The Wii U tablet controller has not been a big draw for mainstream consumers.

MARCH 17, 2015 • After five years of ongoing discussions, Nintendo and DeNA Co. Ltd. have agreed to launch a mobile membership service offering new games based on Nintendo IP. The gamemaker will not port existing titles and intends to utilize those of its characters and play mechanics that best translate to users of smartphones and tablets. During the press announcement in Tokyo, Nintendo president Satoru Iwata said what has held the company back from mobile development previously is the necessity of providing a strong network infrastructure, as well as an accessible online service environment for users. Iwata sought to dispute notions that the migration to smartphones in any way lessened interest in the company’s primary video game business by confirming development of its next console system, codenamed NX. The strategy is that by developing mobile titles for a wider audience greater interest can be generated in Nintendo’s console systems. The service Nintendo and DeNA developed will not only support smart devices, but also the Wii U, 3DS and PCs. Iwata said Nintendo will be the primary party operating the service. DeNA chief executive Isao Moriyasu said the main reason his company pursued the partnership with Nintendo is that the mobile game business is so challenging that to succeed requires continued availability of high quality content. No name or monetization specifics for the service were disclosed, but a fall 2015 launch is projected. While the target for the service is global neither Iwata nor Moriyasu outlined a strategy for market rollout. As part of the agreement, both companies are each taking a ¥22 billion ($181 million) stake in the other.

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Impact: Nintendo has a problem. The company needs a vehicle to reach out to mainstream consumers to bring them into its family of franchises and hardware. Nintendo was once an almost de facto introduction to the digital world for children in Japan, North America and Western Europe. The Wii and DS expanded that audience even further from 2004 to 2008. But that was almost a decade ago and a lot has changed. The iPhone’s arrival in 2007 laid the groundwork for a revolution in personal mobile entertainment that the emergence of tablets and Android smartphones has only intensified.

The challenge Nintendo now faces is that pre-teens are no longer automatically being introduced to Nintendo IP as more kids have access to non-Nintendo mobile devices. Worse, the Wii U’s tablet interface failed miserably as a vehicle to draw in non-core gamers and, to add insult to injury, proved to be less than compelling to established game players. The prospects for Nintendo’s handheld business have been bolstered by the introduction of the new 3DS XL and strong software sales, but we can’t say these solid performances are reaching out to new players. Meanwhile, going forward Nintendo is not introducing as many new potential consumers into the Nintendo pipeline.

So the gamemaker is turning to smartphone development as a means to attract that wider audience. In theory this strategy makes a great deal of sense, but practically, there are serious challenges. For its part Nintendo has been slow to develop and operate easily accessible online networks to purchase and play titles. It is a testament to perseverance that significant percentages of title sales are now digital, but Nintendo still has a long way to go in delivering seamless network experiences. Another challenge is that Nintendo has set out global aspirations for its new membership services, yet its partner, DeNA, is primarily a force in the Japanese market and has struggled to expand elsewhere. As the global mobile market has grown, DeNA has actually seen a decline in revenue in both 2013 and 2014. Talks between Nintendo and DeNA began in June 2010 and are only now coming to fruition. At that time the stock of both DeNA and Nitnendo were almost double current prices before today’s announcement.

This does not mean DeNA cannot be a viable contributor in building out the service, only that the company is rooted firmly in Japan, and that is a very different mobile market compared to the rest of the world. And while both companies are correct that mobile success is often based on one-hit wonders, they are launching a service that is going to require multiple releases over a short period of time. While they may be very much inclined to try a single game on an app store, a membership pitch may be a tough sell to consumers who are not already Nintendo stalwarts. We’ll need many more specifics about payment structure, marketing spend and content availability before feeling secure about the potential for success.

On the plus side, DFC is impressed that the service will extend to all Nintendo platforms, and the PC. Nintendo stressed that the main reason for going into mobile was to introduce consumers to its IP and hopefully drive them to more high-end Nintendo products. Nintendo was careful to stress that this was not a major change in business model. DFC Intelligence is forecasting that growth in mobile games will more than double from 2014 to 2019. However, it is a very difficult space and the number of people making serious money is limited. That being said, Nintendo is a company that could have a hit on the level of a Candy Crush Saga. As we discussed in the 2014 DFC brief on the subject, King Entertainment took a long-term multi-platform approach to make Candy Crush Saga such a huge success. Nintendo is in a fairly good position to have a similar success.

Overall there are a lot more specifics needed and there must be major concern that Nintendo does not seem to truly have thought out a global strategy. Given that the service is launching later this year it will be interesting to see how much of it is truly global versus mainly Japanese focused. Either way, Nintendo clearly needs to find a way to reach out to a fresh supply of consumers. This is at least a major positive step in that direction, assuming it is not too little, too late. The critical last piece in this puzzle is that the upcoming NX console needs to be a showstopper so that any new consumers that are brought in by Nintendo smartphone games have something compelling to be drawn to.