Talking Point: Moving To Smartphones Is Not The Answer For Nintendo

The numbers don't add up

It seems that a month can't pass by — in the past couple of years — when investment analysts, games industry figures and Nintendo's own investors aren't saying that Nintendo needs to expand and release games on alternative platforms. It's creeping into discourse around the Wii U due to the hardware's struggles to date, yet it's been a theme most prevalent around the 3DS; the mass-market presence of smartphones and tablets has led to inevitable questions about the viability of dedicated gaming portables.

Of course times change, and the 3DS has enjoyed sustained 2013 success around the world — after a troublesome start in 2011 — and enabled Nintendo to maintain a degree of profitability when spending heavily on Wii U development, marketing and swallowing its low sales. Unsurprisingly, considering Nintendo's repeated and often-proven mantra that software sells hardware, this success has been driven by a year of heavyweight game releases; most, tellingly, developed and / or published by Nintendo itself. Nintendo gamers know the list by now, including (among others) Pokémon X & Y, Animal Crossing: New Leaf, Luigi's Mansion: Dark Moon, the recent The Legend of Zelda: A Link Between Worlds and others besides. There have been recognisable brands, critical acclaim, diversity in genres and a steady release lineup; once Nintendo's development teams and partners are in full flow the results can clearly sustain a hardware renaissance.

The 3DS has, as most gamers and members of the media would surely agree, enjoyed an excellent 2013. It was understandable, then, that in a recent interview on GT.TV Nintendo of America President Reggie Fils-Aime became visually exasperated (briefly) when the topic of smartphones and tablets was raised as a potential direction for Nintendo. Here's what he said.

The fact of the matter is we create systems that have buttons, that you interact with in a variety of different ways, because it makes for a better gameplay experience. That's the primary reason why, for us, this is not a proposition that makes a lot of sense. Now, separately, we could talk about all the financial and profit reasons why not to do that, but for the player, in the end, it's not as good an experience.

The argument over gameplay experiences can go around in circles, so let's touch upon the key point that's often overlooked; would it make financial sense for Nintendo to release its content on smartphones and tablets? Fils-Aime hinted in his answer that, given the inclination, he could make valid business arguments to counter claims that Nintendo's profitability would improve with that strategy. While we may not have access to all of the details of the business, focus group results and so on, we can at least consider some key aspects of this argument and question whether those that make such claims about the idea's validity are doing so out of short-term speculation, or genuine business insight.

Let's start with some major video game publishers, brands familiar in the dedicated game system space, and assess their successes and failures at present with mobile content. Square Enix is perhaps the first that will spring to mind for Nintendo Life regulars, especially, as a company that has produced 3DS ports on smartphones and even built up excitement over reveals that transpire to be a smartphone release. It's a company targeting the mobile market by utilising the Final Fantasy brand, in particular, trying various cost models in the process.

The company's most recent financial reports highlight an ongoing aim to expand online gaming experiences alongside accelerating "the production of titles for smart devices". The chart below shows that in the first six months of this year, games for smart devices and PC browsers are on course for similar levels to the last full year, with the overall trends being revealing.

These games are an important source of revenue for Square Enix, that is clear, but not the goldmine of irresistible momentum and revenue some may perceive them to be. For some companies the market can also, frankly, be difficult to understand, with the task of turning tens of millions of downloads into tangible profits not a guarantee. Take this relatively recent New York Times article on Disney's smartphone products to date, and it emphasizes the challenges of the iOS / Android games market model. It's possible to achieve tens of millions of downloads and yet struggle to translate that success into solid profit, an equation with which Disney Interactive is still grappling.

But switching to the free model has by and large been difficult for Disney, analysts say, with Exhibit A the crucial Where’s My Water? franchise, which started as a paid download and became a free app with in-game purchases for the sequel. (After completing multiple free levels, players must either take a forced short rest or pay 99 cents to $16.99 for added play.)

The sequel was released on Sept. 12 and, despite lackluster reviews, became Apple’s No. 1 download that weekend. But the game languished at No. 180 on the iPhone top-grossing chart and No. 193 on iPad, according to App Annie, a mobile analytics firm. People were playing, but not paying.

In Disney's case, the challenge is overcoming the issue of charging for a game upfront — going up against the substantial range of free games — or going the in-game purchases route. Christa Quarles, Disney Mobile’s general manager, admitted that the free-to-play Where's My Water 2 didn't generate the revenue the company hoped — "We struggled. There are not a lot of examples of successful transitions from paid to free-to-play." Capcom seems to be another company struggling to translate ambition in the growing smartphone market into results to satisfy board members and investors. In its most recent financial results briefing, the publisher at one stage hailed the growth of the smart device market, before then ultimately acknowledging that while titles such as Monster Hunter 4 and online experiences are performing well, the smart device market is yet to hit its mark.

However, mobile contents did not achieve expected level of sales throughout the period under review, due in part to lack
of major titles and the fierce competitive environment.

In the interest of balance, of course, it should be acknowledged that some recognisable gaming brands are rather pleased with progress in this market, notably Sega. It's most recent results cited positive trends with its smart device content.

Performance remained favorable in the field of digital game software for mobile phones, smartphones, and PC downloading, with the number of registered IDs for the online RPG “Phantasy Star Online 2” exceeding 3 million cumulatively on August 19, 2013. Among titles for smartphones, “CHAIN CHRONICLE” continues to perform robustly, exceeding 0.8 million downloads cumulatively on September 18, 2013.

