Nintendo, Disney, and Cultural Determinism

However, some thirteen years after the iPhone, Nintendo continues to struggle in mobile. 2016’s Super Mario Run is one of the ten most downloaded mobile games of all time, with 700MM+ installs. However, it achieved only $75MM in gross revenue after four years according to SensorTower. These downloads are a testament to the power of Nintendo’s IP, but eleven cents per user and less than $100MM in total topline likely makes Super Mario Run the worst performing game with nine figure installs… by far.

2019’s Mario Kart Tour has fared better with an estimated $90MM to date, but the market has also grown 10% since Super Mario Run. In addition, Nintendo’s other 2019 release, the match-three title Dr. Mario World has failed to cross even $10MM. Two other titles, Dragalia Lost and Animal Crossing: Pocket Camp are under $150MM.

One of Nintendo’s six releases, 2017’s Fire Emblem: Heroes, has done well: $700MM according to SensorTower. This is still short of the mobile “greats,” but it’s encouraging. However, there are caveats. More than half of this revenue is in Japan, for example, twice the share of the average Nintendo title. Nintendo does not have a hit mobile title as much as it has a hit local mobile title. In addition, five of Nintendo’s six mobile games have seen year-over-year revenues decline during COVID-19 — including Fire Emblem: Heroes — even as the entire market experienced enormous lift. But most important is to understand who actually made Fire Emblem: Heroes.

Nintendo has three core approaches to mobile gaming. Under the first model, Nintendo creatively designs, technically builds and develops, and live operates the title. Under the second model, Nintendo either co-produces or designs the high-level creative before handing off actual development and operations to third parties. Under the third model, Nintendo’s participation is limited to overall creative and brand approvals (e.g. signing off on the story, characters, and character designs).

Obviously, Nintendo’s share of the economics declines across each group. This, itself, is not a problem. What’s a problem is that the greater Nintendo’s involvement, the less successful a mobile title seems to be. Nintendo’s mobile creative seems to erode the success of a title more than its IP lifts it. Put another way, Nintendo’s involvement increases margins but decreases revenue by an even greater degree. The performance differential of Super Mario Run (which Nintendo led) and Fire Emblem: Heroes (where Nintendo was passive) is instructive here. However, the best example is likely Pokémon GO, which has generated more than $3B in gross revenue. Neither Nintendo nor The Pokémon Company are listed as the game’s “developers” or “publishers” — only Niantic is. Instead, The Pokémon Company (which Nintendo owns less than a third of and does not creatively manage) holds the ill-defined credit of “collaborator.”

It’s common to hear how Nintendo has “struggled to date” with mobile, but it is “learning” and the upside is “enormous.” This is true. However, we are pretty late into mobile gaming already. The learnings are clear, and no billion-dollar gaming company should still be “learning” mobile in the ways Nintendo is. Consider the 2016 struggles of Super Mario Run. Here, Nintendo made the ill-fated decision to offer only two free levels and charge $10 to play the full game. This violated most monetization primitives around free-to-play, engagement-based monetization and gameplay design — and by Nintendo’s own admission, this hampered the game's success.

Three years later, Nintendo released the hotly anticipated mobile title Mario Kart Tour and touted the lessons learned from Super Mario Run. However, this title too showed an enormous disconnect with mobile mechanics and needs. Shockingly, the game launched without multiplayer. It was a Mario Kart where you couldn’t play your friends even if they sat beside you! It was also some six months until multiplayer was available — and ten months until landscape mode launched!

And while players could access most of the game for free, playing races with challenging AI required a $5 per month subscription. This struck most fans and observers as absurd. A new copy of the Switch or Nintendo DS versions of Mario Kart cost $60 new and $20 used. In addition, global hit games like Fortnite were entirely free to play (and the cosmetics-only Season Passes last three to four months and cost $10), and the Apple Arcade subscription had just launched for $5. Furthermore, Mario Kart Tour still deployed extensive microtransactions in the game atop this fee. You could spend $5 a month, not play with your friends, and still need to buy items. Worse still, the game was apparently dreadful. On Metacritic, Mario Kart Tour holds a 58 Metascore and 3.8 user score.

