The Game Master

Not Everyone hates a loser. In Seattle in 1991, the city sat by mournfully as the owner of the Mariners--the only major-league baseball team in the Pacific Northwest--announced he was selling the team and that the most likely buyer planned to uproot the club to Florida.

It didn't much matter that the Mariners had been perpetual cellardwellers with one of the worst records in the majors. Residents of Seattle--indeed, the entire region--didn't care that their team lost, they just didn't want to lose their team. Slade Gorton, a senator from Washington, organized a group of politicians and businessmen to help keep the Mariners. They approached everyone they could think of--from Microsoft's Bill Gates to the executives at Boeing Aircraft--trying to find a financial angel.

One of their stops was Nintendo, the Japanese video-game company, which has its American subsidiary based in Redmond, just outside Seattle. Nintendo's U.S. president, Minoru Arakawa, wanted to help. Arakawa called his father-in-law, Nintendo's chairman, Hiroshi Yamauchi, the secretive and powerful commander of the world's $10 billion video-game industry. Yamauchi had never played baseball nor ever watched a game, but he saw something valuable in the Mariners. Saving the team would be great public relations for Nintendo--as well as a way for Yamauchi to return something to the country that had made him one of the richest men in the world. Since 1985, Americans had spent about $17 billion on Nintendo video-game systems and cartridges, so the $100 million needed to save the Mariners was pocket change. Yamauchi instructed his son-in-law to make a deal.

Senator Gorton and his group were elated. With Yamauchi's $75 million, they were able to put together a consortium of local investors that would enable the team to stay in Seattle. Yamauchi was happy, too. He got to look like a hero. Only one hurdle remained: baseball commissioner Fay Vincent.

Vincent promptly turned Yamauchi's PR coup into a media nightmare. No deal, said Vincent. Baseball is an American game and baseball cannot allow foreign ownership. When it was pointed out that Canadians owned teams, Vincent modified his objection: There could be no non-North American ownership. It didn't even matter that Yamauchi readily agreed to give irrevocable proxy of his voting interest to Arakawa, who was a 15-year resident of the Seattle area.

Yamauchi's bid came at a bad time. The American economy was reeling in a worsening recession, and the Japanese were viewed as the monsters who had lost the war but won the peace. Wittingly or not, the baseball commissioner placed Yamauchi's offer smack in the center of the trade issue, making Nintendo a lightning rod for America's hostility toward Japan. In Japan, banner headlines portrayed Nintendo as a victim of the latest round of Japan bashing, and in the United States, Nintendo supporters called Vincent's ruling racist.

Sitting in his corporate headquarters in Kyoto, Japan, Yamauchi was surprised by the uproar. He didn't care about the team one way or the other, but he was concerned about controversy. One of his many successes was keeping a low profile. In fact, he had done it so well that few people, inside or outside Japan, knew much about him. Now his name was on the front page of The New York Times, and reporters across the United States were probing into his life.

In America, baseball's ownership committee met in secret throughout mid-1992. Popular local support for Yamauchi's offer seemed to influence the baseball owners, and it looked likely that the Nintendo chairman would get his team. But just to be sure, Senator Gorton played a little hardball: He intimated that baseball's antitrust exemptions might be reviewed by Congress if the committee blocked Yamauchi's purchase.

Finally, on June 11, 1992, the club owners formally approved the deal. In Seattle, Yamauchi was viewed as a savior--and got the PR boost he desired. Elsewhere, he was merely another predator from Japan making off with American treasures. Even Yamauchi's own countrymen viewed him with wariness. "We know better," said a businessman in Japan. "Do not become involved in dealings with Yamauchi. Cross him and he'll squash you. Americans will pay if they are fooled."

In fact, we already have.

In 1983 American companies dominated the home video-game industry, which was then worth about $2 billion a year. While the industry has tripled in size, today virtually none of it belongs to Americans. Of the almost $6 billion a year now at stake, almost all of it heads overseas to Japan, and much of that flows into the bank accounts of Hiroshi Yamauchi and his companies.

