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Nintendo: At The Top Of Its Game


Information Processing: GAMES

NINTENDO: AT THE TOP OF ITS GAME

It's beaten back Sony and Sega. Now, it needs more titles

It's nearly summer, and video game jockeys--those 8- to 14-year-olds with twitchy fingers and laser aim--will have a lot more time to hone their skills. Lucky for Nintendo. After losing its luster--and market share--to rivals Sega and Sony, the stalwart Japanese video game maker is back in the race with its Nintendo 64 game player. Since charging back into the North American video game business last September, Nintendo already has sold 2.6 million "N64" consoles and grabbed 50% of the market. That's on top of 2.7 million units in the rest of the world. As Nintendo game hero Mario would say, "Mama mia!"

Now, it looks as if there may be more to shout about. Nintendo's comeback is spilling over as N64 owners return to stores to snap up Nintendo games. In April, seven of the top 10 top-selling video games in the U.S. were for the N64, including the 3-D dazzler Super Mario 64. These games, combined with console sales, propelled Nintendo's revenue to $3.5 billion, up 18% for the year ended Mar. 31, while earnings rose 9%, to $54 million. "Nintendo took its sweet time bringing the N64 to market," says analyst John G. Taylor of Arcadia Investment Management Corp., "But they did a lot of things right."

The game, though, is far from over. Nintendo still lags Sony Corp.'s 11 million PlayStations worldwide. Worse, it's woefully behind in its number of games: Nintendo has just 17 on the market, vs. 150 for Sony's machine. That may seem like a small handicap given the supernova sales of the top hits, but game titles are critical for success. A wide selection keeps buyers coming back--and they produce a steady stream of fat royalties, some 30% to 35%, that game developers pay to console makers.

JUICY MARGINS. So get ready for the next rock 'em, sock 'em phase of the video-game wars: the scramble for software. Nintendo is scurrying. Arch rival Sony has games in every genre, led by top-selling Crash Bandicoot. Sega is after the next hot title--including online Internet games that can be played on their machines. And software titan Microsoft is throwing its weight around by recruiting game developers to make the personal computer more attractive as a game machine. "The one with the best titles will win," says analyst Sean P. McGowan of Gerard Klauer Mattison & Co.

What they win is not just the video-game-maker championship--but also juicy margins. Analysts say Nintendo's software margins are nearly 45%, while N64 margins are a mere 1% to 5%. Software now contributes more than half of the company's profits. No wonder, then, that Peter Main, a Nintendo of America Inc. executive vice-president, chants daily: "It's the games, it's the games."

It's also why Howard C. Lincoln, Nintendo of America chairman, is now making personal calls to game developers. Take Electronic Arts Inc., a top maker of sports titles. Last January, Lincoln, who rarely seeks out developers, called EA CEO Lawrence F. Probst III. EA's chief had long refused to create Nintendo games, saying the royalty fees and up-front costs were too high. But Lincoln went wooing, and in mid-March EA agreed to produce six N64 sports titles by Christmas, 1998. What changed? Nintendo was anxious enough to make financial concessions, and the N64 is gaining momentum. "The economics now work," says Probst. Lincoln has been trying to work similar magic elsewhere and says that by yearend, the N64 will have 40 games.

But 40 is, well, just 40. That's far short of Sony's game arsenal, but don't expect Nintendo to change tactics. Lincoln maintains a few best sellers are better than a slew of mediocre titles. "I'm not concerned about the argument that we don't have enough software," says Lincoln. "I'm concerned about quality."

To that end, Nintendo is unbending with developers. It approves all games before it agrees to sell them. It also requires developers to pay cash up front to cover the cost of manufacturing in its Japanese plants. And Nintendo insists on using costly cartridges, because the performance is quicker than with CD-ROMs--usedbySony,Sega,andPCmakers. Cartridges cost $35 each, vs. $5 to $10 for a CD.

Sony, on the other hand, is a U.S. developer's dream. The company manufactures the cheap CDs in three locations around the U.S. That shortens the lead time, and using CDs cuts costs by two-thirds. Consumers pay less, too. The average Sony game price is $40 to $50, vs. Nintendo's $60 to $70. Says Kazuo Hirai, Sony Computer Entertainment chief operating officer: "We are competing for entertainment time, money, and attention."

And for developers. In January, Nintendo lost Yuji Horii, developer of the hit game Dragon Quest, to rival Sony. Horii says Sony offers better royalties. But he also was concerned about the capacity limitations of Nintendo's cartridge system, which made it tough for him to elaborate games. Joseph Osha, an analyst with Merrill Lynch Japan Inc., says cartridges, which now have 8 megabits of storage, will soon double. But CD-ROMs, at 650 MB, will far outstrip cartridges even then.

GRAPHICS. Nintendo can't afford to fall behind in games. That was its lesson at home when it first launched the N64 in June, 1996. After an initial sales surge in Japan, the N64 stalled because only two games were available. By the time the N64 reached U.S. shores, Nintendo had at least eight games in hand, including Super Mario 64. It worked, as 9-year-old Alan Casper can attest. The Seattle video game aficionado owns a Sega Genesis, a Super Nintendo Entertainment System, a PlayStation, and an N64. His favorite? The N64. "I like the graphics," he says. "I want to work at Nintendo."

So far, shoppers are flocking to stores for the latest in game gear. That's helping feed a boom in the $15 billion video-game market, which some analysts wrote off a few years ago, due to the rise of home PCs. After sagging to 9.6 million units in 1995, video-game machines should rebound this year, to 11.8 million units, according to researcher IDC/Link. Sales of games are booming, too: In the first quarter, consumers bought 13.3 million video games, vs. 10.4 million PC games, says market researcher NPD Group Inc.

But don't count on PC makers backing off the game market. Intel Corp.'s recent introduction of the MMX microprocessor boosted Pentium game-playing performance 10% to 20%. Now, Intel is pushing the new Pentium II as the brains of arcade games, hoping these migrate to home PCs and stimulate PC sales.

Microsoft's strategy is broader. The company continues to push Windows 95 as a gaming platform and has beefed up its staff with ex-Nintendo stars such as Alexey Pajitnov, the developer of Tetris. What's more, Microsoft plunged into online gaming this spring with its Internet Gaming Zone Web site, offering developers a stage to strut their software stuff--free. Microsoft also is working with Sega to move Windows into arcade games and possibly into Sega's next-generation home console.

Nintendo's answer to all these efforts is to stay focused where it's already strong--red-hot games. Star Fox is Nintendo's biggie for the summer. Developed by Shigeru Miyamoto, the man behind Mario, the $69.95 title features a fox and other animals on an outer-space mission. It launches on June 30, backed up by a $7 million ad campaign.

One of Nintendo's most intriguing--and risky--moves is a peripheral for the N64, called DD64, debuting in Japan by yearend. Essentially a response to the bigger CD-ROM format, the DD64 is a magnetic disk drive that will hold 64 MB of data. The DD64 also will have a communication device--possibly a cable modem. Analysts peg the price at $99.

Still, there are risks even to this. Historically, add-on devices don't go over big with gamers, who make one initial hardware investment and call it a day. There's also the chance that Nintendo could split its market into two camps--N64 and DD64. Then, game developers will be scratching their heads, wondering which to support.

Mama Mia!By Seanna Browder in Seattle, with Steven V. Brull in Tokyo and Andy Reinhardt in San FranciscoReturn to top


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