for. They made it and it was more competitive on a specs perspective than the PS1. And they did try to market it like it was for everyone, like it was a game system for kids, for adults.

• 1:18:29David Rosenthal?

  Yeah, except it looked like a lunchbox.

• 1:18:31Ben Gilbert?

  Totally. And it also was competing against the supercomputer PS2.

• 1:18:36David Rosenthal?

  Yeah, literally, people are worried about this thing guiding nuclear missiles. Like, what do you think the American teenager is gonna wanna buy? The thing that their parents are freaking out about nuclear war? Or a thing that looks like their little brother's lunchbox?

• 1:18:52Ben Gilbert?

  And the PS2, you know, it's black and it's sleek. And it's the same playbook that the Sega Genesis ran in terms of we're like the grown up gaming machine. On top of all of this.

• 1:19:02David Rosenthal?

  Microsoft enters the market.

• 1:19:04Ben Gilbert?

  Yes.

• 1:19:06David Rosenthal?

  Another company.

• 1:19:07Ben Gilbert?

  So suddenly you have a two horse race, both of which have infinite treasuries and are subsidizing this market they really wanna get into. And neither of the two horses is Nintendo.

• 1:19:16David Rosenthal?

  Yeah, so Microsoft with the Xbox, Microsoft takes at least a $5 billion loss on the first generation of the Xbox. And they are thrilled about that because this is their entry into the long term strategy of getting into the video game market.

• 1:19:33Ben Gilbert?

  And owning the living room. It was their, how do we get Microsoft in the living room?

• 1:19:38David Rosenthal?

  Even though they took that loss on the whole generation, like, I think that's hardware and software included. I don't think Xbox as a franchise was profitable at all for Microsoft on that first generation. They're willing to take that enormous capital loss, which is basically all of Nintendo's treasury to compete against them. And they've got Sony. Nintendo just gets rocked.

• 1:20:01Ben Gilbert?

  And on top of all of this, there was a bill coming due that Nintendo had to pay eventually. And this is where they had to pay it. They finally leave cartridges. So they have zero backwards compatibility with the GameCube because they were too stubborn to adopt discs sooner. And on top of the fact that they're moving away from the cartridges, they go with mini CDs.

• 1:20:26David Rosenthal?

  Mini DVDs.

• 1:20:27Ben Gilbert?

  What on earth?

• 1:20:29David Rosenthal?

  It's like, did you learn nothing?

• 1:20:31Ben Gilbert?

  It's not backwards compatible with any of the stuff that they've had before.

• 1:20:35David Rosenthal?

  Which the N64 wasn't either. Another dumb move, but that had to happen because of the silicon graphics technology, which was dumb in the first place.

• 1:20:43Ben Gilbert?

  Yeah, it is truly hard to believe that Nintendo would come roaring back from this moment. So this is Nintendo at their ultimate low.

• 1:20:54David Rosenthal?

  Yeah, so to put some numbers on that, the GameCube sells barely over 20 million units for the generation versus the 155 million that the PlayStation 2 sells. Even the Xbox beats the GameCube. The Xbox sells 24 million units with that $5 billion plus loss that Microsoft's taking. So, any other company, like this is Sega's failure with the Saturn and the Dreamcast that basically bankrupts the company. This is that times 10. Like, this is a smoking, smoking crater for Nintendo. Except, unlike Sega, all the way back to the beginning of this episode, they had one very small, but very big thing

• 1:21:39David Rosenthal?

  that kept them alive through all of this.

• 1:21:42Ben Gilbert?

  The gift that kept on giving.

• 1:21:44David Rosenthal?

  The Game Boy.

• 1:21:45Ben Gilbert?

  Yep.

• 1:21:46David Rosenthal?

  Before doing the research for this part two, like, I didn't realize, the Game Boy and its successors saved Nintendo's skin for like 20 years.

• 1:21:55Ben Gilbert?

  So that's Game Boy, which includes the Game Boy Pocket, it's Game Boy Color, it's Game Boy Advance, and then, of course, they would launch the DS, which we'll chat about in a minute here. But it is amazing that Nintendo basically had a monopoly on portable gaming. This entire time, there's the home console wars that are playing out, and there's this whole side thing that's happening where Nintendo is selling millions of units as the only credible player in handheld.

• 1:22:20David Rosenthal?

  Literally, everybody's wringing all their hands about the home console business, and that's all that anybody who's serious pays attention to. But over in the handheld market, Nintendo is just continuing to crush it like it's like 1989 here. So remember how we said all the way back in the beginning of the episode, that the Game Boy is the fourth best-selling console of all time? And then we just said that PlayStation 2 is the first best-selling console of all time. Numbers two and three are the DS and the Switch, and then the Game Boy Advance isn't far behind. So, everything, and we're gonna talk about the Switch at the end of the episode, obviously, but everything that Nintendo gets wrong in the home console market. They get right in the handheld market.

• 1:23:05Ben Gilbert?

  We could have re-titled this episode as Nintendo, the handheld gaming company, and that wouldn't have been far from the truth.

• 1:23:13David Rosenthal?

  That is 100% the truth. So let's go down the checklist. Global monopoly, yes. Sony does launch the PlayStation Portable.

• 1:23:21Ben Gilbert?

  I had one.

• 1:23:22David Rosenthal?

  Oh, you have one? Oh, that's awesome. I never had one.

• 1:23:24Ben Gilbert?

  Got stolen out of my locker in high school.

• 1:23:26David Rosenthal?

  Oh, no.

• 1:23:27Ben Gilbert?

  Brutal.

• 1:23:28David Rosenthal?

  Oh, brutal, which is a great device, but it was for a different market segment than the Game Boy. It never competed head to head with Game Boy.

• 1:23:35Ben Gilbert?

  It had a really fancy screen, so it was like pretty good for watching movies. It was more like a small computer. It was kind of like an iPad as probably the precursor to an iPad type device.

• 1:23:45David Rosenthal?

  Totally. Very Sony device.

• 1:23:47Ben Gilbert?

  Yes. All the way to the proprietary memory sticks. Very Sony.

• 1:23:52David Rosenthal?

  Yes. So global monopoly, check. Most innovative technology, ironically, also check. Thanks to Gunpei Yukoi's maxim of lateral thinking with Withered Technology. A huge and dominant third-party developer platform, check. Locked-in consumer software libraries with perfect backwards compatibility, check. Literally everything that they got wrong in the home business, they get right in the handheld business. So the Game Boy and Game Boy Color sell 118 million units over a 12-year run. That is the more impressive headline number. But the Game Boy Advance, which comes out in 2001,

• 1:24:37David Rosenthal?

  only ends up having about a three- to four-year lifespan before the DS comes out in 2004. During that time, the Game Boy Advance sells 81 million units, making it the 10th best-selling console of all time, despite having this incredibly short primary lifespan. So average selling price for the Game Boy Advance was about $100 a pop. That is $8 billion just in hardware revenue. And remember, Nintendo is making margin on this hardware revenue during those years. It also does 375 million units in software sales, which is almost double what the GameCube did.

• 1:25:18David Rosenthal?

  So like, literally, you're right. Like, this episode should be titled Nintendo, the Handheld Gaming Company.

• 1:25:24Ben Gilbert?

  It's crazy. I mean, it just gives them so much margin of safety to screw up generation after generation over in the home console market.

• 1:25:33David Rosenthal?

  And then the DS. I was perfectly within the generational window where I'd missed the DS. So I didn't realize what a monster this was. And what I mean in the window, I was too old to buy it as a kid and too young to buy it as a old fuddy duddy. We'll get into that in a minute. The DS was a monster. Remember, we just said the PS2 sold 155 million units, and the DS is the second best-selling console of all time. It sold 154 million units. So basically neck and neck with the PS2. Let's be conservative and say that the average selling price for the DS was $100. It was actually more, but we'll be conservative. We'll say

• 1:26:18David Rosenthal?

  it's $100. That is $15 billion in hardware revenue for Nintendo. And that's just the hardware. The DS sells almost a billion game units at an average selling price of like $30. So that's $30 billion in high-margin software revenue.

• 1:26:38Ben Gilbert?

  And at this point, Nintendo is still dramatically a first-party publisher for their own platforms. And so that billion units sold, also, most of that, or at least half of that, is them.

• 1:26:50David Rosenthal?

  Is Nintendo. Yeah, it's incredible. I mean, the DS franchise generated almost $50 billion in revenue for Nintendo.

• 1:26:58Ben Gilbert?

  Wow, that's wild.

• 1:27:00David Rosenthal?

  How is it possible that this same company is failing so spectacularly on the home console side while simultaneously succeeding so spectacularly on the hardware side?

• 1:27:13Ben Gilbert?

  And I'll say, the portable side is the side that's paving the future for what Nintendo would become, for better or for worse. They're the ones who are having this very strong opinion of, let's innovate on a gaming device and what a gaming device is. And to this point, that hasn't really been Nintendo's MO. I mean, you look at the NES, the controller is kind of what you would expect. The SNES, okay, cool, they came out with the shoulder buttons on top, the L and R. Okay, that's a small step forward.

• 1:27:43David Rosenthal?

  You know, the N64, I think, does deserve credit, particularly Mario 64. That was the first game and game system that showed how to do 3D games. Like, it was incredibly innovative.

• 1:27:55Ben Gilbert?

  Totally agree. And then the GameCube is a very me-too console. You know, everything about it is like, we wish we had done some of this on the N64, but it's too little, too late now. But what you're seeing in the handheld, especially in the DS, is, okay, this is super innovative to have two screens. One of them is a touchscreen. With the 3DS that would come later, one of them is a 3D screen. Nintendo is starting to, at least the handheld group, figure out, the way forward for us is we design innovative hardware that can inspire new types of games to be played and new types of games to be designed, especially by our first-party team in-house. And that does all kinds of amazing things for them. Think about the Wii, think about the Switch switching, literally,

• 1:28:40Ben Gilbert?

  and the Joy-Cons and how popular that is. It also does terrible things for them, which we'll talk about for the Wii U. But this is when they really discover they are unapologetically innovating on the hardware to play games, and that is what defines them. This is so much the future direction for Nintendo that in 2002, when Hiroshi Yamauchi is leaving the company and transitioning to the next CEO, Satoru Iwata, and leaving it in his hands, his final request is, quote, "That Nintendo give birth to wholly new ideas and create hardware which reflects that ideal and make software that adheres to that same standard."

• 1:29:21David Rosenthal?

  Yes, and it's not just new types of games to be made on new types of hardware. It's serving the end goal of enabling new types of people to play games. So what's going on here and why the handheld business becomes such a juggernaut for Nintendo is, I think, as we alluded to earlier, it starts serving to...

• 1:29:46David Rosenthal?

  Completely different markets than the PlayStation and the Xbox. And both of those other markets are A, completely ignored by Sony and Microsoft, and B, very, very large. So the first is the kids market. This is the bread and butter, all the way back to the NES and the toy aisle. As Sony and Microsoft moved into the Grand Theft Auto era and the Call of Duty era and the Halo era.

• 1:30:15Ben Gilbert?

  Right, core gamers.

• 1:30:16David Rosenthal?

  And more mature content. The Game Boy became the new home for kids. It's cheaper, A, so like if you're a parent of a four or a five-year-old, you're not going to worry about buying a hundred-dollar piece of plastic for them. It's less immersive, which is actually a feature for kids because it's easier to play. And then back to the Nintendo kind of guarantee, seal of quality brand, you can be pretty sure that Little Susie and Little Jimmy isn't going to be playing really violent or adult content games on your Game Boy Advance or DS or what have you. So it's really compelling for little kids and their parents.

• 1:30:54David Rosenthal?

  And as we talked about a few minutes ago, nothing embodies this more than Pokemon. We talked about Pokemon on the NFL episode where Pokemon is, I think, in my opinion, wrongly listed as the highest grossing media franchise of all time because the NFL really should be a single media franchise and is bigger. But it doesn't matter. Pokemon is number two or number one, no matter how you want to say it. Lifetime Pokemon franchise revenues are just under $100 billion. And the primary medium for it is the freaking Game Boy.

• 1:31:32Ben Gilbert?

  Yeah. So let's take a little detour and tell the Pokemon story here because it is incredible. I think this is not a super deep story, but so cool. So many little aspects of this are like one in a million chances. So you mentioned $100 billion lifetime franchise since 1996 when it came out. $60 billion of that is merch.

• 1:31:58Ben Gilbert?

  Merch, like video games is only 35-ish billion of the 100 billion. So people became such big fans of this that they tripled, quadrupled the actual video game sales in merch revenue. And that's $60 billion. If you compare it to, say, I don't know, the Marvel Cinematic Universe, which people think of as a big media property. The MCU is $30 billion lifetime, which is half of Pokemon's merch revenue.

• 1:32:29David Rosenthal?

  Yes. Now, Pokemon is a masterfully managed business franchise IP. I don't know for sure the breakouts, but I believe a large portion, if not maybe even the majority of that merch segment is the trading card game. All the way back to Hanafuda cards and Nintendo. Almost 50 billion cards have been sold. That's 5-0 billion Pokemon cards exist in the world.

• 1:32:57Ben Gilbert?

