Unlike many investors, Nintendo has a firm understanding on the core principles of their business and why they are so profitable.
You must understand that this idea directly violates the Yamauchi Rule, one of the iron-clad rules of videogames. This rule, simply stated: "A videogames console is nothing more than a box that you need to play Mario." That is the foundation of Nintendo's business model. They made a game called Super Mario. You want to play it? Then buy this box. Will Mario play on one of the other boxes from rival brands? No. You can only play it on Nintendo's box.
If there one rule on which Hiroshi Yamauchi has nurtured Nintendo's DNA and for which later Nintendo's CEOs publically oath they will pursue it is “dokusou” (独創) which means ‘creating something unique’.
To pursue “dokusou” Nintendo leverages their special hardware/software integration to create novel fun experiences.
A very condensed description of Nintendo's DNA can be found in the President message to shareholders on Nintendo website (note that the base concepts were formed under Hiroshi Yamauchi and preserved by the various subsequent CEOs Iwata, Kimishima and Furukawa):
To shareholders and investors:
As an entertainment company that creates smiles, we aim to offer our unique and original brand of play that anyone and everyone can intuitively enjoy. To enable unique entertainment experiences, we place our dedicated video game platform business – integrating both hardware and software – at the center of everything we do. We understand that all entertainment eventually loses its appeal, so we continually work to provide new and original products and services for people everywhere.
With our dedicated video game platform business, we express the appeal and value of Nintendo Switch – paired with unique game offerings like the Super Mario titles – as an experience that can be enjoyed anytime, anywhere, and with anyone.
To continue growing our core business, our fundamental strategy is to expand the number of people who have access to Nintendo IP. To this end, we seek to broaden the touch points of Nintendo IP with consumers in areas beyond dedicated video game platforms. This includes applications for smart devices, which are ubiquitous throughout the world, as well as visual content, theme parks, and character-based merchandise.
In addition, we work to develop a long-term relationship with each of our consumers, with Nintendo Account as the connection that spans platform generations and unites a variety of entertainment experiences, centered on our integrated hardware-software entertainment.
Based on our belief that the true value of entertainment lies in its uniqueness, Nintendo will strive to increase our corporate value by offering unique entertainment that plays to the company’s strengths, continuing to adapt to the times and cherish the spirit of creativity.
We humbly ask you, our shareholders and investors, for your continued support.
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Here a few Yamauchi's remarks about the possibility of Nintendo developing console games for non-Nintendo platforms from an interview conducted in late 2000/early 2001:
Q: Several software houses have undertaken a multi-platform strategy - signing agreements with Nintendo and others to become licensees for several different game systems. Do you think this will have a rejuvenating effect on the industry?
Y: Well, let's say that we make a game called X and we port it to game systems from Company A, Company B and Company C. Then it doesn't matter if a user bought A's, B's or C's system, he'll be able to play game X on his own console. There's no difference between any of the game systems in this case.
Now I certainly understand the reasoning behind a multi-platform strategy. As I said before, development costs have spiralled upward, and it's become difficult to guage how well something will sell in the marketplace. They want to cut their risks and be able to sell that many more copies of a single title, so they decide to just release it on everything. I can understand that.
However, if this becomes the norm, then it'll have a dire effect on the marketplace. If users can play the same game on every single system out there, then there'll be no reason to buy one system over the other. It'll be just like buying a TV; no matter which one you buy you'll still have all the same channels. In the game business, software is our lifeblood. If that software becomes the same everywhere then there'll be zero difference between companies. The marketplace will just turn into a giant hardware war.
Now, you'll agree with me that TV sets are a fairly indispensible part of life these days. More people have them then don't. Washing machines and refrigerators are the same way. People have to buy them no matter what, so dealers end up relying on added extra features and advertising to compete in the marketplace. On the other hand, game machines are far from indispensible. If the software was the same no matter which system you buy, then the only point we'd be able to sell on is price. This industry is based on producing fun, innovative games, but if that goes away then we're all done for. That's why, even though I understand where software houses are coming from, I think ultimately it could break apart the industry.
Q: That's why you continue to produce games only for your own systems, including the upcoming Gamecube.
Y: Yes. Nintendo's business is to make games that can only be played on Nintendo systems. Nintendo's games only run on Nintendo's consoles, and no one else's. Our aim is to get people to think Nintendo's games are the greatest, the best in the world.
We're devoting all of our effort to that right now, and we'll be able to show our efforts to the world this year. We'll see how it turns out after the Christmas season, or about ten or eleven months from now.
Q: What do you think is an appropriate price point for game systems?
Y: The cheaper, the better. Gamers play games, and not systems, after all. If a gamer wants to play game A and game B, then buying the game system is nothing but a secondary obstacle to that. As a result, the cheaper the hardware is, the easier it is for the users to buy it.
At the same time, though, we have to worry about our costs. Up until fairly recently it was safe to lose money on hardware sales, since you more than made up for it in the software you sold. It's impossible to get a system out the door that way anymore, however. So when you release a system today, you don't necessarily have to profit from it, but you can't afford to lose money on every single console you sell.
