THE trajectory of Nintendo’s stock price in the past year has been worthy of the vaults and free-falls of a particularly exhilarating round of “Super Mario Bros”. The Japanese video-gaming firm’s hit title helped start the era of living-room gaming over three decades ago, when it introduced Mario, the pudgy Italian plumber, to millions. But recently Nintendo has failed to keep pace with the rise of smartphone gaming.
Many investors hoped that when the firm announced its first-ever game designed for smartphones in autumn 2015, Super Mario would be the one to make its long-awaited mobile debut. The company’s share price tumbled by 10% on the news that it was only Miitomo, a new chatting app. Then came “Pokémon Go”, a location-based game in which players catch virtual creatures on their screens while roaming the real world. Nintendo’s stock price more than doubled to over ¥32,000 ($318) within a few weeks of its release in July. Its market value briefly overtook that of Sony.
Then down again. Nintendo’s shares plummeted by the most since 1990 when the firm made it clear that it had less of a stake in “Pokémon Go”, which was primarily developed by Niantic, a Google spin-off, than investors had believed. And up. In September, at Apple’s launch event for the iPhone 7, Nintendo’s Shigeru Miyamoto (pictured), guru of the gaming world, stole the show with the promise of “Super Mario Run”, the firm’s first ever Mario game for smartphones. It is being developed with DeNA, a Japanese mobile-gaming firm, for Apple’s iOS operating system, and will make its debut in December.
Nintendo’s shares are up by 15% since that announcement and by 38% since the start of the year. The game is likely to be available on Android, Google’s mobile platform, next year. Serkan Toto, a games consultant in Tokyo, expects as many as 1.5 billion downloads across both systems.
The advent of “Super Mario Run” represents a huge change for the company. Five years ago Satoru Iwata, Nintendo’s late boss, warned that “Nintendo would cease to be Nintendo” if it went mobile. Until now it has clung to its “walled garden” model whereby its Mario games could be played only on Nintendo hardware, enticing players to buy its new consoles as well as the latest hit game.
The problem is that these days, not even Mario, Zelda or Donkey Kong can shift enough of Nintendo’s underwhelming consoles. Sales of hardware, which have accounted for 50-60% of its revenue each year since 2005, are slumping. Nintendo’s first Wii, aimed at casual gamers, was the best-selling console of its generation. But its successor, the Wii U—pricey and poorly marketed when it was launched in 2012—was a flop. A big reason is that families and youngsters, its target market, were playing games on their parents’ tablets and smartphones instead. In contrast, Sony and Microsoft, which make the PS4 and the Xbox, respectively, target hard-core gamers. Nintendo reported annual losses in 2011-2013.
Free-to-play smartphone games always seemed to Nintendo like junk food, says Mr Toto, next to the gourmet fare—its $200 consoles and $60 games. The standard “freemium” revenue model for mobile games relies on in-app purchases of virtual goods that enhance the game. This is unpalatable to Nintendo as a games firm selling to families because it could be seen as taking direct advantage of the addictive qualities of its products. It also worried that allowing third-party games developers to use its characters willy-nilly in simple mobile games early on would cheapen them. When some repeatedly suggested going mobile, Mr Miyamoto declined. He was the only one at the company that Mr Iwata could not overrule, says a Nintendo-watcher at a bank in Tokyo.
The firm has belatedly realised that its hesitation in embracing smartphones has already lost it a whole generation of potential gamers, says Mr Toto—and lots of revenue to boot. Nintendo owns only a third of The Pokémon Company, which licenses the Pokémon franchise, and of Niantic, but it could earn ¥7 billion-14 billion a year from “Pokémon Go”, says Haruka Mori of J.P. Morgan, an investment bank. It is already played in 100 countries.
Underlining the potential of Nintendo’s intellectual property (IP) on platforms other than its own, it was only when Niantic overlaid Pikachus, Jigglypuffs and Digletts onto a niche augmented-reality game called “Ingress” that it took off. In two months “Pokémon Go” racked up a staggering 500m downloads. Jefferies, an investment bank, calls Nintendo’s IP an “unmatched treasure”. That it is now putting its most precious character on mobiles and tablets suggests that other creations will soon follow suit.
But Nintendo is not jettisoning its conservative approach. The message at headquarters in Kyoto, says a local investor, is not to get “carried away” by the success of “Pokémon Go” or by Mario’s leap onto the iPhone. Its mindset is in some respects still that of an old hand in an oldish tech sector. Only last year Mr Iwata clarified that its mobile foray in no way suggested that it had lost any of its passion for consoles.
Indeed, Nintendo says it is making the shift in the hope that mobile users—who may be encountering its games for the first time—will be enticed to buy its consoles and help perk up hardware sales. “Super Mario Run” will be free to download, but players will pay a flat fee after a few sample levels (the amount is as yet unknown, but probably ranging between $5 and $20). Company staffers are preoccupied with a new console to be launched in March, code-named the NX. It is said to be a hybrid between a console and a handheld device, to be played on the go or docked at home. The focus on the NX is partly because the firm badly needs a big technological splash. If the console is another dud, it could even be forced to think about shutting its consumer-hardware business.
Its continued focus on hardware is of a piece with a firm that still sees itself primarily as a craftsman of boxed goods, says Mr Toto. At its headquarters (which he describes as a mix between a “Kafkaesque castle and Willy Wonka”) games designers sport dark-blue engineering jackets like those worn by Japanese factory workers, with pens in their breast pockets. Seth Fischer, an Israeli activist investor in the firm, says the building is “like a mausoleum”. For many observers the success of “Pokémon Go” shows the gulf between Nintendo’s offerings and what customers want: hobbled, perhaps, by monozukuri, a tendency for Japanese consumer-electronics firms to over-engineer products to best others on weight or size, say.
Yet the firm has clearly shifted direction. For Nintendo to approve a partnership with a tiny foreign company like Niantic is an about-turn, as is its decision to put its mustachioed mascot on hardware made by Apple. Even two years ago, says Hideki Yasuda, an analyst at ACE Research Institute in Tokyo, Nintendo would not have agreed to Mario’s appearance at the closing ceremony of this summer’s Olympic games in Brazil. To the glee of many, Shinzo Abe, Japan’s prime minister, took up the baton for Tokyo 2020 dressed in Mario’s signature dungarees and red cap. In 2014 Nintendo launched wildly popular “Amiibo” figurines of its video characters that connect with its games.
Continued success will of course depend on more than just endless recycling of IP. Nintendo will have to create new, compelling characters and stay on top of consumer hardware, which still accounts for a lot of its revenues. And the move into mobile carries risk. One is the clout that Apple and Google have in smartphone-gaming. Nintendo will have to hand over to Apple 30% of the revenues that “Super Mario Run” earns via its app store, for example. Its partnerships with DeNA and Niantic mean that it is relinquishing at least some control over game development, too, which could dilute quality. And it is unclear that casual gamers paying small amounts on their phones will fork out the money for a pricey Nintendo device.
That said, Nintendo certainly has the skills on the software side: the firm is simply a fantastically good maker of games. Of the world’s 25 all-time, best-selling video games, it owns 17. It also has impressive staying-power in the business of fun. The firm began in 1889 with the production of handmade hanafuda playing cards decorated with flowers, and was one of the first to move into arcade games in the 1970s. It also likes to remind people that it invented the whole business of hand-held games played on the go. Seen that way, Mario is just returning to his roots.