Nintendo's Roller-Coaster Week

If Nintendo needs any inspiration for the roller-coaster rides being planned for its upcoming theme parks - the first of which will open at Universal Studios Japan in 2020 - it need look no further than the graph of its own stock price over the past three weeks. Having soared to almost double its previous valuation in the space of less than a fortnight, the company's shares tipped over a sharp peak on the 18th of July (just like a real roller-coaster, this is pretty much the point where the passengers, or in this case investors, start screaming) and hurtled downhill, shedding almost half of their gains in the space of less than a week. As I write this, they're bumping along a somewhat more gradual downward slope, up dramatically from where they stood at the start of the year but still vastly lower than their peak earlier in the month.

Much of the change in valuation has come, as was pointed out with richly deserved sarcasm by several publications, because investors suddenly realised that Pokemon Go isn't actually developed or published by Nintendo. The company owns significant stakes in both The Pokemon Company (which licenses the IP) and Niantic (which develops and operates the game), but Pokemon Go is not a Nintendo title. This isn't exactly difficult information to uncover, but it apparently took investors a couple of weeks to puzzle it out; if that glaring lack of basic research underpinning major investment decisions is making you feel a little uncomfortable about the degree to which the world uses market movements as a barometer for business and economic realities, welcome to the club.

"[The NX report] implies another significant departure by Nintendo from the mainstream of the home console market"

While the extreme nature of the movements in the company's valuation is down to an ignorant stampede followed by belated realisation and the financial equivalent of a terrible hangover ("oh god, what the hell did I invest in last night?"), the overall trend does match up to a degree with the very unusual week or two that Nintendo has had. Looking away from the firm's stock performance, there's a sharp contrast across two fields of the company's activity. On one hand, you have Pokemon Go proving beyond a shadow of a doubt the strength and latent potential of the company's enviable IP library, and pointing the way to a bright future for the firm and its franchises. On the other, well; on the other hand you have the company's really rather bleak financial statement this week, which pointed out just how far its home console business has fallen.

Set against that backdrop is the fast-spinning rumour mill around the NX, which this week generated a report on sister-site Eurogamer to the effect that the upcoming console is a portable device with detachable controllers, a docking station that connects it to a TV, cartridge-based media and innards based on NVIDIA's Tegra chipset. The report squares with much of what we know or suspect about the device, and places it firmly in the realm of being as much a follow-up to the 3DS handheld as a replacement for the disappointing Wii U home console. Assuming its accuracy - and it seems most likely that the broad sweep of the information is correct, if not the precise details - it implies another significant departure by Nintendo from the mainstream of the home console market.

It can be hard to figure out what exactly to make of Nintendo's position. On the one hand, it's clearly got some of the most powerful brands in gaming, with huge potential when they can reach the right audience, and it still does reasonably well in handheld. However, it's been through a disastrous downturn in the home console market and seems to have concluded that any kind of direct competition with Sony and Microsoft is doomed to failure. This has resulted in a frankly slightly bizarre plan for a new console that's already proving itself sharply divisive within the most likely early adopter audience.

"Once, Nintendo might have competed with Sony and Microsoft by matching or exceeding their consoles with a mid-cycle launch; but the PS4 Neo and Xbox Scorpio hardware are the final nail in that coffin"

It's helpful, I think, to consider this situation in the context of the broader movement of Nintendo's history in the games market. This is a company which, until recently, had two key pillars; home consoles, and handheld consoles. It has dominated the handheld console market pretty much uninterrupted for decades, while its success in the home console market has been more sporadic, marked by both world-beating success (the NES, SNES and Wii) and commercial disappointment (everything else, with the Wii U representing a nadir). It now finds itself at a turning point; the handheld console market, while still healthy, has been undermined to a terminal degree by the existence of smartphones, and the home console market, short of another brilliant flash of mass-market popularity on the scale of the Wii, has turned into an arms race for which Nintendo has neither the resources nor the appetite. Those who expected NX to be a technical marvel that leapfrogged Sony's enormously successful PS4 in graphical fidelity, and are now expressing bitter disappointment at the supposed use of the low-power Tegra chipset, have been delusional from the outset. Once, Nintendo might have competed with Sony and Microsoft by matching or exceeding their consoles with a mid-cycle launch; but the PS4 Neo and Xbox Scorpio hardware are the final nail in that coffin. They are a further escalation in a war for which Nintendo was already ill-equipped.

