Nintendo's Origins - Acquired  ## Metadata - Author: **Acquired** - Full Title: Nintendo's Origins - Category: #podcasts - URL: https://share.snipd.com/episode/c8aa4a6b-c6dc-4e3d-b240-616358589fc3 ## Highlights - The Birth of Silicon Valley Key takeaways: • Nolan Bushnell and Ted Dabney hired Al Alcorn, an amazing engineer, to help them make video games simpler and more affordable to produce. • Al Alcorn helped them design systems with the highest amount of functionality with the fewest number of chips. • This was valued in Silicon Valley and technology engineering at this time. Transcript: Speaker 2 That doesn't compete yet with audiences. Right. It's escapism at its finest and now we take it for granted that whenever you play a video game, you're entering some escapist fantasy, but that was a brand new novel idea. Speaker 1 So they get this feedback, Nolan and Ted, and they think, all right, well, one, we need to make this technology simpler so that it's more affordable and cost effective. So they hire one of the co-workers from Ampex, a guy named Al Alcorn, who's an amazing engineer. One of the themes that's going to come up a bunch in this episode is the mythical 10x, 100x engineer or game designer, somebody who can do things that other people can't. Specifically, what was really valued in Silicon Valley and technology engineering at this time was the ability to design systems with the highest amount of functionality with the Fewest number of chips. Because every chip that you put in there added a whole lot of cost to the bill of materials. Speaker 2 Yep. And not just on the raw costs, but on the assembly time. Soldering takes time. And at this point, there's a very little software involved in these games. You're mostly hard-coding the functionality onto the motherboard itself, depending on what chips you put in. Yeah. Speaker 1 To put a finer point on that, I don't think there's any software involved. Like, I think everything is hard-coded in these chips at this point in time. Right. ([Time 0:12:43](https://share.snipd.com/snip/e71b29ef-5a13-4212-ba50-1a23a6a04708)) - The rise of Atari and the founding of Sequoia Capital Key takeaways: • Atari became Sequoia Capital's very first investment. • Nolan and the team of Atari start bringing on additional folks to build an engineer games that they can sell. • They hire a young kid named Steve Jobs. • Amazing. Transcript: Speaker 2 When you say newly minted, you know, it's funny in today's terms, he'd be like an emerging manager. I think he had raised what $5 million fund. And this is effectively like Sequoia fund one looking to make its first investment. Yes. Speaker 1 And Atari becomes Sequoia Capital's very first investment. And it goes even deeper than that with the money. Nolan and the team of Atari start bringing on additional folks to build an engineer games that they can sell. You know, this pond thing worked out pretty well. They hire a young kid named Steve Jobs. Speaker 2 Amazing. Speaker 1 To come in and design a one player, a solo version of Pong that you can play, which ends up being called breakout that he does with his buddy Steve Wozniak. Speaker 2 This is like my favorite hidden Atari story is that freaking Steve Jobs was the designer and the creator with Steve Wozniak of breakout. ([Time 0:20:43](https://share.snipd.com/snip/b73d446e-cf85-49c3-a260-a5e8a28cd657)) - The Rise and Fall of Atari Key takeaways: • Arcade games are made quickly and with a quick cash flow cycle,. • The consumer market is different,. • To address the consumer market, you need to build a machine for every person, and then get retailers and marketers on board. Transcript: Speaker 2 With arcade games, you make the game, you work with a distributor like Midway or Bally or something like that, you get it into arcades and bars and the money comes in. The cash flow cycle is very quick. And you make one of the machines and like a thousand people can play it. The way to address a thousand consumers is make a machine and let them flock to the bar to drop quarters in. Yeah. Speaker 1 And the consumer market, things are very different. You need to get machines into retail and then you need to get retailers and marketers behind what you're doing and build demand amongst consumers for people to have a reason to go to the Speaker 2 Store and buy your thing and bring it home. And you need to build a hundred, a thousand times more machines to address that same set of consumers in their home. Speaker 1 Right. Toys R Us isn't going to buy your product for their stores if you only have 10 of them. You're going to buy your product if you have at least a million of them. Yep. So Silicon Valley has not evolved to the point yet where there are like big growth funds out there that could come in and give Atari a couple hundred million dollars to build up this inventory. So they decide the right thing to do is sell the company. They end up selling it to Warner Brothers in 1976 for $28 million. And this becomes one of the greatest acquisitions of all time for a very brief period. ([Time 0:25:52](https://share.snipd.com/snip/f6454a89-d7ca-463e-8b51-680642aca71a)) - The Video Game Console Fad Key takeaways: • The video game industry is not like toys,. • There is great product market fit and demand for good games out there. Transcript: Speaker 2 It's fad based and it's super seasonal. Basically like Q3Q4 matters and you're not selling anything Q3Q1. It's like just the rush up to Christmas. And so everyone's sort of viewing it as, oh, 1982's Christmas toy was the video game console. And oh, yeah, it didn't really pan out