Pokémon Go is the latest entry in the blockbuster Pokémon franchise, which Japanese video game giant Nintendo (JP:7973) first introduced two decades ago. Similar to past iterations, it revolves around tracking and capturing the eponymous, cute and cuddly monsters. The twist is that US developer and Google spin-off Niantic, which licensed the rights to the franchise from Nintendo and The Pokémon Company, has integrated Google Maps, augmented reality technology and the user’s smartphone or tablet camera into the game. That allows players to walk around a virtual version of their neighbourhood - complete with parks, streets and monuments - and see Pokémon overlaid on to the real world.
Mad rush
The free game has amassed more than 21m daily users since its release on 6 July - more than Twitter or Tinder - making it the most popular US mobile game and one of the highest-grossing apps on both Apple and Google’s stores. It netted an estimated $14.4m (£10.9m) in under five days, as players paid for in-game items that attract Pokémon and speed up levelling, and analysts peg its global turnover at about $13m a day. The boss of app-store payments specialist Bango (BGO) says the game’s currency, Pokémon coins, are “selling very well”.
Source: AppInstitute
Exuberant investors have sent Nintendo’s shares up more than double, adding more than £14bn to the group’s market value and making it one of Japan’s 20 largest companies. But they may have acted rashly, as Nintendo won’t profit significantly from Pokémon Go’s success. It’s partly a question of scale: the group turned over 504bn yen (£3.61bn) in the year to March 2016, and recorded the equivalent of £235m in operating profit. More importantly, Apple and Google take a 30 per cent cut of all in-app purchases made through their stores. And Nintendo only has a small claim to its profits; it owns just under a third of The Pokémon Company and has an undisclosed stake in Niantic.
One-way bet?
Investors are betting that Nintendo can parlay Pokémon Go’s success into blockbuster mobile games featuring Mario, Donkey Kong and its other popular characters. But its first foray into mobile gaming, Miitomo, has grossed only $115,000 in the four months since its release. It’s also too early to assess Pokémon Go’s monetary prospects and staying power. In-game purchases or ‘microtransactions’ can be hugely lucrative: Finnish mobile gaming group Supercell raked in over $2bn in revenue from Clash of Clans and other free games in 2015. Niantic is also working on sponsorship deals with McDonald’s and other retailers that will attract players to their outlets, and it could sell access to its database of millions of people’s location and movements to marketers.
But the mobile gaming industry is highly competitive and most players move on to the next game within weeks. Pokémon Go has tapped into nostalgia for the original Pokémon games, allowing millennials to realise their fantasy of catching Pokémon in the real world. That could fade, and the need to physically move in order to play may lose its novelty value and become less appealing as the seasons turn. The game has also alienated early adopters: overwhelming demand has repeatedly knocked out the group’s servers and bugs and glitches remain common. And its simplicity, which has been key to its mass appeal, threatens to limit its longevity.
Investors can profit handsomely from immediately buying shares in a company after one of its products or services takes off. But they risk heavy losses if the market realises the brouhaha lacks any real foundation. They should look closely at how much money will be siphoned off by partners and intermediaries and never reach the bottom line. Nonetheless, the Pokémon phenomenon highlights the value of spreading bets: if Nintendo didn’t invest in Niantic and The Pokémon Company, it would have missed out altogether. It’s also a lesson in the importance of established brands to a business; 20 years on, Pokémon can still catch the world’s eye.
And it should remind investors not to write off a struggling business too quickly. Nintendo was founded as a playing-card company more than a century ago, but has evolved time and again and continues to pioneer new forms of entertainment.
