Pokemon GO Won’t Upend Nintendo… or the Gaming Industry

Since its launch on 6 July, Pokemon GO has become something of a cultural phenomenon the world over. An augmented reality mobile game, Pokemon GO superimposes computer generated graphics onto real life backgrounds, which users view through their camera phones. Like a modern day Ash Ketchum, the aim of the game is to go traipse around the (real) world, finding and ‘catching’ Pokemon.

Whatever opinions you hold about the game, if any, one thing is clear: Pokemon GO has captivated an entire legion of devotees around the world, a good number of which happen to be adults.

And for good reason, too.

A very similar story played out some 20 years ago, when Pokemon first launched to an unsuspecting audience (this writer included). Back then, the Pokemon franchise wasn’t the behemoth that it is today. Most of its fans were, as you might imagine, tweens and young children.

While it remains to this day a TV show targeted at these same age groups, an entire generation of global consumers has grown up on Pokemon. And, in the process of becoming fully functioning members of society, they tend to hold dear the things which helped shape their own upbringings.

Fast forward two decades, and you end up with a throng of people who are not only familiar with Pokemon, but, more importantly, who now have significant disposable incomes to boot. People with the kind of purchasing power that executives at major corporations have a habit of basing long term strategies around. Those of us that grew up on Pokemon are now part of the so-called ‘advertiser’s dream’: males aged 18–45 years of age.

Nintendo and Pokemon GO

Nintendo [TYO:7974], as part owner of the parent company which owns Pokemon, knows this. But perhaps even it didn’t anticipate the kind of impact that Pokemon GO would have on society.

The respected Japanese consumer electronics and software giant is home to many of the world’s most recognisable gaming franchises: Super Mario, The Legend of Zelda, Metroid, and Pokemon to name a few.

But its latest success with Pokemon GO is raising alarm that it could lead to a change in direction at the company. At least according to one investor.

Seth Fischer is the CIO at Oasis Management. He’s one of Asia’s best known hedge fund managers. And, as Reuters reports, he happens to be a ‘small but loud shareholder’ at Nintendo as well.

With the company’s market value expanding by US$17 billion the launch of the game, you can see why. Investors like Fischer are calling on Nintendo to fully embrace augmented reality (AR), pushing it to the forefront of its overall strategy.

As Reuters reports:

The phenomenal success of Pokemon GO and the surge in Nintendo Co’s (7974.T) market value by $17 billion in just over a week has been seized upon by one of its most vocal investors to press for a change of strategy at the company…

‘…Seth Fischer, founder and chief investment officer at Oasis Management, is one of Asia’s best known hedge fund managers and has long been a small but loud shareholder. Encouraged by the success of mobile games like “Candy Crush”, he has campaigned for years for the Japanese console maker to develop and sell games for platforms run by Apple (AAPL.O) and Google (GOOGL.O).

“I hope they will now understand the power of smartphones,” Fischer told Reuters. “And as a result, I hope this means there is a whole change in strategy.”

“I hope they will now understand the power of smartphones,” Fischer told Reuters. “And as a result, I hope this means there is a whole change in strategy.

“My next focus with Nintendo is for them to focus on monetizing the rest of their 4,000 patents for mobile gaming, multi-player gaming, et cetera. I think they could be making 30 to 60 billion yen ($290 million to $570 million) annually from licensing.”

Augmented reality is just one piece of a large pie for Nintendo

Similarly, other insiders believe the success of Pokemon GO will push gaming executives in Japan to take AR more seriously. But Nintendo, and the wider gaming industry, should be careful about reading too much into Pokemon GO’s success.

For one, most of Nintendo’s franchises are not like Pokemon. They don’t lend themselves to what makes Pokemon GO ‘work’ as an AR mobile game.

There are, of course, very smart people at Nintendo. But replicating what they’ve managed with Pokemon GO with their other IPs is questionable.

Would a Zelda augmented reality game work as well? Moreover, how would it work in the first place? If you’re familiar with the franchise, you’ll realise the game doesn’t lend itself to that kind of experience. For most other Nintendo IPs, it’s not immediately obvious how AR would work, either.

In fact, you could argue that Nintendo would be better off focusing on virtual reality (VR) instead. That’s the trend the entire industry is going in, and for good reason. VR compliments the experience that most gamers are familiar with. We can’t say the same about AR, which alters the very framework of traditional gaming.

Because of this, AR is likely to develop as a sub-genre of gaming that is very different to what you’ll find across the rest of the industry. At least until graphical fidelity reaches a point where the marriage of real life and graphics becomes indistinguishable. But that’s a long way off.

Of course, none of this is to say that Nintendo shouldn’t experiment with its intellectual property. But suggestions that the company should move its focus away from console and handheld markets are misguided. After all, if Nintendo can capitalise on opportunities across all gaming segments (console, handheld, VR, AR), why wouldn’t it?

In all likelihood, that’ll be the course of action Nintendo takes. But it needs to ensure it doesn’t heed the calls to veer off into one segment, at the expense of the others.

For the time being, the console business will remain critical to Nintendo’s ongoing success. And Nintendo knows that, which is why its next console is releasing next year.

With some investors calling for change at Nintendo, the company would be wise to resist any attempts to upend their business model just yet. Diversification, and maximisation of potential from existing IPs, should be the way forward. Or, as the Pokemon tagline might sagely advise company executives: Gotta catch em’ all.

Mat Spasic,

Contributor, Markets and Money

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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