ZhugeEX Blog

A full 5,000 word write up on the success of Pokemon Go. 

Pokémon Go was a hit the moment it hit the app store, jumping to the number 1 grossing spot in all launch countries within just a few hours. The new location based / AR game from Niantic and The Pokémon Company has done exceptionally well on both iOS and Android with more daily active users in the US than Candy Crush. The game also holds the number 1 grossing spot across all 34 countries that the game has launched in so far. Despite having officially launched in just 34 countries, it is clear that the game is already a global phenomenon with many in other countries downloading the APK through unofficial sources in order to get a taste of the game. It’s estimated that the game has already generated more than $40 million in gross revenue in just two weeks, a number that is generally unachievable unless you’re Supercell or another big mobile publisher.

The Pokémon franchise is a little over 20 years old at this point and to date has found success in traditional video games, trading cards, movies, tv shows and licensed merchandise. To date, more than 280 million units of Pokemon game software have been sold for Nintendo hardware and more than 21.5 billion individual trading cards have been sold to consumers. There have also been 18 full length feature films and an animated cartoon series which was hugely popular during the 1990’s. At retail, licensed merchandise generated over $2.1 billion in 2015 and overall the entire franchise has grossed over $50 billion in its lifetime, making it one of the biggest game related franchises ever.

The idea for Pokémon Go was created by Nintendo, The Pokémon Company and Niantic/Google. The concept was originally just an April Fools prank by Google that allowed you to catch Pokémon on Google Maps and was later announced as a fully fledged game in September of 2015. The development and publishing of the game was handled by Niantic, a start up that was spun off from google with a $20 million investment from Google, Nintendo and The Pokémon Company. A further $10 million was also put up on the condition of the company achieving certain milestones. Milestones which are no doubt met thanks to the hugely successful launch of Pokémon Go. Partnering with Niantic was a genius move as the company already has a ton of experience with AR, as well as a huge database of locations, from their previous game called Ingress. Pokémon Go builds on Ingress by utilising that database to create a world map and fuses that with the Pokémon IP and gameplay to create a new and unique mobile experience that resonates with gamers today.

Pokémon Go has been labelled the most successful mobile game in week 1 by many research firms due to the fact that it is the fastest game to reach number 1 on the iOS grossing chart and because the game has more daily active users on Android than Twitter and other popular social apps. The main takeaway from this is that the game has managed to not only reach a huge audience, it’s also encouraged users to spend in app and this has caused Pokémon Go to shoot to #1 on both the download and revenue charts in all launch countries so far. There are a number of factors as to why there has been this immediate response from gamers. The first point is that this was the perfect time to bring Pokémon to mainstream gamers on Mobile. The millennial audience which grew up with the original Pokémon games and anime are now in their late 20’s and early 30’s making them the perfect demographic for a new mobile gaming experience that features a nostalgic brand.

However brand & nostalgia alone are not the only reasons why Pokémon Go has been so successful, otherwise Pokémon Shuffle would have also been a hit. The location based gameplay and AR features play a role in why the game is so successful, but again it’s not the only reason, otherwise Ingress would have been a hit. Instead It is the combination of Pokemon’s brand, location & AR based gameplay, nostalgia and platform that has caused Pokémon Go to become a hit in such a short amount of time. It’s really no surprise that the game is doing well, but what is so surprising is how the game has sort of become a phenomenon on its own with little to no marketing. Publishers like Supercell and Machine Zone will spend millions on acquiring new users and it’s no secret that the cost per user is constantly increasing for publishers. With Pokémon Go the game wasn’t even featured on the app store front pages, nor was it heavily advertised on TV or in other ad form, yet it still shot to number 1 in a very short amount of time. Word of mouth for the game has been amazing and it really shows just how strong the Pokémon brand is.

What is also of note is how Pokémon Go has found success in a radically different category to what is in the top 10 at the moment. The most successful mobile games so far have typically been in the endless runner category, in terms of high downloads, and in the match three or Tower/Military strategy game category, in terms of high revenue. Instead Pokémon Go has proven that it can do well despite being in a completely different category thanks to the pairing of a nostalgic franchise and location based/AR gameplay. As noted above, this isn’t something that you can emulate as it took both the big franchise and location based AR gameplay for this game to do well. Data suggests that Pokémon Go is serving a portion of the market that is hungry for new gaming experiences on mobile. Slice Intelligence data shows that 53% of Pokémon Go players, who had made an in app purchase, made one or fewer in app purchases on other games in the last 6 months. In fact the demographics of Pokémon Go are quite unique overall with 52% of all buyers in the 18 to 34 age category. No doubt the brand is bringing in those who used to play the game on handhelds back in the day.

