Console Wars (2015)

PART THREE

THE NEXT LEVEL

22.

TARGET PRACTICE

“It’s not arrogance,” Peter Main explained to a room full of skeptical faces. When he delivered these words, he truly believed them with all his heart. The owners of those skeptical faces, however, felt fairly certain that Main’s heart was made of stone. It was December 1991, three weeks before Winter CES, and he and Randy Peretzman were in Minneapolis for an emergency meeting. One week earlier, they had met with Target’s buying group to discuss Nintendo’s new returns policy and management was subsequently so incredulous that they were “invited” back for an encore performance—this time with the senior VP, EVP, and president. “Arrogance? Not even close, fellas. It’s just good business sense, that’s what it is.”

“It’s the truth,” Peretzman added with a friendly nod. “If you would like, we’re more than happy to send you a copy of the numbers.”

It took a moment for Target’s managers to fully absorb the news, and when they did, they were not particularly moved. “This is not about numbers,” the senior VP explained. “It’s about relationships. Our relationship with our guests, and our relationship with Nintendo.”

“We understand, and we respect your point of view,” Main conceded, torching his words with a light touch. “But we need you to understand where we are coming from as well. If this keeps happening, then it’s only a matter of time before we go bust.”

“Oh, come on!” someone scoffed, outraged by the notion that Nintendo’s empire could crumble so easily. “It’s a minor problem at best.”

In the silence that followed, Main and Peretzman locked eyes in a moment of shared commiseration. They had not expected this to be an easy task, but anticipating the push-back didn’t make enduring it any more enjoyable. “With all due respect, fellas, this is a major problem, and our new policy is the only conceivable way to fix this thing.”

Whether minor or major, the problem itself was relatively easy to understand. Shortly after the Super Nintendo was released, customers began returning 8-bit NES consoles to their nearest retailer and then using this refund to buy the 16-bit system. From Nintendo’s perspective, this was understandable, but only up to a certain point. If someone had bought an NES in August and then a month later, when the SNES was released, they wanted to return it for the newer model, that was fine. Nintendo didn’t ever want their customers to feel cheated. But by the same token they didn’t want to feel cheated themselves. And that’s exactly how they felt when customers began returning NES systems they had played for years, some originally purchased as far back as 1985. In effect, they were flipping the old consoles into the new ones for nothing more than a small fee to cover the price difference. The reason they could to do this was because of the extremely liberal return policies that most retailers had in place.

In 1991, someone could walk into a store with no receipt and no original packaging—they didn’t even have to have all the parts (“Um, I don’t remember this NES coming with a controller”)—and receive a full refund by claiming there was a defect. No proof had to be provided, nor did the retailers even really care. In their eyes, the customer was always right, and financially it didn’t hurt them much because they would just send the supposedly defective product back to the manufacturer for their own refund. As a result of retailers empowering their customers with the gift of infinite rightness, companies like Nintendo would suffer the costs of that moral wrongness.

Perhaps Nintendo would have felt more sympathetic about the situation if their products had been considered notoriously defective. But that was not the case, not even close. Because of Yamauchi’s fixation on controlling every tiny detail, and Arakawa’s unyielding dedication to the user experience, Nintendo enjoyed a famously low defect rate (less than 1 percent). In addition, NOA was one of the first companies to devote an entire department to studying, analyzing, and managing the returns process. Given this unrelenting commitment to excellence, was it so much to ask that the retailers getting rich off Nintendo stop turning a blind eye to the abuses of that process?

Peter Main shook his head. “Just ask yourselves where this will end. Let’s say that we continue the way we’ve been going. Then what happens five years from now when we release a 32-bit system? And then five years after that, when we come out with a new 64-bit machine? And so on, and so forth? Are you honestly going to let these people keep turning in something they bought in 1987 for the rest of their lives?”

“Well,” someone said after a collective shrug, “what’s the alternative?”

“I just told you the alternative!” Main declared. “Our ninety-day return policy. I think that you will agree that three months is more than enough time to figure out if something is defective. Is that really too much to ask of your customers?”

“Guests,” Target’s senior VP said, forcefully pronouncing the word.

“Huh?” Main said, mentally replaying his previous sentence. “Which guests?”

“You said customers. But at Target we don’t think of our visitors that way. We consider them guests and we treat them as such.”

“All right,” Main said, making every effort not to roll his eyes. “Your guests will be given ninety days, which certainly seems like a fair amount of time.”

