Console Wars (2015)
POSTCARDS FROM ARKANSAS
Wal-Mart headquarters felt like a military compound during peacetime. It was huge, impressively segmented, and delivered the impression that things were not nearly as calm as they seemed. Kalinske entered the complex and was escorted into the office of Wal-Mart’s electronics merchant, a man whose every move called to mind the word “veteran.” The men shook hands, enjoyed some small talk about college football, and eventually meandered toward the conversation that had brought Kalinske here. “How much do you know about videogames?” Kalinske asked.
“Pretty much just whatever Nintendo tells me,” the electronics merchant replied.
“Well, then, allow me to introduce you to the future,” Kalinske said, and presented his Sega gadgets, along with the product analysis reports and market data that his ragtag team had worked so hard to prepare. He leaned forward, dropped his businessman persona, and spoke in a just-between-us tone. “I understand that Wal-Mart feels an obligation to keep Nintendo happy. I get it. But this isn’t a Tengen situation.”
Kalinske was referring to Tengen, a videogame publisher and developer created by Atari Games. Tengen owned the rights to most of Atari’s popular games from the early 1980s and wanted to license some of the company’s more popular titles for the NES. Hideyuki Nakajima, Tengen’s manager, approached Nintendo to work out the details, but he quickly found out that there was nothing to be worked out; Nintendo had a standard licensing agreement that dictated the same terms for all of its licensees. If Tengen wanted their games on the NES, they’d have to sign a very one-sided contract with Nintendo that would prohibit them from releasing their game on any other console and compel them to give Nintendo 30 percent of their revenue as a royalty. It also stipulated that they’d have to buy physical cartridges directly from Nintendo, which was not only expensive (about $10 each) but often highly frustrating, as it gave Nintendo the leverage to pick and choose which orders to fill.
Nakajima thought this was absurd, so in 1986 he arranged for a special meeting with Nintendo of America’s president, Minoru Arakawa, and senior vice president Howard Lincoln to discuss renegotiating these standard terms for what he believed was an exceptional situation. Nakajima kindly reminded Nintendo that Atari, Tengen’s parent company, had essentially created the videogame industry and deserved some special privileges, particularly the ability to publish more than the five titles per year that Nintendo’s standard agreement specified. But Arakawa and Lincoln stood their ground and reiterated that no special treatment would be offered.
After thinking over the terms of the deal, Nakajima resiliently decided to find a way around this lousy licensing agreement. So he had Tengen engineers begin by trying to find a way around the security device inside the NES. Nintendo’s console had a lockout chip containing a protocol called 10NES programming, which detected unlicensed cartridges and prevented them from working. Tengen engineers tried everything to break this code, even chemically peeling layers from the NES chips to allow for microscopic examination. Yet despite these efforts, Tengen was unable to crack the code, and in 1987 it signed a contract with Nintendo.
But after releasing a slew of successful games like Pac-Man and RBI Baseball, Nakajima was infuriated by how much Nintendo’s royalty cut into his company’s profit margins. He rationalized that the only way to get around the lockout chip was to figure out exactly what made up its 10NES programming. He needed to obtain a copy, but there were only two places where this code could be found: Nintendo headquarters and the U.S. Copyright Office. Since breaking into Nintendo was impossible, Tengen would approach the U.S. Copyright Office and claim that they were filing a copyright infringement suit against Nintendo. Despite this being entirely fictional, they went the whole nine yards to make it appear true, and even signed an affidavit legally testifying about the accuracy and urgency of this lawsuit. The Copyright Office handed over the code, and Tengen worked backward to create a program called the Rabbit, which could unlock the NES. Now, not only did Tengen possess the ability to produce as many games as they saw fit, but by learning about Nintendo’s distribution techniques (through the three games they had legally released as third-party licensees), they were equipped to contact the retailers directly. Essentially, Tengen had relegated Nintendo to middleman status, and then cut them out completely.
This was a brilliant plan in theory, but in practice the problem came when Nintendo gave the retailers an ultimatum: us or them. Though Nintendo couldn’t legally threaten to stop supplying retailers, they had enough strength to use the power of what-if (“What if our trucks got lost going to your stores? What if we stopped filling your orders in full?”) to make this an easy decision. The retailers bit the bullet, got rid of all Tengen products, and wrote off the losses. To further flex their muscle, Nintendo eventually took Tengen to court and got an injunction to prevent them from producing their illegally created games. Nakajima and Tengen had no choice but to bow out of the business, and soon the name Tengen served as nothing but a cautionary tale.
Now, as Kalinske sat before Wal-Mart’s electronics merchant, he tried to make it perfectly clear that this was an entirely different situation. Sega hadn’t done anything illegal, nor had they screwed over Nintendo; they were just a competitor who had the better product. “To be perfectly honest,” Kalinske said, “I think carrying our products will boost Nintendo sales. The money we spend on print and television is only going to help the industry overall, and you and I both know exactly who the industry is.”
The merchant looked through some of Sega’s materials again and smiled.
Kalinske scooted up to the edge of his seat. He didn’t need a big order, just an order. A single order. That would be enough to motivate his employees, give Sega the credibility it sorely needed, and confirm to Kalinske that maybe he wasn’t in completely over his head. Please, just a single order, especially with the Super Famicom coming.
“A little while ago I was interested in stocking an electronic handheld game,” the electronic merchant explained. “A stupid little football game, not even close to anything on the Game Boy. For fifteen bucks, maybe Mom and Dad buy it for Sonny if he makes all A’s, or hits the game-winning shot. But then a pal of mine, someone in the same line of work, he passes along a rumor to me: there was a small store struggling to keep up with the big boys, and they decided they were going to lower the price of the NES by five cents just so they had some small advantage. Well, they advertise this in the Sunday newspaper, their five-cent advantage, and another small store sees this and calls Nintendo to let them know. A week goes by, Nintendo sends out the trucks to deliver the product, and lo and behold, there’s nothing left for the store with the five-cent discount, and by sheer coincidence, the guy who passed along the tip gets a bigger allocation than normal.” The merchant tapped his fingers on the desk. “But like I said, this was just a rumor I heard. It’s probably not true. After all, that would be illegal.”
Kalinske shook his head. “Not just illegal, it’d be un-American.”
The merchant gave a gummy smile. “Perhaps one day we’ll return to a place where the streets are paved with gold and all you need to succeed is a good idea, a strong work ethic, and some kind of bootstraps. Or perhaps we’ll continue to move in the opposite direction.” The merchant pondered this for a second and then stood. “Personally, I like the place with golden streets. And believe it or not, I like you, Mr. Kalinske. But my answer is no.”
“I understand,” Kalinske said, standing to leave. “And I appreciate your ode to better, simpler times. But you know what the sad thing is? The man in your story, the one who tipped off Nintendo, I don’t really blame that guy. He was just trying to find an angle. If you ask me, the people really killing this country are the ones who realize the American dream is being crushed but don’t bother to do anything about it.” Kalinske thanked the merchant for his time, and then flew back to Sega with a 16-bit chip on his shoulder.