In Mario Kart, comebacks are easy. The farther behind you are in the Nintendo racing videogame, the easier it is to pick up more powerful weapons like the Blue Shell, a homing missile that will help you target and knock out the person in first place.
If only the real world worked that way. The company behind iconic game characters Mario, Kirby, Pikachu and Donkey Kong now finds itself trailing the pack in an industry it helped create. Nintendo’s 2012 followup to its wildly popular Wii game system, the Wii U, failed to catch on with consumers. Critics blamed lackluster sales on miscalculations by Nintendo management and the company’s failure to anticipate the rise of games on smartphones, which would steal away a chunk of the Wii’s more casual players.
So far, Nintendo has revealed no Blue Shell in its strategic arsenal. To the bafflement of critics, it has refused demands for significant change, time and again. It has insisted on staying the course — milking its valuable franchises, locking them to its own hardware and trying to invent new ways to play games.
But for the first time in its 125-year history, Nintendo has reported three consecutive fiscal years of operating losses. It’s not clear when a recovery will come.
Second chances are rare in industries as competitive as gaming, and Nintendo has had at least three in the last three decades. But observers now question if sticking to the current game plan will put it on track to a fourth turnaround and help it avoid the fate of its one-time rival Sega, now a bit player in a war fought by giants.
Extra Life No. 1: Donkey Kong to the Rescue
Near the employee cafeteria on the first floor of Nintendo’s American headquarters in Redmond, Wash., the company proudly displays some of its earliest arcade videogame hits. In front of this procession of arcade cabinets is one not-so-fondly remembered failure: A Space Invaders knock-off, Radar Scope, which was the first title worked on by now-legendary Nintendo game designer Shigeru Miyamoto.
The game did fine in Japan at first, but an ambitious North American launch in 1980 was disastrous, with two-thirds of the cabinets shipped to the continent left unsold.
Instead of wasting the cabinets, Nintendo of America founder Minoru Arakawa asked headquarters for a new game that could run on the same hardware. Nintendo ditched the cockpit-style hoods that discouraged arcade-goers from crowding around, and reintroduced the Radar Scope cabinets with a fresh coat of paint and a new piece of software: Donkey Kong.
The launch of Donkey Kong was a watershed moment in videogame history, perhaps as significant as Pong is to the gaming canon. It was challenging and addictive, and one of the first games to have a story: A giant gorilla named Donkey Kong kidnaps the girlfriend of the player character, at first called Jumpman but later renamed Mario. Donkey Kong and its offshoots were also one of the game industry’s first franchises, long part of Hollywood’s playbook but new to the games business. Mario, of course, would go on to become Nintendo’s mascot, appearing in hundreds of games.
Nintendo aimed to follow up on its hits at the arcade with a miniaturized effort in the living room.
Extra Life No. 2: When Videogame Consoles Were Retail Poison
The Famicom (short for “Family Computer”) enjoyed a strong launch in Japan in 1983, and two years later, Nintendo of America wanted to bring it stateside. At first, the company seemed poised for another Radar Scope debacle: Initial success in their native market, but major hurdles in the U.S. following the 1983 crash of the American videogame console market. Retailers thought the videogames business, led by Atari, was over.
“Neither the consumer nor the retailer was interested in a videogame console,” said Gail Tilden, who for 24 years starting in 1983 was Nintendo’s vice president of brand management. “That’s why the Nintendo Entertainment System was called an ‘entertainment system.'”
The NES was effectively the same device as the Famicom, but with a different name, a different design and a “lockout chip” that made it harder to run unlicensed game cartridges, which had contributed to Atari’s downfall.
The company convinced retailers to stock the NES by throwing in extra hardware, like the light gun, which made Duck Hunt possible, and R.O.B., a toy robot that helped kids play through a couple games. And thanks to games like the first Super Mario Bros., another breakthrough title, the NES was a hit.
The Console Wars Begin
For the rest of the 1980s, Nintendo owned the living room, commanding 95 percent of the American console market as it entered the next decade.
Nintendo’s golden era was interrupted by Sega with the release of the Sega Genesis in 1989. Console Wars author Blake Harris said the key to the Genesis’ success was its aggressive marketing, which emphasized more adult-themed games and the new console’s technical superiority, painting Nintendo as games for little kids.
Sega made a huge dent in Nintendo’s market share, at one point capturing 55 percent of the U.S. But it lost its grip with poorly explained add-ons like the Sega CD.
