3 Ways Nintendo’s Fear of Piracy Shaped its Business

Let’s take a look at 3 ways Nintendo’s irrational fear of piracy defined its business over the past 18 years.

Feb 12, 2014 at 8:24AM

These days, everyone has an opinion about what Nintendo (NASDAQOTH:NTDOY) should do next.

Nintendo's alarming 70% and 25% reductions of its full-year forecast of Wii U and 3DS sales, respectively, have sparked endless debates about the future of the company -- should it abandon hardware altogether, start making mobile games, or buy its former rival Sega?


The truth is that most people are looking at the wrong part of the company. The real key to Nintendo's future lies in its past, and understanding how its stubborn, paranoid fear of piracy shaped the company's identity today.

1. Proprietary software designs
When Nintendo dominated the 8-bit and 16-bit eras in the 1980s and 1990s, it repeatedly struck down companies, such as Tengen, which refused to pay Nintendo's licensing fee or conform to its quality control standards. Nintendo also threatened to revoke retailers of their supply of licensed titles if they carried these unlicensed games.

In 1991, Nintendo planned to add a CD-ROM, made by Sony (NYSE:SNE), to the 16-bit Super NES. However, Nintendo eventually pulled out of the agreement, and Sony turned the system into the industry-altering PlayStation in 1994.

Nintendo abandoned the CD-ROM format because it was afraid that its games could be easily copied. Therefore, instead of migrating to CDs, as its rivals had done, Nintendo stubbornly stuck with the cartridge format with the fifth generation N64 in 1996.

Nintendo's N64 cartridges could only store 64MB compared to a standard 640MB CD. Nintendo also required its third-party developers to purchase expensive cartridges to test out its games.


Nintendo's N64 cartridge. (Source: Wikimedia)

The tiny space of the cartridge -- which made it tough for companies to add recorded voices, orchestral music, and full-motion videos to its games -- handed the console market to Sony on a silver platter as third-party developers like Capcom (NASDAQOTH: CCOEF) and Konami (NYSE: KNM) embraced the PlayStation.

Although Nintendo moved to a disc-based format with the sixth-generation GameCube, it stubbornly made it smaller than the PS2, once again to prevent piracy. As a result, the GameCube's smaller disc tray was unable to play DVD movies or audio CDs.

The seventh-generation Wii finally offered games on proprietary discs similar to DVDs, but by then Sony had already moved on to the Blu-Ray format.

As a result, Nintendo was always a generation behind in terms of overall storage capacity:

Nintendo console

Storage media size

Sony console

Storage media size







PlayStation 2




PlayStation 3


Source: Industry websites.

Granted, not every developer needs to take advantage of the full storage capacity of the disc, but Sony has repeatedly looked more accommodating to developers than Nintendo with its higher capacity storage media.

2. Proprietary hardware designs
Meanwhile, Nintendo needed to find a way to pull away from Sony and Microsoft (NASDAQ:MSFT) as the seventh generation approached, but it was still afraid of its software being duplicated.

This was painfully evident in its continual crackdown of PC emulators for the NES, Super NES, and N64 consoles.


An Android N64 emulator running Super Mario 64. (Source: Appszoom.com)

The solution was the Wii -- an underpowered machine that offered a unique motion control scheme that hadn't been offered on a mainstream console before. The Wii was a huge success, selling over 100 million units over seven years before it was discontinued across most of the world last November.

The Wii's success, however, convinced Nintendo that it had to take the same approach in both handheld and home consoles.

To discourage emulation of its handheld games, Nintendo introduced the DS, which had two screens -- a regular display and a touch screen. Its successor, the 3DS, enhanced its top screen with stereoscopic 3D. That innovation made the 3DS, which has sold 42.8 million units worldwide, a huge success.

Unfortunately, Nintendo's need to be original led to the design of the eighth generation Wii U -- a device that has less horsepower than either Microsoft's Xbox One or Sony's PS4, and offers a second screen that many consider redundant. The device has sold 5.6 million units since November 2012, making it the worst selling Nintendo home console of all time.

3. Ignoring online multiplayer
While striving to be different in software and hardware, Nintendo completely ignored the evolution of online multiplayer games.

Microsoft introduced Xbox Live in 2002 and Sony added the PlayStation Network (PSN) in 2006, leaving Nintendo in the dust until 2012, when it finally decided to launch the Nintendo Network.

However, Nintendo's developers reportedly failed to research Xbox Live or PSN before launching the network. A widely cited interview with a third-party developer published in Eurogamer claimed that Nintendo's developers told them that "it was no good referencing Live and PSN as nobody in their development teams used those systems."


Nintendo Network on the Wii U. (Source: Wikimedia)

Despite those problems, the Nintendo Network is finally gaining traction with developers. Well-known titles such as Ubisoft's (NASDAQOTH:UBSFF) Assassin's Creed IV: Black Flag, Activision Blizzard's (NASDAQ: ATVI) Call of Duty: Black Ops II, and Electronic Arts' (NASDAQ: EA) FIFA and Madden games are all playable on the network.

It just all happened too late -- adding a multiplayer network should have been Nintendo's top priority when it launched the original Wii in 2006. Although the current number of Nintendo Network users is unknown, it probably still has a long way to go to catch up to Sony's 110 million PSN users and Microsoft's 48 million Xbox Live users.

Ironically, the rise of online multiplayer gaming and the need for constant Internet connections turned out to be one of the best piracy deterrents of all.

Gamers might be able to play a single-player campaign in a pirated game, but they are usually unable to play multiplayer games -- simply because the company's servers can easily recognize and disconnect pirated versions of the game. Multiplayer gameplay comprises such a large part of many games today that playing a single-player campaign is equivalent to playing a demo of the game.

The bottom line
In closing, Nintendo's fear of piracy was the primary reason that Nintendo forced itself to do everything differently from Sony after the N64 era. While that resulted in some big hits, like the Wii and the 3DS, it also resulted in some huge failures, such as the Wii U.

Looking forward, Nintendo has shown resistance to mobile games or free-to-play games for the same reason that it has resisted launching an online multiplayer network. The company is resistant to change because it feels entitled to dictate the market trends in the industry it was instrumental in creating.

The future of Nintendo will not be dictated by abandoning hardware, making mobile games, or buying smaller rivals. It will be decided by its willingness to embrace changing trends in gaming, rather than slavishly sticking to its dated vision of what the video game industry should be.

Want to learn more about how to profit from Nintendo's successes and failures?
The key is to learn how to turn business insights into portfolio gold by taking your first steps as an investor. Those who wait on the sidelines are missing out on huge gains and putting their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you what you need to get started, and even give you access to some stocks to buy first. Click here to get your copy today -- it's absolutely free.

Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers