JULY 11, 2016 • Since its release on July 6, Pokémon GO has become a mobile sensation, with some reports saying the smartphone game is near Twitter in the number of daily active users it draws on Android devices. Niantic, Inc., the software company that co-developed Pokémon GO with The Pokémon Company, reported so many people were playing the game in the days after the title was released in the U.S., Australia and New Zealand that Niantic’s servers were overloaded and upcoming releases in other markets had to be postponed. Another indicator of Pokémon GO’s popularity is that Nintendo Co. Ltd., which is an investor with Google Inc. in Niantic, and who owns 32% of the Pokémon Company, saw its stock experience a two-day rally on the Nikkei exchange that added ¥718 billion ($7 billion) in market value on July 11. Pokémon GO is an augmented reality (AR) game where people can encounter Pokémon creatures in many real-world locations using their smartphones, and can likewise get receive Poké Ball ammunition from PokéStops located at other real-world locations such as retail storefronts or schools. On July 31, Nintendo will release Pokémon GO Plus, a $35 wearable wristband that allows players to capture Pokémon in the wild without need of their smartphones. The device can later sync with a smartphone later via Bluetooth so players can see what creatures they have captured.

Impact: Pokémon GO is definitely not the first AR game. However, it is the first AR title to reach a mass audience and clearly shows the power of familiar IP. Pokémon GO was really a Niantic/Google product but, not surprisingly, it was Nintendo that brought it to the masses. Niantic, as part of Google, launched the AR game Ingress for Android devices way back in 2012. Like most mobile products Ingress was more an idea then a product with a clear path to monetization. Then Nintendo came along.

The idea for Pokémon GO was worked out between former Nintendo president Satoru Iwata, Pokémon Company CEO Tsunekazu Ishihara, and Tatsuo Nomura who was a senior software engineer on Google Maps. It was originally a 2014 April Fools prank called Pokémon Challenge that put the creatures into Google Maps and offered a fictitious Pokémon Master job at Google for the first person to capture all 150 Pokémon. Based on the positive response, an actual mobile game grew out of Pokémon Challenge, with Pokémon GO announced in September of 2015 as a partnership between Google startup Niantic and the Pokémon Company. A month later, Niantic was spun-off from Google with $30 million in investment from Nintendo, Google and The Pokémon Company. Why Niantic? The spin-off’s 2012 game, Ingress, was a smartphone-based, AR proof of concept where players competed to control actual city landmarks. Pokémon GO relies on geographic information from Ingress to place creatures in the real world.

Although Nintendo is not alone in siring Pokémon GO, such huge early success for this free-to-play title shows 1) how popular Nintendo game content is and 2) how the quick distribution of the mobile world can drive an instant hit. Most importantly it shows Nintendo has much more going on in the mobile space than just its partnership with DeNA. Miitomo, Nintendo’s first mobile endeavor with DeNA, definitely did not capture the imagination of consumers anywhere near what Pokémon GO is achieving. Nintendo is experimenting, and working with partners to learn what works best as it is enters mobile development.

Of course, this leads back to those that argue why should Nintendo still be in the proprietary hardware business when they can get their content out to millions overnight via regular mobile devices. The answer is simple: hardware is where the money is made and Nintendo will make far more money from devices then they will from even a big success like Pokémon GO. In several recent DFC Intelligence reports, including The Business of Video Games, it was argued that controlling a proprietary hardware system is the most valuable position in the video game food chain. Nintendo’s first effort to monetize Pokémon GO will be through the $35 Pokémon GO Plus wearable device. However, that is just the tip of the iceberg.

Mobile devices could be very fertile territory for Nintendo content, much as when the Wii became a huge hit thanks to its movement input controllers. But Pokémon GO mainly confirms what DFC was talking about when we said Nintendo has major upside potential with kids. Surprisingly the kids market tends to get ignored as many game companies go after an older audience that tends to be a little more stable in its tastes. Pokémon GO shows there is an entire additional audience for just plain fun simple hit driven games…not just kids, but all kinds of teenagers, moms, etc. who are excited to run around catching Pokémon. Marrying the appeal of Pokémon IP with the novelty of AR, real-world immersion proves the upside that Nintendo can achieve. The reality is, however, that Nintendo could not have achieved this success without Google or a Google-incubated startup. Yet Nintendo’s access to Niantic opens up opportunities for other game applications of AR, and it is no stretch of the imagination to see the possibilities behind an AR-DS handheld and from there taking it to a proprietary Nintendo NX device. That is where Nintendo can make real money.

Lastly, too much should not be ascribed to Nintendo’s recent $7 billion rise in market value. Yes, it is an indication that DFC is right to call 2017 as Nintendo’s potential year based on an effort of appealing to kids. But much of this needs to be done through new hardware efforts which will be much more challenging to pull off than a simple free mobile app with widespread appeal. Stories of data hacks, Pokémon GO inspired robberies, privacy invasion and many twisted ankles could dent much of Nintendo’s short term value. But the end result could be consumers running to the safety of Nintendo’s proprietary hardware.

Just remember that this week’s market value boost is small in comparison to 10 years ago when Wiis were flying off the shelves and Nintendo’s market value leapt from about $20 billion to $80 billion in a few months. Nintendo has opportunities on a growing number of fronts. When Nintendo announced its mobile efforts in March 2015, DFC argued that its mobile initiative should mainly be about growing an IP base that would buy proprietary Nintendo products. Pokémon GO is just one positive step in that direction but there is still a long way to go.