Sony built the format. The contract said who could use it.

Nintendo needed a cheaper way to ship games. The contract it signed gave Sony a branded machine that played Nintendo's titles, and control of who could publish on the new format.

Here is what each of them was buying.

What Nintendo needed

Nintendo sold games on cartridges, and cartridges were expensive to make. Several dollars each. You had to order a production run months before you knew whether anyone wanted the game. And a cartridge held very little.

A compact disc held more than a hundred times as much and cost cents to press.

So Nintendo went looking for someone who could build a CD drive for its next console. Sony could. That was a good decision, made for good reasons.

What Sony was doing

Sony had invented the compact disc with Philips in 1982, and CD-ROM with them in 1985. Sony was not learning this format for the deal. Sony had built it, and had watched it take over the music business from the inside.

Inside Sony there was also an engineer called Ken Kutaragi. He had already persuaded his management to make the sound chip that went into the Super Nintendo, and he has described that as his way in. What he wanted was for Sony to make a games console.

Sony's leadership thought games were a toy business that would cheapen the name. Norio Ohga, the chief executive, protected him anyway and kept the work alive.

And the plan Kutaragi got approved was larger than the drive. It was the CD add-on for Nintendo, and a Sony-branded machine that would play both Nintendo cartridges and CD games.

None of that was hidden. The Sony machine was part of the partnership, Nintendo agreed to it, and Sony announced it from a stage in 1991. This is a story about pricing rather than about deception.

The first decision

The contract said who would build the drive. It also said who would control the new CD format that ran on it.

On that format, Sony would decide which companies were allowed to release a game, and Sony would collect the licence money.

To understand why that matters, you need to know how Nintendo actually earned. Nintendo made its money from games rather than from machines. Anyone who wanted to release a game for a Nintendo console needed Nintendo's permission and paid Nintendo a share of every copy. The machine was the doorway. The licence was the business.

So on cartridges, Nintendo kept its business. On the CD format, that part sat with Sony.

The same clause, seen from two chairs

Nothing was hidden here and nobody was tricked. Both sides read the same words.

The facts: Nintendo had a cartridge cost problem and went to the company that had invented the disc. Sony had invented it, had a plan approved that included a machine of its own, and ended up holding the licensing rights to the format. Nintendo judged those terms unacceptable three years later.

My read: the clause sat on the far side of a problem Nintendo had not reached yet, and closer to the centre of what Sony was doing.

There is no account of that negotiation. Who asked for the clause, whether anyone argued about it, whether Sony thought it was valuable or thought it was ordinary. I do not know.

What changed

The contract stayed the same. The world around it moved.

By 1991 the CD was clearly where games were going. The clause that had looked like a detail was now about the next ten years of Nintendo's business.

Hiroshi Yamauchi, Nintendo's president, read the terms, decided they were unacceptable, and told Howard Lincoln, one of Nintendo's senior people in America, to find another partner.

I cannot tell you when anyone at Nintendo first noticed. No source I have gives a date. What the dates show is that the contract was signed in 1988, and that by the summer of 1991 the two companies had been building the drive together for about two years.

The second decision

Now Nintendo had a problem it had created itself, and a choice about what to do with it. That choice is a separate decision from signing, and it carries its own price.

There were two roads, and both of them were Nintendo's to take.

The first road is to go back to Sony and say the terms do not work. Reopen the clause. Pay for that in money, in time, and in how Nintendo is seen afterwards.

That price gets paid twice. Once across the table with Sony. And once inside Nintendo, in front of the people who approved the contract in the first place.

The second road is to build the same product with somebody else, say nothing while you do it, and let the other side find out when it is finished.

Which road Nintendo took

The second one.

In June 1991, at a trade show in Chicago, Sony stood on a stage and announced the CD drive it had built with Nintendo. The next day, at the same show, Howard Lincoln announced that Nintendo would be building it with Philips instead. Sony's people heard it in the room, at the same time as everybody else.

The facts: Nintendo had a second partner ready before it said anything, and the announcement came one day after Sony's.

My read: going back to Sony meant asking for something. Going to Philips meant not having to ask. The second road looks cheaper, its cost is not in the room at the moment we choose it.

What the second road cost

Ohga and Kutaragi carried the work on and turned it into a console of Sony's own. The published accounts agree that the announcement in Chicago is what pushed that decision. The PlayStation went on sale at the end of 1994.

Nintendo paid nothing on the day it chose. The bill arrived three years later, as a competitor in a market Sony had not been in before.

Back to 1988

The man across the table had a console plan in his pocket and the format in his hands.

None of that was secret. It was simply not what Nintendo was there to talk about.

We can know exactly what we are buying and still misprice what we are paying with. On where a thing is going, the other side may have the better view.

So, in the deal we are working on now, which part of it matters more to them than it does to us, and do we know why?

Be well, Tina

#TheHumanSignal #PerformanceReDefined #OwnershipMindset