This post is written by New Markets' Zack Elias:
Nintendo recently announced that it would begin producing video games for smartphone and tablet devices. This is a big step for the oldest market player in video games. The industry was built on the backs of its core brands, such as Mario and Zelda, which remain a key part of its business. It’s an aggressive move from a company largely perceived as a legacy stalwart in a rapidly advancing industry. Nintendo’s conservative business model paradoxically positions it well to move into a rapidly growing mobile gaming industry that threatens to disrupt its core customer base.
Aside from winning share through its established brands, Nintendo has carved a unique place in the market by owning the entire value chain of its industry: it is the only major competitor to produce most of its own hardware (the platform that games run on) and software (the video games themselves). Competitors Microsoft and Sony mainly produce hardware (Xbox and Playstation, respectively), but tend to leave production in the hands of third party developers and publishers. They build increasingly powerful expensive pieces of gaming equipment that must appeal to as wide a range of video game developers as possible. Nintendo, however, exercises strict control of its core franchises to put a greater focus on developing engaging gameplay mechanics first and then producing hardware platforms designed to support those mechanics.
As a result, Nintendo’s core customer base tends to consist of gamers that prefer casual, intuitive gameplay mechanics over those that prefer a hardcore, more cinematic video game experience (which is the segment dominated by Sony and Microsoft). This philosophy dates back to Nintendo’s earliest days as a producer of video games.
Mobile technology, however, threatens to disrupt Nintendo’s core business, as it has in many other industries. Consumers are finding the same casual and intuitive gameplay on their smartphones and tablets – devices that don’t require them to shell out an extra three hundred dollars (at the time of writing) for the WiiU console currently required to play Nintendo’s latest games.
This is why Nintendo’s decision to enter the mobile space is so interesting. The company is cognizant of the disruptive threat that the adjacent mobile market poses to its core business. Critics characterize this move as a desperate attempt to stay relevant in an accelerating industry that leaves Nintendo behind. But the evidence points the other way. Here are three reasons to believe that Nintendo’s move into the mobile space will not only pay off, but will pay off big time.
Understanding of jobs to be done in mobile gaming. Critics underrate a very important fact about Nintendo: that it has been the market leader in mobile gaming for decades, before the rise of the smartphone/tablet. Nintendo’s biggest seller is not the WiiU console, but the 3DS handheld system that has cultivated a very dedicated, profitable niche of customers. The original Nintendo DS handheld is one of the best-selling gaming devices of all time.
These handhelds have been so successful because they benefit from a robust library of games produced out of Nintendo development studios. The reality is that Nintendo understands how to make a good mobile game better than most others. The company understands what consumers want from a video game they can play on the go.
Critics point to the financial achievements of Candy Crush or Clash of Clans and call Nintendo’s understanding of the space outmoded. Today’s biggest mobile gaming moneymakers offer addictive, repetitive gameplay in limited amounts, and then force the player to either wait several hours or pay small amounts of money to continue playing. This is a different design philosophy than the games Nintendo is known for.
Despite the popularity of these kinds of games, their big differentiator is in the pay-to-play business model, not in the game itself. Nintendo’s deep experience in developing intuitive and addictive content for its handhelds positions it well to offer a stronger gameplay experience for consumers. Nintendo may not even need to adopt similar business models – it only needs to win in its niche, the “pay once and play” category. This market segment may not offer the same sky-high profit margins, but it is a niche that Nintendo has experience cultivating in the mobile space to produce reliable, long-term growth.
Unparalleled insight across hardware and software. Nintendo will not simply be porting its games over to mobile, but developing content custom tailored to the smart-device platform. Its unique understanding of the interactions between software and hardware means that it is well-suited to find and exploit the types of game mechanics that mobile gamers find enticing.
Nintendo can also press its hardware advantage in the form of peripherals – attachments to your phone or tablet that augment the gaming experience. Additionally, its sterling track record in hardware design gives Nintendo the opportunity to integrate mobile gaming into a broader ecosystem, something it has already achieved with its handheld systems. It succeeds in hardware innovation where others have failed (see: the success of the Wii over the failure of Microsoft’s Kinect, its own attempt at motion sensor gaming). Nintendo wouldn’t be the first to integrate phones and tablets into a hardware ecosystem, but they could very easily be the first achieve it successfully.
Universally recognized brands. Nintendo’s sterling reputation alone carries great weight with customers the world over. Consumers know that Nintendo strives for quality gameplay first, and know they will not receive a buggy, half-finished product like many other releases produced for large hardware platforms. More importantly, Nintendo owns the most popular franchises in video game history. Mario, Zelda, and Pokemon are all instantly recognizable, and are international sensations that drive sales in very large volumes.
Critics say that the slow growth of WiiU sales has proven that the famous franchises alone don’t motivate players all that much. The reality is that the WiiU is an expensive piece of hardware, coming in at $275. Gamers may not want to pay hundreds of dollars to play the latest iteration of Zelda, but they have already absorbed the sunk cost of their smartphones. Since gamers already own the hardware, the cost barrier to playing the game is much lower.
The other response to critics is to point to the success of the handheld 3DS, which has sold over 50 million units worldwide (as of December 2014) and requires a similar, albeit smaller investment into hardware ($200).
Moving into mobile can give Nintendo a multitude of quick wins by tapping into the international cabal of Mario and Pokemon fans worldwide that already own smartphones. The company has the funding and the marketing talent to relentlessly promote their franchises and sell games that require investment into expensive hardware. With a lower barrier to entry, Nintendo is well-positioned to profit heavily from its growth into the adjacent mobile space.