Wii Will Rock You

Fortune's Jeffrey M. O'Brien explains how Nintendo's new game machine won over the world—and beat the pants off Sony and Microsoft.

By Jeffrey M. O'Brien

June 22, 2007

Nintendo's legendary videogame designer Shigeru Miyamoto is lying face down on the floor in Kyoto, Japan, hobbled by a right cross and struggling to regain his composure. The man some credit with the very existence of the $30 billion videogame industry, the Walt Disney of our generation, has taken one blow to the face too many. I'm standing over the creative force behind Donkey Kong, Super Mario, Nintendogs and his latest worldwide sensation, the Wii. I goad him to get up for the rest of his beating.

Clearly, one of us is taking our boxing match a bit too seriously. After all, it's not really Miyamoto who has crumbled but rather his avatar—his Mii, in Nintendo parlance. "Ohhh" is about all the man can muster as the clock runs out. Miyamoto puts down his controller and concedes defeat to finish a photo shoot.

I may have beaten him at his own game, but we both know who's the real winner here. Nintendo's newest contraption has performed exactly as designed, creating yet another Wiivangelist, this time a gloating gaijin 5,000 miles from home who not only got up off the couch to play a videogame but actually worked up a sweat. With this little victory Miyamoto and company gather more momentum in their quest to conquer worthier competition.

Videogame controllers generally feature a bewildering array of buttons, and watching an avid gamer work the device, thumbs pattering across plastic, can be intimidating. By contrast the Wii's wireless, motion-sensitive remote, which Miyamoto had been dreaming of for years, often requires no button manipulation whatsoever.

In the boxing game my 54-year-old host and I were bobbing and weaving and punching at air—jabs and crosses mostly. Miyamoto, whose official title is senior managing director, would angle his hands from one side to another to avoid haymakers; each time I missed, he'd giggle. And everyone in the room laughed along.

While game consoles typically attract youngish males with an antisocial streak, the Wii is bringing people of all demographics together: in nursing homes, for Wii bowling leagues, on cruise ships, at coed (!) Wii-themed parties and, of course, in lines—as hordes of consumers clamor to buy the impossible-to-find $250 machine. Nintendo is churning out over a million units a month and still can't meet demand.

At the Nintendo World store in New York City's Rockefeller Center, shipments arrive nightly. In the wee hours customers begin lining up around the block. Doors open at nine, and a few hours later the consoles are gone. In the world's gadget epicenter, Tokyo's Akihabara district, shopkeepers complain about the lack of inventory. Wii displays are covered with SOLD OUT signs, while piles of PlayStation3 boxes carry a different message: 5 percent OFF. Even the Nintendo of America company store near Seattle sees lines of employees, visitors and contractors. Forget about lucking into a Wii at your local Best Buy.

It's not unusual for a new game console to sell out during its pre-Christmas introduction, only to see sales dwindle come January. But six months after the Wii's launch, sales are accelerating. Nintendo sold 360,000 boxes in the U.S. in April, 100,000 more than in March. That's two Wiis for every Xbox 360 and four for every PlayStation3.

While Sony and Microsoft lose money on hardware in hopes of seeding the market with their consoles, analysts say Nintendo makes about $50 on every unit. It may not sound like much, but the company plans to sell 35 million of these things over the next few years. That's $1.75 billion in potential profit. Add that to the ridiculous earnings from the company's handheld gaming device, the Nintendo DS, as well as software sales and licensing revenue, and you begin to understand why Nintendo's market cap just passed $45 billion, an all-time high. (Nintendo trades on the Tokyo and Kyoto stock exchanges and as an ADR in the U.S.)

More difficult to comprehend is how a company founded 118 years ago as a maker of playing cards in Kyoto came to be pummeling Microsoft and Sony. The answer has something to do with reinvention. From industry-changing arcade machines to handhelds, 3-D graphics to immersive game play, Nintendo has shown a knack for leapfrogging its industry. Sure, some initiatives failed—a toy vacuum cleaner, a taxi service, a chain of "love hotels"—but the company rarely fails to surprise. And if the Wii shortage demonstrates anything, it's that this time, in changing perceptions of gaming, Nintendo has surprised even itself.

In a quieter moment Miyamoto ponders that ability to chart a new course. "How Nintendo has been able to create one surprise after another is a big question even for me," he says. "I'd like to know the answer."

New Recruits

The word "Nintendo" is an amalgamation of three symbols: nin, meaning "leave to"; ten, for "heaven"; and do, "company." The most common translation in Kyoto is "the company that leaves to heaven." What that means is open to debate. It could be a resignation to fate, as in "The company's destiny is in heaven's hands." But it's clear from a series of exclusive interviews with several executives over three months in Japan and the U.S. that little is left to chance. Another translation might be "Take care of every detail, and heaven will take care of the rest."

The man who oversees every detail is president and CEO Satoru Iwata. Iwata, 47, started as a developer for a firm Nintendo bought in 2000. Since taking over in 2002 he has westernized Nintendo, instituting performance-based raises and a retirement age of 65.

To hear suppliers and contractors talk, working with Nintendo is both frustrating and inspirational. It can be Wal-Mart-esque, driving down prices by playing parts manufacturers against one another while challenging them to be more creative. Employees talk breathlessly about loving their jobs while grumbling about hectic schedules. Everyone flies commercial. The one person permitted in first class, Iwata himself, has been known to slog to London and back in one day for a press conference. No hotel required.

In short, Iwata has made Nintendo as efficient as a bullet train and as stingy as a bento box. The company's 3,400 employees generated $8.26 billion in revenue last year, or $2.5 million each.

While exchange rates and fiscal calendars complicate comparisons to U.S. companies, let's do it anyway. Over roughly the same time frame, Microsoft employees generated $624,000 each; Google's performed 50 percent better, at $994,000, though still less than half as well as Nintendo employees. Nintendo's profits reached almost $1.5 billion, or $442,000 per employee, last year, compared with Microsoft's $177,000 and Google's $288,000.

Such gaudy numbers aren't the result of mere penny-pinching. Mainly they're a product of the strategic course Iwata has set. When he took over, PlayStation2 was king, and Microsoft, with its Xbox, was challenging Sony in a technological arms race. But Iwata felt his competitors were fighting the wrong battle. Cramming more technology into consoles would only make the games more expensive, harder to use, and worst of all, less fun.

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