  Wild. All right. So Pokemon, 1990, Game Boy comes out and Satoshi Tajiri had started this thing called Game Freak, like a decade before with some of his friends. It was a fan magazine for video games. They eventually get into making their own video games. None of them really necessarily take off, certainly not to the extent of Pokemon. So at Game Freaks, Satoshi Tajiri is sort of pitching internally, "Hey, we should make something for the Game Boy. I saw the functionality with the link connector and I loved collecting bugs as a kid. And it sort of made me think about bugs going back and forth on the link cable between these two Game Boys.

• 1:33:38Ben Gilbert?

  I wonder if there's something we can do around kids and bug collections and trading them or battling them or something." And so he comes up with this concept and he pitches it internally. Now internally, what is it? It's four programmers.

• 1:33:52David Rosenthal?

  That started life as a video game magazine.

• 1:33:55Ben Gilbert?

  Yes. Riled up about this concept and he goes and pitches it to Nintendo. Nintendo's not excited about it, but there's one person who sees promise and says, "I think we should green light this and I will mentor Satoshi Tajiri." That person is Miyamoto.

• 1:34:12Ben Gilbert?

  And so suddenly you have the very best game designer in the world seeing promise in your harebrained concept.

• 1:34:18David Rosenthal?

  Literally bug collecting, which if you know anything about Miyamoto personally, like obviously that would resonate with him.

• 1:34:26Ben Gilbert?

  Yes. Game Freak raises money from Creatures Inc., who I think the right way to kind of think about it is Creatures Inc. is the publisher and Game Freak is the developer.

• 1:34:35David Rosenthal?

  Yeah, I think Creatures also manages the Trading Card Game.

• 1:34:39Ben Gilbert?

  Okay, makes sense. So they then spend six years developing the game. Four people over six years with a whole bunch of setbacks, living off of basically Satoshi's dad's money because they're living in his basement and trying to survive off of him having a real job. And in 1996, it's finally ready and they launch it.

• 1:35:02David Rosenthal?

  Yep. I believe it was red and green in Japan initially, and then it was red and blue in the US.

• 1:35:07Ben Gilbert?

  Oh, you're right. And the whole thing is so unbelievably frail that when they go to translate it and make an American version, they actually need to re-code the whole thing from scratch because it's like spaghetti code everywhere. So it does well, but unlike every other Game Boy game that peaked and started trailing off, this thing just accelerates. And it just goes and goes and goes. And everyone at Nintendo is shocked. Everyone at Game Freak is shocked. Everyone at Creatures is shocked. No one expected this thing to be this successful, especially after taking six years to bring it to market with basically four crazy people.

• 1:35:44David Rosenthal?

  Yeah, it's just wild. And, you know, obviously, fast forward today and Pokemon is enormous on just about every dimension, but it goes from that to selling just on core video game consoles, Nintendo consoles, over half a billion lifetime units of console software sales. It's incredible.

• 1:36:05Ben Gilbert?

  Do you know the trivia with the names of the Pokemon characters?

• 1:36:09David Rosenthal?

  Oh, no, I don't.

• 1:36:10Ben Gilbert?

  So Ash Ketchum in the Japanese version is named Satoshi after Satoshi Tajiri.

• 1:36:16David Rosenthal?

  Ah.

• 1:36:18Ben Gilbert?

  So Satoshi's nemesis, you know, Gary Oak, the sort of rival of Ash Ketchum, in the Japanese version is named Shigeru after Shigeru Miyamoto.

• 1:36:28David Rosenthal?

  Ah, that's awesome.

• 1:36:31Ben Gilbert?

  Yeah, but this would evolve eventually into, and we'll come back when we talk about Pokémon Go later, but it would evolve into the Pokémon Company, which is sort of the licensing body that is 32% owned by Nintendo and the other thirds are owned by Game Freak and Creatures. And I think the way they basically operate is as if they're a studio of Nintendo at this point.

• 1:36:54David Rosenthal?

  It's the most successful second-party business of all time.

• 1:36:58Ben Gilbert?

  Wow.

• 1:36:58David Rosenthal?

  I don't know that for a fact, but I assume it is a fact. I can't think of anything else that is a second-party business that would be as big as Pokémon.

• 1:37:04Ben Gilbert?

  Yeah.

• 1:37:05David Rosenthal?

  So obviously, the kids market is huge.

• 1:37:10Ben Gilbert?

  I mean, I remember this is all I did all day at recess. And any time I could bust out my Game Boy at school, like this is what we were doing.

• 1:37:15David Rosenthal?

  And it spans generations. Like, I think it's all kids are doing today, all day at recess. And we're old now. Like, I have kids, not yet at Pokémon age, sadly. Okay, so that's the kids market, obviously huge. The other market that the Game Boy slash DS franchise serves for Nintendo, and this is perhaps not surprising, given if you think back to the original history with Gunpei observing the businessman on the train playing with the calculator, but it's what eventually becomes the casual gaming market. Now, people aren't thinking about it quite as that at this point in time.

• 1:37:54Ben Gilbert?

  Nintendo totally discovers slash invents casual gaming.

• 1:37:58David Rosenthal?

  They 100% do. I mean, this is my dad and millions of dads around the world playing Tetris in the 80s and 90s. It really, like Nintendo codifies this and embraces it best with the DS. This is Brain Age. Brain Age were these like mind-training games that were targeted at older people and like grandparents. It's Nintendo Dogs, which is Miyamoto's dog-raising simulator. That's like really popular with women and older women as opposed to most video games. And it turns out that this category, which nobody knew existed until Nintendo accidentally found it, and then they didn't even like truly embrace it until the mid 2000s.

• 1:38:43David Rosenthal?

  This is actually the biggest gaming category of them all.

• 1:38:47Ben Gilbert?

  By far. And it's incredible because the modern instantiation of casual gaming, certainly the largest, is mobile free-to-play casual gaming. And Nintendo sort of invented it before mobile and before free-to-play.

• 1:39:00David Rosenthal?

  Totally. So Brain Age 1 and 2 combined sell 34 million copies on the DS. Nintendogs sells almost 25 million copies. Tetris, all the way back on the Game Boy, sold 35 million copies. Now, most of those are bundled in the US. These are billion-dollar franchises within Nintendo that nobody thought about for decades. It's kind of crazy.

• 1:39:28Ben Gilbert?

  Yep.

• 1:39:29David Rosenthal?

  So we asked the question, how is Nintendo screwing up so royally on the home console side while they're succeeding so spectacularly on the handheld side? I think it's one that the kids and the casual segments were viewed as these kind of ghettos for a long time that no serious company, and certainly nobody like Sony or Microsoft, would go after and go compete with, wrongly so, by the way.

• 1:39:55Ben Gilbert?

  And the people who would have competed with them were Atari and Sega, and both were basically defunct by this point. So Nintendo had this lane wide open because everyone else who's trying to come into the industry is coming after the core gaming segment or the serious gaming segment or the high ARPU, the high average revenue per user, people that are buying $60 DVD discs to play.

• 1:40:14David Rosenthal?

  And so, you know, then to the other side of how are they allowed to screw up so badly in the home side? I don't want to say it doesn't matter, but it kind of doesn't matter. So Nintendo's revenue and operating profits more or less stay flat from the NES era all the way through to the mid 2000s, even though the home console business basically just gets like doused in gasoline and lit on fire. But the handheld side completely replaces it. Nintendo's kind of always doing a solid four to five billion in revenue a year, call it, and maybe half a billion to a billion dollars in operating income. Like, there's no gun to their head.

• 1:40:58Ben Gilbert?

  Yeah, so handheld, very good business for Nintendo. And when you couple that with... A generation of home console that is also a good business for Nintendo when they absolutely knock it out of the park and define a brand new form factor and a brand new way to play games that has mass, mass audience, then they do the most revenue in the company's history. And that's going to be the we. And we're going to get to that. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:41:39David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:41:56Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:42:11David Rosenthal?

  And that's how you get features that customers love, like Tabular Review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 1:42:35Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 1:42:54David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:43:24Ben Gilbert?

  Truly insane numbers, and that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at lagora.com/acquired and just tell them that Ben and David sent you. All right, so the we. There's a little bit of a lead up to the we, which has some leadership changes. Satoru Iwata comes in and succeeds Hiroshi Yamauchi as president of Nintendo LTD, the parent Japanese company.

• 1:44:05Ben Gilbert?

  And right around this same time, in 2003-ish, Reggie Fiza May works his way up the ranks and comes in as the president of Nintendo of America. And so you've got this pretty awesome tag team of leadership that is ready to do something very different. And the GameCube comes out, they sort of know right away, this is a miss. They're still doing everything that you sort of think they would do to try to occupy the time until they have something really great. But they're already foreshadowing very early that, yep, yep, yep, we hear you developers and gamers, like, we need to be doing something different.

• 1:44:40David Rosenthal?

  And they're learning from the DS, which they just launched and became this enormous success. They're like, ooh, maybe these people want to play games at home, too.

• 1:44:49Ben Gilbert?

  Totally. So there's this great keynote in 2004 where Reggie comes out onstage, he's introducing himself and he says, "I'm Reggie. I'm about kicking ass, taking names, and we're about playing games." And then they have this whole keynote of kind of the most hardcore Nintendo I've ever seen. It's almost like a dark in-your-face. They don't know who they are as a company. It kind of reminds me of Luke Skywalker at the beginning of Return of the Jedi. Like, you're really not sure which way it's gonna go. Could be dark, could be light. But what you do see is them starting to really embrace some things. So they start talking about the DS, and they're showing off the backwards compatibility.

• 1:45:31Ben Gilbert?

  It looks kind of funny, but you can put in a Game Boy game, and it kind of sticks out in a way that is clearly awkward, but they know that this is an important thing because they have this massive install base of people that had all these Game Boys and Game Boy Advance and everything over the years. So, okay, we're embracing that, check. You also see them talk about everything they sort of can in the GameCube, but then Reggie invites Satoru Iwata out on stage in from Japan to talk about this revolution that is coming for home gaming.

• 1:46:04David Rosenthal?

  That's right. The codename for the Wii was Project Revolution.

• 1:46:07Ben Gilbert?

  Yes, and they really start sort of just foreshadowing how they really want to change everything again and how it's an exciting time to be working with Nintendo as developers because everything is just about to be so different and truly a revolution. They laid this groundwork a whole year before they even announced the name Wii.

• 1:46:30David Rosenthal?

  Yeah, and I think almost two years before the Wii actually comes out.

• 1:46:34Ben Gilbert?

  I think that's right.

• 1:46:35David Rosenthal?

  Yeah, the Wii is such an enormous success on basically every level, but it really is the triumph now fully across all of Nintendo as a company and all their product lines of the Goonpei Yukoi, lateral thinking with withered technology maxim, infrared motion sensing, which is what the Weemo uses, is an incredibly novel technology to bring to video games, but it's a well-understood quote-unquote withered technology. Like TV remotes have been using this for decades.

• 1:47:06Ben Gilbert?

  It's a World War II technology.

• 1:47:08David Rosenthal?

  Yeah, but it works just unbelievably well. The Wii goes on to be incredibly counter positioned to the PS3 and the Xbox 360. Again, we talked on the Sony episode about all their problems with the PS3. There was this like cell-based supercomputer that was a total beast to program for. And here's the Wii that's underpowered and using this old technology, but opening up brand-new markets. It sells over 100 million consoles, coming back from barely 20 that the GameCube sold. What a turnaround. It beats the PS3, it beats the Xbox 360. It becomes the seventh-best-selling console of all time and the fourth-best-selling home

• 1:47:50David Rosenthal?

  console. And the games they make for it, they make Wii Sports and they bundle it in with the Wii. They make Wii Fit, they make Wii Play. This completely Revolutionizes the market. My favorite sidebar story on this is, uh, remember how Travis Kalanick was like a world champion Wii tennis player?

• 1:48:08Ben Gilbert?

  Right. Second best in the world or something?

• 1:48:10David Rosenthal?

  Which later got debunked because turns out there were no global leaderboards. I think he was just really obsessed with Wii tennis or something like that.

• 1:48:18Ben Gilbert?

  He was probably really good at it and just told people he was second best in the world.

• 1:48:22David Rosenthal?

  Totally. But this is part of the market that the Wii enables, which is like Travis Kalanick doesn't have time to go spend, you know, thousands of hours playing Call of Duty, but he will go play Wii tennis and he'll get like really into it.

• 1:48:35Ben Gilbert?

  Totally. And they intentionally make the controller look like a TV remote because they just want people to call it the remote. They don't want people to be intimidated by it. It's like, look, if you can use a TV, you can use a Wii.

• 1:48:47David Rosenthal?

  Totally. The Wii mote.

• 1:48:49Ben Gilbert?

  They also made it smaller. I think the mandate was that it's the size of three DVD boxes so that it's not this big intimidating.

• 1:48:57David Rosenthal?

  Ah, yes, the console itself.

• 1:48:58Ben Gilbert?

  Yes, exactly. And this is where we should talk a little bit about the different segments of games because it's starting to become important. And I think this will help us understand Nintendo today. The Wii really starts to lay the groundwork for understanding where their position today. We have three people to thank for conversations that we had leading up to this. Nick Fight from Rec Room, longtime friend of the show, and some games industry veterans, the creators of Xbox Live Arcade, John David and Greg Canessa, for kind of going down memory lane with us and helping us to understand the way that this landscape looks. So there are many segments of games, but it's worth breaking it down to three. There's casual, there's mid-core in the middle, and then there's a core gaming audience.

