Nintendo’s $2.7B mobile games opportunity that’s never going to happen

Ahead of its investor briefing coming Thursday, we took a closer look at the opportunity size for  Nintendo mobile games. After releasing dismal figures last week, anticipating a loss for the third year in a row, Wall Street firms were quick to downgrade its stock. According to Michael Pachter at Wedbush, Nintendo’s business model of “proprietary hardware supported by compelling proprietary software is broken.” It needs little explanation that the transition to digital has had a dramatic effect on the traditional, console-based business. Today, digital games account for $11.8 billion in total sales in the US alone.

In response to a poor run of its Wii U, CEO Iwata was quoted to be “thinking about a new business structure.” One such avenue is to port its existing intellectual property to mobile platforms. But how big is the mobile opportunity for Nintendo, really? According to our estimates, porting its games to mobile would yield Nintendo $2.7 billion over the course of the next-gen hardware generation.

Nintendos opportunity

The mobile promise

By all accounts, the notoriously proprietary-only publisher and device maker is floundering in an increasingly cross-platform and digital world. A dogmatic approach to a changing, digital world may, in fact, spell its demise. The truth is that Nintendo’s business can’t simply redirect and adopt a free-to-play model. But there is a potential salvation in moving towards mobile and licensing of intellectual property. By our numbers, porting to mobile would earn Nintendo between $1.8 and $2.7 billion over seven years.

Last year, we reported on the death of the dedicated gaming device. So it came as no surprise that Nintendo’s handheld business came up short in 2013. The days of shelling out for a 3DS when your phone or tablet already has access to tens of thousands of games—and can do lots of other things, to boot—seem numbered. And with the Wii U labeled a failure, the console standby is no longer as viable, either. Mobile offers a few options.

nintendo chart

Scenario 1: Nintendo ports existing games to mobile

This could do well in the short term: following the success of titles like Minecraft and Final Fantasy, porting Mario, Zelda and Pikachu to smartphones would yield Nintendo an estimated $1.5 billion in its first year. But once initial demand is satisfied, sales will drop off steeply. Worse, Nintendo’s business model is based on its (formerly) highly profitable hardware sales. With its key software living on the iPhone and Android there would be no need to buy a Wii or 3DS. To simply unleash its entire portfolio onto mobile would allow the company to make a good chunk of money relative to its deteriorating console business, but it would undermine its profitable handheld market and change the Nintendo ecosystem.

By developing an in-house mobile studio, Nintendo would even be able to maintain control over its IP while still allowing them to capture a wider audience. Again, this would hurt its hardware business, and requires making nice with the mobile platforms out there like Apple and Google. Remember, Sega got out of the console business and lived to tell the tale. After losing market share to mobile and tablets, the last thing Nintendo needs to do is hang on to an unsuccessful console. Better to port especially older and existing titles to rival platforms and regroup for the next console launch.

Scenario 2: Nintendo licenses IP to mobile publishers

This could be a smarter plan in the long term, but Nintendo holds very high standards when it comes to developing on their platform, let alone working on their crown jewels. However, opening up its IP stable to licensing deals—and bringing us Mario vs Zombies, Angry Zelda, Clash of Donkey Kong—will likely earn them respect from a generation of gamers. By comparison, companies like Square Enix (Final Fantasy) and Mojang (Minecraft) have successfully ported to mobile.

Considering the strength of its brands, this may be the better way to go. Despite the success of card games on social and mobile platforms, to name an example, Nintendo has refused to release Pikachu on devices that gained popularity with a younger demographic in recent years. Making its key content available will earn them a new market.

Scenario 3: Nintendo launches a smartphone app to drive customers to its existing business

Just like you can lose customers to a rival platform, so, too, can you try to win them back. Already there are rumors that Nintendo plans to market its console business to smartphone players. But that may not fall in line with Apple’s plans: why release what is essentially an advert for a rivaling handheld device on your own platform?

This strategy also assumes that people are willing to pony up cash for multiple devices. It’s a bit like throwing a Halo demo on a Playstation: looks neat, but will that make you buy an Xbox? The presence of Netflix and Hulu applications on its 3DS suggest that maybe Nintendo will follow its Microsoft rival and open itself up to a more diverse range of entertainment and content. Marketing via smartphones allows to retain control over its IP, while still expanding its customer reach.

Based on historical sales figures on iOS and Android, we developed a bull and bear earnings scenario. Factoring in Nintendo’s premium brand equity and an average market price of $8.41 resulted in a low of $940 million and a high of $2.7 billion in sales. A single release of all its major titles on mobile yields a slightly higher return than a staggered release schedule. The numbers, however, are somewhat disappointing. One explanation is that Nintendo’s existing titles are not geared toward a market that is moving toward free-to-play.

To survive, Nintendo will have to evolve. No doubt, Nintendo will have to let go of its fully integrated, proprietary nature, and ensure it maintains relevance in a growing cross-platform world. Now, for the first time in its history, does Nintendo seem ready to make a change. The company has been slow to adapt. But the market is saying it’s time.