Just how rich is Yamauchi? For the past three years, Nintendo Company Ltd. of Kyoto has consistently earned pretax profits of more than $1 billion a year, and its total U.S. sales were equivalent to more than ten percent of America's trade deficit with Japan. In1991 Nintendo supplanted Toyota as Japan's most successful enterprise, based on profitability, penetration of foreign and domestic markets and stock performance. Recently, report after report chronicling the unhealthy Japanese electronics industry has cited one major exception: Nintendo, a company that was virtually unknown a decade ago.

Building Nintendo into a $4.2 billion giant took a kind of finesse and ruthlessness that is rarely seen in any industry. Yamauchi uses, as an associate says, "whatever is required--threats, intimidation, coercion" and he has stymied most attempts to stop him.

Despite all this controversy, Yamauchi remains a mystery man who doesn't even play his own video games.("I have better things to do," he says.) A colleague once persuaded him to sit down in front of a television set hooked up to a system. Yamauchi took the controller in his hands and tried to follow the instructions, but he quickly became frustrated and quit, refusing to try again.

Hiroshi Yamauchi prefers to play a much bigger game. And he always seems to win.

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Nintendo was founded more than 100 years ago by Fusajiro Yamauchi, Hiroshi's great-grandfather, to make playing cards. Nintendo means "work hard, but in the end, it is in heaven's hands." Hiroshi Yamauchi explains: "As much as we try, we cannot control every factor. Luck has to be with us."

At first it seemed as if luck was not with young Hiroshi. His father deserted the family when Hiroshi was still a boy, and his mother, unable to care for him, followed her husband out the door. Hiroshi went to live with his grandparents, who were restrictive and overpowering but exposed him early to the family business that he would later run.

As a young man, Yamauchi was balefully handsome and debonair. He carried himself with conceited sturdiness, dressed in expensive, well-tailored clothes and kept his fingernails long, manicured and polished. His childhood made him sullen and bitter, though he was able to disguise his moods with levity and a dust-dry wit.

Anger dominates much of Yamauchi's life. Even when his father returned, aged, ailing and anxious to make amends to his only son, Yamauchi refused to speak with him. The man had brought shame and dishonor to the family and was to be avoided. It was a decision that even the hardened Yamauchi was to regret. Years later, when Yamauchi was in his late 20s, he heard from a half sister he didn't know he had: Their father had died of a stroke. She said Hiroshi should honor his father's memory by attending the funeral.

Yamauchi sat alone for a full day before deciding he would go.

At the funeral, Hiroshi met his four half sisters, his father's second wife and an aunt he had never known. He was overwhelmed when his aunt told him he looked exactly like his father. He wondered what else he might have inherited from the man. And he began to worry that he might pay a psychological price for refusing to reconcile with and forgive his father.

Such emotional turmoil was commonplace in Yamauchi's life. Not long after he had enrolled in Waseda University, his grandfather, Sekiryo, sent for him. The elderly man, propped up with pillows on his bed, spoke soberly. Ill health was forcing Sekiryo to step down, and Hiroshi was to assume the position that was supposed to have been his father's. He would have to leave school and immediately come to work at Nintendo as president.

Hiroshi, responding without emotion, said he would take over the company, but he insisted on several conditions. The most important: He must be the only family member at Nintendo. "This meant that a cousin had to be fired," a Nintendo director remembers. "Yamauchi wanted there never to be a question that he was in charge."

Weak and saddened, Sekiryo had the cousin fired, and, in 1949, Hiroshi Yamauchi, then only 21 years old, was appointed the third president of Nintendo. The old man died soon thereafter, never sure whether or not his family and the business would survive. Since his grandfather never saw the success Hiroshi eventually had with Nintendo, Hiroshi was left with one overriding fear: that his grandfather died thinking his grandson was an ill-mannered, disrespectful and spoiled child. Hiroshi's daughter Yoko Arakawa says, "My father felt that he disappointed his father and grandfather and he never forgot it."