Despite the overwhelming success of the game, there have also been a number of issues for Pokémon Go. The most notable of which being that the servers seem to crash every time a new country is added or too many people try and play the game at the same time. It can serve to be frustrating to consumers on mobile who are used to games just working and the downtime could cause some people to abandon the game. However, the game itself is very unique in that it’s similar to an MMO where gamers are all playing in one world together and can see the same world and influence it together. This means that playing with friends is fun and so it makes it harder for users to leave the app when all their friends don’t mind the servers being down and will continue playing the game. It’s clear that the game has a huge amount of players, due to the servers being down all the time, and so far the number is seemingly continuing to grow. Therefore it’s not an entirely bad thing that the servers are down all the time and honestly it may have a minimal impact on churn.

There have also been a number of stories in the media of how Pokémon Go players are finding themselves in dangerous situations as a result of the exploration that is encouraged in game. Some have discovered dead bodies, been robbed and even been shot at as a result of playing Pokémon Go. This negative press has had some speak out about how the game is dangerous and shouldn’t be played. However a lot of the stories of this nature are fake and also the number of stories is tiny in comparison to the overall player number. These situations are just as likely to happen when using pretty much any social app on your mobile phone and it’s no different to the texting and driving situations. One other issue I want to point out is the issue of privacy in the app, at launch the game was able to access your entire google account with read/write access. This rightly outraged a number of users who realised how this data should not be in the hands of Niantic and The Pokémon Company and many complained about it. Thankfully Niantic quickly pointed out it was a mistake and quickly updated the app permissions to have basic level access.

Another issue I see with the game is how Nintendo have not had a huge amount of involvement with this game. What I mean by that is that this game is clearly not part of Nintendo’s push into mobile with DeNA, and whilst it’s great that Nintendo are working with other partners, it means that they’re fracturing the user experience for gamers. In Miitomo, you can log in with a Nintendo account and earn rewards in game through your Nintendo account. For Pokémon Go there is no option to log in with a Nintendo account, there are no rewards, there is also no way to add your friends list from Miitomo either. Whilst it’s understandable that Niantic would choose to focus on Google account integration and Pokémon account integration, adding a Nintendo account option would have been a great way for Nintendo to grow their new membership system and also create a consistent experience for all Nintendo IP games and properties. This is certainly something that should be considered for a future update as a lot of cross functionality can be added through the use of a Nintendo account to enhance the gameplay experience for gamers who are already invested in the Nintendo ecosystem / encourage new gamers to invest in the Nintendo ecosystem.

The main issue however, which links back to the first one, is how Niantic have managed the worldwide roll out of the game. Niantic have tried to get the game to as many regions as possible but each new launch leads to more server downtime. It leaves the company with a dilemma, in that everyone wants the game to launch in their region, but at the same time they want reliable servers. Niantic do seem to be prioritising new launches over server reliability right now and it seems to me that they want to maximise the opportunity for additional revenue as soon as possible. It may also be a way for Niantic to increase the value of their company as soon as possible or achieve company milestones attached to the additional $10 million from Nintendo/TPC/Google. I am sure there are many interested in buying Niantic, perhaps even Nintendo at this point.

Following on from the point above is that the game will face difficulties launching in countries like China and South Korea. The world’s 1st and 4th largest smartphone markets. The issue arises due to the use of google maps as the base of Pokémon Go. Google Maps is banned in China whilst in South Korea the maps service is very limited in terms of functionality. It’s highly unlikely that Niantic will be able to release the game in China unless they partner with a Chinese company like Baidu to use their maps instead, and with the new regulations in place that requires all mobile games to be approved, it’s highly unlikely that the Chinese Government will even approve a foreign GPS tracking game in the first place. It should be easier in South Korea but will still be fairly difficult to launch there.