• 1:49:42Ben Gilbert?

  And so casual games are what we've been talking about that have sort of broad appeal, that you can kind of pick it up and play. It's a quick in and out. It takes you minutes to understand, but hours to master.

• 1:49:51David Rosenthal?

  It's Tetris, it's Brain Age, it's Wii Tennis.

• 1:49:54Ben Gilbert?

  Exactly. And in the modern casual world, the most common type of monetization model is free to play. And this is the thing that's really taken off on mobile. You know, you see Candy Crush, that sort of almost brainless thing that you could listen to a podcast while you're playing this type of game. And the revenue per user per day, if you're really good in this sort of thing, is like 20 to 40 cents. That's the way to sort of think about the monetization potential. If you're not good at it, it can be like one to five cents. Then there's mid-core games, which it's like games where you pick up where you left off. That's sort of how I think about it. Like, not core games like World of Warcraft,

• 1:50:37Ben Gilbert?

  but a version of that where they're taking these core game mechanics and you're making them more approachable. And so they take some time to learn, but once you learn them, you really love the game. Zelda Breath of the Wild is a really good example of this. And when we are talking about ARP Dow, the average revenue per daily active user, that metric we mentioned before, it's more like a dollar in terms of monetization potential. Smaller market than casual gaming, but a dollar per person, like that's definitely a market worth going after, a dollar per person per day. Once you get into the core gaming segment, I mentioned the World of Warcraft, but this is really anything where you're like training yourself even to play it at all, and your grandma can't pick it up and start playing.

• 1:51:18David Rosenthal?

  League of Legends.

• 1:51:19Ben Gilbert?

  Right. The revenue per user on that is through the roof, but it's a much smaller audience. And so I wanted to sort of paint this picture to try to help us understand where Nintendo decides to start playing from here. They've typically been kind of a mid-core company with their titles. You think of the Zetas, the Super Mario Odyssey. And with some casual games, you think about Super Smash Brothers, or Mario Kart, you know, your kind of button mashers. Those games lean more casual. What they did with the Wii, which in some ways was shooting themselves in the foot, and David, you can push back on this

• 1:51:58Ben Gilbert?

  if you disagree, is that they started walking away from their mid-core characters that really defined who Nintendo is, and launched a casual gaming home console. The thing that was a hit for the Wii was Wii Sports. It's these sort of lifestyle games. And the things that I don't even ever remember playing on the Wii are Mario and Zelda. That's not what that platform was for.

• 1:52:26David Rosenthal?

  Yes, I would agree with exactly how you characterize that. And I also agree that by doing this Nintendo shot themselves in the foot, but I don't know that you can blame them necessarily. I think it actually was completely brilliant at the time, and it completely revitalizes the company. So with the Wii and its success, Nintendo's revenue almost quadruples from the $5 billion-ish range to just under $20 billion in 2009.

• 1:52:58Ben Gilbert?

  All time high, even to date, even including all the Switch's success, that was still the all time high.

• 1:53:02David Rosenthal?

  And operating income goes through the roof to over $5 billion. They're killing it. This is like an unbelievable revolution, as they would have said. Unfortunately, though, you know, and this is where you can debate whether it was possible to see this coming or not. Right after the Wii launches and brings this revolution. So that's 2006, 2007 timeframe. The app stores launch on mobile late 2008 into 2009, and that just sucks all of this away. And this is the problem about shooting themselves in the foot. They were so vulnerable to this in a way that Microsoft and Sony weren't,

• 1:53:44David Rosenthal?

  because the core gaming market and the hardware and the platforms that Microsoft and Sony were putting out, they weren't threatened by mobile. Mobile didn't take share from them, but it took like all of Nintendo's share.

• 1:53:58Ben Gilbert?

  Right, because the Wii was not the Mario console. The Wii was the casual gaming console, and the greatest casual gaming experience in the world launched and fell right into everybody's pocket a few years later. That swept out their entire current market away from them. And then it took them a decade to basically go back to their roots with the Switch and figure out how to like revitalize all the mid-core Nintendo IP onto a platform that was dedicated and best in class for that use.

• 1:54:29David Rosenthal?

  This is like the really sad part of the story. They just get rugged here.

• 1:54:33Ben Gilbert?

  And you could see it in the stock price. It is nuts. When you look at when Iwata came in and took over in 2002, and we talked about the Wii was released in 2005. In the four years from October of 2003 to October of 2007, Nintendo's market cap nearly 8x'd from 9 billion to 70 billion. They were a 70 billion market cap company, but very briefly. I think their market cap was even bigger than Sony's for that year. But by 2012, it was all the way back down below where it even started to $8 billion.

• 1:55:08David Rosenthal?

  Yeah, the impact of mobile gets felt pretty much immediately. In 2009, which is just the third full year that the Wii is on the market, and when it should be hitting like the fat part of its life cycle at its prime, that's when the app stores really hit. And Wii sales declined 20% that year when they should be accelerating. And then they fall roughly another 30% each of the next two years. And software sales, which are more important, declined even more. That's on the home console side in the Wii, which is like maybe a little more insulated from mobile. Meanwhile, the DS, which was this juggernaut, is just getting rocked.

• 1:55:51Ben Gilbert?

  Yeah, it's weird. In some ways Nintendo called it because they realized that casual gaming was going to be a huge market. And they realized that portable gaming was going to be a huge market. But they did not have any strategy around mobile.

• 1:56:05David Rosenthal?

  Yes, it was the perfect marriage. So Nintendo launches the 3DS to try and differentiate versus smartphones and having the 3D screen. They launched that in 2011, but sales stall out pretty much immediately. I'd forgotten this about the 3DS. And they have to do a major price cut on it within six months of launch. So they dropped the price 30% less than six months after the console launches. Like that is. Bad. So that does stem the tide for a bit and 3DS sales do grow for the next couple of years, but then the smartphone juggernaut is just too big. 2013, 14, 15, 3DS sales just fall off a cliff.

• 1:56:49Ben Gilbert?

  This saving grace that they had their entire life or from 1990 onward of no matter how much we screw up, our handheld gaming's system will sort of protect us. Shields are gone.

• 1:57:00David Rosenthal?

  Totally. And so now Nintendo is in a Sega post Saturn and Dreamcast type situation. There is an existential crisis happening. So in Nintendo's fiscal year 2012, they report their first ever annual loss. So this was a company that even during the crappy years was making half a billion to a billion dollars in operating income is just coming off the Wii year bonanzas where they're making $5 billion in operating income. All of a sudden they're bleeding cash and it gets doubly bad because the only way out of this for them, if they're going to keep their hardware strategy is to rush out a new console,

• 1:57:44David Rosenthal?

  which means they have to invest capital in R and D and in marketing for launching a new console to try and stem the losses both on handheld and mobile. It's rough. So they've rushed out the 3DS, they've rushed out the Wii U as the successor to the Wii. Oh, the Wii U is a piece of garbage. The thing sucked.

• 1:58:04Ben Gilbert?

  And there's so many insights with the Wii U that are correct.

• 1:58:08David Rosenthal?

  Directionally correct. Let's put it that way.

• 1:58:10Ben Gilbert?

  People want touchscreens. Okay. You're right. Phones and iPads are really starting to take the market by storm. So having a controller for your home console that has a little touchscreen on it. Okay, I can see that, but God, is this convoluted. You basically handed people what looks like a portable console, this controller with a screen on it.

• 1:58:31David Rosenthal?

  But it's got to be in range of the console.

• 1:58:33Ben Gilbert?

  Right. They can't actually use it as that. They have to use it as a controller for the console. And there's all sorts of innovative things they can do that this is sort of where the maxim of Nintendo really comes into play where. They're obsessed with designing hardware that enables new game experiences and then designing games to work with that hardware. They still, to this point in time, have never shipped a game on any hardware where they did not design the controller. And so they're starting to make all these like very clever use case games for this very strange piece of hardware where like there's accelerometers in the controller. So you can tilt it back and forth, or you can put it down on the table and you can write on it, or you can be like playing chess and you can flip it sideways.

• 1:59:16Ben Gilbert?

  It's weird watching the commercials for this because you're like, wow, this could do everything. This is like a very innovative console, but a bunch of things were wrong with it, including the fact that it was rushed to market, wildly misnamed. It sounds like it's an accessory for the Wii, which it wasn't. It was a full new generation.

• 1:59:34David Rosenthal?

  Yeah, it was bad. So the Wii U just really compounds the gravity of the situation for Nintendo. It only sells 13 million units in its entire lifetime. Remember the GameCube was bad selling over 20. It's Nintendo's worst selling console ever, save for the Virtual Boy, which was worse.

• 1:59:59Ben Gilbert?

  And these losses continue year after year after year. I think most of the years from 2011 to 2017, 18 were in the red.

• 2:00:07David Rosenthal?

  Yeah. And so as that happens, shareholders and shareholder activists start demanding that Nintendo go the way of Sega and get out of the hardware business. There's this really, really obvious value maximizing, at least in the short term move that Nintendo could do, which is take their IP and publish it on smartphones.

• 2:00:30Ben Gilbert?

  And this argument makes a lot of sense. What does this company have anymore? They do have IP that is super valuable that you should put everywhere, but nobody likes their last console. They can't prove that they've been able to do two consoles in a row. They can't prove that they've been able to leverage their user base into buying the next console literally ever. They can't prove that there's any purpose to everything they learned from the Wii, because all that great casual stuff that they learned for the Wii is now happening on smartphones, which they have no play in. So it would be very reasonable to be like, you really need to stop making hardware and you have this unbelievable asset, which is some of the world's most valuable IP.

• 2:01:08David Rosenthal?

  Yes. So there's a legendary story, which may be apocryphal, and after some more research, I think actually is apocryphal, but the spirit of it is absolutely on point. Mitch and Blake tell this over on the GameCraft Podcast, where at the 2013 shareholder meeting, Iwata's up on stage, he's taking questions from the audience, he gets in an argument with a shareholder, not even an institutional shareholder, just like an individual shareholder who's there, who says like, "Hey, my daughter loves playing games on her smartphone and she loves playing Nintendo games. Why are there no Nintendo games on smartphones?" And that Iwata's like, mortal honor is offended and he jumps offstage and punches the shareholder in the face.

• 2:01:51Ben Gilbert?

  What? Really?

• 2:01:52David Rosenthal?

  So I don't think this really actually happened. I think it's a urban legend, but it very well could have because Nintendo and Iwata were just so stubborn through all of this. They're like, "No, the Wii U, it's the future. Like, please buy our console."

• 2:02:08Ben Gilbert?

  And they're philosophically opposed to mobile in a number of ways. One, they like controlling the whole experience. They did not design the smartphone controller, therefore they don't feel that they can make great games for it, which is pretty stupid, but it's how they feel. They also philosophically hate the business model that's doing well on mobile, which is free to play. They think it's like the devil. They think it is an immoral thing to do.

• 2:02:31David Rosenthal?

  So ironic, given Nintendo's history.

• 2:02:33Ben Gilbert?

  Right? You talk to video game veterans and they do say like, "We are very grateful that Nintendo exists in the industry because otherwise it would literally just become this detritus of capitalism."

• 2:02:45David Rosenthal?

  I totally sympathize with this point of view. And, you know, Iwata says, this is an actual quote from him around the time. He says, "Making smartphone games is absolutely not under consideration. If we did this, Nintendo would cease to be Nintendo. Having a hardware development team in-house is a major strength. It's the duty of management to make use of those strengths. It probably would be the correct decision in the sense that the moment we started to release games on smartphones, we'd make profits." Remember, they're not making profits at this point in time. However, I believe my responsibility is not to short-term profits, but to Nintendo's mid- and long-term competitive strength. Now, he's absolutely right, and history proves him right here.

• 2:03:28David Rosenthal?

  But from a shareholder perspective at the time, people are like, "You gotta go. We've had enough."

• 2:03:34Ben Gilbert?

  Well, the funny thing about this survivorship bias is if history didn't prove him right in the long term, we also wouldn't be doing this episode. Somebody could have had that same opinion and then gone the way of Sega. And today, we would be talking to you about the Xbox or some other episode.

• 2:03:48David Rosenthal?

  Totally. Nintendo's stock price from the highs after the Wii declines over 80%. So like, oh, it's brutal. And I think there's probably a decent chance that Iwata would have been forced out. Unfortunately and completely tragically, he dies way, way, way too young and unexpectedly of cancer in 2015.

• 2:04:09Ben Gilbert?

  Age 55.

• 2:04:11David Rosenthal?

  Age 55. It's just terrible. It's also really sad because he and Miyamoto and other Nintendo executives finally do realize that they have to change things. And they come up, just like Tom and Sega had the four-point plan. They come up secretly and internally around this time in 2013 with an internal three-point plan for Nintendo, and it is everything that they need to do. And it starts with point one. We need to stop fighting this smartphone battle and embrace it. But we're going to embrace it in a Nintendo way, and this is super smart. We're going to build a new standalone business unit, and we're going to do it in partnership with the Japanese mobile company DNA

• 2:04:56David Rosenthal?

  to co-develop smartphone games using Nintendo IP. But we're not going to fully transition the business to smartphone games like the investors want us to. We're going to use this as a way to unlock our IP and spread it out more broadly to the rest of the world, kind of like we've seen Pokemon has done. The Pokemon IP is applicable so far beyond the Game Boy games. And all of the revenue and activity from that, it drives sales back to the Game Boy games and to the Game Boy platform. We can and should be doing that same thing with all of our IP with Mario, with Zelda, et cetera.