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Young President Yamauchi was not welcomed by Nintendo's employees. They resented his youth and inexperience and were worried that Yamauchi planned a clean sweep of longtime employees. Their fears proved to be wellfounded. He fired every manager left over from his grandfather's reign, in spite of their years of service. He wanted none of the old guard who might question his authority.

Although Nintendo was successful, selling 600,000 packs of playing cards a year, Yamauchi was restless. He planned to branch into new businesses. To finance them, he took Nintendo public and became chairman. "Nintendo was a small company without resources, and we had to use caution as we grew," Yamauchi says. "It took some time before I found a direction." He transformed Nintendo first into a company with disparate businesses--a line of instant rice, a taxi service and a hotel where rooms for sex encounters were rented by the hour--and then into toys. One was called Love Tester. A boy and girl held the handles of the Tester, then joined their free hands. A meter read the current passing through them and determined, with mock scientific accuracy, how much love they had between them. The device was a big success. Public hand-holding in Japan was still considered risqué, and the Love Tester gave young couples the excuse they needed to touch.

By then, American companies, particularly Atari, had created a multibillion-dollar industry selling video games that were played in arcades, pizza parlors and pool halls. Intrigued, Yamauchi launched an arcade-game division of his own. At first, Nintendo's games were unremarkable and business was precarious. Yamauchi turned to a young apprentice who had impressed him and asked him to try his hand at game design. The result threw Nintendo's American sales force into a panic. One salesman hated the product so much that he began looking for a new job. In an era when the big-selling games included words such as "mutilate," "annihilate" and "destroy" in their titles, this one had a ridiculous name: Donkey Kong.

Many employees, including Minoru Arakawa in America, implored Yamauchi to change the name, but he refused. "It is a good game," he said firmly. Yamauchi may not play video games, but no one questions his genius when it comes to choosing them. "It's like a sense for the fashion business, knowing what will become hot and popular next season. He can read a few years in advance, "says one Nintendo executive. "He is so certain that he is right that he listens to no one."

Yamauchi was, as it turned out, either remarkably intuitive or very lucky. Donkey Kong was an international smash, generating hundreds of millions of dollars.

If Donkey Kong could make that much from quarters, Yamauchi was sure that he could rake in more dough if he conquered the home video-game (continued on page 176)The game master(continued from page 128) market, which was just beginning to take shape in Japan. All he needed to do was develop a good system for the home--and then create a pipeline with an endless supply of games."We had a head start because of our distribution network's selling playing cards in toy and department stores," Yamauchi explains. "It was a logical decision."

Coming up with the perfect homevideo system was not easy, especially since the industry was young and Yamauchi had no special knack for computers. "He had no concept that he was building a computer," admits Masayuki Uemura, one of Nintendo's engineers. "But he had his first glimpse of the incredible potential of a home-computer system disguised as a toy. He saw far more than he let on to us."

Yamauchi pushed and bullied his engineers to develop new games by pitting them against one another. He divided them into groups and said that he would produce the work of only one group--the one that outdid the others. "Months of work were disposed of with a scowl," one top designer complained. If the chairman was displeased, the project was dead, instantly. His victim suggested that Yamauchi's judgment was sometimes capricious and that his callousness caused a great deal of frustration and anger. Engineers occasionally left, and others, exhausted and disappointed, were sent on sabbatical. They were told, "The company is making money. Don't work. Spend the time, relax. Come back fresh." Designers whose work was rejected would redouble their efforts, determined to have their game chosen the next time.

"It's true that people complain," Yamauchi admits. "But this method works. I have found that competition among workers and high expectations are great motivators. As a result, I get the kind of work that is expected. Of course, some people do not like it, but they are the same people who have not succeeded."

In 1983 Yamauchi began selling the system his men had created. Since it was, he claimed, Japan's first Family Computer, he dubbed it the Famicom. Consumers were dazzled less by the Famicom itself than they were by the games--such as Super Mario Brothers and the Legend of Zelda--created by Nintendo's competing research and development groups. These games were, simply put, some of the best ever invented. Millions of Famicoms flew off the shelves.

