Nintendo (NASDAQOTH:NTDOY) recently signed a deal with Google's (NASDAQ:GOOG)(NASDAQ:GOOGL) YouTube to allow players to directly upload gameplay videos from their Wii U consoles, as long as they split their ad revenues with Nintendo and YouTube through an affiliate program.
While that sounds like an innovative move for Nintendo, it's actually a forced compromise. Last year, Nintendo flagged thousands of "Let's Play" clips on YouTube featuring gameplay from its games, claiming that it was entitled to a cut of the ad revenue due to copyright claims. Nintendo then required content creators to place ads at the beginning and end of their videos, with that revenue being split between Nintendo and YouTube rather than the creator of the video.
Locking "Let's Play" streamers out of their ad revenue sparked a fierce backlash against Nintendo, since many content creators considered gameplay videos to be free advertisements for Nintendo's games. Many players also criticized Nintendo's plan as a desperate tax on a dwindling customer base.
That criticism might not be too far off the mark -- Nintendo reported its third consecutive annual operating loss in May, and only sold 310,000 Wii Us during the fourth quarter. By comparison, Sony (NYSE: SNE) was selling an average of a million PS4s per month during those three months.
Should Nintendo just let Wii U owners upload content for free?
As I discussed in a previous article, Nintendo often makes business decisions based on copyright and piracy concerns. In the past, Nintendo prosecuted programmers for developing emulators for its discontinued consoles and intentionally used hard-to-copy proprietary media formats such as cartridges (N64) and mini-DVDs (GameCube).
Yet it's hard to understand why Nintendo doesn't just let Wii U owners -- all 6.2 million of them -- upload their gameplay videos to YouTube and let them retain their ad revenues. It seems like the perfect setup for a positive feedback loop -- Nintendo gets plenty of free advertising, while gamers are rewarded for streaming Wii U games on YouTube.
However, Nintendo has noticed that there's money to be made in that loop. Last March, All Things D reported that YouTube usually takes a 45% cut of the ad revenue generated by content creators, which leaves the creator with an average of $2.50 per 1,000 views.
A popular gameplay video featuring New Super Mario Bros. Wii U on YouTube channel Rooster Teeth has racked up nearly 2 million views since last March. According to All Things D's calculation, the video could have generated $5,000 for the content creator over a period of 15 months -- not bad passive income for 25 minutes of streaming gameplay. Spitting that revenue again with Nintendo, however, could easily cut those earnings by half.
Do content creators have the right to stream Nintendo games?
The key point of contention between Nintendo and some "Let's Play" creators is whether or not gameplay videos should be subject to copyright restrictions.
On one hand, Nintendo believes that it is being much more lenient than film and record studios, which have repeatedly forced content creators to remove TV shows, films, and music videos from YouTube. Nintendo is actually allowing gamers to profit from simply streaming their games to YouTube -- certainly not as much as other original content creators, but still better than its original plan of only splitting the ad revenue with YouTube. Moreover, streaming games from a Wii U doesn't require the purchase of additional props or the use of fancy video editing software -- it's a low-cost setup that anyone can use.
On the other hand, video games are not like TV shows, films, or music videos for one simple reason -- they serve a different purpose from the original product. Pirated versions of TV shows, films, or music videos on YouTube threaten the original creators, since they are digitally identical to the legitimate versions. People who watch "Let's Play" videos can't play the games they are watching -- it's like watching someone cook food that you can never eat. Therefore, "Let's Play" videos are really more like extended ads than pirated content.
Stop hitting that brick, Mario -- there aren't any coins left!
Nintendo's recent moves -- a focus on Skylanders-like figurines, an out-of-character Mercedes ad campaign, and now a "tax" on YouTube fans -- reveal a company that is desperately seeking new ways to generate revenue to avoid a fourth consecutive year of operating losses.
Yet Nintendo has repeatedly failed to address the three real problems with the Wii U -- the lack of robust first- and third-party support, an absence of attractive new IPs, and a weak and confusing marketing campaign. It has also refused to heed the advice of investors and analysts, who have tried to persuade the company to sell mobile games, add more in-game microtransactions to its games, or sell its flagship titles on rival consoles.
Nintendo President Satoru Iwata has called many of these suggestions "short-sighted." But it's difficult to see how Iwata's own solutions -- like having Mario drive a Mercedes SUV and "taxing" its YouTube gamers -- are any more focused on the long game than those ideas.
Leo Sun owns shares of Google (C shares). The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares) and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.