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Nintendo's Pokemon Bubble and Bust?

by Laura Aitken-Burt August 08, 2016

​Everyone is talking about the newest app craze to take the world by storm – Pokémon Go. Two decades since the initial Pokémon Game Boy and card game in 1996, the little 'pocket monsters' have been re-created in a new form for the smartphone world – and the only comparable phenomenon is the original Pokémon itself! 

The app has managed to gain incredible attention partly because almost all 20 somethings are using it to re-live their nostalgia for the old game through new technology that makes it as close to a 'real world' experience as possible. 

The app is not only the first real success of augmented reality which many technology companies are trying to develop, but a phenomenon across the entire technology market. Since launching on July 5th, people have downloaded Pokémon Go more than 75 million times across iOS and Android, according to app-market intelligence firm Sensor Tower. It only took 19 days for the game to surpass the 50-million-download milestone. Pokémon Go is still only available in just over 30 markets, but it is still the top-grossing game in the $36.9 billion worldwide mobile-gaming market and remains at the top of the charts.  Players are using Pokémon Go for an average of 43 minutes a day - that's more than Twitter, WhatsApp, Instagram or Snapchat. Since the game makes players walk around to hunt Pokémon, it means an average man playing the game for seven days would burn 1,795 calories - and a woman would burn 1,503. There were even far more tweets about Pokémon Go in its first week (15.3 million) than Brexit (11.7 million) and the Euro 2016 championships (7.5 million)

But although in the days after the July 5th launch stocks for Nintendo soared over 300 billion yen past Sony, growing upwards of 60% , they have fallen 18% since an announcement two weeks later on the 22nd July that the impact on revenue for the company would be limited. Stocks generally rise and fall but sharp spikes should be looked at with caution about whether they are an increase that can actually be sustained and turned into real profit by the end of the quarter. Is this a prime example of a tech 'bubble' and 'bust' moment? Are markets overinflating the importance of Pokémon Go or undervaluing the changes it is creating to the app market?

What have we learnt from Pokémon Go's launch?

Word of mouth is powerful ​

What is perhaps most impressive about Pokémon Go’s rise to the top is that it was an organic, word-of-mouth sensation. The game did not even have to indulge in expensive TV or poster advertising to break all the records— and iOS and Google still have not featured it on the front page of their app markets.  The Pokémon craze took off from people simply finding out about it and spreading the word to download it. Nintendo therefore saved millions from not having to develop such advertising.

Importance of Infrastructure 

Despite being the home of Pokémon, Japan had a delayed launch of Pokémon Go knowing there would be a huge surge in downloads which could affect the servers.  Niantic CEO John Hanke told Forbes that the delay was necessary in order to ensure that the servers were suitably robust to withstand the high demand that was being generated already in other parts of the world.  The game already started to have problems with freezing and crashing and coping with new sign ups after its unprecedented popularity. It's all well and good coming up with an amazing app idea but if the infrastructure to deal with it is not sufficient enough and it continues to regularly crash at peak hours of use, people will quickly lose interest. The danger of ideas becoming redundant in the face of infrastructure issues is extremely pertinent to technological companies. Just look at the dotcom boom and bust companies who were just a bit ahead of their time. 

User experience and progression is always key

There has been some signs that users are already declining in America and that people are feeling burned out without the opportunity to trade or sell Pokémon between other players yet. Many Pokémon Go players have also complained that the game gets progressively harder as they level up, which may turn off the casual players who aren't willing to spend hours trying to get from Level 15 to Level 16. Niantic in fact has admitted that Pokémon Go only has about 10% of its planned features currently in the game, which may be why some players are starting to feel like it could be a fad due to the limited gameplay options.  Niantic will have to work fast now to ensure that users do not decline too much as re-gaining trust will be hard even if improvements are made. Launching before a game is entirely developed could therefore be a fatal error.

How to monetise an app

Pokémon Go has been free to download, as with many top apps in order to ensure as many people as possible download and use it. However, ways in which to actually monetise the game could prove difficult. Although the number of downloads is impressive, the number of people who will be interested enough to spend actual money to level up their Pokémon is more minimal. Partnerships will be important here for the game to offer some sort of benefits/offers/vouchers for players if they achieve certain goals. Nintendo could have options if companies want to benefit from the large user base achieved already, but before creating other ways of giving out money, they need to collect some profits themselves first. And selling out for advert pop ups everywhere will almost definitely start to annoy players and result in a loss of interest in the game. 