“Sometimes, when a company is the deal, they don’t pay attention or don’t validate the capabilities of others,” former Nintendo of America vice president Perrin Kaplan said. “Sega was a light under the butt to stay focused.”
Nintendo responded to the Genesis in 1991 with the Super NES, a more powerful console than the NES that featured some of the company’s most ambitious software, like Super Mario World and Donkey Kong Country.
By the end of the console cycle in 1995, the Super NES had far outsold the Genesis, and Sega’s later consoles never matched The Super NES’s success. Nintendo’s competition, however, only got more intense with time.
The (First) Bad Years
“I feel like there was some arrogance,” said a former high-level Nintendo engineer who asked not to be named. After a “great cycle with the SNES,” the engineer said, the company assumed it would have a smooth transition into its next home console, the Nintendo 64.
Instead, it found itself ill-prepared to compete with another company it had once considered a partner, Sony. After talks with Nintendo to develop a CD drive add-on for the Super NES fell through, Sony built a rival console business, the PlayStation.
Nintendo initially scoffed at the PlayStation, the engineer said, and remained confident that third-party game developers who had shared in the profits of the Super NES would stay loyal.
Big mistake. While Nintendo carried on with game cartridges in its next home console, the Nintendo 64, the PlayStation and its cheaper CDs were a better deal for developers; Sony offered better licensing terms, plus those CDs were faster to produce and could store far more data.
Sony ultimately shipped more than 100 million PlayStations, about three times as many N64s as Nintendo sold. And that was just its first act.
The PlayStation 2 was an even bigger success, while Nintendo’s next effort was an even bigger dud. The Nintendo GameCube sold fewer than 22 million units, while new competitor Microsoft sold 24 million Xboxes and Sony moved more than 115 million PlayStation 2s.
Now, Nintendo was not just beatable — it was in third place. Profits slipped from $1.4 billion (159 billion yen) in fiscal year 1993 to $520 million (65 billion yen) in 1997, but the company stayed in the black, and rebounded in the late ’90s as Pokémon, a hit series on its portable gaming device Game Boy, became a global phenomenon.
This was a low point for its home console business — and also the foundation of its greatest high.
Extra Life No. 3: Wii Would Like to Play
“I fell in love with it the minute I tried it in Japan,” Kaplan said of the first Wii. “I am a ‘snack gamer,’ at best, but the second I started playing with it, it was over for me.”
To the surprise of just about everyone outside of the company, the Wii (appropriately codenamed “Revolution”) succeeded where the Gamecube failed. Launched in late 2006, the Wii embodied the spirit of Nintendo’s counterintuitive innovation.
Unlike everything up until the Wii, the new game system got game players to stand up from the couch to wave around a novel motion-based controller, imitating actions like swinging a tennis racket, golf club and baseball bat in games like Wii Sports. The controller came with a warning to wear the wrist strap or risk shattering your television screen, as some consumers inevitably did. Players of all ages, including a new market of casual gamers, bought in.
This strategy led Nintendo to sales of 50.4 million Wiis between 2006 and 2008, and more than 100 million consoles to date, while Sony and Microsoft each ultimately sold about 80 million of their concurrent consoles.
Dan Adelman, an eight-year Nintendo veteran who left in August, said Wii Sports was packed in with many Wii consoles for a reason.
“Motion controls were a totally foreign concept,” Adelman said. “Sports games were chosen because people already knew the rules. A new type of gameplay paired with the new controls might have turned new users off, but the goal was to familiarize players with how motion controls worked.”
Suddenly, Nintendo was no longer the console for kids. The Wii made Nintendo a trend-setter. Sony and Microsoft both tried to emulate its success with their own approaches to motion controls, the PlayStation Move and the Xbox Kinect.
Where Did Wii Go Wrong?
Meanwhile, Nintendo prepared for its second act: A new console, the Wii U, based around a tablet-like touchscreen controller called the GamePad. Thinking different had paid off, big time, in 2006 — why not again in 2012?
One former Nintendo employee told Re/code he had heard the GamePad described as a “Fisher-Price iPad.” In its first two years, only 7.3 million Wii Us have been sold worldwide.
Like the Wii, the Wii U was bundled with a collection of mini-games that highlighted the new technology, this time called Nintendo Land. But the games were less intuitive, the value of the GamePad was unclear and the console’s launch was marred by confusion over what, exactly, the Wii U was.
