Will an Internal Revolt Change Nintendo’s Stance on Mobile Games?

Nintendo (NASDAQOTH: NTDOY  ) President Satoru Iwata is locked in a battle with senior managers regarding his refusal to publish smartphone games, according to Japanese news site Business Journal.

Nintendo president Satoru Iwata. Source: Wikimedia Commons.

This internal revolt echoes a frequent request from investors -- that Nintendo sell mobile games to generate additional revenue and return to profitability. Last quarter, Nintendo's revenue fell 8.4%, year over year, to 74.7 billion yen ($727 million), and it posted a net loss of 9.9 billion yen ($97 million). Even strong sales of Mario Kart 8 failed to generate enough new interest in the Wii U.

Should Iwata finally give mobile games a chance? Or is he right to keep Nintendo's iconic characters exclusive to the company's hardware?

Why does Iwata refuse to make mobile games?
Iwata believes that customers buy Nintendo hardware to play Nintendo games, and any short-term revenue gained from mobile games wouldn't be worth the dilution of its franchises.

Yet it's easy to see the flaws in Iwata's hardline position. No one is asking Nintendo to port exclusive games like Mario Kart 8 to mobile devices. Many investors simply want Nintendo to revisit some classic titles -- like Super Mario World -- on mobile devices. Nintendo already does this with Virtual Console, its download service for classic games on the Wii, Wii U, and 3DS. Nintendo could also launch exclusive mobile mini-games, which could tie into its 3DS or Wii U counterparts.

Candy Crush Saga. Source: King Digital Entertainment.

In terms of revenue, Iwata's supporters argue that mobile games aren't as profitable as full-length titles. Paid games usually aren't -- Mojang's Minecraft: Pocket Edition for iOS costs $7, while Nintendo's Pokemon X and Y for the 3DS both cost $40. Mobile gamers generally think that a $10 game is expensive, while 3DS and Wii U gamers are willing to pay more than $40 per game.

However, free-to-play games with microtransactions can be more profitable than console titles. King Digital Entertainment (NYSE: KING  ) , the maker of Candy Crush Saga, reported that its revenue nearly tripled, year over year, to $608 million last quarter, while its profit soared 141% to $127.2 million. Candy Crush Saga accounted for 67% of all gross bookings. If Nintendo can release just one addictive mobile game like Candy Crush Saga, it could generate plenty of revenue and return to profitability.

While the Candy Crush model is definitely lucrative, Iwata in February slammed free-to-play titles as being "free to start," stating that good games could be ruined with excessive, "pay to win" microtransactions.

What does Iwata believe Nintendo should do instead?
Iwata has tried to help Nintendo find new sources of revenue, but his previous efforts have failed to make much of an impact.

In February, Nintendo added minor microtransactions to a few 3DS games, like Rusty's Real Deal Baseball and Steel Diver: Sub Wars. Yet Nintendo's idea of "microtransactions" was to simply offer a free trial version that could be upgraded to a full version.

In Rusty's Real Deal Baseball, players could play the game for free, pay $4 to unlock the full game, or try to get a better price by "haggling" with an in-game character. Steel Diver: Sub Wars was also a free demo that could be upgraded to a full version for $10. Both games disappointed investors, who wanted Nintendo to sell in-game items like better bats or subs to maintain a consistent revenue stream.

Rusty's Real Deal Baseball. Source: Nintendo.

In June, Nintendo announced a free DLC for Mario Kart 8 that let Mario drive a Mercedes-Benz GLA SUV, opening the door to interactive product placements in its games. That same month, Nintendo signed a deal with Google to allow Wii U gamers to directly upload gameplay videos from their consoles to YouTube -- as long as they split their ad revenues with Nintendo and YouTube. These were minor victories, but hardly stable sources of revenue.

Looking ahead, Nintendo is rumored to be working on a way to connect the 3DS to smartphones. It's unclear if a connection between the two will pave the way for Nintendo to launch games on mobile phones, but it hints at an eventual compromise between Iwata and his outspoken opponents.

The Foolish takeaway
Satoru Iwata is a brilliant businessman and programmer who helped Nintendo dominate the seventh console generation with the original Wii. But considering that the maker of Candy Crush Saga is now on track to generate higher annual revenue and profit than Nintendo, it might be wise to give mobile games a try.

A single hit smartphone title, like Candy Crush Saga or Clash of Clans, could help Nintendo return to profitability and revive interest in its core flagship characters. This could lead to higher sales of 3DS and Wii U software in the future, and stabilize the company by diversifying its portfolio beyond hardware and exclusive software.

What do you think, fellow gamers and investors? Should Satoru Iwata stand his ground, or should he let Nintendo develop mobile games? Let me know in the comments section below!

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 08, 2014, at 12:34 PM, BHGamer wrote:

    I have to agree with most of this, however, I disagree with the last comment "A single hit smartphone title, like Candy Crush Saga or Clash of Clans, could help Nintendo return to profitability and revive interest in its core flagship characters." Could it return to profitability yes. But I think the flagship core of characters is to worn out and tired. There will always be Mario and Zelda, but really, nobody else is sick, especially with Mario, just being plugged into everything to make a buck? Here's what I would do. Keep the flagship characters on the main consoles, 3DS and Wii-U. Use mobile games as a sort of "test market" for some new IP's, and if people like them, then make a full game on the flagship systems. This will introduce new IP, characters, into a market that I believe wants them, it would generate revenue for Nintendo with little to lose even if the game or IP would flop. I would love to see a game like The Last of Us, come from first party Nintendo, not just published by Nintendo. What is the last thing Nintendo has done that has been original? By that I mean not using characters that were conceptualized in the 1980's or 90's and or Pokemon?

  • Report this Comment On August 08, 2014, at 1:03 PM, awang0718 wrote:

    This entire "internal revolt" situation is entirely false information that came straight from NeoGAF and was reported by some Business Journal journalists who often checked the site. Check your sources next time, Mr. Sun.

    I agree with BHGamer on his stance on mobile. It should be a "testing ground" for Nintendo to create new IPs. If those new games can become successful on mobile, Nintendo can bring those games over to the 3DS and any future Nintendo handheld. This strategy would generate money for Nintendo, introduce a new IP, and prevent cannabalization of Nintendo's hardware business.

  • Report this Comment On August 09, 2014, at 7:44 AM, Nuvendil wrote:

    The revolt is a rumor, not news. Ergo, should not be on journalism website that takes itself seriously.

    Second, to say Nintendo should take notes from King when King has been "big news" for all of a few years and is itself only 11 years old is a bit ludicrous. Especially when other companies doing the super casual games on phones are not faring so well. Zynga is in free fall. Square Enix, while it has made some money, has also been severely burned by some major failures. And of course the ever haunting but rarely mentioned fact that most people who enter the mobile market don't make money.

    And consider the magic of microtransactions and why it works. One major reason is a sizable chunk of the market grew up paying good money for console titles. The "free" price tag of the game and the small price of these transactions for people of that age group are very attractive. But what happens when the much more shrewd generation comes up who is not wowed by freemium and elects to not make those transactions? Profits could experience a serious free fall.

    With Zynga in the state it is in and with so many companies in a constant and sever state of flux on the mobile market, nothing has proven mobile is a reliable revenue source for large companies like Nintendo. Iwata should hold his ground assuming there is any ACTUAL opposition in Nintendo (there is no evidence to backup the rumor that the "revolution" article talks of). The Wii U just doubled its weekly baseline sales and is outperforming Xbox One the past few months if charts are to be believed. Nintendo needs its resources focused on maintaining the momentum. To divert resources at this crucial juncture would be an absurd and self destructive proposal.

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