that people would want those in more future years. But I'm sure we'll find something else. Speaker 1 So here's this opportunity of a lifetime sitting right there in plain sight for anybody who has the foresight to actually realize this, which is the video game industry, specifically The home video game industry is not like toys. There actually was incredible product market fit and demand for good games out there. There's a reason why kids wanted this stuff. And the business model of a home video game system is one of the best of all time. We talk on the show about how the software business model is the best business model of all time. And the media business model is the second best business model of all time. Social games are software that is media. It doesn't get any better than that. ([Time 0:38:37](https://share.snipd.com/snip/842fa149-25fb-4abd-83aa-00a48afe7ca9)) - The Importance of Focusing on the Customer Experience Key takeaways: • Markets are not always winnertake-all,. • It is important to focus on making the customer experience good in order to win. Transcript: Speaker 3 And the other thing that's true is that it is rare for markets to truly be winner-take-all. So even if your competition exists, it's not like 100% of the market is going to go to them or 100% of the market is going to go to you. Two data points I think are really instructive here. Salesforce has something like 21% market share in CRM. And Salesforce is the obvious juggernaut in the space. It's only 21% market share. And then Amazon AWS, it's like 33% market share. So even if there is a dominant provider in your space, as long as the market is big, there's still lots of room for you to grow. And that's especially true if your perceived competition is a new startup because they're not going to be a juggernaut in the space. They're going to have 0.002% of the market and you might have 0.001% of the market. That's really the dynamic we're talking about here. And by the way, this is a mistake that even seasoned entrepreneurs make. I wish I could tell you that at Pilot, I'm blissfully unaware of what our competition is doing. Like, no, obviously I'm looking at their website and stuff, but it's just like the way that you're actually going to win is by focusing on actually making the customer experience good. ([Time 0:42:58](https://share.snipd.com/snip/e536fb30-ec0a-4cfc-85a4-e4a701a76de1)) - The History of the Nintendo Switch GPU Key takeaways: • The CPU in the Atari 2600 was not the only chip working on the machine,. • The PPU in the machine was a dedicated graphics process. Transcript: Speaker 1 We can only use cheap off the shelf at this point dated technology for the CPU of this machine. And up until now, the CPU was everything. The CPU was the brain of the computer. We're in the 80s, even through to the 90s. Remember Intel's marketing and the PC industry and the CPU was so important. But the Nintendo team realizes because even though this is a programmable console, we're doing specialized applications for gaming. This doesn't have to be a machine that can also do your spreadsheets. We can pair a cheap CPU with a secondary processing unit within the machine that they dub the PPU, the picture processing unit. And I think maybe I'm wrong and this is why nobody talks about this. Or maybe like we've stumbled onto something like incredible in history that just everybody overlooked. I think this might be the first example of a dedicated GPU in a piece of hardware. Speaker 2 Oh, interesting. Speaker 1 I wonder if that's right. A programmable GPU. So let's unpack this a little bit. The Atari 2600 had a CPU that did most of the work and then it also did have another chip that interfaced with the television. And Atari called this the TIA, the television interface adapter. ([Time 1:53:44](https://share.snipd.com/snip/a3c7744d-3e32-4867-bbc4-5ea62a7d71bc)) - Nintendo's Scale Economies Drive Its Dominance Key takeaways: • Nintendo has a strong scale economy, which allows it to produce more desirable products than its competitors. • Nintendo also has power over its developers, which allows it to dictate the terms of their relationships with the company. Transcript: Speaker 1 We're not going to talk about it on this episode, but Netscape being an N64, information super highway based technology platform. Speaker 2 It's crazy. All right. Well, let's get into analysis here. Speaker 1 Let's do it. Should we start with powers as usual? Speaker 2 Yeah, let's do it. Speaker 1 So for folks who are new to the show, as always, we run each company we analyze through Hampton-Helmers, wonderful seven powers framework, where he identifies seven ways by which a Company can earn persistent differential profit margins versus its competitors. And any given industry, aka have power in its industry. The seven powers are counter positioning, scale economies, switching costs, network economies, process power, branding and cornered resources. All right. Let's get into it for Nintendo. Speaker 2 Well said. Far and above number one, in my opinion, is scale economies. We have done all but name it. Speaker 1 Not network economies. Speaker 2 Well, it's a good question. Speaker 1 Keep going with scale economies. I agree. Speaker 2 The reason scale economies jump to mind is we just keep talking about it on this episode without naming it. And when we talk about things like Nintendo produced the most desirable console, which all the consumers bought, which then meant that Nintendo had power over its developers, that Is ([Time 2:53:13](https://share.snipd.com/snip/64f8ab79-b636-4e5c-9f00-40af814343b7))