Orange County Register, April 16 1989

Candy Sours surveys an aisle crammed tight with newly uncrated Nintendo home video machines and game cartridges at a Target store in Santa Ana. It is a rare sight.

"We usually only get four or six (machines) in and they're gone," said Sours, a manager at the store. Popular games, like "Super Mario Brothers II" and "Zelda II -- The Adventures of Link," are snapped up even quicker.

It is a lament heard around the county, and for that matter, the country. Now at the height of their popularity, video games and the hardware they run on are as scarce as an open freeway during rush hour.

Retailers and distributors are counteracting with the same ingenuity and skill it takes to guide Link through countless treacheries to rescue the good Princess Zelda. Some are creating elaborate allocation schemes and employing other tactics to placate customers. Video store owners and swap meet vendors are cashing in on Nintendo fever by renting or selling hard-to-find games.

One competitor, Atari Games Corp., is suing Nintendo over restrictions on who can make the game cartridges to run on Nintendo machines. (At present, Nintendo allows only authorized licensees to sell games for its machines.)

In the midst of the frenzy, some competitors and retailers have accused Nintendo of orchestrating the shortage to keep customer interest -- and prices --high.

Nintendo, which holds about 76 percent of the home video market, denies the charges and promises that shortages will decrease as the year goes on.

Meanwhile, a video-game-hungry public keeps the craze alive, despite the scant supply.

"Poor Mom and Dad are dealing with kids who've heard about a new game and bug them to death about having it," says Celeste Dolan, general manager of Video Take-Out, a Van Nuys distributor. "Then they have to tear their hair out trying to find it. They call or race all over town."

The melee is quite a turn of events from four years ago, when home video all but died. After a spectacular rise, poor quality games with mediocre graphics and repetitive plot lines switched customers off the toys. Sales crashed to $100 million from $3 billion, according to industry estimates.

Enter Nintendo, a 100-year-old Japanese company that got its start making playing cards. In 1985, Nintendo brought to the United States an updated version of its Famicom video game system that was a smash hit in Japan.

Nintendo quickly rebuilt the market, relying on tight quality control and games with vastly improved graphics to win back consumers.

Last year, the company sold 7 million game systems -- a cartridge player that plugs into a color television, controller pads and zapper gun -- at prices ranging from $80 to $160.

But the force behind the industry resurgence has been the games, which retail from $25 to $50. Early entries in the post-1985 wave, such as "PacMan" and "Donkey Kong", were versions of popular arcade games. Newer games are quest-oriented, featuring heroes who battle their way through screens of monsters and other hazards to gain an ultimate prize -- and rack up points in the process.

Nintendo and competitors Atari Games in Sunnyvale and Sega of America, a San Francisco-based division of Tonka, sold 43 million video games in 1988, according to industry figures. These three major industry players racked up total sales of $2.3 billion last year, but they could have sold more.

Nintendo and its licensees marketed 32.5 million game cartridges in 1988, but could have sold another 10 million if they'd been available, says William Wilson Jr., a spokesman for Nintendo's American subsidiary, based in Redmond, Wash.

Tengen, a division of Atari Games that makes game cartridges for both Nintendo and Atari game systems, met only 10 percent of the demand for its games last year, says David Ellis, a spokesman for the company. Tengen still makes the Nintendo cartridges while involved in a legal dispute with Nintendo over its right to do so.

The companies say the shortage could let up some in 1989. An estimated 63 million games could be sold this year, with 50 million of those coming from Nintendo or its licensees, Wilson says.

Meanwhile, retailers say they can expect to have empty shelves for part of every month, despite doing everything they can to keep video games in stock.

"We run out of them in a day or two, the new releases. Sometimes it could be up to several months before they come back in,"says Larry Ruflin, owner of Toy Express in Anaheim.

The hottest seller at his store is "Super Mario Brothers II," the adventure of two mustachioed Italian janitors who dodge hammer-throwing monkeys, lava balls and man-eating plants to rescue the Mushroom Princess. "Zelda II -- The Adventures of Link" and "Track and Field II," are also top sellers, Ruflin says.

When games run out, Home Express in Tustin gives customers rain checks they can redeem when the merchandise is in stock, says John Koch, the store's electronics buyer. A number of other retailers also give redemption coupons for games and cartridge players.

The problem extends to distributors, companies that buy games in bulk from Nintendo and its licensees and resell them to chains like Target and Toys 'R' Us, and independent toy stores.

CSD, a Buena Park distributor, receives 25 to 30 orders for every game cartridge it gets in stock, says Carl Nadeau, the company's operations manager.

According to Nadeau, CSD lets its sales force decide which customers will get all the games they ordered, and which will get only part of an order.

"They allocate based on how (the retailer) sells the whole category, including (Nintendo) T-shirts, pins and caps," Nadeau says.

At Christmas time, Video Take-Out stopped accepting new customers in deference to its existing clientele, Dolan says. At other times of the year, the distributor tries to be as fair as possible in filling orders, she says.

"If we get in a shipment of 500 pieces of a title and we have back orders from customers for 1,000 pieces. We'll try to fill 50 percent of each customer's order," she says.

Toy stores are now vying for game supply with video stores, which have rediscovered video game rentals after dropping them in the early 1980s.

