Nintendo was faced with the challenge of designing a controller specifically for 3D games. They wanted to introduce analog control but didn't know how well it would be recieved. Would game developers still want the traditional 8-direction control pad or would they switch to analog?
The design of the Nintendo 64 controller is likely the result of these questions. Nintendo came up with a 3 pronged solution. Hold the controller by the two outer handles for digital control, or hold it by the middle and right handles for analog control. The fact that they put the analog thumb stick in the center of the controller suggests that even they had doubts that analog would catch on.
Other innovations are the four yellow C buttons - specifically for controlling game viewpoint, and the Z trigger which is actually underneath the center of the controller - so the player can press it even when holding the controller by the center handle. Added to that was the usual two shoulder buttons, Start, A and B.
The final innovation is the expansion bay underneath the controller. This allows each player to have their own memory card, Rumble Pak (first appearance of vibration function in a console controller), or one of the other expansions that was later released.
All this innovation, unfortunately, tended to throw off players. If you handed the controller to someone who wasn't used to it, it was fairly likely that they would hold it by the wrong handles for the intended control method or that they were unaware the Z button even existed.
You can also also see a near final prototype of the N64 controller here.
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