Nintendo will be releasing their second quarter earnings in a couple of days and I fully expect there to be a focus around the partnership between DeNA and Nintendo. The company stated that they plan to launch around 5 titles on mobile before March 2017 based on Nintendo IP. Both companies confirmed that at least one title will launch before the end of the year and we should certainly hear about this, if not at Nintendo’s investor briefing, then at DeNA’s in a couple of weeks.
The original deal was announced back in March this year when Nintendo purchased 10% of DeNA stock for $181 million. The partnership was created to allow joint development and operation of gaming applications for smartphones using Nintendo IP and characters and to create a new multi device membership system that would work across Mobile, Console and PC. This deal was Nintendo openly stating that they plan to move away from the archaic business model they’ve held on to for so long as they finally planned to develop games for a segment of the market that will shortly generate more revenue than console game software revenue does.
Nintendo had denied for a very long time that they would ever enter the mobile market stating that offering content to third party systems would hurt their business model. It’s actually quite ironic that by Nintendo taking this stance they’ve actually done a lot worse than some companies who just develop mobile games. Nintendo’s traditional model of only releasing software on their own dedicated hardware hasn’t proved successful for them this time around as the Wii U has only managed to sell 10 million units compared to the wildly successful Wii which had an install base of over 100 million. Under the current business model this means that software sales will also struggle thus affecting overall revenue and operating profit as seen in the images below. In fact Nintendo recently suffered 3 years of losses because of this business model.
The gaming market today can be split into 3 segments, there is console, PC and Mobile. 10 years ago we saw console as the biggest of the 3 but if we look at 2015 we can see that revenues generated by console game software is set to remain flat year on year whilst PC software revenue has overtaken console and will continue to grow, mobile game software revenue is forecasted to overtake console revenue next year and will continue to skyrocket. Consoles are far from irrelevant but it’s clear to see that it’s no longer the biggest segment in the gaming industry and when Nintendo aren’t even the biggest presence in that segment it’s clear that this is why they are now taking drastic steps to change their business model to expand outside of traditional console gaming.
Mobile has grown to such an extent that it is already replacing the direct usage cases that casual and semi casual gamers bought the Nintendo DS and PlayStation Portable for. It’s why revenues from dedicated handheld gaming software this year are estimated to fall short of $3 billion compared to the more than twice that amount being generated 5 years ago. With gamers able to get portable gaming experiences on their smartphone we’ve seen the dedicated handheld install base go from an estimated 230 million last generation to around 65 million today. The days of shelling out for dedicated handheld gaming devices are long gone and with the Wii U being a failure due to lack of third party support, confusing marketing and a lack of appeal to casual gamers we believe that Mobile could represent a good opportunity for Nintendo.
I’m not saying that Nintendo should completely abandon their traditional console model and just go into mobile. If Nintendo are able to address the problems that the Wii U had, such as third party support, they could very easily release another console which could be more successful thanks to the strength of their IP. The toys to life market also represents another opportunity for Nintendo as does new partnerships to license their IP. This is something I believe Nintendo should continue doing in order to increase awareness and expand their business model. The NX console due to release in the second half of next year will be Nintendo’s attempt to reclaim market share in the traditional console space whilst branching out with these other opportunities.
Nintendo have already shown that they are now more open to invest in other opportunities such as the partnership with universal to open theme park rides at Universal’s Parks & Resort. Their investment into Niantic, a company that develops augmented reality software, who are developing a Pokemon game for mobile devices and of course their partnership with DeNA which shows Nintendo is finally getting serious about branching out which is something investors have been wanting to happen for a very long time.
DeNA and Nintendo have both stated that the goal of this partnership is to create world-class smartphone games with massive reach that can achieve mid to long term profitability. Nintendo have been very vocal about entering the mobile industry in the right way by “carefully selecting” the IP and type of games they will be releasing to ensure that the games being released are of the highest quality and do not devalue the Nintendo brand.
DeNA have been very vocal in stating that they want a long term partnership with Nintendo to create multiple hit games rather than just creating one big game. The company aims to have hundreds of millions playing the games and ensuring that each game can bring in more than $25 million a month. The partnership really does benefit both companies but for DeNA there is less risk involved as they are now developing games based on known IP’s that already have big fanbases who would be willing to play the games. Nintendo have much more to lose in that they may not be able to generate a healthy return in such a competitive market.
Releasing a mobile game in 2015 may be seen as very late by some, and to be honest it is, but the mobile gaming industry is still growing and maturing so this can allow Nintendo to bring something unique to the market that could be very successful. Nintendo stated recently that they are trying to appeal to everyone with their mobile titles, in a similar way to how they appealed to everyone with the Wii, except this time they have plenty of competition rather than just two other console manufacturers.