To put this in a macro perspective, Nintendo set a $1B annual revenue goal for mobile in 2017 (it was then at $300MM thanks to its net revenue from Pokémon GO + Fire Emblem: Heroes). This target didn’t seem ambitious, but by January 2020, Nintendo had only hit $1B in lifetime mobile revenues. In February 2018, just before he took over Nintendo, Shuntaro Furukawa said, "From what I can see, smartphone games are the ones I want to expand the most.” He admitted, "I can't say that there are any [games] that are like [Pokémon GO] in development.” This still seems true. It’s insane Disney Tsum Tsum can gross $2B, but an iOS Mario or Mario Kart can’t crack $100MM.

Ultimately, it all starts with what Nintendo is and wants to be. Nintendo makes hardware for their first-party games and first-party games for their hardware. As long as this hardware is successful, Nintendo is unlikely to lean into mobile. The company is, for example, fully capable of making a fully-fledged version of the side-scrolling Super Mario Bros. — or even porting a classic version of the game — to iOS. And millions play the full version of Fortnite on their iPad and iPhone each day. Nintendo simply does not want to. Just as it has not wanted to do this on Sony PlayStation or Microsoft Xbox for years.

The recent breakout success of Animal Crossing: New Horizons on Switch is a perfect example. It could easily play in its entirety on smartphones and tablets — and reach millions more in doing so. However, the success of the title led Nintendo to “chill its mobile ambitions,” according to Bloomberg. Specifically, Nintendo’s President told the outlet, “[Nintendo] is not necessarily looking to continue releasing many new applications for the mobile market.” This is not the signaling of a company that has learned or wants to continue to learn.

In 2020, it should be clear that Nintendo does not find the mobile gaming category interesting. The rationale isn’t hard to understand, even if many investors struggle to confront it. Mobile is, for the most part, less creatively sophisticated than console gaming, and success depends on the extensive cloning/replication of “best practices.” For a company that refuses to remake its own titles and is focused on constantly reinventing existing hits, the idea of cloning games or making “Candy Crush but Zelda” is of little interest. The greatest cultural challenge, though, is in mobile monetization. In 2019, WSJ reported that Nintendo had asked its mobile developers to reign in monetization mechanics so that players “won’t spend too much.” The company feared that stories of players spending hundreds or thousands of dollars would hurt its brand image.

This is not an unreasonable fear. However, “whale” monetization is the core driver of mobile games today. Only 4% of Candy Crush players, for example, spend on the game. And 10% of this 4% (or 0.4% of users) generate 50% of revenue. As a result, even minor adjustments in whale optimization can devastate economics. According to WSJ, CyberAgent, the developer of the Nintendo-based mobile title Dragalia Lost, “slashed its fiscal-year earnings forecast for the first time in 17 years in January due in part to the game’s disappointing performance. While player numbers for the game have grown due to an aggressive advertising campaign, revenue from each player has fallen short of projections.” An anonymous official at CyberAgent told the Journal, “Nintendo is not interested in making a large amount of revenue from a single smartphone game… If we managed the game alone, we would have made a lot more.” Notably, Disney should share Nintendo’s brand concerns in mobile gaming. But this has not stopped the company from releasing basic games that generate billions from whale monetization. Its brand, albeit not one based in games, does not seem to have suffered. Nor has the Pokémon franchise in the years since the ultra-lucrative (and whale-supporting) Pokémon Go.

In truth, Nintendo has been in exactly this place before. Online gaming emerged in the late 1990s on the PC and took off following the release of Xbox Live in 2002 and Steam in 2003. And within a few years, these suites had mostly been matched by the PlayStation Network, which launched in 2006. Since the mid-2010s, the biggest — and certainly the most lucrative games — have been based around online and predominantly multiplayer experiences. Many of these titles monetize mostly, if not exclusively, through online services.

For years, Nintendo openly resisted online services and downplayed their importance. It was years late in supporting basic online service features such as voice chat and friend lists and today it’s on its third online service, having shut down 2005’s Nintendo Wi-Fi connection in 2012 for the Nintendo Network, which was shut down in 2018 for Nintendo Switch Online. Most players will say this third service still lags the offerings of Sony and Microsoft a decade ago — and not just in feature set but also reliability.

Online services, though, are a technical feature set. More important is the games behind them. The biggest games today aren’t just online multiplayer titles, they’re persistent experiences that are in a constant process of revision, expansion, and change. In particular, these “games” typically hand over much — if not all — of the experience to players to create their own stories, trade, share, build, and remix. Here, the role of the developer isn’t to tell a finite story, but to facilitate a virtual world through constant technical updates, marketplaces, and UGC discovery/curation tools.

