With this discussion of the NES technical specs, everyone has forgotten possibly the most important chip in the box, the “lockout” chip.
The lockout chip was Nintendo's method of controlling what NES-compatible games were manufactured. A microchip inside the NES ran a program called “10NES” that prevented all cartridges from functioning unless they contained a similar chip. Since this "authenticating processor" was a Nintendo patent, only Nintendo could legally provide the component to companies who wished to produce NES-compatible cartridges. Nintendo would grant licenses to software developers and then manufacture the actual cartridges themselves, ensuring that the specs for the chip remained a secret.
And not just any company could get a license. If a third party company wanted to develop for Nintendo, they were not allowed to make games for anyone else. This exclusivity requirement is what effectively killed the Sega Master System. Games were not allowed to contain any questionable language or adult content and developers were only allowed to release two games a year. What did these companies get for playing by the rules? Why the “Nintendo Seal of Quality” of course! This seal didn’t mean that it was actually a quality game, just that the developer had paid Nintendo their cut.
In 1989, Tengen, a third party developer that was actually a subsidiary of Atari, announced that they were terminating their licensing agreement with Nintendo because they had found a way to bypass the lockout chip. Tengen quickly released unlicensed versions of Gauntlet, Tetris, and Pac-Man in really cool black cartridges. (I still got my copy of Gauntlet around here somewhere). Nintendo sued Tengen for breach of contract, while Atari filed an anti-trust suit against Nintendo. Nintendo also sued Tengen for copyright infringement, stating that there was no way they could have bypassed the chip and must have copied it instead. Many retailers refused to carry the Tengen games because Nintendo had threatened to hold deliveries to any store that sold them. Sound familiar kiddies?
Why did Nintendo institute all these rules? Just because they were money-grubbing bastards? Well, yes, but also to prevent another industry wide crash like in 1984. During the early 1980s everyone and their brother got into the games biz. Anyone who knew how to write code could make a game for the Atari 2600. Quaker Oats even had a video games division! The market was flooded with games, most being dumped off at rock bottom prices. Scores of companies went out of business as profits plummeted. By the end of 1984 the American videogame industry was effectively dead, just a passing fad that we had worked out of our system. Nintendo’s rules helped to limit the number of games on the market and prevent this from happening again.
So was Nintendo greedy? Yes. Did they engage in anti-competitive practices? You bet. Did they save the home gaming industry? Quite possibly so.