• 2:05:38David Rosenthal?

  Speaking of, if we want to do that right, just like we see Pokemon doing it, it's not just that we want to do mobile games. We also want to do theme parks. We want to do movies. We want to capitalize on nostalgia because now, just like you and me, Ben, the core Nintendo customers from the old days have gotten old enough that we have nostalgia for the NES, the SNES, the N64. They start releasing NES, SNES, classic editions, like re-releasing the home consoles with HDMI ports. This is genius. They make tons of money from this. So they sign a partnership with Universal Studios to start building Super Nintendo worlds, first in Japan and then in Hollywood, which just opened. It's coming to Florida. It's coming to Singapore.

• 2:06:22David Rosenthal?

  And then really, these points, one and two, embracing smartphones, embracing the IP strategy is really to buy time so that they can rethink the hardware strategy and reimagine what the future of Nintendo is going to be because I think Iwata is totally right. For better or worse, Nintendo is not Nintendo if they exit the hardware business. Sega is a shell of its former self and Nintendo probably would ultimately have gone the same way if they had exited the hardware business at this point in time.

• 2:06:54Ben Gilbert?

  All right. So in 2013, they start laying the groundwork for the Switch, for leveraging the IP to, you know, the movie coming out right now and theme parks and of course, mobile.

• 2:07:07David Rosenthal?

  So that takes us to the summer of 2016 and a big surprise announcement. The very first smartphone game with quasi Nintendo IP. It's not through their partnership with DNA. It's not Mario. It's not Zelda. It's Pokemon and Pokemon Go. And this is like the perfect everything. Mobile game, wait for Nintendo to dip its foot in the water. Oh, it's just amazing. Pokemon Go is one of those things that you just cannot make up what happens here.

• 2:07:49Ben Gilbert?

  The craziest thing is I had been playing Ingris for the previous 18 months. And so when Pokemon Go came out-

• 2:07:56David Rosenthal?

  You and all the nerds out there.

• 2:07:59Ben Gilbert?

  I was like, wait, this is just Ingress with Pokemon in it. This is very strange.

• 2:08:05David Rosenthal?

  Do you know how the Nintendo Pokemon Google relationship starts?

• 2:08:09Ben Gilbert?

  No.

• 2:08:10David Rosenthal?

  So Niantic, which developed Pokemon Go in collaboration with the Pokemon Company, and Nintendo is one of the main shareholders of the Pokemon Company, was a spin out from Google. And Niantic was the team that within Google had made the mobile location based game Ingress that Ben was just talking about, which was super geeky and like really fun. But it was basically Pokemon Go without the Pokemon.

• 2:08:35Ben Gilbert?

  Yeah, it was like a test of the infrastructure and to develop the right game mechanics. And the IP that it was using was sort of an old sci fi novel, but it wasn't like exactly one to one.

• 2:08:48David Rosenthal?

  That's right. But the spark of this relationship actually goes back to 2014. And the 2014 April Fool's joke, Google loves April Fool's jokes. And I had forgotten about this until I read about it in the research. And then I was like, oh yeah. Which was the Google Maps Pokemon Challenge. So on April Fool's Day, 2014, Google released a video saying they were recruiting for a new position within Google. That was like the, I think they called it like Pokemaster or something like that, like the Google Pokemaster. And that it was a competition to get this job.

• 2:09:28David Rosenthal?

  And the way you could compete was by capturing Pokemon on Google Maps. And they had like a video for it and all this stuff. And it was hilarious. Now, what I don't know and wasn't able to find was, were they already starting to think about Pokemon Go and building a game together? Because very clearly the work that went into putting Pokemon showing up on random spots on Google Maps was exactly the work that needed to go into building Pokemon Go. But this was a total like under wraps surprise. Nobody outside of Google and Pokemon Company and Nintendo knew that this was coming. Then one day in the summer of 2014.

• 2:10:08David Rosenthal?

  2016 it hits and it's just a cultural touchstone. I mean, I'm sure

• 2:10:14Ben Gilbert?

  Totally.

• 2:10:14David Rosenthal?

  Almost everybody listening to this episode remembers this.

• 2:10:18Ben Gilbert?

  I was convinced AR had arrived. I was like, oh, we found the AR use case. The world will never be the same.

• 2:10:23David Rosenthal?

  Every venture capitalist was running around trying to find AR and VR companies. Niantic spins out and then does raise a boatload of venture capital from, you know, all the big VCs. Pokemon Go itself gets over 500 million downloads just in 2016, which is mind boggling. Now, a lot of those folks churn, but it becomes a real viable, ongoing smartphone game.

• 2:10:48Ben Gilbert?

  But the ones who don't churn spend.

• 2:10:50David Rosenthal?

  They love it. So it has well over 100 million ongoing monthly active users. It now earns about a billion dollars every year. It's one of the top mobile games out there, period. Investors in Nintendo get so excited about this. And in particular, what this means is a harbinger for other Nintendo IP coming to mobile. That within two weeks of Pokemon Go's release, the Nintendo stock price doubles

• 2:11:20David Rosenthal?

  from call it a $15 billion is to a $30 billion market cap. And everybody's just going wild like this is it? Nintendo is finally going to embrace smartphones. The reality is maybe perhaps in part because of Pokemon Go's success and the breathing room that it buys them, they don't.

• 2:11:38Ben Gilbert?

  The funny thing is that this game is not released by the Pokemon company that Nintendo has 32% ownership in. This game is released by Niantic, who has secured a license to the IP from the Pokemon company. And to your point around the stock spiking, Nintendo has to issue a press release telling investors mid-quarter, hey, y'all are real excited. We do not expect this to impact our revenue meaningfully for the quarter. This was a license.

• 2:12:11David Rosenthal?

  What's interesting is I think the stock does drop back a little bit when they issued that press release, but not that much. People are still really excited. They're like, this is the great unlocking of value. It's happening.

• 2:12:25Ben Gilbert?

  But to like really underscore this, I mean, there's a few interesting nuances here. One, to this day, only 3% of Nintendo's revenue is the entire basket of mobile and licensing and theme parks and movies. They clump mobile in with all that. They don't look at games like Pokemon Go, or what we'll talk about in a minute, Super Mario Run, as a Nintendo game. They look at this as, oh, we've licensed RIP for someone else to do something with. And the fact that it's a game, even though that sounds like what we do as a company in our core business, oh, no, no, no, this is different. This is a license.

• 2:13:00David Rosenthal?

  It's actually part of the IP strategy, and it's actually marketing.

• 2:13:04Ben Gilbert?

  Right. It is only 3% of their revenue. So all of this Pokemon Go stuff that happened is like, okay, like, a lot of people got reminded what Pokemon is again. But Niantic makes a bunch of money from that. Nintendo doesn't make a bunch of money from that.

• 2:13:18David Rosenthal?

  Yep. Now, I suspect the Pokemon Company made and continues to make a bunch of money from Pokemon Go. Not quite as much as Niantic.

• 2:13:26Ben Gilbert?

  But a bunch is relative. Like, it's not impactful to Nintendo's business.

• 2:13:31David Rosenthal?

  It's not transformative. Certainly not to Nintendo.

• 2:13:34Ben Gilbert?

  Also, it's worth pointing out, if the Pokemon Company were the developer of this game, there's no way it would have the attractive business model that it has. It is a whale-driven microtransaction game that Nintendo is philosophically opposed to. And so, in the same way that Apple gets to claim, you know, we're the privacy company, but then get paid tens of billions of dollars by Google, Nintendo gets to claim like, oh, we don't touch these dirty microtransactions, and yet, we're selling a license to a company that is making billions of dollars from doing that.

• 2:14:09David Rosenthal?

  So Pokemon Go is the first quasi Nintendo IP to hit smartphones. Later that year, in the fall of 2016, they do come out with the first game in the DNA partnership, Super Mario Run, and a whole bunch of people download it. It doesn't end up becoming a big ongoing game like Pokemon Go.

• 2:14:26Ben Gilbert?

  So Miyamoto gets up on stage in an Apple keynote, which was really cool to see because, you know, these companies are like sort of spiritually aligned, although one sort of ate the other's lunch. You know, Nintendo's throwing stones at Apple, saying that their business model is moral evil. So you've got Miyamoto announcing on stage that they're going to bring Mario to the iPhone, which to me, watching it, I remember thinking like, okay, so they have no strategy. This is like him waving their arms around and being like, oh, my God, the Wii U is so bad. We don't know what to do. Don't look over here, look over there. And I think even in the keynote, they say, we don't know what the price is going to be yet, but it's not going to be in-app purchases. You're going to buy it once upfront, because that's how we believe games should be bought, which of course is him saying, we're just not going to make any money on this

• 2:15:10Ben Gilbert?

  because you're not going to sell a $60, $70, $80 SKU on the iPhone. You're going to sell a $5 SKU on the iPhone. And so the game itself is effectively the original Super Mario, but since Nintendo doesn't own the controller, it's sort of a little bit of a weird mechanic. You're like tapping on the screen to make him jump and you're holding it to make him jump higher.

• 2:15:28David Rosenthal?

  Yeah, it's like a really weird baby between the original Super Mario and a runner game, which runner games are a somewhat popular niche genre on mobile.

• 2:15:40Ben Gilbert?

  Right, because you're not controlling the speed at which you're running. You're just going. The funniest thing about it is it's so Nintendo in all these different ways. They're super, super anti-piracy. So even though they're making basically no money on this thing, they won't let you play it without an internet connection because they're so afraid of people jailbreaking the iPhone that like you can't play it on a plane or in the subway. It's so

• 2:16:05David Rosenthal?

  That's so Nintendo.

• 2:16:06Ben Gilbert?

  Sometimes they like cut off their entire body to spite their face.

• 2:16:09David Rosenthal?

  I had forgotten that. That's ridiculous.

• 2:16:12Ben Gilbert?

  Matthew Ball puts it the very best. He has a great piece written in 2020. We'll link to it in the show notes, which is basically, here's why Nintendo looks a lot like Apple and Disney, but isn't actually as attractive of a business as Apple and Disney is kind of the crux of the piece. And there's this paragraph that says, 2016 Super Mario run is one of the 10 most downloaded mobile games of all time with over 700 million However, it has achieved only 75 million in gross revenue after four years, according to Sensor Tower. These downloads are a testament to the power of Nintendo's IP, but 11 cents per user and less than 100 million in total top line likely makes Super Mario Run the worst performing game with nine-figure installs by far.

• 2:16:57David Rosenthal?

  Which, you know, on the one hand, point taken. On the other hand, this is explicitly not Nintendo's strategy.

• 2:17:05Ben Gilbert?

  Right.

• 2:17:05David Rosenthal?

  Which brings us to the announcement at the end of 2016 and then the launch in March of 2017 of the Switch. Now, the Switch is so interesting. It obviously goes on to become this enormous success. I love mine. I've played the hell out of it.

• 2:17:26Ben Gilbert?

  123 million sold in the first six years.

• 2:17:29David Rosenthal?

  Yep. It's the first console you bought since the PS2, is that right?

• 2:17:33Ben Gilbert?

  Yeah.

• 2:17:34David Rosenthal?

  Yeah.

• 2:17:34Ben Gilbert?

  Well, I guess I had a PSP, but I didn't consider that a console.

• 2:17:37David Rosenthal?

  Exactly. It is this amazing success, but when it's announced, so many people, certainly the investor community, and I raise my hand and count myself among this. I thought it was a terrible idea. It was not obvious, at least to Wall Street, that this was the savior that it ended up being. When they announce it, Nintendo's stock drops 7% and then it keeps falling until launch. Remember, everybody's all excited about like, oh, Nintendo is finally coming to mobile. Like, there's a great bull case narrative for Nintendo out there. And then they drop the Switch and people are like, what the hell is this?

• 2:18:14Ben Gilbert?

  We're making a thing that's like a phone, but bigger and you need to also carry it with you. So now you need a second device.

• 2:18:21David Rosenthal?

  It's an underpowered home console combined with a big portable console that doesn't fit in your pocket.

• 2:18:30Ben Gilbert?

  Even though you do have a console that does fit in your pocket.

• 2:18:32David Rosenthal?

  Right. You have better versions of like both of those out there on the market. Now, this will be really fun for us to talk about because I think there's two things going on here. And I think Nintendo saw both of them. The one that they certainly saw, Ben, is what you're talking about earlier of the mid-core market being underserved at that point in time. And in particular, the mid-core market for Nintendo IP. There wasn't a really good platform to play Nintendo or otherwise mid-core type games out there. And the Switch was the perfect platform to do it. That certainly was one thing that the market didn't appreciate that Nintendo saw.

• 2:19:15David Rosenthal?

  I think there was also another dynamic here, or at least this is my experience with the Switch. While the dynamics in the mobile gaming industry, on the one hand, were very different than the Atari 1983 video game crash in that, obviously, that industry still makes tons of money. It's by far the biggest segment of the gaming industry. I think it's $120 billion annual revenue industry in and of itself now, mobile gaming. On the other hand, some of the same problems are definitely there. It's filled with shovelware crap. Even the games that make the most money are crap. This is why Nintendo is philosophically opposed to it. And so many people appreciate their point of view.

