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Article - 'History of games (part 2)' by GaZZwa

An item about Miscellanious posted on Aug 8, 2003


The follow-up to GaZZwa's research into the origin of videogames. What we have here is something a little more familiar, the NES, master system and a little thing called the Game Boy that broke a few records.


Fourth Generation Systems, 1985 -1989

Welcome back to The History of Games. Whilst the First Generation to Third Generation videogame market had been controlled by America (every system was by an American developer), in the Fourth Generation era we witness the domination of the business by Japan. From here there was a head to head war between Sega and Nintendo, two Japanese companies, and there was little room for previous Generation dominators such as Atari.

Fourth Generation Terminology:

Cartridge (Cart): A box (typically plastic) which contains video game data that can be plugged into a video game system. The cartridge would play a very important role in the Fourth Generation, because the refinement of DRAM (Dynamic Random Access Memory) chips reduced the manufacturing costs of the cartridges. The term "cartridge" would also be shortened to "cart”

Home Video Game System: This term is used to designate systems that are specifically designed for video game use. In other words, when a home video game system is mentioned it can be assumed that it is not in reference to a personal computer. Although there have been many attempts to convert a video game system to a personal computer (mostly in the second generation by Amstrad) a video game system is still a system used primarily for games.

Joypad: The joypad is a variation on the joystick (Second Generation.) While the joystick consists primarily of a rod or "stick" to interface with the console, smaller buttons (usually in a cross shape) were used on the joypad. This design reduced production costs and the smaller profile allowed for simpler packaging.


Two innovations in the computer electronics industry had to occur before home video games could achieve similar popularity as in the Second Generation. Both transpired in 1984. The first was the reduction in cost of Dynamic RAM (DRAM) chips that allowed programmers more memory than conventional RAM and accessed at much higher transfer rates than magnetic disks. The second was the production of higher power 8-bit processors, which lowered the prices of the pervious chips. This made the two technologies easily accessible to video game companies.
These innovations were ideal for the production of home game consoles that could compete with the ability of arcade machines. Several companies from the previous generations (Atari, Mattel, and Magnavox) tentatively tested the gaming market. However, they simply released updated versions of their older systems. The successes of the Fourth Generation would come from unknown companies with fresh consoles.

Sega was the first of the Japanese companies to try a new system. Created in 1954 in Japan by an American David Rosen, Service Games originally produced coin-operated mechanical games. In 1965, Rosen purchased a Tokyo jukebox and slot-machine maker and adopted a shortened version of Service Games, Sega. During the Pong era, Sega was busy making very popular pinball games. Later, under the direction of Gulf & Western, Sega entered into the video game market with the arcade game "Periscope." They would be an integral player in the industry, eventually suffering during the gaming market crash in the Third Generation. When DRAM chips and inexpensive 8-bit processors became available in 1984, Sega, being headed by Hayao Nakayama at the time, entered the home console market with their Master System. The Sega Master system would sell very well, but its success would be short lived.

The Sega Master System

While they had produced several very popular arcade and home video games over the years (Frogger, Buck Rogers, Congo Bongo) the Sega Master System was the first system that Sega had released in America. Unlike the other systems during this era, the Sega Master System (SMS) had two cartridge ports. One had the standard cartridge configuration, while the other accepted small credit card shaped cartridges. These card games were limited by their size and memory, however, they were typically much cheaper than the normal size carts, and sold reasonably well for the system. The system was capable of utilizing both ports at any given time, and Sega used this feature to produce 3-D glasses for use with certain games. These glasses used little LCD screens that would alternately flash opaque and clear. When choreographed with similar flashings on the screen, it turned some games into an early "virtual-reality" experience.

In a side-by-side comparison of the SMS and NES, it is obvious that the SMS had more potential than the NES. This opinion was shared by video game magazines as well. However, with a mere fraction of the games that the NES had, the SMS would never be able to attain any significant popularity in America. In Europe, on the other hand, the SMS would sell so well that Nintendo of Europe would have to license some of their games to them to stay afloat.