Of course, we're often directed to details of games and companies that represent the biggest successes, which is the norm for any platform. The phenomenal performance of Angry Birds is perhaps the best known example, with Rovio's IP becoming a cultural behemoth. Yet with hundreds of thousands of apps these examples are the exception due to the crowded nature of the market, with visibility and sustainability issues impossible to completely ignore.

The mobile space can also fluctuate wildly, with Draw Something 2 a good indicator of how fortunes can rapidly change in a marketplace of short memories. Its predecessor was a phenomenon that made developer OMGPOP one of the hottest commodities in the business, prompting a big money acquisition by Zynga — an estimated $200 million. As outlined in this pocketgamer.biz article, that original saw its — admittedly staggering — level of success fade after the takeover by Zynga, and the inevitable sequel struggled to generate revenue on a scale to justify the investment made by the new parent company; after release it reportedly peaked at #74 in the grossing ranks. In what must go down as one of the most extraordinary high-value acquisition gaffs, Zynga faced difficulties from heavy investment for poor returns and shutdown the division — among other studios — in which OMGPOP had been absorbed.

It's an incredibly volatile marketplace that can also lead to wild variations in market value. GungHo Online Entertainment is a major success primarily due to smartphone game Puzzle & Dragons; we reported ourselves in May that the company's market cap had surpassed Nintendo's, with eye-watering profit levels. The company is still earning hundreds of millions of dollars per financial quarter, but it was reported at the end of October (thanks again, pocketgamer.biz) that its market cap was now around $9.3 billion, dropping from the $15 billion figure in May. The company is countering this drop in profit levels with moves into new markets including, yes, Puzzle and Dragons Z on 3DS.

Let's be clear, we're not ignoring key facts about the smartphone and tablet gaming market — it's a notable success, continues to grow at seriously impressive levels, provides a range of content accessible to a broad range of gamers, and is a business opportunity for developers and publishers of all sizes. What we hope we've also highlighted, however, is that it's not a land of easy gold and honey, but rather a tough marketplace packed full of competition and encountering some issues. It's the site of as-yet-unresolved pricing concerns — as is the "conventional" retail games market, admittedly — as a race to the bottom and free apps can lead to questionable and occasionally scandalous "freemium" models, while those that charge up-front for games try to convince consumers that their game is more worthwhile than a rival that has no initial cost. It's hugely competitive and tough to crack for the vast majority, with big fish such as Square Enix, Capcom, Disney and Sega having varying degrees of success.

What's key to the Nintendo smartphone content debate isn't what it would gain from bringing major releases of its intellectual properties to smartphones, but what it would lose. Not only would the company enter a market prone to wild fluctuations and steep challenges, but it would — potentially fatally — undermine its strongest business. It's the portable that would suffer most; the DS family of systems is the biggest-selling handheld console in history (narrowly behind PlayStation 2 in the overall stakes) and the 3DS is Nintendo's current leader; if the current portable wasn't performing, the Wii U to date would have done greater damage to the company's sizeable balance sheet. A key point for the 3DS, beyond its form and value offering, is that it's the only place to get certain Nintendo content. The moment Animal Crossing or The Legend of Zelda appear as all-new fully-featured games on smartphones, is the moment that Nintendo will arguably destroy the asset that's served it so well. The company wouldn't be where it is today without the lineage of Game Boy — in its multiple generations — to DS and now 3DS.

When you look at Nintendo's greatest successes, in fact, it is handhelds that have delivered the most reliably substantial sales; it's in home consoles where results have fluctuated a good deal more. For its flaws and mis-steps, and it does make them, Nintendo has been right to avoid even tentative major releases on smart devices, even if it's correct to explore opportunities to expand the likes of Miiverse and — perhaps in future — eShop purchasing options accessible from any online device. The company's made clear that it will consider options to utilise the omnipresence of smartphones and tablets to promote its own platforms and products.

But as for games, for the immediate future Nintendo should stay well away. It's becoming increasingly true, as third-party support fluctuates, that consumers are most attracted to Nintendo systems for its first-party games, while some other exclusives and occasional multi-platform games add extra flavour. Nintendo's is also a business model where a financial loss, any loss, comes as a surprise, as it's often run with frugality and to make a profit in even the toughest times. Let's not forget that, despite the Wii U's undeniable troubles, the company has been in the black in the past two financial quarters, with analysts projecting profits below Nintendo's own targets for the year — but profits nevertheless.

One mis-step or short-term profit chase on iOS or Android could have major consequences for Nintendo's presence as a hardware producer, eventually leading it to be a software-driven company such as Sega, Square Enix, Capcom et al. That would be a sad day indeed, especially as the company produces consoles with a different approach to the rivals from Sony and Microsoft, and as we've shown it wouldn't necessarily bring the guaranteed runaway glory as consolation.

We'll let Satoru Iwata close, urging long-term security over short term priorities when speaking to the Wall Street Journal (via The Verge).

If I was only concerned about managing Nintendo for this year and next year — and not about what the company would be like in 10 or 20 years — then I'd probably say that my point of view is nonsense.

But if we think 20 years down the line, we may look back at the decision not to supply Nintendo games to smartphones and think that is the reason why the company is still here.

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