Why Nintendo-DeNA changes everything/nothing, and three pitfalls they’ll need to avoid

Today, Nintendo accepted that the world has changed.

In a surprise announcement, Nintendo revealed it had negotiated a substantial partnership with DeNA to bring Nintendo IP to smart devices. The companies took equity stakes in each other: Nintendo owns 10% of DeNA and DeNA owns 1.4% of Nintendo.

CEO Satoru Iwata made it clear that this was not about ports: “There are significant differences in the controls, strengths and weaknesses between the controllers for dedicated game systems and the touchscreens of smart devices. We have no intention at all to port existing game titles for dedicated game platforms to smart devices because if we cannot provide our consumers with the best possible play experiences, it would just ruin the value of Nintendo’s IP.” But it is an acknowledgment by Nintendo that a large swathe of its potential audience are now engaged with their smart devices, and that this poses a competitive threat to Nintendo which it needs to tackle head-on.

This changes everything

Nintendo, the last holdout against the cross-platform, smart device era has finally thrown in the towel and accepted that the party is over for dedicated games consoles, right?

Well, no.

We can all agree that there are some big consequences. No-one can now point to Nintendo, one of the biggest gaming successes in history, and argue that mobile or tablet gaming is not important, or even proper gaming, “because Nintendo isn’t there”. Nintendo itself now agrees that smart device gaming will be a very important part of the gaming ecosystem.

But nor does it mean that Nintendo is abandoning dedicated console hardware. Not only did Iwata-san confirm the existence of a next generation Nintendo console, codenamed NX, he also revealed that in 2014, five different Nintendo games sold more than 2 million units on 3DS, an impressive achievement. (I should know, but don’t, whether this is in part because fewer third parties are making major games for 3DS, hence leaving the field emptier for first party titles.)

This changes nothing

Iwata-san was keen to emphasise that this partnership was about bringing new Nintendo games to smart-devices using existing Nintendo IP. This does not seem to be a deal predominantly about new IP (as I have seen reported), but about existing IP in new titles.

(This might be a terminology thing, since IP is a generic word covering all the intellectual property of a company. It can mean the underlying IP like Mario or Zelda, or an individual title, like Mario Kart or The Ocarina of Time. I am pretty sure that what Iwata is saying is that any of Nintendo’s characters/worlds/storylines are available to the alliance to make a mobile game, but existing games, designed for handhelds or consoles, are not.)

I don’t think this means that Nintendo is going all in for mobile/tablet either. This is an experiment, a toe-in-the-water, a first try.  If the stock jumps, which I think it might, that is more because a bunch of bearish investors have long argued that bringing Nintendo IP to mobile is a licence to print money.

I am not so convinced.

Some surprising admissions

Iwata-san said that an alliance is “an approach that aims to realize certain objectives by leveraging the strengths of the other party in areas where each company could not easily succeed by itself.” This alliance has two main aims:

(As an aside, I have seen suggestions that this might be a subscription service, but this seems unlikely to me: I believe this is a cross-platform network for the largest number of people, not a subset focused on subscription.)

That is quite some admission. As regular readers of GAMESbrief know, I am not a believer in the long-term future of the dedicated hardware console. I think it is likely that the long-term value lies in the brand and the network that Sony and Microsoft have built up, and their services which connect players with their games, their content, their virtual goods, their online wallets and their friends. Nintendo just admitted that it can’t build that itself. Which is worrisome. (Iwata did take pains to say that “Nintendo will be the primary party to operate this new membership service,” presumably to satisfy people like me who worry about this sort of thing.)

Nintendo has accepted that it may not have the DNA (geddit?) to build successful mobile games without external influence. It feels the same way about large scale online networks. It is great that Nintendo has made these admissions. This is where the problems start.

Pitfall 1: thinking of mobile as a marketing channel

DeNA CEO Isao Morijasu said that there is intensifying global competition in the mobile game app space. “In order to get consumers to notice a game and actually take time to play it, a compelling differentiator is needed. The most apparent of all differentiators is, I believe, intellectual property, or IP.” For DeNA, getting these licences is just a marketing expense. Nintendo IP will drive downloads. A lot of downloads. This solves one of DeNA’s biggest problems: how to acquire customers cost-effectively when marketing costs are rising so fast, whether cost-per-install or the appearance of Clash of Clans in an ad break during the Superbowl.

But Nintendo also thinks of this as a marketing channel. “Very simply put, it is structurally the same as when Nintendo, which was founded 125 years ago when there were no TVs, started to aggressively take advantage of TV as a communication channel. Now that smart devices have grown to become the window for so many people to personally connect with society, it would be a waste not to use these devices.”

