Thinking Points

  • Nintendo announced its partnership with Cygames, a well known Japanese mobile social game developer.
  • According to management, this does not affect its partnership with DeNA (TSE: 2432), which owns a 21% stake in Cygames.
  • Overall, Nintendo’s plans to develop its smart devices business into a core segment remains unchanged, and the company intends to release 2 to 3 titles per year.

Nintendo announced its partnership with Cygames last week, a developer well known in Japan for mobile social games. Popular titles include free-to-play digital collectible card game Shadowverse and role playing game (RPG) Granblue Fantasy.

Source: Shadowverse and Amazon

Cygames and Nintendo are joining forces to develop a new action RPG called Dragalia Lost. The partnership is in line with Nintendo’s overall direction of building its smart device business into a core segment.

What about the DeNA partnership?

With a history of few and focused game development partnerships, the Cygames partnership announcement came as a bit of a surprise. After all, Nintendo is already partnered with DeNA (TSE: 2432) for mobile game development.

Naturally, analysts asked questions about the DeNA partnership during the fiscal 2018 earnings presentation. The short story is that management is happy with DeNA, but also actively seeking partners that are aligned with Nintendo’s general direction.

One key point to note here is that DeNA has a 21% stake in Cygames (Japanese). Nintendo is set to acquire a 5% stake. The majority shareholder is CyberAgent (TSE: 4751), an internet media and games company.

More interestingly, Dragalia Lost is a brand new game with brand new intellectual properties (IP). No Mario, Kirby, Zelda, or any of the other popular Nintendo IPs. In fact, management noted that Cygames originally planned the Dragalia Lost project, then Nintendo gained interest and got involved in the planning and development. The game is set to release sometime this summer in Japan, Taiwan, Hong Kong, and Macau.

Source: Dragalia Lost

The party continues

Finally, Nintendo is really riding the mobile game wave.

A recent (well written and insightful) Seeking Alpha article concluded that the last decade has been a disappointment for shareholders, in large part because it missed many trends in the gaming industry:

…But from an investment perspective, when we look at the value created for shareholders of most companies in the video game industry over the last decade, we can only be disappointed by the fact that Nintendo didn’t really reinvent itself since the mind-blowing success of the Wii. Most of its competitors have evolved to become entertainment giants across multiple channels, changing the way we consume software digitally with online platforms, live competition, social features, weekly events and new content.

App Economy Insights, Seeking Alpha

It’s hard to argue this, especially with the Wii U failure. The author made a point that the company missed fundamental trends like the rise of free-to-play games, digital shift, games-as-a-service, social features, and more.

And it certainly looks like Nintendo missed a lot of parties, except that these parties are still going on.

I think Nintendo’s place in the gaming industry is often misunderstood. If anything, the current lack of free-to-play games, social features, etc are opportunities. This has a lot to do with Nintendo’s position in the gaming industry, which I more or less explained in this article.

The short story is that Nintendo’s product is the whole gaming experience, which is delivered through careful development of hardware AND software. The company is in the same gaming industry as Sony’s PlayStation (TSE: 6758) and Microsoft’s XBox (MSFT). However, [bctt tweet=”Nintendo doesn’t compete with Sony or Microsoft in the same way that they compete with each other.” username=”kenkyoinvesting”]

 

Maybe a colossal failure was avoided

Hardware development has been critical to Nintendo’s ability to craft the whole gaming experience. This isn’t my own theory. In fact, management briefly mentioned this in the earnings presentation Q&A (answer to Q7). Hardware exists to draw out the positive qualities of software.

In many ways, internal hardware development forced the company to play a different game than Sony and Microsoft. Here’s an image I used in my last article that shows how Nintendo controllers evolved while Sony and Microsoft controllers more or less remained the same:

Source: Reddit (Gaming subreddit)

From this angle, the company’s late start in mobile games makes sense. Nintendo had a structural advantage in crafting games because it designed its own hardware. Once smart devices became the playing field, Nintendo no longer had that advantage.

The controls for Super Mario Run is descriptive of Nintendo’s focus on the gaming experience. It’s easy to port previously released Super Mario console games and retrofit similar mechanics to function on smart devices. On Nintendo devices, you need to hit a button or move a stick to get Mario to move. In Super Mario Run, the running function is automatic.

Ben Gilbert, Senior Tech Correspondent at Business Insider writes:

“Nintendo’s approach to smartphone gaming has been focused on crafting its franchises specifically for the platform, rather than trying to force its console games onto a mobile device. This results in spin-off games with controls and gameplay mechanics that only make sense on smartphones and other touch-based devices.”

Ben Gilbert, Business Insider

The bottom line

Nintendo’s Cygames partnership announcement came as a surprise. Even more so because the first co-developed game, Dragalia Lost, doesn’t include any Nintendo IP. That said, Nintendo’s overall direction for its smart device business remains unchanged. After gaining a good feel for game development on smart devices, the company intends to build it into a core segment and still plans to release 2 to 3 titles each year.

 

Author: Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.