“The great thing about the Wii was, family members, siblings or friends could play it,” Harris said. “It was a family atmosphere. But there’s only one [GamePad] tablet, and you can’t buy a second one.”
And Nintendo faced a bigger challenge than just bad marketing. Millions of the consumers who welcomed the Wii and its novel motion controls with open, flailing arms had moved on to an explosion of other gaming options.
In interviews with Re/code, multiple ex-Nintendo employees praised its “blue ocean” philosophy of trying to find new ways to play games that will reach as many people as possible. But casual gamers, who by definition are part of that broad target audience, are not the most loyal.
“All those people who bought a Wii to play bowling, they’re not the people who need a new system every time it comes out,” Tilden said. “They would be happy to play the original Tetris on the Game Boy today. Even if the new hardware was similarly innovative and entertaining, it’s a hard sell.”
By positioning itself as the gaming company for everyone, Nintendo was no longer competing against just Microsoft and Sony. It was now fighting all manner of distractions, from smartphones to online video streaming services. The original NES was called an “entertainment system” for marketing reasons, but now everything is an entertainment system.
“Before Sega, they never really had any competition,” Kaplan said. “Today the competition is ‘soup du jour.’ Consumers have a zillion options.”
Less frequently discussed, but no less crucial, is the reality that game developers also have a zillion options. Adelman said that between the releases of the Wii and Wii U, “the indie [independent game] scene exploded in a big way,” with platforms like Valve’s PC gaming store Steam and app stores like iOS and Google Play dominating the discussion.
“The conversation in the Wii days was, what kind of game would you want to make for this system?” Adelman said. “Now it’s, how could you make your game better for this system? Or would it be appropriate to port it to this system and make some modifications? Would it be worth it?”
Electronic Arts, the second biggest game publisher by market value, has been MIA on the Wii U since March 2013, and even some longtime allies are backing off. Activision continues to make Wii U editions of its kid-friendly Skylanders series, but did not release this year’s Call of Duty on the system, a first for the series on consoles. Ubisoft delayed the Wii U version of its heavily-hyped game Watch Dogs from May, when it launched on all other platforms, to November, and did not release this year’s new Far Cry or Assassins Creed games on the console at all.
“For the first time in my career, I just don’t know what Nintendo does next,” said Casey Pelkey, who worked at Nintendo for 18 years as its marketing business director. “But you could say the same for Microsoft and Sony.”
The difference, though, is that Microsoft and Sony are dealing with the new gaming landscape fine, at least for now. Each has sold more consoles in a year than Nintendo did in two. And the top third-party developers that have abandoned Nintendo continue to pump out big budget games for other consoles.
That means Nintendo has to rely on its own franchises, like Mario Kart and Super Smash Bros., to get its own numbers up and hopefully attract outside developers once again.
“In the end, what third-party companies want is a large install base to sell their games into [and] a wide demographic footprint that they can target their games to,” Nintendo of America president Reggie Fils-Aime said in a recent Q&A with Re/code. “[For] the Wii U business, year-to-date versus last year, our install base is almost doubled.”
Maybe, but it’s not enough. For a publisher deciding where to commit resources, Sony’s 13.5 million unit sales and Microsoft’s 10 million units shipped to stores are the obvious choice over 8 million on the Wii U, developing for which requires dealing with unique and less powerful hardware.
The ex-Nintendo employees interviewed for this story all agreed that Nintendo’s own characters still have cultural currency. Kaplan said she believes the Wii U would have been a hit if it had launched with Super Smash Bros., which debuted last month and quickly became the fastest-selling game on the console.
Tilden, who now consults on branding strategy for other IP like My Little Pony, said she constantly sees people dressed as Nintendo characters at fan conventions.
“Mario is probably more broadly appealing at this moment than Mickey,” Tilden said. “I go to every con. Nintendo’s characters, Mario and Zelda particularly, you don’t see anything as much as you see that.”
However, she acknowledged that the children of the iPad generation are “probably not being exposed” to those characters as much today as they once were.
By Nintendo’s admission, its future revolves around the popularity of its characters, which live only on its hardware. But unless it can convince more people to buy that hardware in the first place, or take those characters to other devices, new generations of gamers will never know Mario, or Link, or Donkey Kong.
This article originally appeared on Recode.net.