But in the world of mobile, and particularly free-to-play, acquisition is not the most important of the three pillars of any business (Acquisition-Retention-Monetisation). Retention is key. By bringing Nintendo IP to smartphones, Iwata-san may well get an enormous number of initial downloads. Electronic Arts’ Plants versus Zombies 2 achieved 16 million downloads in five days. There’s a decent chance a Nintendo IP could beat that.

But in the world of F2P, getting those downloads is not enough. Having a great game is not enough. You need a great game, that will keep players for days and weeks and months, and that creates a context within which players want to spend money on things they value.

Hold on, Nicholas. Who said this game was going to be F2P? (Nintendo didn’t.) Why wouldn’t they focus on premium games? Leaving aside the partnership with DeNA, which Iwata-san specifically said was undertaken because, on mobile, Nintendo “must provide ever-evolving services in addition to being high-quality products“, if Nintendo wants the smart device strategy to bring Nintendo IP to a much wider audience as part of their funnel of driving their audience to dedicated hardware/software combos like the 3DS and the NX, it needs to be free.

That’s not to say it will be a free, but this is the painful conundrum Nintendo faces.

Which leads to…

Pitfall 2: imagining that AAA design sensibilities translate directly to F2P design

I’ve lost count of the number of studios, or designers, or developers whose background is in AAA who move to F2P and say words to the effect of “These F2P games are rubbish, just wait till gamers get a look at what a proper studio/designer/dev can do”, only to vanish without trace when they learn that the criteria for success in F2P are different to those in AAA.

Mobile design and F2P design (which are different but overlapping disciplines) have their own constraints, their own quirks and their own requirements. AAA studios can learn them, but they need to accept that their old way of doing things may no longer be the best.

Nintendo will learn this, I am sure. But it will take a while for a perfectionist product-maker to transform into an adaptable service provider.

And to make things worse, it is doing this through a joint venture. Iwata-san has admitted they need help, and sought it from DeNA. Now he needs to make sure that the alliance actually works and is not, like most alliances, riven by faction, dispute and disagreement.

Service-based design requires a tight integration of business intelligence and design. It requires all parts of the development chain to understand what they are doing and why, using metrics to understand where the challenges are, and then design instinct, skill and experience to solve those challenges. Any publisher who makes F2P games with third part developers will know how difficult it is managing the close, trust-based relationship that is critical to making these processes work. When two parties are involved, not just one, the us-versus-them mentality needs to be quashed. And that is hard.

Now imagine you are doing that with some of the gaming world’s most beloved IP, that is critical to the ongoing success of one of the biggest game companies in the world. Making quick, agile decisions (which King and Supercell have mastered) will be difficult in a joint venture involving a company that is used to taking its time. The transition to a service will be painful. And it is happening in a competitive environment, leading to…

Pitfall 3: competing in a red ocean

Nintendo executives have long been known to be aficionados of Blue Ocean Strategy, which focuses on creating new markets, not competing in existing markets. Smart device gaming is about as red an ocean as you can get, and that is not Nintendo’s strength. It seeks out new waters. It zigs when others zag. This announcement looks like zagging to me.

Never bet against Nintendo

One of the only rules that games analysts have is “A smart analyst never bets against Nintendo.” Iwata-san is incredibly smart. In the announcement of the partnership with DeNA, he is humble about the difficulties he will face:

“Just looking at the fact that several applications that earn great profits are highly visible in the smart device game business, people in general appear to see it as an easy money market. The fact is, however, it is a highly competitive market and only a handful of content providers have been able to show enduring results. If Nintendo cannot make it to that handful of winners, it does not make sense for us to be engaged in the software business on smart devices.”

It is not clear how Nintendo’s entry into smart device gaming will pan out. There are some likely outcomes:

There are some much bigger unknowns:

My feeling is that despite the euphoria amongst investors that this mobile deal will unlock enormous value for Nintendo, I am not so sure. I am sure that there is potential for Nintendo in the mobile space, but at substantial risk to its existing business. I am optimistic that Iwata-san has a Blue Ocean strategy hidden up his sleeve. I am nervous that he has concluded that he can’t build service-based games or a cross-platform membership scheme without a partner. I don’t expect to see “pay 99c to make Mario jump higher”, but I do expect Nintendo fanboys to be incandescent with rage at the despoliation of their beloved IPs when Nintendo/DeNA announce their first free-to-play game.

In the end, this new announcement changes everything. And it changes nothing. We just have to wait and see.

Nicholas Lovell is the the author of The Curve, a F2P design consultant, most recently on Angry Birds Transformers, and writes at www.gamesbrief.com. This post originally appeared on GAMESbrief.