Nintendo's Q1 Reflects Struggles Unrelated to Pokemon Go Success

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Nintendo shares fell sharply in Tokyo on Wednesday, following its release of a first-quarter earnings report that disappointed analyst expectations.

The company reported a drop of 31 percent in net sales and an operating loss of about US$48 million, which it attributed to growing strength in the Japanese yen but which likely had more to do with dismal sales of the outgoing Wii U console.

The weak results come amid a frenzy over the recently released Pokemon Go augmented reality game, which Nintendo felt obliged to address ahead of its quarterly report.

The company last week warned that its Q1 results would not reflect any financial impact from the game and emphasized that its share of the profits from the mobile app would be limited due to the structure of its partnership with the two other companies involved.

Nintendo reminded investors that Niantic developed and distributed Pokemon Go, while The Pokemon Co. holds ownership rights to the app. Nintendo owns 32 percent of the voting power in The Pokemon Co.

Nintendo will produce and distribute a peripheral device for the game, called "Pokemon Go Plus," however.

Nintendo shares surged earlier this month after Pokemon Go soared to the top of the Android and iOS app download charts in the United States and overseas. The app has become a phenomenon in the U.S., leading some fervent gamers to walk into bodies of water or street traffic, and to breach private properties or other restricted areas.

The investor reaction to the game's popularity was overblown, because it was clear that Nintendo was not the sole driver of the Pokemon Go mobile app, but part of a partnership that in fact is led by Niantic.

"Nintendo has never suggested it would be the main financial beneficiary if the game was a hit, and a tiny bit of digging reveals that while Nintendo has invested in Niantic and owns a piece of The Pokemon Co., it doesn't follow that it's getting a direct share of the revenue generated in Pokemon Go," said Lewis Ward, research director for gaming at IDC.

Many investors just heard the word "Pokemon" and assumed the lion's share of the work and the profits would go to Nintendo, without doing enough due diligence, he told the E-Commerce Times.

Nintendo's cautionary announcement likely was a preemptive effort to defuse the hype around Pokemon Go, to temper investors' response to the company's quarterly earnings statement, suggested Ward.

Nintendo has never presented itself as the main developer of the app, said Ted Pollak, senior gaming analyst at Jon Peddie Research.

"Nintendo will likely benefit from the Pokemon partnership's success, but they wanted to remind the world that they did not create the game," he told the E-Commerce Times.

The larger and more important story here is that Nintendo is learning the potential power of mass market, cross-platform IP adoption, Pollak suggested.

"If Nintendo brings their arsenal of IP to mobile platforms, it could potentially be lucrative," he noted. "That said, they must be diligent striking a balance between their own platforms, which might represent a premium product, and cheapening their properties in the mobile space."

The real story is the potential strength of Nintendo's intellectual property over a long time horizon, observed Ian Fogg, head of mobile analysis at IHS Markit.

It has the potential to reintroduce many of its legendary characters and games to the mobile market, something the company has been hesitant to do for years, he told the E-Commerce Times, but "until this year, Nintendo has been much in denial about the smartphone market."

David Jones is a freelance writer based in Essex County, New Jersey. He has written for Reuters, Bloomberg, Crain's New York Business and The New York Times.

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