WALTER ISAACSON: Considering that it was the day of the biggest premiere in the history of the entertainment industry, Hollywood was unusually quiet. It was Tuesday, September 17th, 2013.
Look all you want, but nowhere in Hollywood would you find rope lines or red carpets. There were no lavish after parties, no borrowed diamonds or ice sculptures, and no reporters asking anyone who are you wearing. Instead, the action could be found at the strip malls around the world, where groups of people stood outside, waiting patiently in the dark.
What they were waiting for was the clock to strike midnight. Because at midnight, something unprecedented was about to happen.
The hot property making its world debut that day wasn’t a motion picture. It was a video game.
[GUNFIRE AND SIRENS BLARING]
That was the daGrand Theft Auto V” was released on Xbox 360 and Playstation 3. And nothing would tell the story of its success better than the numbers. That version of “Grand Theft Auto,” or “GTA,” sold 11.2 million units in just 24 hours. It would gross $1 billion in just three days.
By comparison, that’s about four times the opening weekend gross of the movie “Star Wars: Rogue One.” Within a year, “GTA” boasted more than 33 million online players worldwide. That’s more than the populations of Austria, Ireland, Greece, and Sweden combined. For developer Rock Star Games, it was a lot of money. But it wasn’t easy money. “Grand Theft Auto V” took many painstaking years to put together with a development budget reported to be more than $250 billion. But how did we get here? How did the home video game market come to not only disrupt the entertainment business as we know it, but also change the way an entire generation spends its leisure time?
We’re about to find out. I’m Walter Isaacson, and this is “Trailblazers–” an original podcast by Dell Technologies.
Hello, Hello, all you people out there in game land.
MAN: Our creative powers are being stretched.
BOY: Gee, ma! We want to finish the game!
MAN: The computer signals the action when it’s ready.
MAN: Today, we’re going to play an exciting new game.
WALTER ISAACSON: On today’s episode of “Trailblazers,” we’re looking at the world of video games. Sit down in front of any modern video game console, and it’s pretty easy to get sucked into the immersive experiences that they create.
Between the jaw-dropping graphics mixed with addictive gameplay, it’s easy to see how video games have come to disrupt– and in some cases displace– traditional forms of entertainment. But in order to understand how we got to where we are, we have to jump back in time a few decades to the summer of 1972, when the phone rang in my friend Al Alcorn’s office. [PHONE RINGING]
It was a call Al Alcorn didn’t care to take. It was from Andy Capp’s Tavern in Sunnyvale, California. The new arcade game machine that Alcorn had recently installed there wasn’t working.
This was no ordinary game. It was “Pong,” a game similar to ping pong where a blip on the screen gets bounced back and forth by two paddle-like lines. It was born from an idea borrowed– or inspired– by a Magnavox console game spotted at a trade show by Nolan Bushnell, the founder of Atari.
By today’s standards, it’s something that looks incredibly primitive. And as Bushnell explains, the success of “Pong” was not something he saw coming.
NOLAN BUSHNELL: I actually didn’t think of it as a viable product. As serendipity would have it, that same day, my first engineer, Al Alcorn, came on. And I wanted him to have a learning project that wasn’t very complex.
We had a contract to build a driving game from Bally, and it was going to be quite a complex thing. And I wanted him to get his feet wet. And so I described the “Pong” game to him and said he had to get it done in a week. And he did. WALTER ISAACSON: Arriving at the tavern later that day, it di dn’t take Alcorn long to discover the problem. The “Pong” machine was so clogged with quarters, it broke.
It was the first sign that Atari was on to something. A normal arcade machine might take in $10 a day. But the “Pong” machine made $40. Soon, millions of people would be introduced to video gaming through “Pong–” first with the arcade version, and soon after through Atari’s home console. Bushnell quickly grasped the key to its breakthrough success.
NOLAN BUSHNELL: “Pong” worked because it was amazingly simple– no rules, really, and people could figure out how to do it almost immediately.