Whilst this issue is very much outside of Niantic’s control, it is a problem for them as the game has already become huge in these countries outside of an official launch. The Pokémon Go fan page on Baidu Tieba has over 300,000 followers already and in South Korea there are reports of gamers flocking to the North of the country where the game is playable. In fact Pokémon Go has become so popular in China that a similar game called City Fairy Go is now the #1 game in China. It’s basically a Chinese version of Pokémon Go but with enough changes to make the game unique. Many gamers are downloading and playing that instead as there is no official release of Pokémon Go in sight. Pokémon Go does technically work in China, through a VPN, but it lack the ability to process payments. Given that the top grossing mobile games in China and South Korea can make a combined $150 million each month, there is a huge potential loss of revenue by not being able to launch in the two countries.

Pokémon Go also has a number of mechanics in the game that have contributed to the overall success of the game. The first mechanic being the overall simplicity of catching a Pokémon. In the console games you would have to start a battle and win in order to catch a Pokémon, with Pokémon Go the capture feature has been simplified in such a way that it just requires a flick to catch a Pokémon. It’s the mechanic that all gamers were taught through Angry Birds a few years ago and one that is simple, intuitive and makes the game much more accessible. The second mechanic of note is how the game is essentially a real world MMO with players seeing the same content on screen as friends that they are standing next to. It means that friends can play together, hunt the same Pokémon together, and see the status of nearby Pokestops and gyms together. This simple mechanic has allowed many players to interact with each other in the real world and keeps players engaged with the game.

However, there are a few mechanics that are missing from the game that were originally advertised in game. The ability to trade Pokémon, fight against other players and group events are still missing. Niantic CEO John Hanke has assured users that the game will receive regular updates every couple of weeks with new features and mechanics. The launch has been smart in a way as Niantic have put in just the right amount of content to keep players engaged. With the addition of the three features above, as well as other features like in game chat, new Pokémon and more, it means that Niantic can create a roadmap for Pokémon Go to continually release new content to keep players engaged and spending. It also allows users to gradually learn the game mechanics as time goes on, rather than be confronted with a bloated and hard to play game on day 1. It’s clear that mobile games today need to adopt the games as a service model in order to have any chance of remaining in the top 10 all year round, the game has done exceptionally well to get to number 1 already and this roadmap could be exactly what Niantic need to keep the game at the top through the next few years.

This brings me on to my final point about monetisation of the game. The primary way that the game is monetised is through the purchase of Poke coins. The prices range from $0.99 for 100 coins to $99 for 14,500 coins. These coins can be earned over time in game but purchasing the coins allows you to get instant access to various temporary and permanent items. Poke coins allow you to buy temporary power ups such as Incense, which increases the number of Pokémon that spawn around you, as well as Lucky Eggs, which double your XP for 30 minutes, and also Lure Modules which you can attach to a Poke Stop to spawn Pokémon there. Permanent power ups include backpack and storage upgrades which allow you to carry more items/Pokemon. You can also buy Pokeballs, these are used to catch Pokémon. It’s a fairly simple list, but what is of note is that the majority of micro transactions in the game provide temporary power ups to you and/or other players which encourages players to spend on these options more often.

Data from Slice Intelligence, Apple and App Annie suggests that the $0.99 option is the most popular option in most markets. What this shows is that in game spend is being driven by a high number of users and not just a bunch of whales who are spending huge amounts. The fact that the game continues to remain at number 1 in each market shows that gamers are also being enticed by the temporary power ups and are continuing to buy those each time they want to have a boost. With a roadmap in place for new content, microtransactions, features and events, Pokémon Go could keep users spending in app and this could very easily turn into the most successful game of the year. However there is still a lot of uncertainty as to whether Niantic will be able to add content that keeps users engaged.

However one other way that Niantic can generate revenue from the app is by utilising a monetisation model that they had in Ingress. In Ingress,Niantic were able to generate revenue through sponsorships of items and locations in game. These sponsorships encouraged players to arrange meet ups at certain locations and made the game more interactive for gamers and allowed Niantic and the sponsors to see the benefits through a constant revenue stream. The pokemon Gyms would be perfect for this, and the CEO has already confirmed that sponsored locations will be included in a future update. It could add a whole new dimension to the game and not only provide a boost in footfall for local business but increase engagement and spend in game (Not to mention rev. from sponsors).