“Come on, guys, that’s three whole months,” Peretzman said. “Wars have been won and lost in much shorter amounts of time.”

“Regardless,” someone else said, “how would we even enforce such a thing?”

Finally, thought Main, a good question. This was another aspect where Nintendo demonstrated that they were logical innovators, not unreasonable dictators. To create a clearer picture of a product’s life cycle, Nintendo had conceived, developed, and patented a system called POS electronic registration. This system allowed retailers to track a product from manufacture all the way until purchase, and also offered other features like real-time sales reports and trend analysis. For Nintendo, this methodology had been invaluable for managing inventory, and they hoped that retailers would find it similarly useful; ideally they would even use it for non-Nintendo consumer products as well. “The system,” Main said after describing it, “is all about efficiency. But, as with all of our advances, it’s about more than just Nintendo.”

“Gentlemen,” Target’s senior VP stated, “I think you are missing the point.”

Once again, Main and Peretzman briefly locked eyes, this time with mutual curiosity about how this could possibly be the case. “With all due respect,” Peretzman said, “what is it that you think we’re missing here?”

The senior VP squinted for a moment, evidently looking for the most delicate way to express himself. “The returns issue may be a big problem, but forgive me for saying that it merely feels like today’s big problem. First it was the allocations. Believe me, I get it. ‘There’s only so much product to go around! There’s a chip shortage in Asia! There’s no way we can give you everything you want because that’s what Atari did and look at what happened there!’ Next it was getting rid of December 10 billing, which, once again, I get. You sell us something, you expect us to pay for it right away; that makes sense. So does North Bend, to a certain extent.”

“North Bend” referred to Nintendo’s newly opened distribution center in North Bend, Washington, which was the latest disruptive innovation from Minoru Arakawa. In a pattern that could be traced back to his engineering roots, Arakawa was forever seeking ways to improve efficiency. As physical proof of this obsession, he carried around a thick tan Ultrasuede portfolio that was always overflowing with cost sheets, inventory reports, and all sorts of additional data that would put most company presidents to sleep. But Arakawa relished the details; he loved knowing exactly how many cents it cost to purchase the little screws that held the game cartridges together, and he loved even more looking for places to buy them more cheaply, finding a route that shipped them faster, or any other way to improve productivity. Most of the time, Arakawa’s attention to detail manifested itself in small ways, like a better deal on packaging, but occasionally it would result in an industry-wide shakeup, as it had with the new $60 million distribution center in North Bend.

From the moment game cartridges came into this 360,000-square-foot distribution center until the moment they were loaded out for delivery, the merchandise was touched only twice by human hands. Instead, the majority of the work was done by highly sophisticated robots, unmanned forklifts, and an enormous mainframe computer, which were collectively responsible for getting the products out to retailers as soon as (in)humanly possible. North Bend operated with a futuristic level of efficiency, but a part of that efficiency required that retailers had to use Nintendo’s distribution center instead of their own. So instead of the retailer receiving their order at a central warehouse and then parceling it out to their stores as they saw fit, Nintendo now wanted to be the one doing the parceling. Nintendo would, of course, follow the retailer’s instructions about which products go where, and they would do so with incredible efficiency, but from the retailer’s perspective there was more at play here. Efficiency was a good thing, but what was most efficient for Nintendo was not necessarily what was most efficient for the retailer. Maybe the retailer wanted to hold off on selling a certain game. Maybe they didn’t want to provide such great transparency into their operations. Or maybe they just didn’t want to pay Nintendo for a service that they already provided, even if perhaps they didn’t provide it as well. Whatever the case, retailers didn’t have much of a choice; as with most of Nintendo’s policies, it was Nintendo’s way or no way at all. And the fact that they didn’t have a choice often bothered the retailers more than the actual situation itself. The retailers believed this was just another example of Nintendo’s arrogance. Meanwhile, Peter Main and Randy Peretzman believed this was just another example of Nintendo’s innovation being misconstrued as arrogance. And though neither side would ever admit it, in a way they were both absolutely correct.

“The point is,” Target’s senior VP continued, “I can appreciate the intentions behind everything that Nintendo does. And, as a result, we’ve always found a way to comply with, shall we say, your pioneer spirit? Sometimes doing so has cost us money, sometimes it cost us manpower, and other times it cost us the flexibility to run our company in the manner we desire. But these are all costs that we are willing to accept. What we are not willing to accept, however, is now putting the cost on our valued guests. And this latest, it just goes too far.”