• 2:20:00David Rosenthal?

  And so when the Switch launches, it's actually kind of a throwback to the NES seal of quality. A lot of people, certainly myself included, I would play more casual, like certainly mid-core, but also more casual mobile games if I had a seal of quality, knowing that this wasn't crap. This wasn't going to try and drain my credit card of hundreds, if not thousands of dollars, and treat me like a whale. And that's what the Switch becomes. Even despite all the success of mobile, there was this room for like quality.

• 2:20:35Ben Gilbert?

  You're right that quality is the way to describe it. It's not first party, it's not third party, it's quality. And Nintendo is going to basically have a pretty low volume throughput of third-party games. And the way that they designed the device kind of forces you to custom make games for it, because it's not great for porting other games. So it sort of flies in the face of everything else happening in the industry, which is, we want our game available on the most endpoints, because it's going to be some kind of open world, services-oriented, events-based game. And you want to be able to play that with all your friends, no matter what devices they're on. And what Nintendo is saying is, we're going to make a device so weird

• 2:21:21Ben Gilbert?

  that it's basically a smartphone, but without Bluetooth.

• 2:21:25David Rosenthal?

  It does have Bluetooth, it's just neutered and you can't use headphones.

• 2:21:28Ben Gilbert?

  Yeah, right. What the heck? I can't use my Bluetooth headphones with it? It's weird. And also, it is going to have like a 2013, 14 era Tegra chip.

• 2:21:38David Rosenthal?

  The Nvidia Tegra finally finds its use case.

• 2:21:40Ben Gilbert?

  It's so strange. And so what it means is, it's a great first-party device, because Nintendo is not making their games for any other platform. So they're happy to custom write for this weird thing. And indie developers, at first, probably won't write games for it, because there isn't an audience. But over time, if it gets an install base, it's great as an indie developer to develop a really high-quality game, purpose-driven for it. But if you're developing Call of Duty, it's pretty unclear that this is a great device for you.

• 2:22:12David Rosenthal?

  Yeah, I think we need to separate out two different parts of the market. Because on the one hand, when you're talking about Call of Duty, when you're talking about, fittingly, Madden, like Madden Football is not on the Switch still to this day, stuff like that, the very, very high-end, the core gaming market. What you're saying is absolutely correct. There is no Call of Duty for Switch, right? Pretty sure.

• 2:22:30Ben Gilbert?

  It actually is going to be part of the divestiture.

• 2:22:35David Rosenthal?

  I love it. I love it.

• 2:22:36Ben Gilbert?

  Microsoft has announced that Activision will do it if they're acquired.

• 2:22:40David Rosenthal?

  Right, but only as like a concession to the DOJ.

• 2:22:43Ben Gilbert?

  And no consumers actually want.

• 2:22:44David Rosenthal?

  So I think that's 100% right on core games.

• 2:22:49David Rosenthal?

  But indie games, the Switch becomes this very vibrant flourishing platform. And like, yes, you have to do some work to port it over, but it's actually not quite as hard as you're making it out to be, especially if you originally developed the game in Unreal or in Unity or for the PC or for Steam, because the Switch runs on the Tegra on Nvidia's system on a chip. Like, you gotta do some stuff with the controls to make it work, but you can port these games over. And so games like Hades is a great example, or Undertale, or Celeste, like, these indie games that I've played and I loved on my Switch.

• 2:23:31David Rosenthal?

  Like, the Switch is by far the best platform for games like this, because they kind of hearken back to the old 16-bit Nintendo era. For the first time in generations, Nintendo has actually become a really viable third-party platform for the right type of developer. And it tends to skew more indie. We talked to folks in preparation for this episode who have games that even tend to be kind of more mobile smartphone-based games, that are actively working trying to get them onto the Switch because of this quality dynamic and that players on the Switch are much more likely to monetize, even though it's a smaller audience base.

• 2:24:09Ben Gilbert?

  I mean, people on the Switch will buy like 20-plus $60 games over the life of owning their Switch. This is not a casual ARP-Dow type audience. This is a high-monetizing, high-intent audience.

• 2:24:24David Rosenthal?

  Yep. And then finally, I think there is another element that we really gotta give Nintendo credit for with the Switch, that I and very few other people saw the potential in when they announced it, which is that the use case that they marketed, the primary use case of seamless playing between on-the-go and at home.

• 2:24:46David Rosenthal?

  Is actually pretty compelling.

• 2:24:48Ben Gilbert?

  Totally.

• 2:24:49David Rosenthal?

  Legendary game director and designer Hideo Kojima of the Metal Gear Solid franchise. He was one of the few people pre-launch that like publicly really recognized this. He has a quote, he says, "The fact that you can play something at home and take it outside, this is the gamer's dream. The Switch is an evolution of that. And before the Switch, you really couldn't do this. Your same save state, your same progress, your same everything."

• 2:25:17Ben Gilbert?

  Yep, exactly right. The other thing they got right with the Switch, which has been huge for them, both as a business and as an unlock for player dynamics, is they finally, finally got online.

• 2:25:28David Rosenthal?

  Yes.

• 2:25:29Ben Gilbert?

  This is a thing where people have been saying, "Oh, Nintendo's always five years behind." I think Nintendo was like 10 years behind in online play. This was literally their third attempt. They now finally have this thing called Nintendo Switch Online. And there's two versions of it. There's a $20 and a $60. But they finally have some semblance of like an Xbox Live type service that works. And before, I think they had the Nintendo Wi-Fi connection and the DS and Wii era. And that had some really weird sub-things inside of it. The Wii Shop channel and DSI Shop. And they had this whole like friend codes thing. And then they deprecated all of that and they launched the Nintendo Network. And inside of that, they had the Nintendo E-Shop.

• 2:26:12Ben Gilbert?

  And the E-Shop eventually got folded into Nintendo Switch Online when that launched. But it has taken a long time and some pretty like half toe in the water technology bets to get here. Famously, they launched Switch Online and they said, "It's great because it's peer-to-peer." And everyone was like, "That's terrible for us. That's good for you because you don't have to build data centers, but it's slow and buggy. What do you mean it's peer-to-peer? Xbox Live has existed for like eight years."

• 2:26:41David Rosenthal?

  Xbox Live has existed for like 18 years.

• 2:26:44Ben Gilbert?

  Yeah, it is wild. So they finally kind of have their act together with that. I have never bought a physical game for my Switch. I've only bought them digitally. The difference between the $20 and the $60 is, there's a bunch of differences, but one of them is like you can get access to the N64 emulator if you do the $60 online instead of the $20 a year online.

• 2:27:04David Rosenthal?

  And I think you get the Mario Kart DLC courses if you buy the $60 version.

• 2:27:10Ben Gilbert?

  Yes, you do. The functionality is good and now there's compelling reasons to subscribe to Nintendo, which is a pretty big unlock in their business. And if you had told me in 2016, before they launched the Switch, that at some point I'd be paying an auto recurring subscription to Nintendo for services I may or may not be using at any given time, to play on a dedicated Nintendo device at that point in history, I would have told you you were completely insane.

• 2:27:40David Rosenthal?

  The Switch really is just an incredible comeback for Nintendo. And while the Wii was also an incredible comeback, it was kind of one that they had clear line of sight into from their experience in the handheld business. And they sort of knew, of course, creativity was involved in making it. But if we can build this, we're pretty sure they will come. The Switch, I don't know if it was luck or genius or just what, but this was the first time they were the true underdogs and they had all the deck stacked against them. And they proved everybody wrong.

• 2:28:18Ben Gilbert?

  Right. And the big question is, do they have to keep doing this? And betting the farm on inventing a brand new form factor, half the time they fail on? Or have they now discovered something that is a durable platform for the future? That they can keep building on top of, leverage the existing base? I mean, how frickin attractive is it now that they have 123 million people who have bought these things for developers? Developers finally want to be in business with Nintendo again.

• 2:28:51David Rosenthal?

  Especially Indies, but the major third parties too. Okay, we're going to have a very robust analysis discussion of this because Nintendo is literally right at the crossroads again of what to do about the next generation.

• 2:29:02Ben Gilbert?

  The Harvard Business School should be like surrounding Nintendo and doing a seance to like, it is like the most incredible business strategy microcosm to learn how they are going to handle this unique position that they're in right now.

• 2:29:15David Rosenthal?

  Ah, forget Harvard Business School. This is why we're here. Acquired is on the scene.

• 2:29:21Ben Gilbert?

  All right. So let's finish out the story and then we'll go into analysis.

• 2:29:24David Rosenthal?

  So, once they launched the Switch, it is an immediate hit. Nintendo plans an initial 2 million unit worldwide production run. Remember, the Wii U was such a flop. They only sold 13 million units in the whole lifetime. So like 2 million units. It sells out immediately. They have to airship more units from their production lines to retailers across the world at a cost of $45 per unit just to get more in the hands of demand out there, which was a brilliant move that the old Nintendo never would have done. Like, it's worth eating that cost to serve demand and build out the install base. What a difference.

• 2:30:02Ben Gilbert?

  Yep. Although I wonder if they still have some of that in them. I mean, it's the sixth year of the Switch and I was like backed up to like a month to get one online and I drove to a Target and got the last one in person. Like, I think there's still some games going on over there for limiting supply.

• 2:30:17David Rosenthal?

  Yeah. Now, and they can probably use the excuse of, oh, chip shortage. But like, there's no chip shortage on the Tegra from 2014.

• 2:30:27David Rosenthal?

  Anyway, it's a huge success. To your point about the mid-core market, it launches with Zelda Breath of the Wild, which originally was supposed to be a Wii U game. It launches also on the Wii U. It's forward and backward compatible to the Switch. And Switch copies of Breath of the Wild sell at literally a one-to-one rate as the console itself for a 100% attach rate. This has never before happened in history of a non-bundled game. You can't separate out Breath of the Wild from the Switch's initial success in that first year or two. It was a generational game that deserves its own episode on a different podcast and I'm sure has many out there.

• 2:31:08Ben Gilbert?

  And this is one where like, when you talk to game industry insiders, 100% of people are like, this game is just so beautifully designed. The quote that I got from someone I was chatting with is, "When Breath of the Wild 2 comes out next month, the whole industry will stop, will not go to work, and will just play Tears of the Kingdom."

• 2:31:26David Rosenthal?

  Similarly, though, to the Switch, I think there's some questions of like, What could Tears of the Kingdom do to top Breath of the Wild? But we'll see. The Switch sells over 15 million units in the first year. So like more than the Wii U just in the first year. Goes on, as you say, to sell 123 million units. So far, it's still on the market. We'll see. I think it's unlikely it will pass the DS and the PS2. But it depends how long Nintendo waits to launch the successor and what form the successor takes.

• 2:31:56Ben Gilbert?

  My money's on Switch 2 in the next six months.

• 2:32:00David Rosenthal?

  I think that is where the betting line is, but we will discuss. On the back of all this, Nintendo revenue just explodes from less than $5 billion at the end of the Wii U era. Immediately in the next year to $10 billion after the Switch launches, then 12, up to $16 billion during 2021. And the pandemic, the stock goes up another 50%. As Switch sales now have started to slow, that we're in the sixth year of the console lifecycle. The stock has fallen again a little bit, but they're still doing $5 to $6 billion in annual operating income. It's still a $50 billion market cap. Nintendo today is so far removed from Nintendo of the Wii U era.

• 2:32:44David Rosenthal?

  And then there's the IP. We are literally recording this the day before the Super Mario Brothers movie comes out.

• 2:32:50Ben Gilbert?

  Which is supposed to actually be pretty good.

• 2:32:52David Rosenthal?

  It's supposed to be pretty good. I want to go see it. I mean, they've got Chris Pratt, they've got huge stars. This is a departure for Nintendo. Now they did do a Super Mario Brothers movie.

• 2:33:01Ben Gilbert?

  Fool me once, Nintendo.

• 2:33:04David Rosenthal?

  Yeah, we won't talk about that one. That was a disaster back in the day.

• 2:33:07Ben Gilbert?

  Matthew Ball points out that the 1993, I think that's when it was, movie was so bad that it set the whole industry back by a decade for licensing video game IP for movies.

• 2:33:20David Rosenthal?

  I totally believe that because obviously, as we see here now in the mid 2020s, video game IP is fantastic for movies and TV shows. But yeah, it was because of that movie, I think, in large part that people shied away from it. The first Super Nintendo World opened at Universal Studios Japan in 2021, and the first American one opened at Universal Studios Hollywood just a couple of months ago. By all accounts, they're both pretty awesome. Two more are opening in 2025 in Singapore and Orlando. Pokemon Go continues to crush it on the IP strategy.

• 2:33:59Ben Gilbert?

  You're talking about a lot of things right now that don't seem to make much money for Nintendo. I just want to point out, it is getting their characters out there. That's all well and good. Maybe they'll start making a bunch of money in the future, but like so far, non-material to the top line.

• 2:34:12David Rosenthal?

  I think that's the point. Well, all right, let's transition to analysis and talk about this first.

• 2:34:18Ben Gilbert?

  Yeah, so what is the end game? Is the end game to get people to fall in love with the characters all over again on a continuous basis so that then they go buy more Switch games and Switch 2 stuff?