WALTER ISAACSON: Steven L. Kent is the author of “The Ultimate History of Video Games.”
STEVEN L. KENT: You know what the instruction set for “Pong” was? The instruction set for “Pong” was avoiding missing ball for high score.
WALTER ISAACSON: “Pong” gave birth to the era of the video game, and Nolan K. Bushnell was its midwife. Not only was he able to create a game that was incredibly addictive, but he was also able to tap into a social idea that was ripe for the times.
NOLAN BUSHNELL: What made it a hyper success is that it was just at the point where there was a lot of talk about women’s liberation and things like that. And the average woman could beat the average man playing “Pong” because of small muscle organization. And it was enlightening.
Because if a woman wanted to play “Pong,” it was a two-player game, and it became acceptable for her to ask some burly guy off of a bar stool to come over and play “Pong” with her.
WALTER ISAACSON: Not only did “Pong” level the playing field between competitors, but it also helped introduce the world to a new concept– one that would forever change the way we interact with each other. It demystified the concept of a computer, something few people had experienced this side of a “Star Trek” episode.
NOLAN BUSHNELL: I’ve always said that video games were the training wheels of computer literacy. Before the video game, people didn’t know that you could do things on a screen. Numbers of people asked me with “Pong,” how does the TV station know I’ve turned this knob. It was just this mindset.
And it turns out that 100% of software programmers that I’ve ever met have all been game players as kids. And I think that you learn logical functions, you learn cause and effect. And I do believe that whether we call it training wheels or a gateway drug, I think that video games have always been very, very powerful.
WALTER ISAACSON: Bushnell had earned his electrical engineering degree at the University of Utah while working during his spare time at the lagoon amusement park, giving him just the right combination of skill sets to launch his disruptive technology on the world. Steven Kent. STEVEN L. KENT: The timing was perfect. Nolan, in his mind, in this great, creative, energetic mind of Nolan Bushnell, who had worked in a carnival midway, he knew what attracted people to the games on the midway. And he tried to employ that into his games. It was this perfect convergence.
WALTER ISAACSON: Strange as it seems in hindsight, when Bushnell sought to take “Pong” into production, investors were hard to find. One reason was context. In many people’s mind, “Pong” was an arcade game in the tradition of pinball. And for generations of older Americans, pinball was looked down upon as a completely useless pastime.
Nolan Bushnell, however, disagreed. He understood the commercial attraction of an arcade-induced dopamine rush. He also understood that to bring video games to the masses, it would be impossible to make his millions just $0.25 at a time. He had to get games out of the arcades and beer parlors and into American homes. Bushnell’s idea– the Atari home console, an idea that initially fell completely flat.
NOLAN BUSHNELL: We took it to the toy show, and we sold zero. And we said, whoa, what’s going on. It turned out that there was an unwritten rule in the toy business that they wouldn’t sell anything over $29. And we were asking $79.
And it wasn’t until we found Sears sporting goods, who said, yeah, we can sell this. And actually, the buyer flew out the next week and took 100% of our production.
WALTER ISAACSON: In a deal with Sears, Atari introduced the home console version of “Pong” in 1975. Then a couple of years later, with the introduction of their first cartridge system, an entire market was created, and video games had come home.
Atari became the flagship brand of the home computer game revolution, with hit after hit– “Asteroids,” “Tank,” “Lunar Lander,” “Battlezone,” and “Missile Command.” It seemed like Atari was unstoppable. Nolan Bushnell was not only rewriting the rules about how we played, but he was also rewriting the rules about how we worked with the new culture that he fostered at Atari.
NOLAN BUSHNELL: It was a culture that we tried to get rid of class distinctions as much as possible. For example, we didn’t have reserved parking spaces for the executives. We didn’t have an executive dining room. And we said we’re all in this company together. We have different roles. And yeah, some of us get paid a little different, because we went to school longer. But in general, we’re all here, elbow to elbow, trying to make something wonderful. And I think that that was really appreciated. We were the first company to give stock options to every employee in the company, which the VCs, when they later on, when they came in, thought was scandalous.
