Pokémon Go may have captured the imaginations of players and investors alike, but the financial prospects of the innovative mobile game have been significantly overblown.
It's easy to get caught up in the revelry when a free product or service enjoys a grand reception, but investors mustn't underestimate how hard translating this interest into profit can be. The views that all parties profit equally and that one success will automatically mean more can also be misplaced.
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 allowing players to see Pokémon overlaid on a virtual version of their neighbourhood.
Mad rush
The free game has amassed more than 21m daily users since its 6 July release - more than Twitter or dating app 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 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".
Nintendo versus Bango
Exuberant investors sent Nintendo's shares up more than twofold, adding more than £14bn to its market value and making it one of Japan's 20 largest companies. But some cooling off in the shares suggests 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 Y504bn (£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 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, 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.
But the mobile gaming industry is highly competitive and most players move on quickly. 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.
Solid brands
Backing a stock straight after a major success can be profitable, but if the market feels the frenzy lacks substantial foundation then shares can retrench. Investors need to be aware how much partners and intermediaries will make and how much reaches the bottom line. That said, 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 while Nintendo had been struggling of late, this shows how dangerous it can be to write off a longstanding company too quickly.
