3 Ways Nintendo’s Fear of Piracy Shaped its Business

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

N64

64MB

PlayStation

650MB

GameCube

1.5GB

PlayStation 2

4.7GB-8.5GB

Wii

4.7GB-8.5GB

PlayStation 3

25GB-50GB

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.

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Read/Post Comments (6) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 13, 2014, at 9:41 AM, laethyn wrote:

    Oh look, another "Nintendo is doin' it wrong!!11" article on fool. I'm shocked. SHOCKED, I tell you

  • Report this Comment On February 13, 2014, at 12:04 PM, targeyone wrote:

    I'm as shocked as laethyn and in a state of disbelief.

    When I saw that a Nintendo article was on Motley Fool, I expected nothing but praise for the company.

    I have no idea what is going on anymore.

  • Report this Comment On February 13, 2014, at 1:28 PM, BHGamer wrote:

    I agree with nearly everything here. Being a 20+ year collector, I also consider myself somewhat of a historian when it comes to video gaming. Nintendo's fear of emulation is completely irrational and yes I believe led to a lot of their problems. I mean honestly, 1% if not less of Nintendo's customers probably deal with emulation, and PC's at the time wouldn't be powerful enough to emulate current hardware. So PC's in the N64 era would be powerful enough to run NES emulators maybe SNES, both systems that Nintendo would be making little to no money on, so it's crazy how it got in their heads. The disc format thing as well, it's nuts to worry about piracy, yes it happens, but the reality is that it's such a low percentage, it wouldn't have affected Nintendo at all. Look at Sony and Microsoft, you don't hear either of them blaming financial woes or system performance on piracy.

  • Report this Comment On February 13, 2014, at 3:48 PM, Arroyoshi wrote:

    A Nintendo bashing article frpm Motley Fool? How unexpected!

    All sarcasm aside let's look at some incorrect figures and statements, since you obviously know nothing of the industry you insist on writing about.

    "The device has sold 5.6 million units since November 2012, making it the worst selling Nintendo home console of all time."

    The Virtual Boy is the worst selling Nintendo system of all time, every other Nintendo console has had a full life cycle while the wiiu has been out for 15 months. You can't call it the worst selling console if it has barely launched, by your logic You could say The PS4 and XBOX 1 are Sony and Microsoft's worst selling consoles ever.

    We need a company like Nintendo to give us games that aren't first person shooters and family friendly games or games that can easily be played with friends, plus if third party developers really used the system's hardware to it's full potential, then we would see more games like Super mario galaxy or 3D World, but we don't. All we get from most third parties are games like the 30 Great Games Franchise.

  • Report this Comment On February 14, 2014, at 5:57 AM, oadrake wrote:

    As a long time gamer, as well as a holder of a degree in video game design, I think I might have an opinion worth noting, but then again perhaps not. Nintendo has a focused business, and that is a very good thing: they make video game consoles and video games. That's it.

    They do not give us under performing, non upgradable PC's ala XboxOne/PS4. They do not give us hacked networks.

    They are not Sony, they are not Microsoft, and that is just fine.

    My son, just two days ago, while snowed in, decided he wanted to play an X-box 360 title, one which we had downloaded years ago, and have played as a family (Him, myself, his twin brother, and my wife) literately dozens and dozens of time, but hadn't touched in almost a year. After an hour of my messing around with the "new improved" Live network, and having to jump through several hoops, I was finally able to get to the point where he could log on and play his game.

    But he didn't care anymore. About a half an hour earlier he had picked up the Wii U gamepad, turned it on, and switched Scribblenauts unlimited to gamepad mode.

    People play games in order to experience, well, positive experiences. My children have stated that they will never buy Microsoft products in the future. My one son says he just doesn't like games that look realistically violent, he prefers anime styled RPG's and such. My other son, and I quote, "Why would I want an Xbox? I get steam on the laptop and that's where we play Minecraft and Team Fortress Two. Also, I can't watch Toby or PewDiePie on the Xbox. Well at least not easily, it's too much trouble."

    Also, let's not forget how many millions of people's financial information was jeopardized when the PS's Play network was hacked.

    Motley Fool, you disappoint me and make me sad. You've become the equivalent of an automotive magazine criticizing a car that they haven't even driven.

  • Report this Comment On February 14, 2014, at 11:33 AM, TMFSunLion wrote:

    Virtual Boy is NOT classified as a home console. It's something between a home and portable console -- and no one classifies it as part of any of Nintendo's console generations.

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