Nintendo/DeNA: The Best of Both Worlds?

For a few brief years, from late 2006 through to early 2011, Nintendo tapped into a rich and exciting new market for games; a mainstream audience encompassing three generations of the family, from kids hunting Pokemon or raising virtual pets to seniors trying to keep mentally active and parents hoping to shed a few pounds. Much of this audience was reached through the hugely successful Nintendo DS, but with that handheld being bracketed by the groundbreaking GameBoy Color on one side and the also-very-successful 3DS on the other, it was the firm's home console, the Wii, that became the symbol of Nintendo's success in reaching new demographics and broadening the market as a whole.

Then, as quickly as they had arrived, that audience departed. The Wii, often unfairly described as a console that gathered dust (it actually had a software tie ratio comparable to the PS3 and only a little behind the Xbox 360), finally lived up to that moniker as the casual gamers who had flocked to buy it shoved it unceremoniously into cupboards, replacing it with smartphones and tablets, the new primary source of a simple digital entertainment fix. The Wii U, lumbered with mind-numbingly stupid branding, weak marketing and a promising control system whose advantages were difficult to communicate, did nothing to win them back; Nintendo's newcomers were off to pastures greener.

"The Wii U, lumbered with mind-numbingly stupid branding, weak marketing and a promising control system whose advantages were difficult to communicate, did nothing to win them back"

This week, Nintendo followed them; if the mountain won't come to Muhammad, Muhammad must go to the mountain. After years of resisting the increasingly shrill insistence from commentators of various stripes that the company must cease making its own hardware in favour of becoming a third-party publisher on smart devices (perhaps along with the devices of Sony and Microsoft, depending on the precise stripe of the commentator), Iwata Satoru, who not so long ago commented that the decision not to publish on smartphones might be seen in future as the decision that secured the company's long-term future, announced that the firm will establish a broad cooperation with mobile publisher DeNA to release Nintendo games on smart devices.

Iwata's reticence was understandable. Even in yesterday's comments, it was clear that he's still deeply cautious about the mobile gaming market. He sees that some people are making a lot of money there, but he also sees that a lot of companies are losing their shirts on underperforming mobile titles - and a handful of companies are doing the worst thing possible, debasing valuable IP with dreadful, exploitative games. Releasing games on iOS and Android is not a panacea to the problems of any game company; doing mobile gaming or free-to-play (they're not necessarily the same thing, and each brings a unique set of challenges) well is extremely difficult and complex. Some of the more wide-eyed and naive commentators on the industry still see mobile gaming as a gold rush, but anyone who's been watching carefully for a while will know that it's actually all too like a real gold rush - in that while there is a small chance of lucking out and becoming fabulously rich, it's dwarfed by the chances of dying destitute in a ditch.

"Iwata wouldn't be doing his job if he didn't have a strategy to get those people back, even if he also certainly knows that his real job, his most important role, is to maintain Nintendo's core business"

Still; all those Wii consumers, all those casual DS owners... Iwata wouldn't be doing his job if he didn't have a strategy to get those people back, even if he also certainly knows that his real job, his most important role, is to maintain Nintendo's core business and to protect and cautiously develop the remarkable library of IP he inherited from his predecessor, the late Yamauchi Hiroshi. If Iwata's final legacy is that he picked up tens of millions of consumers for a few years and then lost them along the way, so be it; that's just swings and roundabouts. If, on the other hand, his legacy is that he hands over to his successor a diminished, damaged and ill-treated library of IP, whose public perception and goodwill is in the gutter, then and only then will he have been a terrible CEO. Iwata knows that; it would be difficult to be the CEO of a 125 year old company without having some awareness that your job is as much to protect the core of the company for your successors, as it is to succeed spectacularly in the short term.

That's why Iwata needs a best-of-both-worlds solution - which is what he appears to be grasping for, tentatively, with DeNA. Everything about the short presentation made by Iwata and DeNA boss Moriyasu Isao yesterday spoke of caution. Nintendo will not flood the smartphone market with either new titles or with back catalogue; it will develop a limited number of new games and focus on building them up to success. All of Nintendo's IP is on the table, Iwata said, which could be taken as meaning that even Mario, Zelda, Pokemon and other such top-tier IP is available to the firm's new mobile teams; or could equally be taken to mean that "lesser" IP is also on the table, that the focus of Nintendo's first tentative steps in mobile gaming will be with something other than the very obvious characters and franchises everyone expects.

