June 13, 2024


Unlimited Technology

Nintendo Chills Mobile Ambitions After Animal Crossing Success

(Bloomberg) — Nintendo Co. is retreating from the $77 billion mobile gaming arena after disappointing results deflated once-lofty ambitions, ending a multiyear effort just as the market goes through an unprecedented Covid-era boom.

President Shuntaro Furukawa proclaimed two years ago that smartphone games would be a $1 billion business with growth potential, building on his predecessor’s promise that Nintendo would release two to three mobile titles each year. That spurred hopes among investors that the gaming powerhouse could carve out a substantial slice of the market. In May, however, the president adopted a markedly different tune, saying “We are not necessarily looking to continue releasing many new applications for the mobile market.”

Nintendo’s shares slid 4% the day after that remark. Close observers might have sensed Nintendo was growing disillusioned with the mobile realm even earlier. Its smartphone games project was born out of necessity to shore up the bottom line amid the Wii U’s failure. Now, riding a surge in Switch popularity and investor confidence, the Kyoto-based company appears to have reassessed the mobile business and narrowed its focus to its own console ecosystem.

In the period from February through May, when other studios were posting record earnings alongside Covid-19 lockdowns, Sensor Tower data showed marquee Nintendo titles like Super Mario Run plummeting by double digits. At the same time, Nintendo’s own Animal Crossing: New Horizons had just become the quintessential haven from virus anxiety, powering the Switch console to new heights of popularity and pushing the company’s share price to a twelve-year high last week.

Mobile games are expected to make $77.2 billion this year, which would account for half of the overall video game industry’s sales, according to research from Newzoo. But “since the release of Mario Kart Tour in fall 2019, Nintendo’s mobile pipeline is empty,” said Serkan Toto, a mobile games consultant in Tokyo. “In a sense, Nintendo’s enormous success on console reduced the need and the pressure to put resources into mobile.”

Most of the top-ranked mobile games adopt a freemium model wherein playing is free but gamers are pushed to spend on upgrades or mighty weapons to advance. That approach is coming under scrutiny with regulators clamping down on exploitative freemium mechanics that force players to pay to win. In Japan especially, gacha — a lottery system where gamers pay in hopes of scoring rare loot — invited controversy because of its addictive aspects.

Fearing that it would harm the brand equity of its franchises, Nintendo asked its mobile development partners not to force players to spend a lot in games, according to people at those companies, who asked not to be identified as the matter is private. A Nintendo spokesperson declined to comment.

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Nintendo has tested various revenue models for its smartphone games, including one-time purchases for Super Mario Run and subscriptions for Mario Kart Tour. Both apps have fallen short of market expectations in terms of revenue, according to Kazunori Ito of Morningstar Research.

Read more: Nintendo Falls on Dour Forecast Despite Strong Switch Sales

For the current fiscal year ending in March, Nintendo said it would focus on already-released mobile apps and doesn’t foresee revenue from that business rising much. The company earned 51 billion yen from smartphone games and other licensing in fiscal 2019, up just 11% from the year-earlier period and still only half of the way to the objective that its president had once set.

Nintendo hasn’t announced what apps it will release next, but the chief of its mobile development partner, DeNA Co. President Isao Moriyasu, has said not to expect new apps from it until near the end of the current fiscal year. That suggests a long wait until Nintendo’s next smartphone game.

Ace Research Institute analyst Hideki Yasuda said that, in Japan especially, gacha remains the only lucrative business model in mobile games. But even if Nintendo were willing to go down that path, it would be unsuccessful, he added.

“You need an active long-running franchise with hundreds of attractive characters to make a good gacha game and then you’d need to keep adding new characters each month to retain players,” Yasuda said. “Fire Emblem is the only Nintendo franchise capable of doing that.”

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Nintendo’s peers offer clues as to why cracking the smartphone market isn’t always straightforward.

Square Enix Holdings Co., whose Dragon Quest Walk has grown into a huge hit, has taken another route to maximizing game revenue. The publisher monetizes its franchises by making them popular on high-definition home consoles first and then steering players to smartphone apps and having them spend money there — not just once, but repeatedly. It has so far released more than a dozen Dragon Quest mobile apps and more than three dozen Final Fantasy games for phones, showing the scale of investment required. Both franchises have legions of characters and by releasing multiple titles from each set of lore, the company prompts players to keep spending to obtain their favorite heroes for each game.

Nintendo’s Animal Crossing mobile app saw a 45% uptick in earnings as the Switch game was released, per Sensor Tower’s data, but the company doesn’t find the Square Enix model appealing. Unlike game studios who have to pay a platform fee whether on console or mobile, Nintendo has a strong incentive to focus all gamer spending on its own platform, where it doesn’t have to share revenue. Its goal is to send customers from smartphones to consoles, not the other way around.

Sony Corp.’s PlayStation unit has also struggled to penetrate the mobile gaming arena. It has a smartphone division called ForwardWorks Corp., which has released eight games mostly based on inactive PlayStation franchises that have failed to gain traction without cross-promotion.

Nintendo’s dimmed enthusiasm for smartphone games is driven not only by disappointing revenues and unsatisfying monetization options but also by the limitations of the platform. The company believes its franchises shine brightest when coupled with designed-by-Nintendo controllers and it’s never been fully comfortable with the touchscreen-only interface of a phone.

“New smartphone games will come, but it’s very likely these will be just alibi releases to appease shareholders,” said Toto.

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