It is hard to not notice the Pokemon Go craze.
That’s not the whole story of why Nintendo (NTDOY, Financial) is ripping as never before. The main reason why I view the Pokemon Go hype (which very well may be a fad; no argument from me there) as an important catalyst is because it upends the power structure within the company.
Nintendo has been making a handheld console called the Nintendo DS since 2004.
Source: Amazon
The device has been a tremendous success story for Nintendo. For many years it has been a tremendous cash cow and recently it has even been its main cash cow. It fits perfectly with Nintendo’s historical business model, which has always been to build a premium device and make some great must-have games for it with Nintendo's exclusive IP.
This draws in hardcore fans of the IP like Super Mario, Zelda, Donkey Kong and Pokemon, of course. Next the platform is attractive to third-party developers because there is a nice installed base of gamers, and they start developing content for the Nintendo device. This creates a flywheel effect in which the content attracts more users and the users attract more developers. Nintendo is in the middle collecting a fee on everything much like Alphabet (GOOG, Financial) and Apple (AAPL, Financial) are now doing with their app stores.
You can understand Nintendo has been reluctant to release its exclusive IP on mobile devices running iOS and Android and giving up the chance to get its flywheel effect going. For a long time the company resisted releasing any mobile phone content (it has no phone itself), and its content was exploited through Nintendo-only devices.
This has been a mistake that has been perpetuated for a few years now likely because of institutionalization at the corporate level. The hardware section that makes the Nintendo DS is bringing in the money and doesn’t want to hurt its sales by Nintendo selling mobile apps.
Pokemon Go doesn’t just represent the chance for Nintendo to refresh a franchise and make billions on the in-game sales itself; it also means the power dynamic within the company is shifting. The hardware division will no longer be the main cash cow and therefore it will no longer be as influential in strategic choices.
That means all barriers for Nintendo to exploit its powerful IP through the vast installed user bases of Android and iOS are gone. By 2019 there should be 2.6 billion smartphone users. In comparison the highly successful Nintendo DS sold 150 million units on a global basis. We are not just going to see Pokemon on mobile but also Super Mario, Zelda and Donkey Kong. Review best-selling games of all time and best-selling single-platform games of all time to get an idea of the implications here.
The market isn’t just getting excited because Pokemon Go is a tremendous success within days of release –Â after all Nintendo is only indirectly exposed –Â but also because Nintendo is now forced to stop following a self-destructive strategy and do the right thing. Pokemon is only the beginning of the mobile powerhouse franchises we are going to see. King Digital (KING, Financial) sold basically on the strength of its Candy Crush franchise and its 500 million monthly active users for $6 billion. Nintendo’s enterprise value is now $16 billion (it holds a substantial amount of cash). Pokemon Go has already surpassed peak Candy Crush daily active user numbers and even surpassed Twitter’s (TWTR, Financial) daily active users.
That’s before the app is released in most parts of the world including Europe and Nintendo’s home country of Japan. That puts its $16 billion enterprise value in perspective. Is it really expensive after the surge? The valuation still understates Nintendo’s value.
Disclosure: Long Alphabet and Nintendo.
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