"We sold the hardware as cheaply as possible," Yamauchi says. "Of course, the idea was to then be able to sell software. When the customers had the Nintendo machine, they needed Nintendo software." Once millions of people had a Famicom, Nintendo was selling all the games it could manufacture. Outside software companies were signed up as licensees to create Famicom games--and they paid Nintendo a handsome fee for the privilege. Nintendo earned "obscene profits," as one of the company's vice presidents phrased it.

New games were anticipated with a fervor that shocked store owners, distributors and parents. Kids camped out in front of department stores and toy shops. Nintendomania was well underway in Japan when the machine, renamed the Nintendo Entertainment System, was released in America in 1985. More than 35 million systems were sold in America by 1992, as well as more than 17 million in Japan and more than 5 million in Europe. Atari, the company that started it all, had virtually no share of the industry that, in 1992, brought in $6 billion in the U.S.

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In Japan, the Nintendo chairman is driven each morning through winding Kyoto streets from the home that belonged to the doctor of the emperor in the 15th century. Behind an immense tangled garden is the residence, a traditional home built in the style of a Japanese temple. In past generations, wealth was measured by the number of tatami mats--the book-thick, rectangular sections of sweet-smelling, woven straw--in a family's home. The average home has eight or ten tatami; the Yamauchi home has 152.

A day maid and a cook arrive each morning and leave after supper. Another maid cleans a few times a week. Yamauchi's wife, Michiko, runs the home informally. There is modern furniture in the ancient, traditional structure, and a teahouse is used as a storage closet. Michiko enjoys entertaining. There are parties and visits from friends and relatives. But one thing is missing. "Dad stays away," says his daughter Yoko.

According to his daughter, Yamauchi has rarely had much interest in his family. His parenting style apparently mirrors his management techniques. His children say he exercised control at home by terrorizing them--issuing edicts and enforcing curfews. In turn, his three children hated Nintendo because it consumed their father.

But Yamauchi was distracted by more than work. He was only in his late 30s, fabulously wealthy and roguishly attractive, a cigarette always dangling from the corner of his mouth. Even after he sold his hotel, he was a familiar face among the Kyoto demimonde. His wife said nothing, but his children resented him bitterly.

In 1970, on Yoko's 20th birthday, Yamauchi shocked her when he announced he was taking her out on the town. She dressed up and accompanied him to a cabaret, a sikikake, where five geisha attended them, serving drinks. The women obviously knew Hiroshi very well. He toasted his daughter's coming-of-age, but when it got late, he sent her home in a taxi. He didn't go home until dawn.

Now 71 years old, Yamauchi no longer carouses at the Gion. His only relaxation comes from a tumbler of scotch and an occasional game of go. His true love is Nintendo, and his obsession has paid off. Yet Yamauchi observes year after year of record-breaking sales and profits without celebration. "It is meaningless," he says. His family realizes that Yamauchi's success means nothing to him. "He is often alone," Yoko says. "I don't think he thinks about being happy."

There is speculation about Yamauchi's retirement: Yoko's husband, Minoru Arakawa, will probably take over at Nintendo, but there is no reason to believe that he will do so before the late Nineties. Yamauchi isn't ready to give up control to anyone.

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All successful men have enemies and Yamauchi has more than most. His dominance of the industry has been so unquestioned that he's been able to exercise his power without much subtlety. Some toy stores depended on Nintendo for up to 20 percent of their sales, which allowed Nintendo to engage in questionable tactics. "You did what they said," says an executive of a chain of stores. "They told you not to carry the competition, you didn't carry the competition. They told you not to discount, you didn't discount." The head of one software firm told The American Lawyer that he had been "at numerous meetings of conspirators" who wanted to fight Nintendo, but they all "chickened out."

