Akio Nakanishi spoke up, "Mr. Lin, we want a five-year license for Hong Kong Blocks. Three years is too short, and we want exclusive distribution rights for all of Japan."
"The duration is negotiable, but exclusive distribution rights are not."
Lin Baicheng shook his head and said firmly, "Unless your company is willing to pay an exclusive distribution fee and place an initial order of no fewer than 10,000 arcade machines, exclusive rights are not possible."
Lin had to protect his interests. If Taito Corporation gained exclusive rights but only ordered a few hundred machines, he would take a huge loss. While the risk seemed small, it had to be considered.
"The first order of 10,000 machines is fine, and we can pay the exclusive distribution fee," Nakanishi agreed.
"Mr. Lin, your arcade machines sell for HK$5,000 in Hong Kong, but $1,500 overseas. Since we are ordering in bulk, the price needs to be lowered a bit," he continued.
Lin Baicheng didn't immediately agree to lower the price but asked, "Mr. Nakanishi, first I need to know — will you be purchasing complete machines or just the boards?"
"Just the boards will do," Nakanishi replied.
"Mr. Lin, I hope this doesn't offend you, but your machines are not yet top-of-the-line. When we take the boards back, we will remanufacture them."
"Not at all, Mr. Nakanishi. You're speaking the truth, so I have no reason to be upset."
Lin shook his head. With less than HK$1 million in initial capital, he couldn't afford top-tier components. Nakanishi was right — the cost of quality boards would have been too high.
"The complete machine sells for $1,500 overseas, and the board is the most expensive component. Even if it's just the board, it must cost $1,300," Lin explained.
"$1,300 is too high, Mr. Lin. $200 barely covers the components and labor," Nakanishi said with a smile.
"Moreover, even at $1,300, with the current exchange rate of $1 to HK$4.2, it's about HK$5,500 — already higher than your selling price in Hong Kong," he continued.
"You can't calculate it that way, Mr. Nakanishi," Liu Yihui spoke up. "As you said, we're using standard components. Labor costs are lower in Hong Kong than in Japan, so most of the arcade's cost is in the board. $1,300 isn't high — we need to make some profit."
"Since this is an initial order of 10,000 units, it's reasonable to offer a discount. How about $1,200 per board? That's my lowest price," Lin Baicheng said, echoing Liu Yihui.
After some mental calculation, Nakanishi agreed. Taito Corporation's actual bottom price would have been $1,500 for a full machine, $1,200 for the board. Using better components during remanufacturing, the cost wouldn't exceed $1,500.
Taito Corporation was very optimistic about Hong Kong Blocks, which is why Akio Nakanishi personally came to negotiate for exclusive rights in Japan, offering a high price to avoid repeating the mistake they had made with PONG.
PONG, developed by Atari in 1972, was a simple but classic ping-pong simulation. Taito had originally had the chance for exclusive Japanese rights, but their sales department thought ¥800,000 for a TV with controls was too expensive and unusual. To share the risk, Nakanishi persuaded Sega to co-distribute it. The game became a huge success, and Taito lost significant profit.
Not wanting history to repeat, Taito decided to send Nakanishi personally to negotiate, aiming for exclusive rights for Hong Kong Blocks.
"Mr. Lin, how much will your company charge for the exclusive distribution fee?"
"We need to discuss that," Lin replied, glancing at Liu Yihui. He had a figure in mind but wanted to confirm it with Liu first.
Nakanishi nodded, "I'll wait for your reply, Mr. Lin."
Lin smiled, "I'll give you an answer this afternoon."
The negotiation paused. Nakanishi and his team left, with Wu Jianjun and Yamada Hideyoshi escorting them to their hotel.
"Old Liu, what do you think is an appropriate exclusive distribution fee to charge Taito?" Lin asked after they left.
"Boss Lin, I don't know the typical exclusive distribution fees in Japan, but Hong Kong Blocks is our first game. The priority is opening the market and cooperating, so I don't think we should ask for too much," Liu analyzed.
"Seems we think alike, Old Liu," Lin said with a smile. "But earning more is always good. We can start by asking $3 million and see how Taito responds. As long as the counteroffer isn't too low, we can accept it."
"Boss Lin, why not license the anti-piracy software to Taito? $300 per board, maybe more — if 100,000 machines sell annually, that's at least $30 million revenue!" Liu asked, curious.
"Do you think I don't want that money?" Lin shook his head. "I'm worried that if we license it to Taito, they could crack the software, bypass us, and develop their own anti-piracy system. How much we'd earn is uncertain."
"That makes sense," Liu said, realizing it could happen 100%. If he were in Taito's position, he'd do the same rather than pay over $30 million a year.
That afternoon, both sides met again at Seagame's office.
After negotiation, the exclusive distribution fee was set at $2.5 million. When Lin had asked for $3 million and Nakanishi countered with $2 million, Lin agreed to $2.5 million to close the deal smoothly.
The final agreement: Seagame granted Taito Corporation a five-year exclusive distribution license for Hong Kong Blocks in Japan for $2.5 million. Taito placed a first order of 10,000 boards at $1,200 per board.
Payment terms: 50% upfront, 20% on delivery, and the remaining 30% one month after delivery.
Both sides hired lawyers to draft the contract. Lin Baicheng signed and sealed it, while Taito required Nakanishi to take it back to Japan for the company president's signature before it became effective.