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To offer some support for happydolphin, I don't think it's with blockbuster publishers/developers that Nintendo having a free engine would help with but rather for winning second level projects which might grow into more prolific franchises.

As an example, look at Demon's Souls, which used Sony's free-use engine. It's been a boon in Japan, with studios like Nippon Ichi and Gust employing it for several titles each. Perhaps Nintendo having a free engine could promote more projects of that level?