Tech Transformers

‘Pokemon Go’ alone won’t save Nintendo but its mobile strategy’s working

Nintendo's share price might have registered its biggest daily decline since October 1990 on Monday, but the fever surrounding "Pokemon Go" suggests a bright future for the Japanese gaming giant.

Nintendo released a statement last week saying that "Pokemon Go" will have a "limited" impact on income and that it won't modify its financial forecasts. It clarified that it in fact does not make the game. It owns 32 percent of the "voting power of The Pokemon Company ", which holds the ownership rights to the fictional monsters. And the game is distributed and made by Niantic, which is a separate company.

For some reason, some investors just didn't quite realize, even though it has been flagged up for months.

A user playing "Pokemon GO" on a London street.
Olivia Harris | Getty Images

Some in the market feel that because "Pokemon Go" isn't going to make money in the short-term, it's a failure. Short interest in Nintendo's stock – which measures how many traders are betting its share price will fall - has quadrupled in the past week, according to analytics firm S3.

And it's true, in one sense, that despite the strength of Nintendo's brand, it's still facing the problem that all mobile game makers face – no matter how much you manage to scale a game, monetizing it is a completely different challenge.

"Pokemon Go" has around 22 million daily active users in the U.S., according to SurveyMonkey. Nintendo has never released official figures, and other global estimates are not available. But currently, the only option for Nintendo to make money is by charging for in-app purchases. Having played the game since near launch, there doesn't seem much need to buy anything at this point.

But Nintendo is working on this. In Japan, the gaming firm partnered with McDonald's to make the fast-food restaurants a site where players can fight each other and collect items. This "sponsored location" model could be replicated across the world if it proves successful with McDonald's.

Nintendo stock plummets after earnings warning
Nintendo stock plummets after earnings warning

While "Pokemon Go" might not have an immediate impact, the potential is certainly there, and it bodes well for the Nintendo's mobile future.

"It's a validation of the mobile strategy," Piers Harding-Rolls, head of games at research firm IHS, told CNBC by phone on Tuesday.

Last year, Nintendo took a stake in mobile gaming firm DeNA and pledged to roll out five mobile games before March 2017. The first of those wasn't exactly a game, but an app which let users create avatars and interact with each other. It has racked up over 10 million users. So there is no doubt Nintendo has a strong enough brand to draw a crowd.

The Japanese gaming firm's problem in recent years has been its inability to compete with the Microsoft Xbox and Sony PlayStation in the console space, while losing out to the rise of mobile gaming. Nintendo has jumped head first into mobile games, but understanding the strategy is about more than just "Pokemon Go" alone.

"It has a knock-on effect on their traditional businesses the handheld devices and brands associated with that. There has been an uptick in sales in Pokemon games, 3DS handheld (console) and there are new Pokemon games later this year," Harding-Rolls said.

"The mobile strategy is about reaching an additional audience they don't engage with enough as it's moved to mobile. In the past the first experience for a user would be a (Nintendo) Gameboy, today it is a tablet. They are trying to engage this audience and tell them Nintendo has amazing brands, it has a mobile experience, and hope they invest in the brand and come and spend money on other devices."

Nintendo is aiming to release Pokemon Go Plus – a wearable that alerts gamers to nearby Pokemon characters later this year – and the NX, its next console slated for a 2017 release. So it hasn't given up on its traditional business.

Pikachu and co may not have made Nintendo a lot of money right now, but the Japanese firm has shown it's able to create mobile hits and scale effectively. With its strong brand portfolio, if it decides to bring the likes of "Mario" and "Zelda" onto mobile too, it could create a vibrant ecosystem for its mobile games and hardware.