Nintendo: Everlasting Gaming IP | In Practise

Nintendo: Everlasting Gaming IP

Former Chairman and President at Sony Computer Entertainment

Learning outcomes

  • Evolution of gaming from cartridges to CD-ROM, DVD, and now cloud gaming
  • Importance of first-party content for console owners
  • How gaming is a media deeply intertwined with the evolution of technology and implications on value creation
  • Why Nintendo’s intellectual property is so powerful and eternal
  • Risks to narrative-based IP versus no-IP types like Fortnite or Roblox
  • Economics of AAA publishing and importance of cross-play
  • Outlook on the value of gaming intellectual property and risks to certain franchises
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Executive Bio

Shawn Layden

Former Chairman and President at Sony Computer Entertainment

Shawn has over 32 years of experience in the gaming industry and joined Sony in 1987 working directly for the Sony Founder Akio Morita. Shawn made his way up the ranks at Sony before joining Sony Computer Entertainment in 1996 as the group had just launched PlayStation 1 the prior year. He enjoyed senior positions running the businesses in Japan and Europe before becoming Chairman and CEO of Sony Interactive Entertainment Worldwide Studios where he was responsible for driving first-party content to differentiate the PlayStation platform. Shawn played a key role in launching and running the PlayStation consoles over the last 20 years and is a well-regarded executive in the gaming industry. Read more

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Shawn, can you provide some background to when you joined Sony and how your role progressed at the company?

I joined Sony back in 1987, shortly after the commercialization of electricity. The course of my career has been, shall we say, serendipitous. I joined in a corporate position, in communications, in Tokyo. I guess you would call it a diversity hire, although we didn’t have that phraseology back in the 80s. Japanese companies were trying to ‘internationalize’ themselves and many of them were doing that by hiring non-Japanese people to come and work at the headquarters, in Tokyo. That’s where I took my opportunity with Sony.

I came with a communications background and I took a role in the public relations department, dealing with the foreign press, in Tokyo. After three years, I moved into the executive suite, as assistant to the founder of Sony, Akio Morita. I got to work for him, directly, for five years, chiefly in the role of writing speeches or ghost-writing articles for magazines. Sadly, Morita had a stroke and had to remove himself from the company.

So in 1996, I joined this fledgling new group that had just sprung up, inside Sony, called Sony Computer Entertainment Inc. They had just launched the PlayStation in America, in 1995. It was a very new group, attacking the video game market for the first time, for Sony. I have to be honest with you, it was crazy days, at the time. Essentially, that entire market was sewn up by two big players who were Sega and Nintendo. It was a new piece of hardware, which necessitated a new operating system. You couldn’t just take a Sega game and put it on a PlayStation; you had to code it for the platform. They decided to enter into that market, to see if they could disrupt it.

Sure enough, 25 years later, I think you could say that they successfully disrupted the video game market.

What was the strategic position of the PS1?

PlayStation, as a platform, really began as a joint effort with Nintendo. Sony was on deck to provide an optical, disc-based medium. Up until then, the Nintendo Super Famicom and the Sega platforms were using cartridges, flash ROM. Sony had the innovation of the compact disc and wanted to bring that out. They were working with Nintendo, up until the last minute, when Nintendo stepped away and decided to partner with Philips of the Netherlands, rather than with Sony. Sony had built the guts of a compact disc, optical format-based gaming platform, but just didn’t have an operating system to make it go.

A gentleman named Ken Kutaragi, commonly referred to as the father of PlayStation, was the engineer behind that. He put a team together that created an operating system that would use that medium. Because it would take the capacity up to 800Mb, because it was a CD, they could put a lot more information on the medium and, therefore, the big hook at the beginning was, bring the arcade home. PlayStation was the first, real 3D graphics home machine. Tekken was big in the arcades and this let you bring Tekken home; it let you bring Ridge Racer home. That was the original pitch for it.

It came out very strongly. Probably the biggest innovation of all, for the first PlayStation, and then going forward, was the change from flash ROM to compact disc. Not only because of the quantity of data that could be held on a disc, compared to solid state media but, more importantly, the cost of goods. The cartridges were a bit before my time, but they were probably going for $7 to $9 a throw, just for the cartridge itself. Compact discs were $1.50. Cartridges needed to be flash, which means that they had to be programmed or coded, in rather sophisticated facilities, to push all that solid-state memory through. Whereas compact discs, like music discs, just came out of a stamping plant. The idea being that, with flash ROM, you’d have to have a minimum order for it to make sense, whether it’s 80,000 or 100,000 ROM cards. But by going to compact disc, all of sudden, minimum orders could be 10,000 discs.