Nintendo of Japan, was originally founded in 1889 by Fusajiro Yamauchi, an artist and craftsworker during the Meiji period. Founded as a playing card company, Nintendo virtually meant "leave luck to heaven." Entering into the video game market in the seventies by joining with Coleco, an American video game company, Nintendo would achieve moderate success through such arcade games as Donkey Kong and Mario Brothers. They would also produce a majority of games for the Third Generation system Coleco Vision. But the gaming market crash at that time would destroy several companies, including Coleco, leaving Nintendo's future in video games uncertain. Teaming up with Mitsubishi to produce watches with simple LCD games built in, Nintendo would tread water for a few years, unable to truly achieve any kind of lasting prosperity. Upon learning of the success that other companies, such as Sega, were having in the U.S. Hirosi Yamauchi, a descendant of Fusajiro's, pressed Nintendo engineers to design their own home console. Yamauchi told his engineers to leave out all extraneous frills to save money and speed up production. The system was rushed by the pressures Yamauchi placed on his designers, and was released no more than six months since the release of the Sega Master System. The first shipments were riddled with defects because of the short design period, thus making many retailers very upset. However, using the marketing data already established by competing companies, Nintendo executives channelled nearly all of the company's resources into advertisements. These advertisements hit the American and Japanese consumers at the exact right time, because sales for the Nintendo Entertainment System would skyrocket over the next few months, and Nintendo would not be able to manufacture enough systems to keep the stores stocked.

Nintendo Entertainment System

The Family Computer (Famicom – as it was in Japan) or the American/European named Nintendo Entertainment System was released in America in 1985, after some limited success in Japan as the Famicom. Over the next few years, its user base would grow exponentially until the NES surpassed the Atari VCS/2600 peak set in 1982. As of 1990, there were over 19 million NES systems in the United States alone.

In addition to the tremendous success of the system, its games had a great deal prosperity. For example, Super Mario Bros. 3 released in 1989 grossed over $500 million just in America. In the field of entertainment, only the movie E.T. has made more revenue. Super Mario Bros. 3 would sell more than 7 million copies in America and 4 million in Japan, which is more copies than any other game in history. Sheff wrote, "By record-industry standards, 'SMB3' went platinum eleven times. Michael Jackson is one of the few artists to have accomplished this feat."

By 1990, the money earned from Nintendo's NES and its games allowed Nintendo to usurp Toyota as Japan's most successful company. In the entertainment business, Nintendo netted as much as all of the American movie studios combined, and more than the three television networks had in the previous two years. In the five short years since the system was released, the NES could be found in more than a third of the household in America and Japan.

This monopoly gave Nintendo significant control over the market during the Fourth Generation, which they utilized in various malicious schemes. Despite all of this, they are still one of the most popular and well-known companies in the world.

Nintendo's only competitor in the 8-bit market was Sega with their Sega Master System. While the Master System did have many more features than the NES (which is evident in a side-by-side comparison) it lacked the third party support that Nintendo had and was not much competition. The Master System sold a total of 2 million units and at times had a market share of 11%, these were the only reason the system survived as long as it did.

The Nintendo Entertainment System (NES) would become the highest selling system in history, and also the most notorious. Nintendo would be involved in the intimidation of retailers, competing companies, and even licensed "partners." They would have countless lawsuits brought up against them, and fill the gaming community with inaccurate rumours and "vapour-ware" for the sole purpose of detracting public attention away from competitors. Ultimately, Nintendo would be brought up on charges of monopolizing, price fixing, and anti-trust violations by District Attorneys from all fifty states, and lose. However, most will agree, that the real loser in all of these battles, was the customer.

Nintendo’s Monopoly

Nintendo has been criticized as being the most "notorious video game company in history." Through their considerable influence in the market during the late 1980s, they were able to control much of the industry using intimidation, scare tactics, and price-fixing. It is interesting to note the events leading up to this domination, and the players involved.
Nintendo, who had been suffering financially since the gaming market crash during the Third Generation, entered the Fourth Generation market with a system that many consider to be inferior to the competing systems of that time. Hiroshi Yamauchi, Nintendo's president, instructed his engineers to leave out the frills of the other gaming systems, and include only the essentials to save money. The system would only have 2,000 bytes of RAM as opposed to the Sega Master System, a competing system, which had 64 kilobytes of RAM. Industry standard graphic processors were dropped in favour of cheaper, less functional, non-standard ones. The push to produce this system was intensified by the fact that the Master System, and other competing systems, had all been in the stores for months, and were achieving great success. When the system was ultimately finished, the defect rate would be as high as 30% per shipment which angered many retailers and turned them against Nintendo (eventually damaging many of these retailers when Nintendo attained the popularity that they did.)
After the NES was released, Nintendo pressed for huge media infiltration of their advertisements, which was something not being done by competing systems. The market had been extremely slow in the previous years, and many companies were very cautious. Nintendo, fuelled by a marketing drive rarely seen, was able to capture nearly 90% of the U.S. gaming market by 1986. This popularity had dozens of gaming companies at Nintendo's door to produce titles for their system. However, because of Yamauchi's foresight, Nintendo had changed the previous "free-market" set up of the industry with the inclusion of something called a "key-chip" in his NES units.

