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Nintendo's Tectonic Move To Generic Mobile Gaming Platforms

|Includes: Nintendo Co., Ltd. ADR (NTDOY)

Nintendo is stubborn. Its traditional Japanese management is back-ward looking. Nintendo lost its touch with today's casual gaming consumers. These were points often heard from impatient investors ever since smartphones and tablets nibbled away more and more revenue at the expense of traditional video gaming markets and platforms. Today, there was a sea change:

Nintendo finally made the move to include other platforms for its well-known and beloved gaming IP:

Nintendo has formed a comprehensive new alliance with DeNA that will make every one of the company's famous IPs available for mobile development.

The bedrock of the deal is a dual stock purchase, with each company buying ¥22 billion ($181 million) of the other's treasury shares. That's equivalent to 10 per cent of DeNA's stock, and 1.24 per cent of Nintendo. The payments will complete on April 2, 2015.

What this will ultimately mean for the consumer is Nintendo IP on mobile, "extending Nintendo's reach into the vast market of smart device users worldwide." There will be no ports of existing Nintendo games, according to information released today, but, "all Nintendo IP will be eligible for development and exploration by the alliance." That includes the "iconic characters" that the company has guarded for so long.

No details on the business model that these games and apps will be released under were offered, though Nintendo may well be reluctant to adopt free-to-play at first. The information provided to the press emphasized the "premium" experiences Nintendo currently offers on platforms like Wii U and 3DS. Admittedly, that could be interpreted in either direction.

However, Nintendo and DeNA are planning an online membership service that will span Nintendo consoles, PC and smart devices. That will launch in the autumn this year.

Source

(Readers interested in more details can watch the entire press conference translated into English here).

Nintendo's stock jumped shortly after the news hit the wires (news came in the late afternoon in Japan this Tuesday, a few hours before the NTDOY ADR started trading in the U.S., the stock is up over 25% at the moment in USD). Is this euphoria really warranted?

I'm quite skeptic - although it was a "damned if you do, damned if you don't" move for Nintendo given the tectonic shift of revenue to generic mobile gaming devices, especially among casual players. Nintendo resisted this move for quite some time, as evidenced by their earlier statements on the subject since 2011. Only by 2014 Nintendo started moving away from its categoric "No way".

Is all good now? This late strategic move will not be a simply money grab for Nintendo because of three reasons:

  1. Most of Nintendo's classic games need traditional physical buttons and controllers to work properly (analogue control sticks for precise moves, buttons for quick reaction times etc.), they will not play well on tablets or smartphones with virtual buttons (Pokemon and some strategy games are the exception to the rule). Therefore Nintendo will have to create new games (see quote above confirming this) based on its IP with partners such as DenA with obvious additional development costs.
  2. Average transaction prices on Android/iOS are much lower (often below $2-5 or $10, rarely up to $20), even for quality IP. Nintendo can't maintain its traditional price points for packaged console games at $40-60 here. The generic mobile market favors new entrants and small teams (even "dorm room one hit wonders" with just 2-3 people), but works against traditional companies with higher cost structures. Some "free to play" mobile games are even considered unethical with frequent in-game purchases ("pay to win"). Nintendo with a lot of younger players who play on their parents' accounts has to be careful not to cross lines with these business models or risk blowback from parents.
  3. Finally, creating too many games on other platforms could erase its hardware revenue and installed base (Wii U, but especially Nintendo 2DS and 3DS) over time - Nintendo would no longer have a critical mass for its own hardware. This is a very delicate move (long-time tech observers may remember Apple allowing to license its Mac OS in the mid-90s nearly killed the company, Apple had to reverse course and kill off cloning. This is a slippery slope for Nintendo). *

Nintendo is (of course) downplaying the danger discussed in 3. saying that these are two entirely different markets:

Nintendo President Satoru Iwata said at a news conference Tuesday that the company hoped to reach hundreds of millions of new users via the service, which will be made available globally. He said Nintendo would take the lead on developing new games for it, while DeNA will operate the technical side. Revenue will generally be split 50-50, he said.

(Source below)

We will see how this move affects Nintendo's revenues over the next few years. Nintendo is doing this strategic shift because it is pushed to do so, not because it really wants to...

"The company seems to have totally changed its mind-set, after having resisted against mobile game development, publicly complained about the low quality of content in mobile and played down its role in the game world overall," said Serkan Toto, a Tokyo-based game consultant. "This is about the most drastic, bold shift in strategy Nintendo could have undertaken."

Source: www.wsj.com/articles/nintendo-opens-door...

Is this the end of the line for proprietary Nintendo devices? No, Nintendo won't give up making proprietary, dedicated gaming hardware for the time being. The company announced a new platform code-named NX at the same event today.

It's not entirely clear to me if this will be mobile or stationary or both markets, the NX name could well relate to a fusion cross-over platform since the market for dedicated mobile devices is shrinking rapidly - until a few years ago, Nintendo enjoyed a convenient quasi-monopoly in this segment, a title it held ever since the first Nintendo "Gameboy" platform launched in the late 80s. These golden days are over for good because of the Android and iOS platforms with instant gratification and hundred thousands of digital titles with instant gratification (digital downloads a click away, no need to drive to a Gamestop).

The actual NX launch is probably still 1-2 years away, today was just a first pre-announcement (probably also intended to calm and re-assure Nintendo's traditional customer base). Late 2016, or even 2017, is a realistic launch target date for NX in my opinion.

Finally, Nintendo will also launch new "quality of life", health-oriented hardware devices in 2016 to expand its offerings beyond gaming and entertainment. These plans however have been very vague so far and Nintendo will encounter two similar giant foes (Android Wear and Apple Watch with many fitness/health features and sensors inside wearable devices) in this segment once again.

Summary: Investors may be dazzled by the additional software revenue (more users) short-term, this is already evident by the large move in Nintendo shares today - but they should not forget about very low ASPs (less revenue per user) for mobile games and the probable loss of Nintendo's installed hardware base over time. The euphoria may be short-lived if Nintendo doesn't manage to add entirely new customers and instead cannibalizes its current hardware platforms over time.

Disclosure: The author is long AAPL.