What, then, might the "pillars" of a future Nintendo look like? Mobile gaming will undoubtedly be one of them. Between the wild success of Pokemon Go - which even if it turns out to be a fad, as I fear its lack of a compelling retention meta-game will ensure, has acted as a stunning proof of concept for Nintendo titles on mobile - and the extensive partnership with DeNA, 2016 is the year when Nintendo arrives on mobile with a bang. It'll take a while to get things just right and to ramp up revenues, but after years of well-considered refusal, smartphone games are about to become one of the core pillars holding up the company. In fact, I'd argue that they're going to be the most reliable and predictable business for Nintendo over the coming years.

A second pillar, one which is off to a good start but will take a few years to get firing on all cylinders, is toys and licensing. The proof of concept in this area is amiibo, with the range of NFC-equipped toys selling incredibly well around the world. Given the limited impact the figures had on the games with which they interact, it's clear that sales were driven by an appetite for Nintendo toys, not by their function as games-to-life accessories. Building on what will hopefully be a long-term toy business, the company is also developing movies and theme parks based on its IP; this is something that needs to be done carefully to avoid destroying rather than creating value, but the potential certainly exists for an impressive, Disney-like brand empire that spans toys, theme parks, movies and TV, all spinning off from the core game franchises.

The third pillar, then, will be console hardware and software; and it's here that things get a little unclear. If Nintendo cannot compete directly with Sony and Microsoft - and I agree with the company's implicit assessment that to do so would be commercial suicide - and its handheld business is in a state of steady decline, then only one option remains; Nintendo must innovate to create a new category which it can own. Ironically, the failure of the Wii U and the decline of handheld frees the company up to some degree; it doesn't face an innovator's dilemma, as its existing businesses are already untenable. Nintendo must create something that is dramatically different from the Xbox and PlayStation, that has a strong appeal to owners of those consoles (not as a rival device but as a differentiated product category) as well as other consumers, and that strongly justifies itself as a must-have device even in an era of consumer device saturation thanks to phones, tablets and consoles.

"This is the enormous challenge facing Nintendo - not just to find new success in the console market, but to figure out, in effect, what its business looks like in a post-console era"

That's a big ask; if it's going to succeed, Nintendo needs to create something truly new, truly desirable and truly innovative. Many consumers have responded to the NX rumours by lamenting that they want Nintendo to do something more like a "normal" console; my concern is the opposite, that NX as described in existing reports actually doesn't go far enough or innovate sufficiently to differentiate itself from the competition. Putting the brains of the console in the controller and treating the TV-connected part as a dumb docking station is a clever reversal of the Wii U's concept, but this and everything else about the NX as described by rumours are relatively clear evolutions of Nintendo's home and handheld console efforts to date. It may be a risky move, but I'm not convinced it's risky enough to capture the imagination of the market.

This is the enormous challenge facing Nintendo - not just to find new success in the console market, but to figure out, in effect, what its business looks like in a post-console era. PS4 (and to a lesser extent Xbox One) have proved the resilience of dedicated gaming hardware at a time when many commentators expected multifunction devices to have taken over; but that market is now effectively closed to Nintendo, which must instead restructure itself and find a form, both for its business and for its hardware, that makes sense in a new era. Early success in mobile and toys shows that there's still plenty of life in Nintendo's brands, and appetite for its franchises; now the firm needs to prove the same of its hardware.