As a result, Nintendo has been able to sell more than 50 million systems throughout the world. There is one sold for every third American home. Around the world, families with Nintendo systems have bought an average of 6 to 12 games, about 600 million of them. For each of the last three fiscal years, Nintendo made more than a billion dollars a year in before-tax profits.

The list of Yamauchi's enemies grew long, and inevitably some began to strike back. Nintendo was unsuccessfully sued for monopolizing the market. In congressional hearings, Nintendo was accused of price-fixing. The Justice Department began an investigation, as did the Federal Trade Commission. Yamauchi succeeded, charged one competitor suing Nintendo, "through a deliberate campaign of distortion, intimidation and coercion."

In collaboration with the attorneys general of several states, the FTC began its investigation into the price-fixing charges and the implications of Nintendo's strong-arm tactics, particularly its control over those companies allowed to create games for the Nintendo Entertainment System. The high-stakes investigations and lawsuits--in one suit, more than half a billion dollars was on the line--dragged on for more than a year.

In Redmond, Washington, executives of Nintendo's American subsidiary were worried. If Nintendo lost the lawsuits, the company's continued dominance in the U.S. was questionable. Back in Japan, however, Yamauchi remained calm. For him, the FTC, the antitrust laws and the lawsuits were "an inconvenience" that went with the territory. Yamauchi didn't ignore the potential disaster. It prompted him to look hard at markets that could replace America if the worst happened. Nintendo had already planned to intensify its push into Europe, but the trouble in the U.S. caused Yamauchi to expedite a European invasion. Nintendo would be prepared if any portion of the American gold mine were to be denied. "We do not see borders in this business," Yamauchi says. "Some countries may be too poor or have heavy tariffs on imports, but with those exceptions we will go anywhere in the world. There are no borders."

Yamauchi has remained consistently and entirely unrepentant, even when Nintendo of America entered into a settlement with the FTC on the price-fixing charges. No guilt was admitted, of course--Yamauchi continued to deny any wrongdoing and never backed down on his most-restrictive controls. Yamauchi also tenaciously fought the lawsuits with the biggest hired guns he could find. In 1991 Nintendo of America spent $20 million on lawyers. (Although many of the lawsuits remain unresolved, in December 1992, the FTC dropped its investigation into Nintendo's possibly monopolistic business practices without taking action.)

Still, Nintendo was vulnerable, and its weakness appeared in the most unlikely arena--the marketplace.

Sega never was a threat as far as Yamauchi was concerned. The $700 million Japanese company--founded, ironically, by an American--had a reasonably successful history in the video-arcade business in Japan and in the U.S. But it seemed too small and too specialized to make inroads into Nintendo's vast consumer business. Sega had released the Master System as a competitor to the Famicom and the Nintendo Entertainment System, but it never gained more than five percent of the market. Like many other companies, it failed to break Nintendo's lock on the industry.

In a rare lapse of judgment, Yamauchi continued to underestimate Sega. When Sega launched a more powerful game system, Genesis, in 1989, Nintendo was caught flat-footed. Genesis had the capacity to generate great graphics, animation and near-CD-quality sound, and the company had a proven software catalog of Sega's arcade hits. The company attacked Nintendo head-on, Sega Genesis does what Nintendon't, its slogan read.

Genesis was a best-seller, and Sega dramatically cut into Yamauchi's market share. An angry Yamauchi fought back in 1991 with the Super Nintendo Entertainment System, a machine as powerful as Genesis.

A mammoth marketing campaign launched the SNES, and while the new system began to recapture some of the video-game market lost to Sega, the damage had been done. Yamauchi had made a major blunder by not coming out with a more powerful machine in time to stunt Sega's growth. Nintendo now has to coexist with a viable competitor in the marketplace, a company that will get a fair share of the $10 billion-plus that consumers will spend on video games in 1993 and the escalating amounts predicted for the following years.

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Sega was only the first of Yamauchi's worries. The video-game industry is changing quickly, and Nintendo's fate rests less on its past and more on how Yamauchi adjusts to the future.