Opportunities for expansion and collaborations

The technological success of the augmented reality game is bound to allow for many types of expansion. In Japan, McDonald's entered a partnership with Nintendo not only to sell Pokémon branded Happy Meal products but also to make the fast food restaurants 'Pokéstops' or 'gyms' - locations where players can battle against other players or find new Pokémon monsters. The share price for McDonald's rocketed with this news, even before the game's launch in Japan.  Not only does Nintendo get more exposure and revenue from such collaborations, other businesses can even get a share of the income created from the craze. This has the potential to expand exponentially, with retailers buying into Nintendo to become a 'Pokéstop' or to lure players in on the pretext of Pokémon prizes. The key for retailers will be to ensure that players are being brought in for the right reasons, rather than simply to wander around the shop trying to capture Pokémon, not spending in the store and potentially annoying other shoppers. But with the pressure for 'brick and mortar' stores to become Omni channel 'experiences' , Pokémon Go could be something to capitalise on. 

But be careful of partnerships

Part of the reason for the stock price fall for Nintendo was the realisation of the percentage the company actually owns of the app itself. Nintendo holds only a 32% stake in its affiliate company Pokémon Co. which actually has the ownership rights for the Pokémon Go game. Niantic Inc. which was formerly owned by Google, owns the actual app development technology. So although Nintendo shares rocketed 60% on the game's launch, the details of the partnerships means that the company itself will see less actual revenue than may have been initially expected. So although partnerships can be helpful, and perhaps even necessary, in order to get things off the ground or to expand the reach of the game further, there is also the danger that that can have a bad effect on the original business' shares.

Intellectual property is always useful 

The fact that Pokémon Go could have such a great effect for Nintendo, twenty years after the initial craze, is mainly due to the intellectual property rights that Nintendo owns on the little charecters. Such an augmented reality game could have been developed by any technology firm but the phenomenon has profited from the franchise that Nintendo owns and the nostalgia which it has brought back for users in a totally new way. Considering that Nintendo is also the owner of the Mario and Zelda franchises which could also be developed into augmented reality games, there is potential for more earnings through app games for the firm. 

Political issues in becoming global

When a business has a global reach, it is important to remember that different countries have different laws which need to be abided by, and could potentially be incompatible with the business. China is the world's biggest market for mobile technology, and hence an important place to launch the game. However, the GPS data necessary for the game is heavily restricted by the government which means that it could be unviable. There have also been security concerns in Egypt with Hamdi Bakheet, a member of Egypt's committee of defence and national security, telling parliament that "Pokémon Go is the latest tool used by spy agencies in the intel war, a cunning despicable app that tries to infiltrate our communities in the most innocent way under the pretext of entertainment. But all they really want is to spy on people and the state."  In such countries where GPS could be a problem, Nintendo will need to deflate the hype that they will be able to launch in all global markets. 

Safety issues in virtual reality games

There have been growing concerns that the game's augmented reality element has made people less aware of their surroundings, causing injuries and potential fatalities such as people walking into busy roads or even into unexploded minefields in Bosnia . There have even been thefts at gunpoint in America with attackers waiting at Pokéstops to strike. However, the game has also spawned new friendships too with people joining together to search for Pokémon...and even go on 'Pokédates'. As with all social apps, Nintendo will have to contend with the 'real world' implications of their 'virtual' game. 

Additional accessories for extra income

Merchandise and accessories for the Pokémon Go app is of course something Nintendo can capitalise on. In Japan, a clip on accessory has been developed which syncs with smart phones and alerts users when the virtual Pokémon are nearby. The gadget could add as much as 8.2 billion yen in profit this fiscal year, according to analysts .

The problem with currencies

At the moment the yen is very strong and is eating away at the earnings made abroad for the Japanese company Nintendo. This is always a problem for companies reaching global markets and although having a strong currency is great for buying power abroad, selling power is much less in comparison.

The Pokémon Go stock market 'bubble' over the past two weeks clearly shows us that new apps can immediately transform the world. As such a huge proportion of the world's population now owns smart phones, and Wi-Fi and mobile internet packages are more widespread, the potential for such apps to overtake the global market in just a week is huge. The question though is whether Pokémon Go can actually sustain its traffic or whether it becomes a fad that slowly loses daily users. The problem with technology which expands so quickly is that it can become outdated just as fast as other start-ups or rivals seek to benefit from the technology break through. Nintendo will need to insure that its servers and infrastructure continue to be improved as users multiply and to continue to develop the game to keep players hooked - though Nintendo does have an advantage in this with already having a dedicated fan base for the franchise itself. Of course, the monetised element of the game will also need to work in order for real profits to be made and the way in which the game can expand into other areas through partnerships could be key here. 

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