WALTER ISAACSON: In time, though, Atari became the first major casualty of one of the emerging realities of the video business– the gamer’s growing appetite for new, unexpected experiences. Maybe Atari saw its challenges coming, but it probably didn’t guess how soon it would be upended by two plumbers and a hedgehog.
In 1889, Fusajiro Yamauchi of Kyoto, Japan founded a company to sell playing cards. The name he chose was Nintendo, from words meaning leave luck to heaven. Fast forward to the 1960s. Nintendo, now run by grandson Hiroshi Yamauchi, hit it big by striking a deal to portray popular Disney characters on its playing cards.
Tegan Jones is the co-host of the gaming lifestyle podcast “Sass Effect.”
TEGAN JONES: That really saved the company. And they were hugely popular, and the company went public in 1962. That really resulted in a lot of new capital. So Nintendo ended up making some interesting business acquisitions at that time– a taxi company, an instance rice company, vacuum cleaners, short-stay hotels, which was an interesting choice, and toys as well.
WALTER ISAACSON: And yes, you did that correctly– Nintendo, for a time, ran a by-the-hour hotel chain. When the fledgling video game industry emerged, Nintendo found its niche.
TEGAN JONES: In 1975, they also thought that it might be a good idea to start producing their own games. So the first one was “EVR Race,” which is something not many people have heard of. But in the same year, they also released just a small game called “Donkey Kong,” which was created by the Nintendo giant Shigeru Miyamoto, who became one of the biggest rock stars of gaming.
And originally, it was actually released on the Atari 2600 in television and the ColecoVision and in arcades. So this was before there even was a Nintendo video game console. WALTER ISAACSON: Then, in 1983, mayhem. New games rained down on the market as third-party publishers rushed to exploit the new video gaming trend. New consoles were introduced from the likes of Mattel, Coleco, and Tandy.
Buyers, wary of committing to any one console, committed to none. Prices dropped to pennies on the dollar. As speed to market overtook quality, the video game industry collapsed. The industry, once worth billions in annual revenue, now embodied the Yogi Berra-ism– nobody goes there anymore. It’s too crowded.
For the playing card company from Kyoto, the stage was set. The rise of Nintendo gaming is a story in at least three acts, yielding lessons that resonate throughout the industry today. One of those acts began in the early 1980s on a bullet train zipping across Japan.
One of the nameless salarymen riding the train that day was a gentleman playing with the images on his pocket calculator. That fascinated a fellow passenger by the name of Gunpei Yokoi. In the universe of portable gaming systems, it was the birth of a movement.
Yokoi saw potential for a compact, go-anywhere game system using the same liquid crystal display technologies used in pocket calculators. His idea evolved, first as the Game & Watch system, then as the Nintendo Game Boy. The lesson– sometimes the best inspiration is observing other people.
Another act was the introduction of a new console. But Nintendo was mindful of lessons learned from the industry’s mid-’80s collapse. Tegan Jones.
TEGAN JONES: In 1985, two years after the crash, they released the Nintendo Entertainment System, known as the NES. And it was a huge hit. And they prevented the market crashing for them by making sure that they limited the third party games each year. So their market for their console couldn’t be flooded. They were in control of the amount of titles that would come out. So there wouldn’t be people getting sick or tired of the games that they had.
WALTER ISAACSON: In act 3, the creation of a cultural ecosystem featuring family-friendly characters– Donkey Kong, Mario, Luigi, and a surfeit of supporting actors. With Disney-worthy discipline, Nintendo would tightly govern the look, the music, and the feel of its games. That consistency would warm users to each subsequent game or platform.
And in all things, Nintendo showed a stubborn disregard for what its competitors were up to. Nintendo’s creativity, consistency, and familiarity paid off. Through the late ’80s, its rise to dominance coincided with the post-crash resurgence in video gaming. By some estimates, in 1990, Nintendo enjoyed a 95% share of the video game market.