“But your cust—” Main began, this time catching himself. “Your guests are abusing the relationship. You have to factor this in to some degree.”

“What’s to factor in? This is just the way things are done. Look at Nordstrom. They will take back shoes for up to ten years!”

“Yeah?” Main shot back. “Well, we’re called Nintendo, not Nordstrom.”

The senior VP let out a sigh. “Peter, Randy,” he said, “we are not trying to be difficult. But please just understand that this policy really violates the whole tenet of how we view our guests. It’s all about trust. And no matter what, we cannot violate that trust and interfere with the right of our guests to return anything they’ve ever bought from us.”

Main nodded, scouring his mind for any last shred of common ground. “I hear you,” he said. “And it is not our intention to interfere with what you’ve got going on. If you want to keep allowing them to return anything, go ahead. Heck, let them turn in their black-and-white televisions if you want. All I’m saying is that starting in 1992, you’re not going to be returning any of that stuff to us anymore.”

Although it had become one of those meetings where hands inadvertently curl into fists, there was enough respect between the two companies for things to end on a more positive note. “Give us the holiday break to think about it, okay?” the VP said.

“Sure thing,” Main said.

“And call us with any questions,” Peretzman added.

The guys from Nintendo bid adieu to their hosts and then caught a plane headed east, girding themselves for the same uncomfortable conversation with the next retailer on their list.

“Well,” Peretzman said as he raised an airplane-sized bottle of vodka, “I don’t think the retail community will ever vote Nintendo as most popular.”

“No sir,” Main said, raising his own tiny bottle of vodka. “But let me tell you, it sure is a hell of a lot better to be the guy with a target on his back, then one of the guys who has already been shot down.”

They tapped their drinks together and toasted to the virtues of persistence, resilience, and misconstrued arrogance.

Shortly after the holiday, Target requested another meeting and also requested that Arakawa be there. With the beginning of the year chaotic for both companies, they decided to meet in Las Vegas on the eve of the Consumer Electronics Show.

The discussion was set to begin around 7:30 p.m. in Peter Main’s hotel suite at Caesar’s Palace, but because of a snowstorm in Minnesota the executives from Target were delayed. At some point, while Main, Lincoln, and Arakawa passed the time, Arakawa decided to curl up on the couch for a nap. Finally, around 10:00 p.m., the Target guys arrived. After an exchange of apologies and pleasantries, they were ready to get down to business—except Arakawa was still asleep.

Main gently nudged his sleeping boss. “Arakawa? Come on, pal.”

Nothing.

Main tried again, this time with a little more zest. “Arakawa,” he said. “The guys from Target are here. You need to get up.”

Without opening his eyes, Arakawa asked if they had changed their minds.

With the Target executives sitting only a few feet away, Main replied, “They’re right over there.”

“Yes,” Arakawa replied. “But have they changed their minds?”

Main looked to the senior VP from Target for a response. “Well, no,” the VP said. “But that’s what we’re here to talk about.”

“Okay,” Arakawa said. “Then I’m afraid we have nothing to talk about.”

The following day, Target made an announcement stating that they would no longer be doing business with Nintendo. When pressed for a reason, the only answer they provided was a “difference of corporate philosophy.”

For Nintendo, this news was not ideal, but they considered it nothing more than a temporary nuisance. Innovation always trumps stagnation, and Target would eventually realize the error of their ways. Until then, there was nothing for Nintendo to do but keep their eyes on the prize and keep doing what they thought was right. And if these were the crosses they had to bear, so be it.

Setbacks like these irked Peter Main, but one of his talents was the ability to put on blinders when he needed to. So when he delivered his address at Nintendo’s 1992 Winter CES event, he was nothing but smiles, sunshine, and sophisticated sarcasm—with one exception. For the first time, Main directly acknowledged his competitor. He openly disagreed with Kalinske’s sales figures, debunked his rival’s rosy forecast for the upcoming year, and, upon introducing one of Nintendo’s new peripheral devices, added one more amenity to its list of features.

“The Super Scope can do it all,” Main proclaimed. “With a comfortable shoulder mount and an infrared transmitter, Nintendo’s newest light gun has pinpoint accuracy from long distances.” He then casually pointed the gun toward his competitor’s booth. “It’s also rather perfect for hedgehog hunting.”