• 2:34:31David Rosenthal?

  I think yes, with the additional nuance that... I'm no brand IP strategist here, but I think the additional goal is generational management that frankly, the Pokemon Company has done so well. Every year is a new cohort of children in the world who can and should be brought into the Nintendo fold. And Pokemon has done this so well. You and I played it growing up, and kids today play it growing up equally, if not more passionately. And I think once you start moving into like, across generations like that, you really do need a broad multimedia IP strategy

• 2:35:14David Rosenthal?

  to make sure that you're engaging and bringing the new generations into the fold.

• 2:35:18Ben Gilbert?

  I think that's right. The better comp is probably the NFL than Disney. Originally, I was like, oh, they're running the Disney playbook. But Disney takes on all of the in-house work of operating their own theme parks and having all their own employees and needing to like, have that core competency. Also, Disney has hundreds of stores. Nintendo has like, I think, two stores. They don't have like, physical touchpoints. With consumers, as much as in part one, we talked about world of Nintendo in the stores to sell the games. It's so different than the actual boots on the ground stuff that Disney has that sort of makes up the Disney flywheel.

• 2:36:01Ben Gilbert?

  And so, you know, in our old Disney plus episode, we talked about how a dollar on a Disney movie in revenue equals $2 in parks and merch. The way that Nintendo is sort of structured where they've decided they want to make great hardware to play games and they want to make games and they want to not do anything else because that's all not very Nintendo. That's a different strategy where all of this other stuff is brand building and it might make some money. I mean, NFL Films was like break even, so it's probably one click away from NFL Films, but it's certainly not the Disney flywheel.

• 2:36:33David Rosenthal?

  I think the NFL and NFL Films is the exact analogy. I think the mobile games strategy within Nintendo is don't lose money, but extend the IP. They're not trying to build it into a revenue driver.

• 2:36:47Ben Gilbert?

  In other words, they're willing to give away margin dollars to not have to be in those businesses, but accomplish the same touchpoints with customers.

• 2:36:55David Rosenthal?

  Yep. Okay, so that's the IP. Let's talk about the big question. What is Switch 2?

• 2:37:01Ben Gilbert?

  Yes. Okay, so here's an interesting way to tee it up. Let's work backwards from Nintendo Switch Online. So that launched in December 2018, so the Switch didn't have it at first, which I think is interesting. It grew very quickly. Three months after launch, it had 8 million subscribers. By January of 2020, it had 26 million. September of 2021, 32. Today, a reasonable estimate, based on everything they've sort of disclosed, is somewhere between 35 and 40 million subscribers. There's about 100 million active Switch players per month. When you sort of think about the churn and people buying multiple devices and devices breaking and stuff like that. So you have an attach rate of like 35 to 40% on a recurring revenue software business.

• 2:37:47David Rosenthal?

  That's pretty good.

• 2:37:48Ben Gilbert?

  It's pretty good.

• 2:37:49David Rosenthal?

  It's not something you would want to just throw away like Nintendo did with the NES install base.

• 2:37:55Ben Gilbert?

  And with the NES install base, it was theoretical, right? It was like, well, these people who we have relationships with should stay our customers. But our customers, the our is doing a lot of heavy lifting in that sentence because they were your customers when they bought a game last time. You hope they will be your customers when they buy a game in the future. Flash forward to today with the Nintendo Switch Online, there are 40 million people who are your current customers, who are paying you money.

• 2:38:27David Rosenthal?

  Their credit cards are automatically being charged every month.

• 2:38:30Ben Gilbert?

  Yes, and when you do some quick math, there's two price points. There's the $20 and the $50. Assume the average revenue per customers, I don't know, 30 bucks, maybe 35 bucks, depending on the mix between those two SKUs. That's a billion dollar, maybe a billion and a half dollar recurring revenue, super high margin software business. And that is before you even factor in the digital games. It's probably a $3 billion business when you think about the one-off digital purchases people are making. So there's like a company called Nintendo that does all the stuff they used to do, but also makes a billion dollars of recurring revenue and another 2 billion on top of that of super high margin software revenue.

• 2:39:14David Rosenthal?

  This is so funny. On Acquired, we always talk about how software is the best business model of all time and media is the second best business model of all time. And video games are truly the best because they are software that is media. And Nintendo, with help from studying Atari, figured that out before anybody with the NES and built this incredible juggernaut. But then they like forgot it for a very long time. Everything you just described is not new innovative business models.

• 2:39:44Ben Gilbert?

  Well, SaaS is new.

• 2:39:46David Rosenthal?

  Right, but Microsoft figured this out 20 years ago. And this was the whole point of the Xbox and why they were willing to lose $5 billion upfront on it because they knew. That if they can get those Xbox Live subscribers and now the Game Pass subscribers, that's a really, really, really good business model. And Nintendo has only just figured it out. So funny.

• 2:40:08Ben Gilbert?

  Yeah, so they basically make $10 billion a year selling physical things on a non-recurring basis, and they make $3 billion a year selling digital things that have super high margin revenue and a billion of that is recurring. So I think that's the framing that you sort of have to go into when you think about what their next move should be. Now they're Nintendo, so they're gonna do whatever their next move, whatever they want it to be. But if it's what should it be? The answer is figure out how to launch a next generation piece of hardware that makes people upgrade, very similar to the way that people do with their iPhones, that has backward compatibility to every other thing that they've purchased in your ecosystem before.

• 2:40:50Ben Gilbert?

  So preserve, you know, make it so that you're growing your monthly active customer base. If they're thinking like this, we might see them do the thing that Apple shifted to, which is instead of reporting total devices sold, reporting their monthly active participants in their ecosystem. And make it so that the Switch 2 has all these cool capabilities that make people want to upgrade, but the same great games work everywhere.

• 2:41:16David Rosenthal?

  This is the forward compatibility piece that

• 2:41:18Ben Gilbert?

  Exactly.

• 2:41:18David Rosenthal?

  Microsoft and Sony and Apple too have figured out of like, make sure the software for a certain period of time keeps working with the old Switch consoles.

• 2:41:26Ben Gilbert?

  And they've already done this for a half generation. Like you have the Switch Lite, and when you were at my house and you were playing with the Switch OLED that I went and bought a couple of months ago, I could see a glimmer in your eye, I could see you saying, boy, if they don't release a Switch too soon, I might be buying this OLED thing, because boys is nice.

• 2:41:42David Rosenthal?

  If I didn't know that we were gonna have this robust discussion about the Switch 2, I would have already bought a Switch OLED.

• 2:41:48Ben Gilbert?

  It's so funny, because I went out and bought it, and I was like, I can't believe I'm buying a thing that's a six-year-old piece of hardware. Like, how is this thing not outdated? And then as I started to do the research, it seems like what happened was they were planning a Switch Pro that was gonna release sometime during COVID, but then when demand popped, right around the time of Animal Crossing and 2020 hit, and they sold a whole bunch of them, and they were supply constrained, I think the plan for Switch Pro sort of went out the window, and they were like, let's just extend the life of the Switch. And some of the features they were planning for the Pro, like the OLED screen, sort of went into this mini step of the Switch OLED before they do the Switch 2.

• 2:42:27David Rosenthal?

  Which kind of presages like, I think it's unlikely Nintendo will do this because they're Nintendo. But if you really want to take the logical conclusion of this business model to the extreme, you turn the Switch hardware line into the iPhone hardware line.

• 2:42:44Ben Gilbert?

  Totally.

• 2:42:44David Rosenthal?

  Where it's not Switch 1, 2, 3, blah, blah, blah. I'm going to guess iPhone is 13, 14, 15. But like, you might upgrade every now and then, and there's plus models and like incremental S models. But you enter the ecosystem at whatever point feels right to you and you're part of the ecosystem.

• 2:43:02Ben Gilbert?

  Yes, and we shouldn't take credit for this. This is the exact thesis popularized by Crossroads Capital, who's a Nintendo long and writes awesome letters that we'll link to on the sort of bull case for Nintendo. But if you are a buy on Nintendo right now, this is the sort of thing that you believe they should do. And there's sort of this question of like, okay, but what will Nintendo do? What do the close insiders at Nintendo who don't care about the stock price, who don't really care about their revenue, who don't really care, I mean, they care enough about shareholders.

• 2:43:32David Rosenthal?

  I think they care about the spirit of Nintendo, as we just discussed for several hours.

• 2:43:37Ben Gilbert?

  Make really fun games on hardware that pushes the envelope on what types of experiences are possible for people. So I think if they get a bee in their bonnet about a new hardware idea that they think is groundbreaking and will enable a whole bunch of new game experiences, they're gonna do that and then they will figure out the business model implications later.

• 2:44:00David Rosenthal?

  I think the thing that is a little scary, and we'll see how much this is imprinted on Nintendo. The Wii U debacle and when smartphones came out, really existentially challenged Nintendo for the first time ever. Like, they could afford to have that philosophy during the 90s and the 2000s, when they had the handheld business to save them every time. They could kind of do whatever the hell they wanted and it was fine. There was no existential risk. We've seen now, even with all the incredible success from the Switch and the $5 billion of annual operating income that they're generating right now. They're in a much more precarious position.

• 2:44:41David Rosenthal?

  Like if they don't get things right, consumers will just leave and go back to mobile. They can't do another Wii U.

• 2:44:50Ben Gilbert?

  Now we're full on and bull and bear. So let's just pull that forward and do it now. This is one of Matthew Ball's point on the bear case, which is everyone's all hot on the Switch as the best selling console Nintendo's ever done, blah, blah, blah. But really it's not one console, it's two because it cannibalized their other business line. So you kind of have to look at not how's it doing against the Wii? How's it doing against the Wii plus the DS? Or the NES plus the Game Boy? And that really kind of puts it in a different perspective where like they have no backup plan. They can't, you know, move forward and one while keeping the other one stable. They now have one platform for better or for worse, and they really can't screw it up.

• 2:45:31David Rosenthal?

  Which is a great thing. As a consumer, that's awesome. It's just like, please don't screw it up.

• 2:45:37Ben Gilbert?

  So here's all the other angles on the bear case. Nintendo missed mobile and they'll never have a business on mobile and all the future growth is in mobile gaming and they just are not there.

• 2:45:47David Rosenthal?

  Disagree. I hate mobile gaming and I love my Switch.

• 2:45:49Ben Gilbert?

  Okay, but let's talk about the business. So Nintendo is cute doing 13 billion of revenue a year, 5 billion of operating income. But let's look over at mobile. Let's see how Apple and Google are doing, who by the way, make no games, just operate stores and sell devices. They're getting away with murder on mobile games. 61% of App Store purchases are games. Turns out that the killer app is mobile games. Casual free to play mobile games turns out to be the killer app for the iPhone. $90 billion in total revenue per year, which means almost $30 billion for Apple and Google. That is nearly 3X Nintendo's very impressive revenue from the Switch this year.

• 2:46:34Ben Gilbert?

  That is the pot of gold in gaming.

• 2:46:36David Rosenthal?

  Yes, totally true. I think one of the things that this episode has really crystallized for me, though, is that it's kind of wrong to think about gaming as one market because it's not.

• 2:46:47Ben Gilbert?

  I think that's right, especially as we're entering the sort of era of people hanging out in video games. I mean, the metaverse is here. It's just in people spending time in a digital environment that isn't necessarily VR, isn't necessarily immersive. It's like, you know, hanging out on Discord while you're playing games together or whatever. To the extent that video games are where you hang out with your friends, that's like a super different use case than me playing Mario Kart to pass the time in my living room and also a super different use case than someone who wants to basically play a slot machine on their phone while they're on a flight. These are all such different human experiences and like jobs to be done that it is totally crazy to call them all gaming. And to your

• 2:47:29Ben Gilbert?

  point, I bet if you talk to a Nintendo executive, you know, they look over at mobile and they're like, okay, sure, Apple is making $27 billion a year, Apple and Google, on people playing what you're calling mobile games. But if I look at that, I think only 2 billion of those are games and the rest of that is something that's not games. It's some kind of like statistical extraction of people's money through digital marketing.

• 2:47:56David Rosenthal?

  Yes. And I think the reality is even more fine grained than that. For example, I love the new Halo Infinite. It's had a lot of problems as a live service, but it's finally getting ironed out. And having spent a large portion of my teenage years on Halo, I just love playing it. If you were an alien, or let's say, if you were a 60-year-old person observing me playing Halo Infinite versus observing somebody else playing Fortnite, on the surface, it looks pretty similar. You're in a live service environment with other people and you are shooting at them. But the job to be done of those two experiences is completely different.

• 2:48:37Ben Gilbert?

  Yeah.

• 2:48:38David Rosenthal?

  And those are very different markets.

• 2:48:40Ben Gilbert?

  Yeah. You said live service, which is another Nintendo bear case. Nintendo is not a good live services company. So even if you're writing off the whole mobile market, Fortnite on Xbox and Fortnite on PlayStation, people play those games as forever games because they're live services. You need to have fresh content to introduce. You need to be able to sort of have events. The way you monetize those games is with this live orientation, which Nintendo has none of in their DNA. So that's sort of like a second market that is not particularly addressable to Nintendo, or at least they don't seem to want to address.

• 2:49:21David Rosenthal?