In a business governed by the phrase “what’s next,” they must have known it wouldn’t last. The console wars were about to begin.
The rise of Sega began halfway across the Pacific on a beach in Maui, author Blake Harris explains.
BLAKE HARRIS: It’s 1990, and Tom Kailnske is on vacation with his wife and his three daughters, and he’s kind of at a crossroads in his life. He had been essentially pushed out of his previous job due to political infighting and didn’t really know what was next, and certainly felt like maybe the best years were behind him.
And then he’s approached on the beach by a small Japanese man named Hayao Nakayama, who is the head of Sega of Japan, a pretty brilliant, dictatorial businessman with the world’s most wonderful comb-over. And he says, Tom, I’ve been looking for you. And Tom, caught off guard at his vacation, says why would you be looking for me. And Mr Nakayama says, Tom, I want you to come run Sega and take on Nintendo.
WALTER ISAACSON: By this point in his career, Tom Kailnske had already held positions as the CEO of Mattel as well as the CEO of Matchbox and was taking a moment to figure out his next move. And as Kailnske himself recalls, when he was approached on the beach to run the American arm of Sega, he was reluctant.
TOM KALINSKE: I thought, well, this is crazy. Why should I interrupt my vacation and go go to Japan with this guy? And my daughter, who was about five at the time, piped up and said, well, Daddy, he says it’s important that you go, so I think you better do it. WALTER ISAACSON: And so he did. Nakayama and gave Kailnske free rein of Sega’s US arm. The first thing he knew he had to do was change the culture of a company that had started to identify itself as weak.
TOM KALINSKE: Inside the company, I would say that the morale was low. They had been beaten up a lot by Sega Japan and by their competition, Nintendo, and they weren’t successful. So we had to come in and change that culture and bring in new and different people.
One of the things I did was I started bringing females into the company, which was unheard of in those days in the video game industry. And I think that helped us quite a bit. They became senior executives and performed extremely well.
Anyway, a lot of changes had to be made, and we had to also have a strategy that Japan would let us do. Nakayama, when he hired me, said I’m going to let you make the decisions in the United States. But that wasn’t so easy at that time.
WALTER ISAACSON: Kailnske’s next job turned his newfound enthusiasm into a strategy that he could pitch to the Sega execs in Japan. Blake Harris.
BLAKE HARRIS: He went to Japan to deliver what he called his four-point plan. And this was his– I’ve been studying the industry for a few months. I’m still an outsider to it, but here is my observations and the ways that I think that we, say, have a chance to get our foot in the door.
And his strategy entailed things like dropping the price, giving away the company’s best game for free, which was unheard of, and which turned out to be “Sonic the Hedgehog,” bundling that game with the system to basically create more games, unlike Nintendo games, by making sports games and licensed games like that, to basically go after older markets, to go after college kids and adults. Because Sega basically conceded to Nintendo– you own the market from age 6 to 14. You own the kids. So we’re going to try to get everybody else.
WALTER ISAACSON: Kailnske presented his plan to executives of Sega Japan. It did not go well.
TOM KALINSKE: Well, you can imagine when I said all these things to this room of board members and senior management in Japan, most of whom didn’t speak English. They started talking in Japan, and they were very upset with me. My key ally, a fellow named Toyota Shinobu, was translating as fast as he could for me. And he said, well, Tom, basically, they think you’re crazy, and they don’t agree with anything you said.
If you lower the price of hardware, we will make less profit. If you put in our lead software into the hardware pack, we’ll lose the profitability from that software sale. If you can’t take Nintendo on, they’re much too powerful, they’re much bigger than we are. That’s just a crazy idea. They can’t imagine why you’d want to do that. And they don’t believe you can get college males to play video games because they’re too busy studying.
And at that point, Nakayama got up and started walking to the door. And he kicked over a chair. You could tell he was very upset. And I could tell he didn’t agree with what I was saying. But he turned, and he looked at me and he said, OK.