About 70 percent of all video stores in the country now carry some supply of video games, says Frank Moldstad, editor of Video Store, an industry magazine based in Santa Ana.

Video Depot in Huntington Beach began renting video games over Easter weekend, says the store's manager, Mike Kraft.

"Word-of-mouth was it was a good business to get into," says Kraft. The shop bought 30 games and rents them out for $2.10 a day, including tax. So far, the store is renting out two or three a day.

Russ Chapman, owner of Video Galaxy in Fullerton, has a library of 40 games for rental as well as a Nintendo machine.

Chapman says he was forced into renting Nintendo games when competitors started carrying the games. "Customers want to make it one-stop shopping insead of going two places, one for the kids and one for adults," he says.

In addition to renting games for Nintendo, Atari and Sega systems, some stores have set up hot lines with recorded messages on upcoming releases and playing hints. Others have instituted trade clubs through which customers can trade one of their used tapes for one of the store's for a $10 service charge.

Short supplies have created an underground market for game cartridges. Nintendo won't sell directly to video store owners, leaving them to either buy overstock from authorized distributors, at retail from mass merchandisers, or from underground suppliers who sell games at whatever price the market will bear.

Some video store owners have paid up to $100 for popular titles such as Zelda II -- The Adventures of Link, which retails for $39.95, according to the magazine.

Video games have even found their way to the swap meet.

Ray and Moe Taghavi have sold Nintendo game cartridges at the Orange County Swap Meet for three years. On a good weekend, they peddle 500 or 600 games, Ray Taghavi says.

The brothers, who operate as Star Video in Los Angeles, find games by paying $2 to $3 per cartridge over wholesale costs to distributors, then sell the games for $5 to $10 less than what they would be sold for in the stores. Star Video absorbs the additional costs and still charges less because it is a warehouse operation with very low overhead, Ray Taghavi says.

The shortage of games has prompted the lawsuit by Tengen, a former Nintendo licensee, to sue for the right to manufacture cartridges for the Nintendo system without Nintendo's permission.

Under the present arrangement, licensees submit game ideas to Nintendo and the Japanese company determines what games to produce and how many copies of each game will be released. Once cartridges are made, Nintendo sells them to its licensees, who resell them to wholesalers for retail distribution. To stop unauthorized companies from selling software for its machines, Nintendo places a "lock out" chip in the cartridges that must be present for the games to work.

Tengen maintains the arrangement gives Nintendo unfair advantages in the market because Nintendo determines the supply, and is suing the company for violating antitrust laws.

Nintendo has countersued for breach of contract and patent and trademark infringement, while Tengen continues to manufacture the cartridges. The suits are scheduled to come to trial next fall.

Contributing to the game shortage, according to Nintendo, has been a lack of dynamic random access memory (DRAM) chips, necessary to store huge amounts of color and graphics information built into the games.

The original Pong game from Atari Corp. (not related to Atari Games) used 8,000 bits of memory. By comparison, Nintendo's least memory-hungry games use 256,000 bits of memory and super-powered games like Super Mario Brothers II can use up to 4 million bits, according to Wilson.

DRAM chips have been in short supply for more than a year, affecting production and price of personal computers as well as other consumer electronics.

Nintendo maintains that because of its strict quality requirements and desire not to raise prices, it can't buy just any chips.

But Nintendo's competitors say the chip shortage is over.

"Tengen makes cartridges in the United States and there are plenty of chips available to meet Tengen's needs," says Ellis, the Tengen spokesman.

Tengen and a number of retailers who carry video games say they believe Nintendo perpetuates the appearance of a shortage when in fact, how much or little product it ships is part of a very smart marketing strategy.

"It's a way of controlling the market and getting the price high by limiting production. By limiting production, they're free to charge whatever they want," says Steve Murawski of Video Concepts, a video electronics retailer in Buena Park.

Nintendo officials deny those charges and say the company sells as many games as it can.

Some retailers speculate the home video game craze will die soon, a la Cabbage Patch dolls and Teddy Ruxpin bears.

But others are convinced video games are as ingrained in American toy culture as Barbie dolls and GI Joe.

"Nintendo's already got a stronger track record than Cabbage Patch. There's more attraction to the games than dolls because they attract male and female," Murawski says.

Want to play? As of the end of 1988, close to 20 percent of American homes had a video game machine. Sales of video game players and cartridges should top $3.4 billion this year, and penetration into American homes is expected to reach as high as 33 percent. Clearly dominating the video game industry is Nintendo, which expects to hold 76 percent of the US market this year, giving it annual sales of $2.6 billion. The company expects to be in 21 percent of US households by year's end. Retailers sold 43 million video games in 1988. Best sellers include: "Super Mario Brothers" (10 million to date) and "The Legend of Zelda" (2.5 million to date). How popular is Nintendo? The company claims to get more than 100,000 telephone calls and 5,000 letters per week requesting assistance on Nintendo products.
Illustration

ILLUSTRATION:COLOR PHOTO:BLACK & WHITE PHOTO; Caption: (color photo of Nintendo video game - Nanetti); Caption: The wild video-game market (illustration - Wise); Caption: (photo of Video Concepts store in Buena Park Mall and their Nintendo display - B&W); Credit: Ygnacio Nanetti:Michelle Wise