The Pokemon Go Burst

Pokemon Go launched to much fanfare and has grabbed the attention of the world. What actually impressed me is that for the first time someone has made mobile AR useful and in a way that makes sense.

With that said, I don’t think this particular title will have longevity. Going on an exciting walk to find Pokemon’s can evolve to the point where you are just going for a walk, to the point where you just don’t have time to look for Pokemon’s whilst going from location A to location B.

Still I think it does show that mobile AR does have a future, but my view is that it’s future resides more as a utility rather than an entertainment source.

Nintendo added $7B in market cap from the success of Pokemon Go and that says more about the future Nintendo has in mobile than the future of Nintendo in mobile AR.

Let’s be frank, if Nintendo shipped a Mario or Zelda title on iOS it would generate a $1B in revenues with very little effort in the area of UA (User Acquisition), it is just a slam dunk.

I have read some posts on how Nintendo is probably making very little money on this deal. OK this is important because the numbers I have been reading border on the deranged.

First off this is a licensing deal, pure and simple and on top of that it is a licensing deal with two of the shrewdest licensing firms in the world. Personally I have done about 500+ licensing deals and always avoided both firms because they were just too hard to get done.

Here is what your typical licensing deal looks like for a huge IP like Pokemon:

Advance

As with any licensing deal what you pay on the front end is directly married to what you are going to pay on the back end in terms of rev-share. I have no idea what the developer paid, but I can make an educated guess, based off of previous experience.

The advance has two purposes, the first of which I mentioned above, the second of which is to get the attention of the IP owner and to remove their risk from the transaction. Thus if the project bombs, the IP owner still makes money.

The Politics

In this case the IP owner is The Pokemon Company (TPC) and NOT Nintendo. Nintendo owns 33% of TPC, but Nintendo has a ROFR -Right of first refusal on all interactive projects/deals and the politics in this deal had to have been epic. Thus it was key to get Nintendo involved from an equity perspective. The developer did this by selling a stake in the firm to Nintendo -In this case Nintendo is known as a “strategic investor” and were probably given a discounted strike price on their equity stake to keep them sweet on TPC deal. The developers other notable investor is Google from which the developer was a spin off.

The MG

Otherwise known as the Minimum Guarantee further mitigates the risk in the deal for the IP owner by stating “Not only will we give you an advance, but we will also give you a guarantee that the minimum you will earn is X over the Life Time Value -LTV- of the license.

The MG for a Pokemon title is going to be in the millions which really does not matter at this stage as I am pretty sure Pokemon Go shattered that figure in the first weekend.

Where is the money going?

OK so this is the single most important question in this launch. OK so to be clear, I have not seen the deal, I am basing all of this off of previous talks with Nintendo and also my experience in doing licensing deals. My assumptions here are just that, assumptions. What I will say is that the post I mentioned above is what we call in licensing a Unicorn deal. They are the stuff licensing/biz dev guys talk about in hushed whispers at cocktail parties at E3.

You will notice in the numbers below that Apple are not mentioned because in ALL licensing deals the focus is on “Net”, the money that goes to Apple is not even counted within the licensing barring the line “Revenues shall and will be considered net after paying the platform owners related fees” in this case Apple…….. ok mostly Apple.

Also the developer would generally be allowed to recoup the development costs off the top, meaning that until the development costs are paid back in full the developer gets 100% of the money.

Rev-share

This is the most important thing right now, today!

There are two main parties here, the developer and the license owner. I want to be super clear here, the owner if the IP here is The Pokemon Company and NOT Nintendo. Nintendo have likely been paid a fee or a royalty to not activate their ROFR -Right of First Refusal- to veto the deal. Nintendo is a significant shareholder in TPC, but they DO NOT own the IP. So I do not think the sales of Pokemon Go is a significant win for Nintendo, the win lays elsewhere for them and that win is not insignificant.

My rev-share estimates look like this and I am basing it off a $5M advance and a $10M minimum guarantee for a 3 year license after which unless a deal is reached TPC will have the title pulled from the store.

The rev-share is graded so as the developer triggers certain sales numbers they gain a greater share of the revenues. This is not your typical license though, it is saturated in politics, importance of the IP (Don’t think that this is the first time that TPC has been approached about a mobile gaming license, they would have received a lot of interest over the years) and of course approvals -a title can really suffer if the IP owners approvals don’t flow as quickly as one might hope.

Nintendo is probably on a flat 10% regardless of sales -IF THAT- because they are in an extremely complicated and conflicted position in that they are a shareholder in both the IP owner and the firm which is getting the license.

That leaves 90% of net left and this “net net” -what is left after paying the platform owner and Nintendo- is probably split like this:

TPC:

$0-$15M 85%

$15M-$25M 75%

$25M+ 65%

The reason why TPC can command such a high license fee is because…. well this is Pokemon were are talking about. They can afford to be greedy as pigs as there is ginormous competition to get a license for Pokemon.

Why is all of this good news for Nintendo?

Well this is pretty straight forward, they have a 360 win:

They own 33% of TPC

They hold a significant stake in the developer

They get a fee for not vetoing the project in its entirety.

Those three items are not the brass ring in this deal. The brass ring is actually what this means for the next Nintendo titles. If there was a list of things that drive investors mad within the video games industry, Nintendo’s complete lack of participation in mobile would top said list.

Investors know that this deal isn’t huge for Nintendo directly. Sure the revenues are nice, but they are not $7B in a market cap bump nice. No, investors are looking at this deal and thinking “Wow, FINALLY Nintendo are jumping into mobile in a meaningful way”.

I would not take Nintendo blowing this opportunity completely off the table……… they have a “history” of shooting themselves in the foot.

If I do a back of the napkin estimate, I would say that Nintendo should be generating at least $3B from mobile-Not Pokemon Go. Their obvious reluctance up until now has been the impact on DS hardware sales.

The positive from all of this is that we are probably going to see more Nintendo IP hit mobile in the coming months and years.

I definitely do not believe that Nintendo Go is going to be huge long term, but Pokemon Go is not financially interesting to me, it is what Nintendo will do next which is.