There are, of course, millions who want to “live” in a virtual Hyrule or Mushroom Kingdom. However, it’s important to recognize what an enormous change this requires from Nintendo. Today, the company doesn’t make a AAA Zelda or Mario title until they have the mix of technology, story, and ideas required to make it stand out from every prior title in the franchise’s history (or that of gaming at large). This results five-to-seven-year gaps between releases, as well as games that have definitive ends (both to the “story” and the user’s playtime). Shifting to a developmental process around indefinite incremental change requires an enormous cultural shift. As a good example, we can consider the 2017 title The Legend of Zelda: Breath of the Wild (which is widely considered one of the best games ever made). Breath of the Wild launched with plans for ongoing DLC updates, with two releases taking place in the first release (adding four and ten hours of gameplay, respectively). However, Nintendo promptly cancelled these plans, with franchise producer Eiji Aonuma saying, “Initially we were thinking of just DLC ideas, but then we had a lot of ideas and we said, 'This is too many ideas, let's just make one new game and start from scratch.’” Accordingly, the next update to the Zelda franchise will release in 2021 or 2022, four to five years after Breath of the Wild, per usual cycle times. This is telling.

In addition, the “games-as-a-service” approach requires rethinking a game’s design from day one — not just narratively, but technically, too. Nintendo is not built around game engines or building “platform”-like worlds.

#3: The Culture of Ambition

Per Fils-Aime’s point at the top of this essay, there has never been a more commercially active or expansive Nintendo. Later this year, Nintendo’s first-ever theme park land will open in Osaka, Japan, with construction already underway for even larger parks in Orlando, Florida, and Hollywood, California. The first Nintendo movie since 1993 is due in 2022 or 2023 (Super Mario) and many of Nintendo’s newest AAA titles, including The Legend of Zelda and Super Smash Bros., now have DLC expansions and regular patching to sustain and improve ongoing play. And while the DLC program for The Legend of Zelda: Breath of the Wild has been abandoned, it led to the first in-generation sequel to a Zelda title in twenty years and four console generations. Animal Crossing: New Horizon, meanwhile, has an extensive and frequently updated live economy in which Nintendo has gone so far as to slash interest rates!

And this is where we return to the Disney idea. Over the past fifteen years, the company has developed new skill sets, expanded into new markets, and proliferated its IP. In addition, a Nintendo subscription feels inevitable, just as Disney’s once did. Microsoft Xbox and Sony PlayStation already offer these subscriptions (Xbox’s is effectively bundled into its online Xbox Live subscription) and they are growing steadily. And as with Disney+, adoption of a “Nintendo+” subscription is likely to be rapid and financially substantial. This reflects the unique strength of Nintendo’s back catalogue and the associated nostalgia. True, library Nintendo titles like The Legend of Zelda: The Wind Waker and Super Mario Bros. 3 are already available digitally a la carte for $5–15 and generate limited sales. However, a $10 monthly subscription that provides frictionless access to any Nintendo game, including day and date releases (which Xbox’s subscription offers, unlike that of Sony), should be a much easier sell. Millions would pay just for the optionality of on-demand access to their childhood. For many - myself included - this would lead to a doubling in annual “ARPU” per Nintendo household. And at almost no marginal cost.

Yet for all of these similarities, the Disney comparison can easily overextend because it simplifies the critical role of culture.

To start, let’s consider the development similarities of Disney and Nintendo. Each company is a master of its respective medium (blockbuster films and AAA console games), and its multi-generational success, four-quadrant appeal, and creative achievements are roughly equivalent. And as the technologies involved in storytelling evolve, so too do these companies. (Though notably, Nintendo didn’t need a Pixar-like acquisition to save itself, since it reinvented 2D to 3D on its own.)

As part of this, it’s important to identify the source of innovation at the two companies. At Nintendo, hardware investments help to inspire or enable its software teams (think of the Nintendo Labo, which allowed players to use cardboard to make new Switch-powered devices). For decades, the most innovative storytelling parts of Disney have been in its theme parks — it’s here that technologies such as the Circle-Vision 360° camera, Unreal Engine, or virtual reality are developed, tested, applied, and learned. And both consoles and theme parks are capital intensive businesses, and both drive significant revenues (though Disney’s obviously has significantly more profits).