During the preceding generations, a video game programmer would simply purchase the equipment to construct games for a system from the system's parent company. The programmer was then was free to design any game without permission from the company. Yamauchi did not like this freedom given to the designers. So he had his engineers create a chip that would lock out the instruction code from any cartridge, unless that cartridge contained another chip, called a "key-chip." This "key-chip" had a disabling code. The disabling code was then patented by Nintendo and copyrighted. The result was that it became illegal to reproduce the code, without Nintendo's consent. Nintendo then made specific contracts that companies must agree to abide by in order to receive permission to reproduce the "key-chip." This gave Nintendo complete control over its third party licensees, and they used that control to propel the NES farther. Specific deals were made which prevented these companies from producing games for any competing home system. Because of Nintendo's considerable market share, few companies argued with this policy. The result was that many competing systems were driven to extinction because of a severe lack of games. Companies like Atari and Sega could not hope to compete with a system with over 100 new games each year, when they could only produce a dozen or so annually without the help of third party licensees. This propelled Nintendo's domination of the market further.

Aiding in the promotion of the NES, were two sizable companies. Toys'R Us attributed 17 percent of its sales and 22 percent of its profits to the NES and its games. They in turn, helped firm up a deal between Pepsi and Nintendo in 1988 that involved the sale of nearly $10 million worth of Nintendo products to Pepsi, and NES advertisements on the outside of 2 billion Pepsi cans. "In return," Sheff wrote, "Pepsi got the cachet of being associated with Nintendo."
Nintendo began orchestrating game shortages sometime in 1988. This was called "inventory management" by Peter Main, an executive in charge of public relations at Nintendo, but was really to keep the customers on a short leash. By limiting the amount of product available,
Nintendo could keep the demand for the product high. By design, Nintendo would not fill all of the retailers' orders and kept half or more of its library of games inactive and unavailable. In 1988, for instance, 33 million NES cartridges were sold, but market surveys indicated that upwards of 45 million could have been sold. That year retailers requested 110 million cartridges, almost 2.5 times the indicated demand. These practices would greatly benefit Nintendo, but drive many smaller software firms out of business. Certain titles would be produced, then sold very slowly over the span of a year, and the profits would not come in fast enough to keep these small companies afloat. The toy and electronics as well as department stores became dependent on Nintendo, in addition to most game producers. This gave Nintendo a great deal of clout in dealing with companies who were used to throwing their muscle around.

One such company was Child World, at the time, the second largest toy-store chain in the United States. They refused to play by Nintendo's rules, and ended relations with them. By 1989, they were experiencing severe financial difficulties due to the loss of 20% of their sales through video games. They came back to Nintendo, trying to appease them, and were met with open hostility. Nintendo agreed to sell them product again, but they would have to pay for the product a year in advance.

Another Nintendo policy that made retailers furious was their return policy, or lack thereof. Because Nintendo's quality control was boasting a defect rate of 0.9% for hardware and 0.25% for software by 1988, Nintendo executives did not see a need for their previous 90 day guarantee. A new policy was announced to the retailers: no returns. Once a game cartridge box or system box was opened, a refund was out of the question. Concerning this, Sheff wrote:
"Pandemonium followed. One of the largest retailers in the country threatened to stop carrying Nintendo Systems and products. Nintendo refused to change the policy and the retailer refused the products. The retailer held out for three months; after that it crawled back and agreed to Nintendo's terms."

Nintendo's next atrocity would be to use the considerable monopoly they had to control the consumer. Because of the game shortages, consumers would be more concerned about getting a particular title than the price. And because of Nintendo's domineering stance with the retailers, they were able to dictate the expected prices for their games.

In the electronics and computer industry, you can expect equipment to reduce in price over time. When new devices are created that make older ones obsolete, the older devices are reduced in price to compete with the newer ones. This is clearly evident if one simply peruses the want-ads in their local paper and notes the prices of computer systems that were considered state of the art a year previous. This logic applies to all aspects of the computer and electronics industry, including video games. Why then between 1985 and 1989 did the NES only lower $10 in its price?