You could tell your clients – in Japan, anyway – if you run out by Thursday, I can probably refill it by Monday; it was that quick to turn this stuff around. People didn’t have to buy huge initial lots, with the cost and inventory associated with that. That was probably the biggest catalyst to the growth of this business.

How do you compare those technical or platform changes then, to today, where we are seeing a shift to digital distribution?

Every platform shift is similar and unique, at the same time. When we moved from PlayStation 1 to PlayStation 2, PlayStation 2 was going to use DVD technology as the medium of carrying the game code because, again, that can take a whole lot more data than a compact disc can. At the time, when it came out, I think PlayStation 2 was one of the least expensive DVD players on the market. It came out the same year that The Matrix came out on DVD; that was a nice coincidence. The growth of the DVD market, overall, also accelerated the growth of PlayStation 2.

Moving on, PlayStation 3 adopted Blu-ray as its medium, again increasing capacity on the disc. There is a symbiotic relationship, I think, between the growths of the Blu-ray market and PlayStation 3. PS4 came out to great success, five years ago. Every iteration of the platform involves higher rate clock speeds, more powerful CPUs, GPUs, the graphics engine and the underlying code to provide a more immersive and spectacular experience. That’s probably the expectation every time a new platform comes out; how is it going to blow me away?

Has the position of the platform owner changed much as the platform shifts?

There are many ways to measure that, depending on whether you are talking about market power or about changing the whole idea of entertainment itself. We used to say, when I was at PlayStation – because we were a platform holder and we were a game developer, at the same time – as a first party, our job really wasn’t to capture market share from other players, whether that be Electronic Arts, Square or Capcom. Our job was to grow the pie and not to steal somebody else’s piece of it. As a platform holder, our job is to create a wider audience, continually.

In that vein, I think Sony brought a lot of innovation such as, back on PlayStation 1, a game called PaRappa, which was very successful and it introduced the whole concept of a rhythm action game. Later on, on PlayStation 2, Sony brought out something called SingStar, which allowed you to have that karaoke experience at home, with a microphone. All these kinds of innovations are very difficult for third parties to do, because the ROI is hard to predict and growing the pie, overall, is not an imperative for third party developers. But Sony took it on to do that, to bring new innovation.

Things like PlayStation Virtual Reality, PSVR, was a whole step change in the gaming community, which platform holders are obligated to do. We’re obligated, as a platform holder, to continue to bring innovation, bring newness, bring excitement to the overall platform while, at the same time, in the studios, making awesome games which show the power of the technology.

When we look at the strategy of growing the pie or, effectively, growing the units sold for the platform owners, there’s that embedded network effect where more users, more third-party developers, better games, more users. Obviously, you need to kick start that so when you are at a platform, what is the core driver of that network effect? What did you really focus on?

Back on PlayStation 1 and PlayStation 2, games were, typically, a single-player experience. It was before the widespread networking of game platforms around the world. The games had to find their audience. You had a lot of couch two-player, back in the day; two people, sitting on the sofa, playing FIFA, but there was no online gaming. That didn’t really start kicking in until the PlayStation 3 era and then took off with PS4. Certainly, with PS4, we see what you call the network effect. Not just that ecosystem building upon itself, but also, players connecting with each other. If four of your friends have a PlayStation and they’re all playing games together and you’re going to get a console, you’re probably going to get a PlayStation, because you want to play with your friends. That tends to accelerate the growth around any single platform.

We certainly found that in PS4. Having to, not only bring out great games but, also, because of that network effect, with people playing online with more multi-player games out there, people are spending more time with single games. You used to play a game, finish it and then get onto the next game. It’s really hard to now know if you have finished a game or not. How do you finish FIFA? You don’t. People are playing Fortnite for years and they keep on going, so it becomes more of social interaction, than just the game itself. You go on Fortnite to meet with your mates, have a little banter and play a little bit of the game and move on. I think the community builds itself that way. Certainly, the added phenomenon now of things like Twitch and streaming games across the net, so people can watch, is still, fundamentally, surprising for me, because I think I come from a bygone era. I’m still impressed when I see people go online to watch other people play games.

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Nintendo: Everlasting Gaming IP

September 16, 2020

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