Nintendo
Describe and evaluate Nintendo’s strategy towards game developers
Nintendo serves as a good example of a firm that has managed to capture a great deal of value created by other players in the market, among others by leveraging the value created in the compliments market. The company mainly signed licensing agreements with outside programmers for development of games compatible with their hardware system. But by still keeping a small share of the game software development in-house (10% in the U.S), Nintendo basically made it known to game developers that they still had the knowledge and expertise required to enter their game developer’s turf at any point they so desired. This credible threat granted a lot of negotiating power against developers and prevented them from ganging up to push back on Nintendo.
A key strategic control of game developers was restricting the use of games to their Famicom (in Japan) and NES (in the U.S.) systems by incorporating a security chip into the hardware. By keeping the number of licenses limited below the number of existing (large number of) game developers, Nintendo could keep an upper hand over the industry providing their complimentary products. Licensing agreements also included restrictions on the sex and violence in games, thus ensuring that Nintendo’s brand equity stayed intact.
Nintendo further kept their power towards licensees by requiring them to pay high royalty fees; fill a minimum number of orders; and sign exclusivity agreements that limited the release of NES-licensed games to the Nintendo system only; and limit the number of titles released each year. High royalties and minimum orders were effectively a two-tier contract and ensured that Nintendo saw a minimum profit margin for each game developed for its system. The exclusivity agreements that Nintendo included in the licenses largely limited game imitation for competitor systems and created a large barrier to entry for potential system entrants. The limit on
Nintendo serves as a good example of a firm that has managed to capture a great deal of value created by other players in the market, among others by leveraging the value created in the compliments market. The company mainly signed licensing agreements with outside programmers for development of games compatible with their hardware system. But by still keeping a small share of the game software development in-house (10% in the U.S), Nintendo basically made it known to game developers that they still had the knowledge and expertise required to enter their game developer’s turf at any point they so desired. This credible threat granted a lot of negotiating power against developers and prevented them from ganging up to push back on Nintendo.
A key strategic control of game developers was restricting the use of games to their Famicom (in Japan) and NES (in the U.S.) systems by incorporating a security chip into the hardware. By keeping the number of licenses limited below the number of existing (large number of) game developers, Nintendo could keep an upper hand over the industry providing their complimentary products. Licensing agreements also included restrictions on the sex and violence in games, thus ensuring that Nintendo’s brand equity stayed intact.
Nintendo further kept their power towards licensees by requiring them to pay high royalty fees; fill a minimum number of orders; and sign exclusivity agreements that limited the release of NES-licensed games to the Nintendo system only; and limit the number of titles released each year. High royalties and minimum orders were effectively a two-tier contract and ensured that Nintendo saw a minimum profit margin for each game developed for its system. The exclusivity agreements that Nintendo included in the licenses largely limited game imitation for competitor systems and created a large barrier to entry for potential system entrants. The limit on