With antitrust regulators around the globe poised to dismantle the most lucrative and unfair of Apple’s Services offerings, it’s useful to understand where its App Store fee structure originated and why double-digit fees make sense in some markets but not in others.

?️ It’s Nintendo’s fault

Nintendo entered the videogame console market in Japan in 1983 with its Family Computer, or Famicom, so named because the company originally sought to make the device expandable into a home computer with a keyboard and floppy drive. But as the product evolved, Nintendo decided that making it simple, affordable, and familiar were key to success. And so Nintendo moved the slot for its overly large cartridge to the front of the device, where it would use a VCR-like loading mechanism, redesigned the durable, kid-friendly controllers to be hard-wired to the device, and dropped the computer add-ons.

Unfortunately for the broader videogame industry, 1983 is remembered more for the other major milestone that occurred that year: The videogame crash that triggered the death or irrelevance of the best-selling U.S.-based consoles from Atari, Coleco, Magnavox, and Mattel Electronics and the related market shift to U.S. consumers playing videogames on home computers.

The crash didn’t impact Japan, but it gave Nintendo and other Japanese videogame makers like Sega time to establish themselves in their home market. The Famicon cost less than half the price of non-Japanese consoles, and Nintendo supported the device with ports of three of its arcade games: Donkey Kong, Donkey Kong 2, and Popeye.

By the end of 1984, Famicon was the best-selling console in Japan. And Sega, another arcade game maker that had launched its Computer Videogame SG-1000 shortly after the Famicon, was a distant second. For the next 40 years, Japanese companies—including Sony, which entered the market in late 1994 with the original PlayStation—would dominate in videogames.

But for that to happen, they had to succeed in the United States first. And that meant overcoming a few hurdles triggered by the videogame crash of 1983. Nintendo and Sega had to overcome retailer opposition to dedicated videogame machines. And they had to convince consumers that their consoles were different and also better than the previous American consoles or home computers.

Nintendo rebranded the Famicom to deemphasize videogames, first to the Advanced Video System (AVS), and then to the Nintendo Entertainment System (NES). And it did the same for system components: The console was called the Control Deck, and its cartridges were Game Packs. And it marketed the device as being more sophisticated than the failed U.S. consoles, with optional accessories like a light gun and the Robotic Operating Buddy (ROB).

⌛ If I could turn back time

I happened to be working at a Toys R Us retail store in the Boston area in 1985, and I recall getting a phone call late that year from a customer who had just been in New York City and had seen a Nintendo home video game system that had a “laser gun and a little robot you can play games with.” And he wanted to know if we sold it. I had never heard of such a thing at the time, and I assumed he had misunderstood what he had seen. To that point, Nintendo was, to me, just a maker of second-rate arcade video games.

But several months later, I was told that we were getting in several security cages full of Nintendo NES consoles, games, and accessories, and that we were not to open any of them until management had shown up to check the inventory. When these cages did arrive, I couldn’t wait, of course, and so I opened up each in turn, amazed by how many different items they contained. Consoles. Games, of course. That light gun. And sure enough, a bundle with the little plastic ROB robot.

?️ Quality control, yes, but also just control

This was my first experience with the key innovation that Nintendo brought to the videogame market, though I can’t say that I understood its importance at the time. Each of its game cartridge boxes bore a gold seal with the text, “Official Nintendo Seal of Quality.” At the time, this reminded me of the Good Housekeeping Seal of Approval, which was likely the point. But there was one major distinction. Where that award was given to products made by other companies that met high-quality standards, the Nintendo seal was part of a concerted effort to differentiate the NES and its games from previous videogame consoles.

This was Nintendo’s final and most important adjustment to address any lingering concerns caused by the videogame crash of three years earlier. It is a change we are still dealing with almost 40 years later.

Like any disaster, the 1983 videogame crash was caused by multiple factors. But key among them was quality control. Atari had done nothing to lock down its hardware platforms, especially with the best-selling 2600 (VCS). This led to the first third-party videogame publishers, which is obviously a positive development on some level. But each of these outside game makers operated independently from Atari, which did nothing to license its technology and couldn’t control the number or quality of the games that appeared in the market. The resulting glut of games, many of low quality.

Nintendo’s answer was to create a licensing program for the NES console that limited the quantity of games that third party game makers could create while having final say on which games would make it to market. This gave it control over the availability of games that appeared for the NES, but also the quality. And Nintendo implemented region-specific lockout chips in the console and its cartridges to enforce its policies.

? Fair is fair

Nintendo had originally sold only its own games for the Famicom to keep the market to itself. But after two game makers approached it about porting their own titles to the console, Nintendo realized that a licensing program, backed by technical blockers, offered it a win-win. It could allow third-party developers to create games for its console while retaining control over distribution and, in the process, receiving a cut for each cartridge sale.

The question was, how much would the market bear?

