via cnn

A year ago it looked like game over for Nintendo's storied console business. The Kyoto-based gamemaker--whose Nintendo Entertainment System ushered in the modern age of videogames--was bleeding market share to newer, more powerful systems from Sony and Microsoft.

Even as the videogame business grew into a $30 billion global industry, Nintendo saw its U.S. hardware sales shrink to almost half of what they had been nearly 20 years earlier.


The Wii is reversing 20 years of declining Nintendo console sales.

The DS broadened Nintendo's market. The Wii goes even further; grade-schoolers and grandmas are getting into the swing.

Today, as anybody within shouting distance of a teenager knows, Nintendo is the comeback kid of the gaming world. Instead of joining Sony (Charts) and Microsoft (Charts, Fortune 500) in the arms race to pack their consoles with ever-higher-performance graphics chips (to better attract sophisticated gamers), Nintendo built the Wii--a cuddly, low-priced, motion-controlled machine that broke the market wide open by appealing to everyone from grade-schoolers to grandmas.

Unorthodox? Maybe. Effective? You bet.

The Wii is a pop culture smash of such dimensions that Nintendo still can't make consoles fast enough. Even so, it's outselling Sony's PlayStation 3 and Microsoft's Xbox 360--at least since January. (The Xbox had blowout pre-Christmas sales.) And while its competitors lose money on every console they build, expecting to make it back selling high-margin games, the Wii was designed to sell for a profit from the get-go.

Nintendo blows by forecasts
Nintendo's turnaround began five years ago, when the company's top strategists, including CEO Satoru Iwata and legendary game designer Shigeru Miyamoto, zeroed in on two troubling trends: As young consumers started careers and families, they gradually cut back on game time. And as consoles became more powerful, making games for them got more expensive.

Studios thus became more conservative, putting out more editions of Madden NFL and fewer new, inventive games that might actually grow the market.

Iwata and Miyamoto eventually concluded that to gain ground, Nintendo would have to do something about the game controllers, whose basic design had hardly changed since the first NES paddles. Changing how the controllers interacted with the consoles would mean changing how engineers designed a system's electronics and casing and eventually the games themselves.

The first product to test the new strategy was not the Wii but the DS handheld game system, released in 2004. To appeal to a broader audience, Nintendo abandoned the kid-friendly Game Boy name it had given its other popular handhelds, while building in Wi-Fi networking, voice recognition, and two screens (See correction below).

The idea was not to load the DS with technology but to help draw in new gamers by offering options other than the old button-based controls. Some DS games would work through the tap of a pen and simple voice commands.

The trouble with gee-whiz gadgets
The $150 gadget got off to a tepid start. Until gamers tried it, they tended to be wary. "People thought it was weird," says Perrin Kaplan, vice president for marketing at Nintendo of America. "It took about two years for people to warm up to it."

But warm up they did, largely thanks to Miyamoto. The creator of Nintendo's blockbuster franchises--Donkey Kong, Super Mario Bros., Legend of Zelda-- offered up Nintendogs, a Tamagotchi-like simulation in which players use every feature of the DS to nurture virtual puppies. The game struck a chord with female gamers in particular, says John Taylor, an analyst at Arcadia Research.

During the first holiday season after Nintendogs hit the market, Nintendo sold 5.6 million DS units--a standout performance that was nearly twice its total for the rest of the year.

Soon after Nintendogs, the company released Brain Age, a game designed for more mature players in which they solve a series of puzzles by filling in answers or speaking phrases aloud. "That further bolstered the market by attracting older boomers and even senior citizens," Taylor says. The DS surge encouraged Nintendo executives, who saw their strategy to grow the market taking shape.

They wouldn't have to wait long to put it to a bigger test. Work had already begun on the console, code-named Revolution, that would become the Wii.

Club Penguin, Webkinz corner the tween market
Nintendo's top strategists knew early on that they wanted to build a machine with a wireless, motion-sensitive controller. But equally important was the chip that would be the brains of the Wii console itself. The more powerful processors that Sony and Microsoft were using would make the screen action look better but would also guzzle more electricity.

What if Nintendo used a cheaper, lower-power chip instead? After all, the DS, with its efficient mobile processor, had already proven that you could create new gaming experiences without the fastest chips. A low-power chip also meant that the machine ...