New technology will bring together such media as television, video games, stereo and the VCR in combination with a CD-ROM and a central processor. Other components can be added, such as a digital photograph reader or printer. A cable-television receiver--one that can manage and search through thousands of cable stations--will also be incorporated. Key to these innovations, however, will be the TV screen and the computer, the clearinghouse of the huge amounts of audio and video information that will allow people to interact with it all.

The Super Nintendo Entertainment System was designed to power such a multimedia system. If all goes according to plan, Yamauchi's video-game system could transform into a multiuse, multipurpose home computer, the first truly pervasive home computer for the mass market. The potential market for such systems is enormous. There are 300 million television sets in the world. If Yamauchi has his way, there could be several hundred million Nintendo machines in homes throughout the world, all running Nintendo-made or -controlled software.

Although companies such as Apple, IBM, Sony, Matsushita, Philips, Fujitsu and Microsoft are also scheming to get shares of this market, Hiroshi Yamauchi daringly announced early on that Nintendo would define the home-entertainment-system industry of the future. The move, he said, was the company's "boldest departure yet from the antiquated perception of video-game technology. Companies such as IBM, Apple, Matsushita and Sony are each struggling to become the company of the future, the kind Nintendo already is: both a hardware and software company." Indeed, when Apple president Michael Spindler was asked in March 1991 which computer company Apple feared most, he quickly answered, "Nintendo."

Yamauchi kicked the pace into overdrive by mid-1992 by revving up the push to sell the SNES. He also directed a heightened drive to do what Nintendo had done better than anyone else in the past--create games that would keep its fans, and new generations of fans, intrigued. To that end, Yamauchi increased the research budget to explore the future of video games and multimedia. He also entered into secret alliances with technology companies and negotiated with entertainment companies for licenses based on Nintendo characters and stories. "The geniuses in our company can create software that children will love. That is how we will succeed. That is why people will buy the system. Once they have it, they will want new kinds of software. We will provide it or license it," says Yamauchi proudly. "It will mean that Nintendo will remain at the center of the home-entertainment industry as it transforms."

He readied a CD-ROM attachment to the SNES (he tentatively plans a 1993 launch). He also worked with Philips and Sony, two of the largest consumer-electronics companies in the world, to create a format that could become the standard for the industry. Nintendo, in a hard-fought battle with these two companies, gained the right to control the licensing of game software--which could easily be worth hundreds of billions of dollars.

Once again, Nintendo's immediate competition comes from Sega. Its CD-ROM player is already on the market. The initial price tag of $300 kept most consumers away, but Sega again beat Nintendo to the punch. Other CD-ROMs came out that played both compact discs and cartridge-based games, and there were stand-alone machines on the market by Commodore (CDTV) and Philips (CD-I).

The Nintendo machine, being created in partnership with Sony, will be more powerful than most systems in the consumer market, built around a 32-bit processor (which has twice the power of most competitors'). With that and the company's marketing strength, Nintendo might well be the one to create the standard--a standard that Yamauchi will control. Imagine if one company earned money not only on every VCR sold but on all the videotapes sold or rented as well.

Last year was the video-game industry's biggest yet, with Nintendo holding on to its considerable share of the overall market and pulling ahead of Sega Genesis with the SNES. It is now ready to do battle for the multimedia market. Remarkably, the most significant attempts to stop Yamauchi have thus far failed. The threats to his dominance in the American market are evaporating one by one, and the European invasion has begun. "No one can stop us," he says. "Many companies would like to surpass us. If they are at war with Nintendo, we are ready. They will not damage us. It is inevitable in our position that people try to harm us and exceed us, but the attempts will fail. Nintendo will continue to become stronger."

Expanding beyond traditional video games is essential, Yamauchi insists. "We learned our lesson from Atari, once the leader in the world," he says. "We are able to understand very clearly why Atari failed. No toy company ever became a truly big and great company by remaining a toy company. We have much more ambition than that. As the lines that limited video-game companies in the past disappear, Nintendo will play a larger role in the world."