If caution was the overriding theme of Iwata's presentation, two others also leapt out with great clarity. The first was continuity, with Iwata most forceful in his emphasis that this does not mean that Nintendo is abandoning hardware. Far from it, in fact; any chance that the DeNA partnership would be interpreted as a defocusing of Nintendo hardware was headed off with the very early announcement of a new console, the Nintendo NX, which will not be discussed further until 2016. The second was control. DeNA, as several commentators have been quick to point out, is really only good at one thing - free-to-play card battling games, broadly along the lines of the Rage of Bahamut title which dominated the latter days of the feature-phone market in Japan and which are quite often very aggressive in their monetisation. Given this track record, it's not surprising that people were quick to dig out the much-ridiculed quote from hedge fund manager Seth Fischer, who proposed to Iwata last year that Nintendo might charge smartphone users 99c to "get Mario to jump a little higher." Fischer is obviously deeply ignorant of games, both of the Nintendo variety and of the smartphone variety, but DeNA's background hasn't done much to assure people that something equally dreadful won't actually come to pass.

"DeNA, as several commentators have been quick to point out, is really only good at one thing - free-to-play card battling games, broadly along the lines of the Rage of Bahamut"

The wording of Iwata's statements suggests that Nintendo doesn't actually think much of DeNA's game development chops, either. In a slide titled "DeNA's Strength", Iwata identified two things - "world-class Internet service construction" and "operating know-how". Not "great games", or "game creation", or... Well, anything to do with games. The message was about as blunt as you're going to see at a joint presentation between two company CEOs embarking on a happy new relationship; Nintendo wants DeNA because DeNA knows how to roll out and operate large-scale network services. It wants to use that know-how to give it a leg up on developing mobile games based on Nintendo IP; it also wants DeNA to work on the engineering and back-end aspects involved in rolling out a network service covering all of Nintendo's platforms (including smart devices), a move which could finally bring the company up to speed with PlayStation Network and Xbox Live. It doesn't have any intention of handing Mario and Pikachu over to a company whose history of free-to-play business practices includes the infamous "kompu gacha" system that was judged to be so abusive that the Japanese government threatened to step in and ban it.

DeNA, for its part, has no grounds to object to this - because this is a much bigger deal for DeNA than it is for Nintendo. Even while Iwata's statements in yesterday's press conference can be summarised as "we'll work with DeNA to stick a toe in this water, we want their technical expertise and nothing else, dedicated consoles are still our A-game", DeNA boss Moriyasu couldn't have seemed happier with the whole arrangement. DeNA is very much the junior partner here, with the capital exchange which underlines the agreement seeing Nintendo taking 10% of DeNA's equity in return for a little over 1 per cent of Nintendo's. The era when DeNA (and its rival, GREE) rivalled the top game companies in Japan is over; it has struggled greatly both with the move into international markets and with the move from featurephones to smartphones. Working with Nintendo is a potential endgame for a company which could otherwise face the fate of many of Japan's "Galapagos" firms - thriving in a closed ecosystem, only to die out in the face of external competition. If Nintendo's smartphone efforts show signs of success, it wouldn't be remotely surprising to see DeNA becoming a subsidiary within a few years - Nintendo's first major acquisition in a very, very long time.

" Working with Nintendo is a potential endgame for a company which could otherwise face the fate of many of Japan's "Galapagos" firms - thriving in a closed ecosystem, only to die out in the face of external competition"

What Nintendo does from here on out will be watched very closely indeed - not least since there is a growing sense that children, who remain a core part of the audience for Nintendo's IP, are not appropriate target consumers for F2P games. A step onto the wrong side of that line could do very serious damage to the image of a company whose most important and enduring asset is the goodwill invested in its name and in its IP. Iwata, for his part, seems very aware of this risk and of his vital role as the guardian of that goodwill. I expect that he will follow a cautious, softly-softly approach to smartphones which eschews a great many common approaches to monetisation in favour of treating mobile as an acquisition and engagement-building platform, with pushing consumers onto dedicated Nintendo consoles and premium games, rather than turning them into smart-device "whales", as the hoped-for pot of gold at the end of the rainbow. I also expect that Nintendo will be deeply criticised both for failing to fully take advantage of the revenue potential of F2P, and for engaging with F2P at all. This is no panacea, but given the hand he has been dealt by technological and market progress, Iwata's cautious play looks like the best one available to him.