I don’t agree with what you’re saying, and neither does anybody in this room. But I told you you could make the decisions for the Western world when we hired you, so go ahead and implement your plan. And they provided the funding for me to do all of those things that I had suggested.
WALTER ISAACSON: Kailnske went to work. Sega US launched an aggressive ad campaign positioning Sega as an edgy brand for older players and Nintendo as a mere child’s toy. For Kailnske, that differentiation was vital.
TOM KALINSKE: Well, to me, if anybody can do what you’re doing, you don’t really have a strategy. They’ll soon– particularly if they have more money than you do– if they can implement your strategy better than you can, or with more money behind it than you have, obviously, they’re going to be more successful, and you’re going to fail.
So that’s why, throughout my life in Sega, we went after this older age group– because others weren’t going to be able to copy us. And we were going to have a free reign for some number of years, at least. And that’s exactly what’s happened.
WALTER ISAACSON: The launch of the Sega Genesis system featured the line “Genesis does, but Ninten-don’t.” Ad after ad pounded Nintendo, many of them prompting demands that they cease and desist, most of which Kailnske ignored.
TOM KALINSKE: There was a couple of cases where our lawyer said, well, they’ve got a good point here. Maybe we better cool that one down a little bit. That specific one, that I recall, was actually on our Game Gear color handheld unit. We had a color LCD screen. And if you recall, Gameboy was black and white or green and white or gray and white.
And the ad we used had an Airedale. And we talked about how dogs are colorblind. And if you don’t mind not being able to see color, then maybe you should play with a Gameboy. And we showed the dog drinking out of the toilet at the end.
Well, this, for some reason, upset Nintendo greatly. And they sent a letter saying that this was something that we had to stop doing. And so that ad, we actually did pull.
WALTER ISAACSON: Persuading retailers to stock Sega was a bigger problem. Nintendo held enormous sway, and retailers felt they couldn’t afford to poke the bear. Visiting Walmart Corporate Headquarters in Arkansas, Kailnske and his colleague, Shinobu Toyoda, were turned down flat. As Blake Harris describes it, that’s when they decided to channel some of the scrappiness that had characterized the famous hedgehog.
BLAKE HARRIS: When Tom and Shinobu left the headquarters in Bentonville, Arkansas, they were flustered. But then Shinobu noticed, across the street, there was a For Rent sign in a mall area. And Tom and Shinobu had the idea to open up a Sega Genesis store where they didn’t actually sell anything, but they invited customers to come in all day and play the Genesis for free.
And not only that, they pretty much bought up every billboard in Bentonville, Arkansas, and they turned Bentonville into Segaville, to the point where dozens of people were going into the flagship Walmart in Bentonville every day and saying, where can I get a Sega Genesis. And you couldn’t, because they didn’t sell it.
And so after a few months of this kind of strategy, which was amplified with getting Sega seat cushions at the University of Arkansas football games and basically continuing to just dominate Bentonville with Sega stuff– eventually, the executives at Walmart called Tom to say we raise the white flag. We will carry your products.
WALTER ISAACSON: By 1994, Sega climbed to a 55% share of the video game market, up from 2% during Kailnske’s tenure. And the secret to creating a company with that kind of success– something that we see over and over again in any company that thrives on innovation– giving employees permission to fail. Tom Kailnske. TOM KALINSKE: At Sega, our corporate culture w as very free and loose and creative. And we celebrated failure. I know this sounds strange, but we did. We used to have the golden chicken award, which was a big rubber chicken.
And we’d hang it over the cubicle of the winner of that that month, and also gave him $100. Because the Golden Chicken Award was for the guy or gal who had a really good idea, but it just didn’t work. So we gave him the Golden Chicken Award. And that kind of stuff inspired a lot of laughter in the company.
WALTER ISAACSON: But like all great parties, at some point, it has to end. And the end of the reign of Sega can be blamed on a missed opportunity that created an incredibly powerful new player in the market.