There were no antitrust concerns. Nintendo was entering a market that the rest of the industry had mostly abandoned years earlier. It would go on to sell millions of console units over many years, but throughout the world and with a growing list of competitors, some of which would outsell it in certain markets or even across entire console generations. And yet the system that Nintendo came up with was fair, with the caveat that it was artificially limiting the market.

After conferring with the two initial game makers who wished to bring their games to the Famicom, Nintendo instituted a 30 percent fee: 20 percent to cover Nintendo’s expensive cartridge manufacturing processes because these other companies could afford to make them themselves and 10 percent for licensing. This system was so well received that Sega and then the rest of the videogame industry quickly adopted it. And this fee structure survived, unchanged, over several console generations and manufacturing and distribution shifts from cartridges to optical media and then digital.

? When will then be now?

During these transitions, costs related to manufacturing fell dramatically. But the 30 percent fee structure, by then an accepted and unquestioned industry standard, remained and has largely gone unquestioned and unchallenged until recent years, when the mobile app stores that also adopted this fee structure became dominant and addressed markets of billions of users across the globe.

Apple and Google cannot justify the fees they charge developers: The fee is arbitrary, and was not tied to any specific services that either offers developers. Instead, these companies are simply unable to walk away from easy money. We know that the Apple App Store operates at a profit with high margins. And so Apple can only argue that the fee is tied to “the immense value” of its store, while ignoring that it specifically prevents any competition that might offer better value in the form of improved security, better quality control, lower prices to developers and consumers, and a choice of payment services.

As problematic, Apple and Google operate monopoly mobile app stores at a scale no console maker will ever match. The best-selling videogame console of all time, the PlayStation 2, sold an estimated 160 million units over several years, and Nintendo could match that figure this year with the Switch. But Apple sells over 200 million iPhones every year, not to mention tens of millions of iPads, Macs, and other hardware devices every single year, and most are a conduit for Apple’s app store sales (and services).

Today, videogame consoles compete with PCs, smartphones, and other mobile devices, and even the web. and that’s just for gaming, as one might argue that they also compete with other forms of entertainment as well. And this is a low-margin business in which consoles are routinely sold at a loss, and their makers attempt to be profitable overall, over time, by charging a licensing fee for each third-party game and peripheral that’s sold for the platform. Just like Nintendo started doing over 40 years ago.

? Consoles are a tough market

But even those fees make profitability difficult to impossible, and so console makers use other tactics too. They release cost-reduced versions of their consoles over time as component prices come down, and if a console stays in the market long enough, it’s possible those hardware sales can become profitable late in the lifecycle. But this requires a virtuous cycle of sorts, which explains why Nintendo and Sony have had more success than Microsoft in overcoming their per-console losses with each generation: They each typically sell many more consoles than does Microsoft.

To counter this problem, Microsoft was an early innovator in subscription services, starting with Xbox Live in 2002. The original version of this service came in free (Silver) and paid (Gold) tiers, and it introduced platform-wide achievements, gamerscore, and other features. Xbox Live Gold cost $49.99 per year and provided subscribers with services like online play and matchmaking that were free to gamers on PCs. This would be unacceptable in an open market, but Microsoft could justify the practice by arguing that console gaming was a simpler, more curated experience than is the case on the PC, and that it was assuming all the infrastructure costs associated with these activities.

Nintendo and Sony were slow to move to this model, thanks in part to their more successful core videogame businesses. But they both got there eventually, and Sony now argues that the fees it charges developers are tied to “transaction fees, server maintenance costs, and licensing payments.” And the services each provides today are considerably expanded compared to two decades ago, with Microsoft offering four separate Game Pass subscriptions across consoles, PCs, and other devices.

? Nintendo is small but special

Today, Nintendo remains a unique entry in this market, and while it’s often been compared to Disney, it could just as easily be compared to Apple, especially the Apple of the Steve Jobs and Tim Cook years. In its relentless drive for quality and control, Nintendo, like Apple, created something special and enduring. But its control is less troubling than that of Apple because Nintendo is a tiny company, comparatively, despite dominating its small market even more than Apple does with its much bigger market.

Consider this for perspective: Nintendo’s best year ever financially was in 2020, when the company reported over $16 billion in revenues, and it has never earned a profit of over $6 billion. But Apple’s revenues in 2020 were $275 billion, and in the most recent fiscal year, revenues hit over $390 billion. Apple’s profitability is off the charts as well, with over $90 billion in profits in each of the past four years. It’s not just bigger than Nintendo; it’s almost exponentially bigger.

Put simply, videogame consoles are different from other digital hardware platforms in that they’re smaller by unit sales, with tighter margins and a less clear path to profitability. In that market, a 30 percent fee to distribute games may still make sense. But it no longer makes sense for mobile app stores. And the correction we’re finally seeing with Apple and Google now is both welcome and long overdue.