The model that they seem to be going for is a free to play model but they haven’t fully ruled out one-off payments, which is what we see with $60 console titles today. The strategy for their free to play titles appears to be one that encourages as many gamers as possible to spend money in-game every now and then which ultimately generates lower ARPU but increases engagement and can just as easily generate high revenues. This is the opposite strategy of games like Clash of Clans which has a very small part of the user base spending the majority of the money. Instead it seems that Nintendo are going after the Hearthstone business model that attempts to get a much higher percentage of the audience to purchase expansions and new packs every few months. This is further backed up by a statement from Nintendo that says they plan for their mobile games to act as a continually updated service with new content being made available to users encouraging them to keep playing.
It’s clear that this is the best route for Nintendo to take and it also goes someway to help them create a new unified account system. I strongly believe that Nintendo’s new online membership service will launch alongside the first mobile game and will carry across to the new NX console devices released next year and beyond. By launching the online system on Mobile, along with console, it gives them the opportunity to reach as broad an audience as possible. Nintendo have always had poor online integration between their devices and this online membership service should finally bridge that gap and bring them up to speed with the likes of Xbox Live on console and Windows 10. It is imperative that Nintendo get this online system right as not only will it provide a better experience for gamers, it will also allow Nintendo to cross promote games and services and increase retention rates whilst lowering user acquisition cost.
I think Nintendo will play it safe with their first mobile game and go for a genre that is already very popular on mobile, such as a puzzle game or endless runner, and attempt to use one of their big IP’s to enable the success of the game. It’s similar to what SEGA did with the Sonic brand. Whilst the console game “Sonic BOOM” failed to break a million units sold on consoles the mobile game “Sonic Dash” was downloaded over 140 million times on mobile and had a number of in app purchases that gamers would have taken advantage of. In fact since releasing that game the studio behind the title has expanded and is now working on multiple mobile games including Sonic Dash 2 which released on iOS and Android this month. By creating a game tailored to the mobile market Nintendo wouldn’t be detracting from their dedicated console business and instead the games would work as an additional source of revenue and promoter for their dedicated hardware and brand.
Only after a slew of successful games would I expect Nintendo to release games or applications that have interactions or similarities to their console games. What I mean by this is an application or game that can be downloaded on mobile and can help unlock certain items or help enhance a certain experience on a fully fledged console title of that same IP. To give an example, something like extra lives being generated on the mobile game can be used in the console game even though the two games have different experiences.
Talking of the future, Mobile represents a huge opportunity outside of what Nintendo have already talked about. We’ve already seen Nintendo work on licensing deals with Activision by allowing certain amiibo characters to work with Skylanders on console and I believe licensing out their IP on mobile could be something that works to the company’s advantage. It not only helps strengthen their own brand but helps the new generation of gamers on mobile become aware of Nintendo IP’s and try out Nintendo games. As well as this I believe there is a huge opportunity for Nintendo to release older titles on mobile in a similar way to how the Wii U has the virtual console backwards compatibility. We’ve seen Square Enix and other companies do this very successfully and it’s been shown that gamers are willing to pay one off costs for the opportunity to play their favourite games again on mobile. Once again this can open up a whole new audience to Nintendo games and whilst some may say this undermines their handheld business, I say that the handheld business is a dying one outside of hardcore gamers so putting the games on mobile would be more beneficial than not putting them on mobile.
Nintendo has to realise, and I believe they have, that we are no longer in a market where dedicated gaming devices are king. It’s the same realisation Microsoft went through recently when smartphones outpaced PC and Laptop sales by 5x the amount. Microsoft realise that they can’t compete in the mobile space when it comes to dedicated hardware sales and Windows 10 sales and that’s why they’ve opened up their software, such as Office, to iOS and Android. Microsoft knows that even though their software is on a competitors platform they are still able to retain control over the software, expand the userbase and market their other devices and services. If Nintendo can take this approach to the mobile market then they could see mobile as a healthy part of their business over the next few years.
As I said earlier, many investors have been calling for Nintendo to branch out more and enter the mobile market but Nintendo were always very vocal in saying this would never happen even though the mobile market continued to grow at record pace and the demand was there for Nintendo style games on mobile. It was only after 3 years of continual losses and an ever shrinking share in the console market that Nintendo finally decided to enter the mobile market and whilst the mobile market is still in a stage of growth it is clearly a very late entry into a market that could have proved profitable for them had they entered it a number of years ago. It’s Nintendo’s arrogance and closed mindedness to other business models that caused those 3 years of losses and so it’ll be very interesting to see if this new and more open Nintendo can do any better.