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As you probably know, in the technology world, smaller is generally considered to be better. Companies compete to make the most portable phone, or the smallest laptop, but apparently Nintendo didn't get the memo on this back in the '80, because if you take a look inside an NES cartridge you may notice they were opting for the exact opposite:

In other words, the case is massive compared to the internals.

Why would they do this? Why would anyone do this? Am I missing something?

Under the hood, the NES was almost identical to the Famicom, its Japanese counterpart released in 1983:

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The Famicom console itself was much smaller that the NES, and it had a traditional top-loading cartridge slot instead of the NES's notoriously unreliable front-loader. It's cartridges were also more reasonably sized:

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At the time the NES was released in the United States, the North American video game market had just crashed. Consumers were unwilling to buy video game systems, and retailers were unwilling to sell them. The Nintendo Entertainment System made quite a few unusual design decisions in an effort to market the NES as an "entertainment system" rather than a video game console. According to the Wikipedia article History of the Nintendo Entertainment System:

Nintendo purposefully designed the system so as not to resemble a video game console, and would avoid terms associated with game consoles, using the term "Pak" for cartridge, or "Control Deck" instead of "console". Renamed the "Nintendo Entertainment System" (NES), the new version lacked most of the upscale features added in the AVS, but retained many of its design elements, such as the grey color scheme and boxy design. In avoidance of an obvious video game connotation, NES replaced the top-loading cartridge slot of the Famicom with a front-loading chamber for software cartridges that place the inserted cartridge out of view. The revised design includes design flaws which have the side-effect of making the NES more prone to breakdown. The loading mechanism became notorious for slowly failing. The Famicom's pair of hard-wired controllers was replaced with two custom 7-pin sockets for detachable controllers.

Nintendo knew they couldn't sell a video game system, so they made something that looked futuristic and not like a video game system. The design decision of inserting a large cartridge into a slot on the front of the system was an effort to resemble something like a VCR rather than a game console.

The mechanical aspects of the NES require that all NES Gamepaks be about the same size. NES could not predict with certainty everything that game designers might want to include in a Gamepak, and were more interested in ensuring that the cartridges could handle the worst-case need than in making them as small as possible.

Making the cartridges larger would also cater toward an attitude that increased size correlates with more sophistication, and made it easier for people to acquire an impressive-looking collections of games.

Which looks more impressive: a stack of 10 NES cartridges, or a stack of 20 Nintendo DS cartridges?