5. Added Values

Nothing is more useful than water; but it will purchase scarce anything; scarce anything
can be had in exchange for it. A diamond, on the contrary, has scarce any value in use;
but a very great quantity of other goods may frequently be had in exchange for it.
--- Adam Smith, Wealth of Nations, 1776

Two hundred years ago, Adam Smith presented a paradox concerning water and diamonds: Water is essential to life, while diamonds are not. Yet water is essentially free, while diamonds, alas, are not.

Had Adam Smith lived in the 1990s, he might have compared televisions and cars with video games. Televisions and cars are like water, practically essential to our modern lives. Video games are modern diamonds. They're a kid's best friend, but no more. So which business would you prefer to be in: consumer electronics, cars, or video games?

Let's compare three prominent Japanese companies, one in each business: Sony, Nissan, and Nintendo. Sony makes televisions; Nissan makes cars; Nintendo makes video games, especially one about a plumber named Mario. Between July 1990 and June 1991, the average market values of these three companies were:

Nissan 2.0 trillion yen
Sony 2.2 trillion yen
Nintendo 2.4 trillion yen

Yes, for a while at least, Nintendo was worth more than either Sony or Nissan. How did Nintendo do it? Never mind how it surpassed Sony and Nissan; how did it even come close? The answer lies in added value.

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