In fact we’re already seeing some local businesses embrace Pokemon Go by offering customers money off products and many users have seen this as a positive thing. In a way, these unofficial sponsored locations are serving to keep people playing Pokémon Go and make their experience better. GameStop recently confirmed that they had run an event last weekend where they dropped lure modules across 462 pokestops that were near to their stores. This increased sales by 100% over the weekend and helped drive additional footfall in store. With official sponsored locations added in we could see an even bigger positive response from players. The game is due to launch in Japan tomorrow and McDonalds will be the first official sponsor for the game. Not only will this boost sales of McDonalds, it will encourage players to play more in order to reach the required levels to take advantage of each reward. 

Overall Pokémon Go has been a hit for Nintendo. Investors have wanted to see Nintendo enter the Mobile games market for a while now and whilst Miitomo had a fairly poor launch, Pokémon Go has had the best launch ever. Pokémon Go has acted like a proof of concept for Nintendo as it shows the potential for Nintendo IP on Mobile is there and can be a success. With a few hit games, Nintendo could easily create another $1 billion+ segment, something that they could have used during the Wii U era. Pokémon Go solidifies Nintendo as a player in Mobile, the game has very high user acquisition at little cost to Nintendo due to the brand and gameplay mechanics encouraging strong word of mouth. The game is also the #1 grossing across all launch countries with what is arguably just a standard bunch of micro transactions and the game has generated increased brand awareness which can feed into Nintendo’s traditional console business and the upcoming releases of Pokémon Sun and Moon.

This has caused Nintendo’s market cap to double in the past week as investors are now confident that Nintendo can do very well with the right product in the Mobile games market. It’s shocking to think that only two years ago they were saying that they would never develop for mobile. Thankfully over the past couple of years we’ve seen Nintendo finally understand that diversifying the business is the best move to make right now as it’s become clear they can’t rely only on their traditional console business. Especially if the Nintendo NX fails to find a place in today’s market. With Mobile, Nintendo can not only create games that reach a wider audience, they can expand the popularity of their brand as well as cross promote their other products.

The reason I’m saying this is a hit for Nintendo (as well as for Niantic and The Pokémon Company) is because Nintendo will receive some of the earnings from Pokémon Go simply for giving the green-light to the project. Not to mention that they’ll earn revenue through the sale of Pokemon Go Plus hardware. Nintendo own the copyright to Pokemon, along with Creatures and GameFreak. As well as this, Nintendo are the sole owner of the Pokémon trademark.  Don’t forget that Nintendo have a 33% stake in The Pokémon Company which is a joint investment between Nintendo, Game Freak and Creatures. Nintendo also have an undisclosed stake in Creatures as well, not to mention an undisclosed stake in Niantic. So to cut a long story short, Nintendo have a huge part in this game, even though they didn’t publish it.

To break it down, Apple/Google will take a 30% cut from the total gross revenue, leaving the remaining 70% to be split among The Pokémon Company, Nintendo and Niantic. Of course Niantic will get their cut, and The Pokémon company will get their cut. But Nintendo will not only have their own cut, as a stakeholder in The Pokémon Company and Creatures, they will be entitled to over 33% % of what The Pokémon Company earns. Not to mention anything they earn from their small share in Niantic and any other dividends. In other words, Nintendo are indeed benefiting from the success of Pokémon Go, but there are other benefactors here which means that overall Nintendo are still getting a small part of the pie.

It’s hard to say how big of an impact Pokémon Go will have on Nintendo’s financials this year. If the game remains at number 1 all year round then the game will certainly have some impact on Nintendo’s revenues, but even in the best case scenario I don’t expect the single game to have any significant or material impact to revenues/profits. However the addition of Animal Crossing and Fire Emblem this year, along with the success of Pokémon Go could cause a boost in Rev./Profit for FY16. Animal Crossing will no doubt be aiming for mass market adoption due to the popularity of the game whilst Fire Emblem will be aiming for a good number of core console fans to play and pay due to the game still being fairly niche/core overall. If these two games do well this year then they will certainly have an impact on Rev./Profit, however once again I don’t expect it to be significantly above what Nintendo have already forecasted. A full year of revenue from a handful of hit mobile games in FY17 will be what provides the biggest impact to Nintendo’s financials.