This was exactly what Attorney Generals from all fifty states were wondering when they began investigating the activities of Nintendo of America in 1989. They found that Nintendo had been fixing the price of systems and games in the stores, using intimidation to influence retailers to abide by their wishes, and were making astronomical profits. Nintendo had been doing this since they first brought out the NES in 1985. They had strived to construct the system inexpensively, however, it was being sold at the same price as the competing systems. An antitrust action was brought up against Nintendo by these same Attorney Generals, and on October 17, 1991, District Court Judge Sweet granted approval of settlement agreements.

Nintendo was ordered to reimburse $25 million to consumers who had purchased systems and games between June 1, 1988 and December 31, 1990. This was to be done through coupons that entitled the bearer to an immediate $5.00 reduction in the purchase price of any NES game cartridge. This was to be for every game purchased by the customer. If someone had five games they would be entitled to $25 in coupons. While they were ordered to pay $25 million, they wound up only paying around $1.5 million. The reason for this was because Nintendo convinced the Judge that they needed to be certain of a consumer's truthfulness regarding ownership of the system before they could reimburse them. The Judge agreed, and allowed Nintendo to make their own terms. Nintendo required that the consumer had three things: the dated store receipt, the UPC code from the original box, and the serial number from the back of the unit. Considering that this occurred in 1991, how many customers do you think still had the original UPC code from the box let alone the dated store receipt from 1988? This is why the refund failed, because only around 300,000 people qualified based on Nintendo's guidelines.

The final problem Nintendo would cause before they were humbled by Sega in the early 1990s, would be to hinder the production of 16-bit systems against the consumers' requests.
In 1988, when it was becoming apparent that 16-bit technology was becoming inexpensive enough to warrant inclusion in the next breed of video game consoles, Nintendo issued a press release that sounded very similar to that fateful statement by Atari made in 1982. Nintendo said, "We feel that the average game player is not mature enough for a 16-bit system, and that the demand is insufficient for it to be a high priority." They were wrong. In the summer of 1989, the first 16-bit system, called Genesis (or Megadrive in Europe) and produced by Sega, would arrive in the stores. By the next Christmas, they were outselling Nintendo's NES 3 to 1 and Nintendo was losing many of their licensees to Sega. This forced Nintendo to reconsider its decision about 16-bit technology, and begin designing one of their own.
When these events are considered with those that occurred during the Third Generation and caused the gaming market crash, the flaws of a single system market become painfully obvious. The fact that more software innovations and higher employment rates in the industry transpired during the Fifth Generation where we find a multiple system market and increased competition adds to this argument as well.

During this time the world was also introduced to the first handheld (or pocket) gaming system. The Nintendo Game Boy was released in 1988 and was a huge success. It’s debut price of $169.99 was quite high at the time, but that did not deter avid game fans from buying it in swarms. Whilst it could not display colour and no backlight meant the screen was often hard to see, the Game Boy was revolutionary and guaranteed Nintendo’s domination of the handheld market (even today no pocket system has managed to sell more than any Game Boy system). It’s selling point was the portable idea – gamers were intrigued that you could take this anywhere. Featuring a wealth of games (the first being Tetris) many remakes or re-releases of NES games – Super Mario Land, Alleyway, (and later SNES games) the Game Boy deserved it’s success. The Game Boy lasted a long time (I bought mine in 1995 – 7 years after it was first released) and since it has died away, newer versions have been released (the latest being the Game Boy Advance with a 32 bit processor).

Of course with the Game Boy’s success, there was little room for other handheld attempts. The Atari Lynx, also released in 1988 was not the success that Atari needed to bring them back on the gaming map. Its debut price was lower than that of the Game Boy and it’s graphics processor and processor speed were higher than the Game Boy (it even had a limited colour palette), but the world’s favourite had already been decided. The Lynx was pretty much a flop being plagued by rumours that Atari was going to desert the system and being unfortunate as to have a lack of third party support, as was the Atari XEGS. Atari’s place in the gaming world was over and it was time they moved aside to make way for the new wunderkind – Nintendo and Sega, who would continue their war in the Fifth Generation.

-- GaZZwa

Special thanks to The History of Videogames Museum, "A brief history of Home Video Games", "The History of Videogames by Gamespot” and of course, my own knowledge which helped me a great deal. Thank you brain, I owe you one.