Nintendo – Do or die

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Mobile represents Nintendo’s best shot at a future.

• Nintendo has finally caved in to the inevitable and announced that its beloved gaming brands will now be making an appearance on smartphones and tablets.
• While this probably signals the end of Nintendo as a hardware maker, I think it is the only way in which Nintendo will survive as a going concern.
• Nintendo is entering into a partnership with game publisher DeNA which will create a multi-device membership service within which new games featuring the Nintendo characters will be offered.
• Existing games running on Wii, Wii U and 3DS will not be ported over but these devices will have access to the new games.
• This represents a massive change of direction for Nintendo.
• Until now it has refused to make its gaming brands available on any hardware other than its own in order to drive sales of its own hardware.
• When a company has a strong brand, competitive devices and desirable software this is absolutely the right strategy.
• However, Nintendo’s brand has weakened materially and its devices are no longer competitive when compared to the offerings from Sony and Microsoft.
• Consequently its gaming brands are at risk of falling into obscurity leaving the company and its shareholders with nothing of any real value.
• By allowing its brands to sell on smartphones and tablets, Nintendo is opening up the possibility to sell hundreds of millions of games and of returning to the forefront of gaming consciousness.
• The end result is likely to be lower revenues but much higher margins and absolute profits.
• For the shareholder, the only thing that matters is absolute profit which is why I suspect the shares were up so strongly on the back of this announcement.
• A few big hits will ensure that the next generation of gamers come to know and love Nintendo games and their characters thereby ensuring the company’s future.
• Japanese managements have a horrible habit of holding out until it is too late but I think Iwata-san has just made it in time.
• Nintendo has enough cash in the bank to invest in creating a great service utilising its beloved brands.
• This is very likely to dampen demand for its hardware but it is not beyond the realms of possibility that mobile can act as an enticement for users to come back to Nintendo hardware at some point.
• Mobile will only be a subset of all the games that are available and if users can be made to fall in love with Nintendo again on mobile, they may end up buying a Nintendo gaming device to experience the other games that are on offer.
• I suspect that this is exactly Nintendo’s strategy which is why it has also announced the development of a new hardware platform called NX.
• This is a long shot at best but Iwata-san’s sage actions give the company an outside chance at staying in hardware as opposed to none at all.
• However, I think that Nintendo will end up having to close hardware development as it is very unlikely to ever achieve the scale required for it to be profitable enough to cover its cost of capital.
• As a software developer, Nintendo will have lower revenues than before, but critically it will be more profitable than ever before with better cash flow.
• Furthermore, by selling huge volumes at much lower prices, Nintendo can ensure the appeal of its gaming brands to a whole new generation of game players that up till now it has stubbornly ignored.
• This move vastly improves the outlook for Nintendo giving it a shot at a real future rather than a long and painful kiss goodnight.