  Well, I think they're building into it. Mario Kart 8 Deluxe has certainly become that, especially with the new waves that they're building into, which is their version of seasons. Like a Mario Kart 8 wave is the same as a League of Legends season. Well, it's the same concept. Whether Nintendo is as good at seasons as Riot is, they're absolutely not. But they are building towards it clearly.

• 2:49:45Ben Gilbert?

  As you sort of look around it, I'm not sure it's a bear case, but it is interesting to just note where everyone else has sort of ended up in this market, where Microsoft is trying to do the Netflix of gaming. They're really pushing into this predictable revenue subscription. You pay us, we give you all you can eat. We don't even care if you play on Xboxes. We want this to be available anywhere. And you should use our app that you pay a subscription for to play games on all devices. That's a very different strategy than what Sony has done, at least for the last five years. They might be changing right now, but we're sort of in the middle of a potential pivot for them. They're basically playing the same old console game, and they're playing it with the highest monetizing audience of people who want to pay a whole bunch of money for a game

• 2:50:28Ben Gilbert?

  and get the unbelievable graphics experience out of it and play it on that device. It's interesting how all three of these companies, Nintendo, Sony and Microsoft, after competing for a while, have now all chosen completely different lanes to occupy in terms of what they're marketing to consumers and what the business model around that is. And I think the big question for Nintendo is, do they care about the strategic position and picking a lane and deciding to be Microsoft-y in this way with the subscription? Or is it really just like, do they pay attention to their shareholders? I don't know.

• 2:51:03David Rosenthal?

  It is a legitimate question. We don't know.

• 2:51:06Ben Gilbert?

  But thank God that someone is a Nintendo in the world and gets to like innovate and drive things forward because everybody else is just kind of copying each other and figuring out, is there a cash grab to be had? Or are we going to miss out on some big thing? We need to hurry up and go chase it. Nintendo is really not doing that.

• 2:51:24David Rosenthal?

  Yeah, I think that is what is clearly different about Nintendo now than the past 20 years, which is they're no longer stupid.

• 2:51:35David Rosenthal?

  They may not be as commercial as shareholders would like them to be, but they're no longer stupid. And I think you probably gotta have some faith that they're gonna figure it out. On the other hand, relative to a Sony or a Microsoft, where you can be pretty sure that they're not gonna screw up the next generation, there is still that wildcard risk with Nintendo.

• 2:52:02Ben Gilbert?

  Totally. Which is the bear case is games are hit driven, consoles are even more hit driven, and they take six to eight years to recover from a mistake. And now they have all their eggs in one basket. Just to close out the bear case, even with the Switch's success, revenue still hasn't matched the 2008 peak. Sure, they're doing more with like this licensing, movie, theme parks, other mobile apps, but it's not clear how they will make a material amount of revenue from all of that relative to their core business. We've talked a lot about the bear case. The bull case, I mean, if they actually transition to this durable platform business, they have a billion plus dollar subscription business on their hands. They have a $3 billion digital, high margin, direct to consumer business on their hands. They also, on top of all of this, to your like, video games are the

• 2:52:47Ben Gilbert?

  best business model of all time, they also have durable IP, perhaps the most valuable IP in all of video games, on top of the subscription business, creating the additional stickiness. And as we get into the crossroads capital viewpoint here, there's a valuation bull case. Because you have this company that if they're actually set up in this way, and they do actually execute the platform playbook. Their price to sales is at a measly 3.5X where they're trading right now. You compare that to Apple, that's half of Apple. If they're actually going to go execute Apple's strategy and they actually have the ability to have the margin structure and the growth rate and the durability that Apple has with

• 2:53:29Ben Gilbert?

  the iPhone business with the App Store on top of it, you can make a case that you should value those companies the same based on their multiple of revenue. But then let's get to profits. Their price to earning is only 13X. For comparison, fricking Sony is at 16X, Apple's at 28X, Disney's at 54X earnings. So Nintendo's got a $3 billion digital business. If you value that comparable to other SaaS businesses, that's like a $21 billion business. You add in their cash. So that gets you to 34 billion. If you look at Nintendo's actual market cap where they're trading today, it's 47 billion. So that means the difference between those two is 13 billion.

• 2:54:12Ben Gilbert?

  Would you value their entire hardware business, hardware switches and hardware cartridges, games for the Switch and all the future licensing revenue at just $13 billion? That's a fricking steal. That's like the whole AWS narrative around you buy AWS and you get the retail business for free. If everything goes right and if you believe the whole platform thesis, that's the like valuation bull case that Crossroads has sort of astutely pointed out.

• 2:54:41David Rosenthal?

  What's really interesting is that Crossroads and others have been talking about this narrative for a long time.

• 2:54:51Ben Gilbert?

  And at the same time, it's funny, a video games executive told me last week, we've all thought Nintendo was going to go out of business for the last 20 years.

• 2:54:58David Rosenthal?

  Right, right, right, right. I suspect there are a lot of people listening right now at the end of our two-part, call it seven, eight hour series on Nintendo that have learned a lot and are surprised about a lot of things. However, I think people that actively follow the stock and either are long or short in it are not surprised. This is not new information per se. There's just so much uncertainty.

• 2:55:24Ben Gilbert?

  And I do think, I mean, we're in a very fun period here because we will get to learn what their strategy is, I think, in the next six months around the next generation console.

• 2:55:33David Rosenthal?

  Yes, and that will be amazing. I guess, though, there is sort of a third option, which you never know with Nintendo, which is that we don't. And they just do nothing. I don't think they will do this, but they could, right? Is there a really compelling reason right now to release another hardware generation? Is the Switch under attack from any angle?

• 2:56:03Ben Gilbert?

  Right. Why release another? The Switch OLED is a great device.

• 2:56:06David Rosenthal?

  Right. It's awesome. I was playing it at your house. I'm tempted to buy one. The only reason I'm not is because I think there might be a Switch 2 coming soon.

• 2:56:12Ben Gilbert?

  And I'm actually not sure what the Switch 2 would have. Maybe it would solve a developer problem where there are certain developers that are frustrated right now by the processor and there's a bunch of games that can't get created that consumers might want.

• 2:56:25David Rosenthal?

  Certainly, that is a big thing. The processor is woefully, woefully underpowered at this point. But processors are so good, and particularly in the gaming world, that can a mobile processor from 2014 that Nvidia made run the latest games? Sure it can. Will it run them with ray tracing? No. Do most consumers care? No.

• 2:56:47Ben Gilbert?

  That's a good question. There's also some weird, way-left-field thing that they could do is they could actually decide, we want to be the next Disney, and they could do theme parks in-house and movies in-house and merch in-house and design all the toys themselves and sell them in stores that they own.

• 2:57:04David Rosenthal?

  Which is what Marvel did. You know, Marvel initially didn't make their own movies, and then they kind of stair-stepped into it. And then when they started their own studio, that's when that really took off.

• 2:57:13Ben Gilbert?

  Right. The tea leaves are reading against it since they're constructing for whatever new theme parks in partnership with NBC Universal. So I imagine they've got a pretty long-dated license on that to break ground.

• 2:57:26David Rosenthal?

  Yep.

• 2:57:27Ben Gilbert?

  Yeah, that's the bear and the bull.

• 2:57:29David Rosenthal?

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• 2:57:35Ben Gilbert?

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• 2:57:46David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 2:58:06Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 2:58:19David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 2:58:30Ben Gilbert?

  We're out of order here, but I would like to do power in playbook if you're game for it.

• 2:58:33David Rosenthal?

  Oh, yeah, for sure.

• 2:58:34Ben Gilbert?

  All right. So what of the seven powers? And for listeners who are new to Acquired, go listen to our previous episode with Hamilton to learn what power is. Do you think that Nintendo has in the time period from 1992 to today?

• 2:58:49David Rosenthal?

  Well, let's start with what we talked about last episode and what we talked about with Hamilton and Chen Yi about this amazing, magical, alchemical blend of scale economies, network economies, and switching costs that the NES was in the 1990s. I think they basically do not have that anymore. That has disappeared in all the ups and downs over the last 20, 30 years. I think you could maybe argue that none of the console players have this anymore, at least not in the same way that the NES did. They do have these elements, but so do their competitors. So it's not differentiated anymore.

• 2:59:34Ben Gilbert?

  Hmm. Good point.

• 2:59:36David Rosenthal?

  So I think that's actually no longer the case for Nintendo. I think they absolutely have a cornered resource in their IP.

• 2:59:47Ben Gilbert?

  For sure. That's their strongest one now.

• 2:59:50David Rosenthal?

  That may be the strongest one and potentially also process power. There's nobody else that can make Breath of the Wild. There are other studios that can make other amazing games. But the core Nintendo games serving that mid-core audience, nobody does it better. And I don't think anybody can really compete with them.

• 3:00:10Ben Gilbert?

  Uh, I have a hard time with this. I'm sure there's indie developers.

• 3:00:13David Rosenthal?

  Uh, okay. Fair enough. Too much nostalgia, maybe.

• 3:00:16Ben Gilbert?

  I mean, I haven't played Breath of the Wild yet. I don't know what I'm waiting for, but I don't know. I'm not sure that they uniquely can create that type of game if you were to pluck out all the IP.

• 3:00:26David Rosenthal?

  Yeah, that's fair. You're right. It's cornered resource. It's the IP.

• 3:00:29Ben Gilbert?

  I do think there's a new one that they've introduced with Nintendo Switch Online, which is, no pun intended, Switching Costs. I bought my games from Nintendo. Like, I don't own them.

• 3:00:41David Rosenthal?

  It's a different version of Switching Costs.

• 3:00:43Ben Gilbert?

  Totally. And interestingly, if I let my subscription lapse, if I don't pick it up again for six months, there's like a six-month grace period, then I lose all my save data. So if I'm someone who got like super invested in all the progress I made in Breath of the Wild, I have to keep paying Nintendo, assuming that I bought the game digitally instead of as a little-

• 3:01:03David Rosenthal?

  As a cartridge.

• 3:01:04Ben Gilbert?

  Yeah. Which is weird that they offer both, by the way. It's a very contrive. It's very Nintendo.

• 3:01:10David Rosenthal?

  I think that is actually a console games industry problem as a whole, not just Nintendo. Xbox and Sony have the same issue. Like, you look at the PS5 and the Xbox Series X through one line. You're like, why the hell do you have CD slots? On the other hand, core gamers feel very strongly about this for the reason you said. They really want to own their games and make sure that nobody can ever take them away from them.

• 3:01:33Ben Gilbert?

  And resale. I can't ever sell. I just paid Nintendo $120 for two games in the last week. That's money I'm never getting back.

• 3:01:41David Rosenthal?

  You know, they still have like a weaker version of that scale economy, network economy, switching cost thing. It's just not solely theirs. Like Microsoft and Xbox have their version of it, too.

• 3:01:53Ben Gilbert?

  Right. If I'm an indie developer, the 120 million Switches is a very attractive group to distribute it to, and so are the Playstations, and so are the Xboxes.

• 3:02:03David Rosenthal?

  I think the Switch and Nintendo is counter positioned against the smartphone gaming market right now, in particular because of this quality concept. I can be very sure that when I buy a game for my Switch, it's gonna be quality.

• 3:02:19Ben Gilbert?

  Right. And Apple, to adopt that stance, would have to forgo revenue. So it is counter positioning. All right, playbook?

• 3:02:27David Rosenthal?

  Playbook.

• 3:02:28Ben Gilbert?

  There's a great line that Shigeru Miyamoto has, which is, "A delayed game is eventually good. A bad game is bad forever."

• 3:02:39David Rosenthal?

  So good.

• 3:02:39Ben Gilbert?

  I think about this all the time, ever since I first read the quote when we were first starting researching three months ago. It is something I think about a lot for acquired episodes. It's like, we loosely have a schedule, you know, we do six episodes every six months, but you and I just keep canceling stuff when we're like, eh, quality's low. And I'm not sure it's the best way to run a business, but it is the best way to create art.

• 3:03:02David Rosenthal?

  Yes. Which, to our discussion about, what is it that the people who work at and run Nintendo think they're doing there?

• 3:03:09Ben Gilbert?

  Yes.

• 3:03:09David Rosenthal?

  It's somewhere in between.

• 3:03:11Ben Gilbert?

  Right. They really do value the art. And I think that's pretty rare. When you look around at like Activision, EA, the people making the big decisions do not care about the art. They are running spreadsheet businesses, and Nintendo is not. But there's a bunch of stuff to read into in this quote, which is great. "A delayed game is eventually good. A bad game is forever." Also nestled in that quote is that Nintendo doesn't improve upon their games after releasing them.

• 3:03:38David Rosenthal?

  Right.

• 3:03:38Ben Gilbert?

  That's so the opposite of Epic Games.

• 3:03:41David Rosenthal?

  Such a good point. And even my favorite example, Halo Infinite. Halo Infinite was a bad game when it launched. It still has a lot of room for improvement, but it is so much better than when it launched.

• 3:03:54Ben Gilbert?

  Fortnite didn't have Battle Royale when it launched.

• 3:03:56David Rosenthal?

  Right.

• 3:03:57Ben Gilbert?

  That's crazy. So that's another interesting one. Matthew Ball points out a third thing about this quote where he looks at the word is a delayed game is eventually good.

• 3:04:07David Rosenthal?

  Now we're into Bill Clinton territory. Define is.