TOM KALINSKE: We were very friendly with Sony. Sony approached us to learn how to make software. They had acquired a studio in Santa Monica, and they really didn’t know how to make video game software. And so our head of R&D, Joe Miller, sent a couple of guys down there to help them learn how to make video games.
And sometime during that, we had a conversation where, instead of each of us making a hardware system, why don’t we have a joint hardware system. Whether you call it the Sony Sega system or the Sega Sony system, who cares. You never make money on hardware. You make all your money on software.
So instead of having competing hardware systems, let’s have one, and we’ll each benefit from the software that we produce and sell for it. I thought this was a great idea. It was a slam dunk deal, in my opinion, because we at Sega were so much better at creating great software than they were at that time.
So we went to Japan together and met with senior Sony management. And senior Sony management said yeah, that’s a good idea. We went over to Sega, and Nakayama did not like the idea. He thought that Sony would never be successful on their own, so why should we help them to the degree that this would require us to help them.
Well, to me, at the time, it was obvious. It clearly was not obvious to Nakayama or others in Sega. So the deal was killed. And I have actually always blamed myself for not being persuasive enough to get that done. Because I still, to this day, think that would have been really great for both companies and would have been better for the video game industry in its entirety. WALTER ISAACSON: Instead, Sony decided to go it alone and developed the Playstation. And Sega saw its market share dwindle in an increasingly crowded market.
Meanwhile, another player emerged. After years of simply dabbling in video game software, Microsoft launched its first piece of video game hardware, the Xbox, mobilizing a vast online community for worldwide multiplayer gamers. So began a contest for video game dominance not unlike a game of “Pong.”
The closest you might come to seeing what a $100-billion industry looks like is to walk around here at E3, the Electronic Entertainment Expo. It’s the video gaming answer to the Detroit Auto Show– a place to glimpse what’s coming, what’s possible, and where the giants are placing their bets– Xbox with its Scorpio, Playstation with virtual reality. Nintendo will build on the launch of its Switch.
But for all the platform wars, no one in the video game industry can ignore its highest axiom– the name of the game is the game. In other words, success or failure hinges on the popularity of the games themselves– a lesson rooted in Atari founder Nolan Bushnell’s arcade philosophy and underlined in bold with the stratospheric success of titles such as “Grand Theft Auto V.” And if Bushnell now has his way, the next big disruption in video games might just seem a little familiar.
NOLAN BUSHNELL: We have “Pong” in virtual reality right now in which you’re the paddle. And so if you imagine that it’s a two-player game, the other person is about 12 feet away from you. But in the virtual reality, it looks like you’re probably 30 feet apart. And you’re running back and forth being the puddle, and the ball is going back and forth between you. It’s actually a lot of fun.
WALTER ISAACSON: Today’s video game industry draws its strength from millennials, a generation of digital gaming natives who grew up with video games and who populate its armies of content creators. For millennials, video games have truly gone mainstream and now include players from all walks of life in ways never seen before.
The rise of video gaming is especially intriguing to marketers, for whom millennials represent a huge– but increasingly hard to access– demographic. Turning from conventional mass media, they have disappeared into the fast-growing selection of new media channels, including video games themselves. Some reports measure today’s in-game ad spending in the tens of billions of dollars. As Nolan Bushnell would tell you, that’s a lot of quarters.
I’m Walter Isaacson, and you’ve been listening to “Trailblazers,” an original podcast from Dell Technologies. If you want to find out more about how gaming is making its way into the business world– think virtual reality– be sure to visit delltechnologies.com/trailblazers4. That’s trailblazers, then the number 4.
In the next episode, we’ll be looking at the increasingly disruptive world of newspapers– an industry struggling to survive in a world of shrinking budgets and rampant online competition.
And you can subscribe to this show on iTunes or wherever you get your podcasts. And if you like it, please leave us a rating and review. We’d appreciate it. Thanks for listening.