Unlike console games, mobile games don’t generate the majority of their revenues on day 1. The Free to Play + Games as a Service model means that Mobile games can generate just as much as console games, if not more, but it will take considerably longer to get there. Hence why I believe Nintendo’s mobile division will not have a material impact on overall rev./profit this year but has the potential to provide a huge impact in FY17. Assuming a Mobile game remains in the top 5 worldwide for a full 12 months, it has a huge chance to be a billion dollar generating game. Pokémon Go could be the first Nintendo game that reaches that benchmark and it’s not hard to imagine that another Nintendo IP paired with unique gameplay on mobile could do the same. Nintendo have gone from FY16 being a write off year, with the discontinuation of the Wii U, to this being a transitional year when we finally start to see Nintendo get serious about other opportunities outside of traditional consoles.

However, I should point out here that I’m not saying that Nintendo should stop making consoles or console games. The success of Pokémon Go has nothing to do with suggesting that Nintendo should get out of the console game and to suggest such a thing is ludicrous. The performance of the NX should be used as a measure as to whether Nintendo should continue in the console market. The success of Pokémon Go shows that Nintendo can diversify their revenue streams and add on Mobile as a new business segment. It’s clear that Nintendo still make the most money from their traditional hardware and software business where they control the ecosystem. Being a successful platform holder in the Console Games market and also being successful in Mobile games is considerably better for any company, rather than to just focus on Mobile games. Only if NX fails should a conversation be brought up about Nintendo going third party or purely mobile. Especially when you consider how fickle the Mobile market can be, remember ‘Draw Something’.

What is of note is how Nintendo are able to reach new audiences with their expansions into other mediums. On Mobile for example we’ve seen that Pokémon Go has indeed reached a younger audience and also a fairly casual audience which has been missing from the Wii U. Nintendo has an opportunity to reach out to the casual market again, which they haven’t had since Wii and the aim will no doubt be to use Mobile as a way to cross sell and promote their console products. This also serves as a lesson to other games companies, especially Sony and Microsoft, that they have a huge opportunity in mobile as well, not only the concept that big franchises can work on mobile, but the idea that they can reach a new demographic. Microsoft indeed discovered this with Minecraft, whilst Sony hasn’t really been able to have any presence in Mobile outside of their Sony Pictures/Aniplex games development company.

The Mobile market has been stagnant for a while with the same sorts of games entering the top 10 and staying there. There have been AR games for over a decade as well as many location based games too, but combining those two features with the brand of Pokémon has allowed Pokémon Go to become a killer app in an app category that was never popular before. The AR category. I should point out that this game isn’t true augmented reality, but it is the first experience that many will have with an augmented reality experience and can be the catalyst that drives more in depth AR experiences on mobile and could even allow AR to take off on dedicated devices (Hololens), however dedicated AR is still a way in the future. Pokémon Go is indeed taking all the AR related buzz at the moment and many are predicting that we’ll see lots of similar experiences pop up. Although how successful those copycat apps will be without a big brand behind it remains to be seen. Instead I believe this will open up the market to completely new AR experiences. Snapchat Lenses made AR popular and Pokémon Go took it even further into the mainstream. These are two completely different apps and are successful in their own right. With more unique apps like these two we could see AR play a big role on mobile and bridge the gap to dedicated AR devices in the future.

In Summary, Pokémon Go has been a huge success for Niantic, The Pokémon Company and Nintendo. The perfect marriage of the Pokémon brand with Niantic’s map database and AR functionality has allowed Nintendo to launch the right product at the right time and capture a large audience that either grew up with Pokemon or are trying it for the first time. The hype for Pokémon Go is amazing right now and the unique gameplay is empowering gamers to experience a new way to play. The game has acted as a proof of concept for Nintendo in the mobile space and investors have been quick to price that in. Although I should note that the game hasn’t even released in Japan yet so there is plenty of potential for Nintendo’s stock price to rise further should Japan respond favourably, which they will. Everyone will now be watching to see what Niantic does in order to enhance the game in the next few months to keep gamers engaged and spending. All eyes will also be on Nintendo’s upcoming games on Mobile this fall to see if they can replicate or prove successful in the mobile market. It’s shocking to think that Nintendo weren’t even planning to release any mobile games just a couple of years ago and now Pokémon has had the most successful launch on mobile ever and is driving sales of Pokémon related merchandise and games.

Nintendo’s financial results briefing will be on the 27th of July and they will certainly be talking about a roadmap for Mobile. Nintendo can very easily create a multi-billion dollar segment through mobile games with just a handful of hit games. If they continue to expand into content licensing (Movies/TV/Merchandise) and also create a successful console then we could be looking at a very different Nintendo in a couple of years from now.