Tiny Video Game Maker May Win Atari-Nintendo War

The Business Journal - Micheal Kray

November 19, 1990

Nintendo Co. Ltd.'s attempt for a knockout blow in its epic legal battle against Atari Games Corp. has opened the home video game market for a small San Jose start-up.

American Video Entertainment, a six-employee firm started in February, has been struggling to get its home video games into retail stores and other outlets, a burden made much tougher because the firm operates as a non-licensee of giant Nintendo.

Then, in legal papers filed late last month as part of its Atari lawsuit, Nintendo dropped a surprise Christmas present into the laps of American Video and two other small, non-licensee start-ups. Nintendo said that the three small firms, whose programs were not licensed by Nintendo, could go about their business with Nintendo's tolerance, if not its outright blessing.

American Video and the other firms had developed games that bypassed a Nintendo security chip and would play on Nintendo game players, far and away the most popular home video game player.

The action could have a big impact on the $4.5 billion home video game market if major retailers choose to carry the games made by the three small firms.

"This could be the end of Nintendo's stranglehold, but we have a ways to go," said Phil Mikkelson, director of sales and marketing for American Video.

"This has removed a big cloud," he added. "We're talking with some big outlets. The retailers still have some doubts, but at least we're talking."

Mr. Mikkelson declined to reveal any potential outlets, but the president of one of the other three small firms was less reluctant.

John Reedy, president of Phoenix, Ariz.-based American Game Cartridges, said Auchan, a large French retailer with a superstore in Chicago, has signed to carry his firm's games.

"We're talking seriously with some of the big players, such as Toys 'R' Us and Waldenbooks," Mr. Reedy said. His firm licenses the technology it uses to get around Nintendo's lock-out chip from Color Dream of Brea, the third of the three small firms referred to by Nintendo. Further, Messrs. Reedy and Mikkelson said some of Nintendo's licensees have contacted the firms about possibly acquiring games made by American Video or American Game.

"This whole thing could bust open, but it's always hard to tell with Nintendo," Mr. Reedy said.

Michelle Bowman, spokeswoman for Menlo Park-based Mediagenic, a Nintendo licensee, said her firm "is interested in the new possibilities. But we're still working with Nintendo and we have to clarify the situation. If we can decrease our costs, then we'll take a new look at the situation."

In the world of computer video games, Nintendo controls a small chip, called a lock-out or security chip, that must be inserted into every video game that wants to run in Nintendo's video game player. Every video game maker wants to be Nintendo compatible because there are about 29 million Nintendo game players in U.S. households. Sega, the No. 2 video game player maker, has about 700,000 units sold in the U.S., according to industry sources.

In mid-1988 Atari Games Corp., and its video game subsidiary, Tengen Corp., found the key to copying Nintendo's lock-out chip and began making Nintendo-compatible games without paying Nintendo a licensing fee.

In a $100 million antitrust suit filed in U.S. District Court in San Francisco, Atari Games claimed, among other things, that Nintendo was threatening to pull its licensed games from any outlet that carried games made by Tengen/Atari Games. Nintendo has since counter-sued.

Dennis Wood, senior vice president of Atari Games, said the recent action by Nintendo "is merely intended to throw more smoke on the situation. It doesn't change our position at all. And I don't see where it has changed the position of video game retailers. They're still worried about retaliation from Nintendo."

A court hearing was slated for late last week at which Atari would move for a summary judgment, while Nintendo wants a ruling that would halt all Tengen/Atari Games home video game sales until all legal issues are settled.

"No doubt it has become very personal between Nintendo and Atari Games," Mr. Reedy said. "I read this latest move by Nintendo as further proof that Nintendo wants to put Tengen out of business."

The outcome of the litigation could have a major effect on consumers. Because of royalties Nintendo charges game makers, Nintendo-licensed games retail for $10 to $20 higher than games sold by non-licensees American Video, American Game and Color Dream. The top-selling game by far this year is Super Mario 3. The Nintendo-licensed game is expected to sell 7.5 million copies at an average retail price of $50.