• 3:04:10Ben Gilbert?

  And Matthew's point is, well, a delayed game could be eventually good. But I think there's this sort of artist polishing thing, which is like, if I just take enough time and I make it the way that I want, it will eventually be good.

• 3:04:25David Rosenthal?

  Yes, I think Nintendo falls victim to this. We haven't really talked about the games themselves side of Nintendo, because that's way beyond the scope of acquired as a podcast. I think there's a big element of this, though, within Nintendo. Like, I think they think that every Zelda game is like amazing, and it's not.

• 3:04:47Ben Gilbert?

  Yes, yeah, you can kind of feel that.

• 3:04:50David Rosenthal?

  All right, I'll jump in with a couple here. One that really popped up to me in this episode in part two is the jobs to be done framework. And we talk about this sometimes on acquired, not a lot, certainly not as much as we talk about seven powers and other ideas. But the handheld market in particular really highlights this for me and how everybody in the industry like basically ignored it forever. And I don't know if Nintendo thought about this consciously, but the Game Boy and the DS were hyper-serving two jobs to be done. One was games for kids and one was games for casual adult players.

• 3:05:34David Rosenthal?

  And neither of those audiences were being served well at all by all the innovation and investment going into all the other gaming platforms. And Nintendo just got it right. And so on the surface, you look at like the Game Boy and you're like, what is this thing? You know, but then like, it's actually serving these wildly diverse audiences in very good ways.

• 3:05:56Ben Gilbert?

  Yeah. That's such a good point.

• 3:05:59David Rosenthal?

  Two more that I want to talk about. One, I don't really know what the takeaway is for this on me, but I've really stuck on this episode of like, how stark the difference is for me on Switch games versus smartphone games. I know that smartphone games are a much bigger market and are likely to continue to be, but the actual experience of playing them is so bad and many people will argue with me on this.

• 3:06:31Ben Gilbert?

  That we're being reductionist on how bad mobile games are and we're not talking about any of the good ones.

• 3:06:35David Rosenthal?

  Totally. And back to what I was just saying on the jobs to be done framework. I think a lot of people that are playing those games, that game is accomplishing a job to be done for them.

• 3:06:43Ben Gilbert?

  Yep.

• 3:06:43David Rosenthal?

  Absolutely. But what this really makes me think and makes me a little bit sad for is how badly Apple failed the consumer in gaming on iOS. There is an alternative history where iOS and iPadOS is a Nintendo-like gaming platform and like game design and the art of gaming is flourishing there. And it would be so compelling as a consumer that like my phone that I have with me all the time also has these beautiful game experiences and that is just so not the case.

• 3:07:21Ben Gilbert?

  The ethos of what these devices were supposed to be and Steve Jobs's Apple is very Nintendo-like. And when you think about the App Store and App Store review and we don't need fart apps, when you have an enormous pile of money on the scale, it's pretty hard to let your values outweigh it. And I think that happened to Apple. I think they all sort of looked at it and I'm not saying Steve Jobs would have been any different. Steve probably would have let the same thing happen and the whole thing was set in motion while he was there. But I don't think anyone had any idea how. Much money, well driven casino mechanic type games, loot box games, Candy Crush type games, how much money those could make?

• 3:08:05Ben Gilbert?

  And if you sort of could go back a priori and say, Apple, you can have a much more closed down App Store that looks a lot more like Nintendo Switch Online, or you can have what it is today. I think they wish, maybe they wish they could have gone the Nintendo route, but being the most valuable company in the world and the most profitable company the world's ever seen is also pretty attractive.

• 3:08:28David Rosenthal?

  I think they want to think that they would have gone the Nintendo route, but they for sure wouldn't have. And it's funny, I was just thinking, as you say that, on the one hand, nobody could have predicted and nobody did predict how big the mobile gaming market would become, but I'm thinking all the way back to bring it full circle to the origins of Nintendo, of course you could have. It's called gambling. It's human nature. It's been there forever. You know, like, the more things change, the more they stay the same.

• 3:08:54Ben Gilbert?

  But it's not just gambling. It's gambling combined with social status. And sometimes it's not gambling, you know, sometimes it's literally...

• 3:09:01David Rosenthal?

  Dude, what do you think casinos are?

• 3:09:03Ben Gilbert?

  That's true.

• 3:09:04David Rosenthal?

  Gambling combined with social status.

• 3:09:06Ben Gilbert?

  That's true.

• 3:09:08David Rosenthal?

  It's just all digital now.

• 3:09:10Ben Gilbert?

  Yep.

• 3:09:11David Rosenthal?

  You can't tell a, what is Nintendo, 135, 140 year old company story without it fundamentally boiling down to being like, human nature is human nature. And the Nintendo story just illustrates so much for me that the seeds of success are sown in a fall and the seeds of a fall are sown in success. The Nintendo story with the ups and downs, the falls came from their successes and the successes came from their falls.

• 3:09:45Ben Gilbert?

  Right. Yeah, their greatest strengths are their greatest weaknesses.

• 3:09:48David Rosenthal?

  Yes.

• 3:09:49Ben Gilbert?

  All right. So my last one is kind of a what would have happened otherwise. And that question is, how is this company not owned by Disney? You have to imagine Bob Iger was on a plane in Japan at some point discussing this.

• 3:10:08David Rosenthal?

  It's unimaginable that he wasn't.

• 3:10:11Ben Gilbert?

  They bought Pixar, they bought Lucasfilm, they bought Marvel. And in 2012, the year that Lucasfilm was purchased, Nintendo was only worth $12 billion.

• 3:10:24David Rosenthal?

  Oh, man.

• 3:10:25Ben Gilbert?

  So assuming that that happened, how did that meeting play out? And I think nothing has ever come out about this, but either Disney would have had to decide, we don't want to be that in the video games business. I mean, they bought Play-Doh and they do have games. I think they make billions of dollars from mobile games. But maybe they decided that IP is not the type of IP that we were buying. And we think that movie IP is more repurposable into our flywheel than games IP. I don't think that's the case.

• 3:10:58David Rosenthal?

  No, because it would be perfect.

• 3:11:00Ben Gilbert?

  It'd be so perfect. Mario, Zelda, the whole cast, Donkey Kong is first-class IP, along with those three franchises they bought and the Disney princess series.

• 3:11:10David Rosenthal?

  Totally. I'm not the first person to say this, but like, I suspect this new Mario movie is going to do really well. You know what's going to just freaking crush it?

• 3:11:20Ben Gilbert?

  Absolutely.

• 3:11:21David Rosenthal?

  When there is a Zelda movie, television, series, whatever, people are going to go absolutely nuts. We talked about it in part one, but like, more people like Mario than like Zelda, but people who like Zelda get freaking tattoos of Link. Like, they name their daughters Zelda.

• 3:11:40Ben Gilbert?

  It's going to be like Lord of the Rings style.

• 3:11:42David Rosenthal?

  Yeah.

• 3:11:43Ben Gilbert?

  So one thesis I have is that Japan, as a nation, would never let Nintendo be sold to a foreign buyer.

• 3:11:54David Rosenthal?

  It's like the reverse of what almost happened with the Mariners.

• 3:11:57Ben Gilbert?

  Yeah. I just have a hard time imagining the Japanese government allowing a deal to go through. And I have to imagine there's sort of some discussion with the state before you even try to propose it. I mean, it's a national treasure. The Olympics opened with nods to Mario. I think when, I can't remember what year it was, but the Japanese prime minister came out of a tube, like one of the Mario green sewer tubes.

• 3:12:22David Rosenthal?

  A warp tube, yes.

• 3:12:24Ben Gilbert?

  So I think no matter how bad this company does, the state would nationalize it before it would ever get sold to a foreign buyer.

• 3:12:34David Rosenthal?

  Yeah, I think that's right.

• 3:12:35Ben Gilbert?

  So, man, I would kill, though, to hear the conversations between Bob Iger and...

• 3:12:40David Rosenthal?

  There's gotta be audio tapes out there somewhere.

• 3:12:42Ben Gilbert?

  I know.

• 3:12:43David Rosenthal?

  Somebody recorded that meeting on their smartphone.

• 3:12:48Ben Gilbert?

  All right, if anyone has that recording or any knowledge of any conversations, we promise we won't tell anyone.

• 3:12:53David Rosenthal?

  [email protected].

• 3:12:55Ben Gilbert?

  Yeah, join the Slack. You can DM in the Slack, too.

• 3:12:57David Rosenthal?

  Yeah, exactly. Oh, that's such a good point. Yeah, there's no way that that conversation didn't happen.

• 3:13:04Ben Gilbert?

  Right?

• 3:13:05David Rosenthal?

  No way.

• 3:13:06Ben Gilbert?

  No way. All right, carve-outs.

• 3:13:09David Rosenthal?

  So I have two carve-outs, podcast and podcast-related. One is really, really good Vanity Fair article with Kara Swisher that just came out. Friend of the show, former acquired guest Kara Swisher, pioneer of our industry and our category. So good. When we had her on the show way back when, we told the story of the Recode acquisition, and she's had like six more chapters in her career since then, which is just so... I hope we have six more chapters in our career at that age.

• 3:13:41Ben Gilbert?

  Yeah.

• 3:13:41David Rosenthal?

  Good for her. You know, she has two children that are about my daughter's age, too.

• 3:13:46Ben Gilbert?

  Amazing.

• 3:13:47David Rosenthal?

  Wow, I could not imagine being 20 years older and parenting young kids like I am now. Like, her energy is just incredible while also doing all these things. So that's carve-out number one. Carve-out number two is a long, long, long time coming, but I have finally, listeners will be like, finally, finally, really gotten into hardcore history.

• 3:14:07Ben Gilbert?

  Nice.

• 3:14:07David Rosenthal?

  It's always been an inspiration for us in theory, and I've never just actually spent the time to dive into it and Dan's so good. Like, he's the OG. Everything we do is trying to be a shadow of him. So, so good. If you haven't listened to it, go check it out.

• 3:14:24Ben Gilbert?

  Yep. All I do is research for acquired. So I like, I'll come up with some other ones, but the Tetris movie is great. I think it's like totally worth your time. It's a fun watch. Let's see, I should come up with one. Oh, I did just listen to a great podcast episode this week. Invest like the best with Patrick O'Shaughnessy. Always a great show. I mean, truly like, he's just one of the best interviewers alive and friend of the show. We've done a home and home with him and we need to do something again. He interviewed Daryl Morey, the GM of the Philadelphia 76ers. I think he's the GM, right?

• 3:14:54David Rosenthal?

  Oh, wow. I'm not up on my NBA.

• 3:14:57Ben Gilbert?

  Yeah. So he left the Rockets. He was considering leaving basketball. He thought he was out and he is now, oh, the president of basketball operations at the 76ers.

• 3:15:07David Rosenthal?

  Wow. I am so behind on my NBA drama. So he took Kinky's job. Wow.

• 3:15:13Ben Gilbert?

  It is a fantastic interview. It is really fun. It actually dovetails off this episode well. They spend a lot of time on the topic, what makes a good game? And they're basically, for all the video game nerds out there who love thinking about balance and things that are OP or overpowered, or nerfing versus buffing, and sort of trying to make a game the most competitive, this episode spends a lot of time on that. And obviously, Daryl has thought a lot about this problem. And how do you continue to tweak the rules of sports to make it, A, the most competitive, like the best true game in the purest sense of the word, but also the most interesting to watch, which in some situations mean you actually want to make it less skill driven. You want to make it more about luck because

• 3:15:58Ben Gilbert?

  you want the any given Sunday effect. And so there's a lot of very interesting points that he makes. And as usual, Patrick does a spectacular job with the interview. So highly recommend it. We'll link in the show notes.

• 3:16:09David Rosenthal?

  I haven't listened to that one yet. I need to go add it to my queue.

• 3:16:12Ben Gilbert?

  It's awesome.

• 3:16:13David Rosenthal?

  Related to that, I'm cautiously interested, skeptically interested to see how the pitch clock goes in baseball this season.

• 3:16:21Ben Gilbert?

  Oh, yeah. Well, I'm literally going to the Mariners game tonight, the former property of Nintendo of America. And I'll have to keep you posted. It'll be fun.

• 3:16:29David Rosenthal?

  Yeah, you'll have to report back.

• 3:16:31Ben Gilbert?

  Well, with that, you should join the Slack. It is a great way to discuss this episode, share childhood stories of playing Nintendo, hear from people who are involved in the industry, who are always dropping great nuggets in after we record. So awesome place for post-episode discussion. That is acquired.fm/slash/Slack. ACQ 2 is churning out bangers, so go subscribe. If you're not subscribed, you should, because the next one, seriously, with the CEO of Retool, was like one of my favorite conversations we've ever had on the show.

• 3:17:03David Rosenthal?

  David is so great. We've also got some really great ACQ 2 episodes coming up too, so stay tuned there. We're taking the deuce to the next level.

• 3:17:13Ben Gilbert?

  We are. Speaking of the next level, David, that is a fancy shirt that I see you wearing. How can people get sweet merch like that?

• 3:17:20David Rosenthal?

  In the Acquired merch store.

• 3:17:23Ben Gilbert?

  Acquired.fm/store. All right, listeners, with that, we'll see you next time.

• 3:17:29David Rosenthal?

  We'll see you next time.