There is some confusion within the gaming community as well as the investing world regarding Pokemon Go's impact to Nintendo's bottom line. I have assembled the facts surrounding the deal with Niantic Labs and Nintendo's stake in the Pokemon Company.
In August of 2015, Niantic Labs was spun off from Google Inc. Google said in a statement at the time that Niantic Labs is “now ready to accelerate their growth by becoming an independent company" working with other entertainment companies. Niantic Labs announced on their official company blog just two months later that Nintendo, Google and the Pokemon Company had invested $20 Million (with an additional $10 Million of incentives) in a joint venture called Pokemon Go. Simple enough? Each company gets 33.33% of revenues and we call it a day. Not so fast! We have yet to take into account Nintendo's stake in the Pokemon Company.
The Pokemon Company has three equal investors: Nintendo, Gamefreak and Creatures. Each investing company has a 1/3 stake in the Pokemon Company. This means that 1/3 of the Pokemon Company's 33% of Pokemon Go revenue belongs to Nintendo. This leaves the revenue to be split 4 ways. Google will receive 33.33% of revenues, Gamefreak will receive 11.11%, Creatures will receive 11.11%, and Nintendo will receive 44.44% of revenues. Nintendo's share of revenue being comprised of their 1/3 interest in Pokemon Go joint venture with the additional 11% coming from their stake in the Pokemon Company. This means Nintendo gets 44.44% of the app's sales, right? Think again.
Google Play and Apple's App Store both charge a 30% fee for games sold on their stores. This means that the investors in Pokemon Go are splitting 70% of sales. We can finally get to the bottom of this caper by factoring in the fees from selling on Android and iOS. Google will receive 23.33% of App Store sales, but 53.33% (their stake in Pokemon Go plus the 30% fee from their store) of Google Play sales. Gamefreak and Creatures will each receive 7.77% of all sales. Nintendo will receive 31.11% of all sales.
Nintendo receives the largest percentage (31.11%) of sales on the App Store than any of their partners, including Apple Inc.
Google receives the largest percentage (53.33%) of sales on their Google Play store with Nintendo still receiving the same 31.11% of sales on that marketplace.
Mia Nagasaka, an equity analyst with Morgan Stanley MUFG Securities, suggested earlier this week that Pokemon Go could generate almost $1 Billion of sales annually if it stays atop both the App Store and Google Play. Nintendo would pocket $311 Million in sales if Nagasaka is correct in her assumption. That would be an amazing return on their nearly $10 Million investment in the Pokemon Go joint venture.
Many people are baffled at how Nintendo's stock seems to be pricing in way more than just this bump in sales. Keep in mind, markets are about perception. Even though Nintendo only receives 31.11% of revenues from the app, the perception on the stock market is that their stock is the one to own to invest in this phenomenon. Nintendo has gained billions of dollars in market capitalization over the last week, and much of that has to do with expectations of future mobile success. The perception in the stock market is that Pokemon Go is a hit and Nintendo is the best pure play to get exposure, but it seems like the smart money realizes that this could be the tip of the mobile revenue iceberg for the Big N.
At the time of this article, Asif A. Khan, his family members, and his company Virtue LLC had the following positions:
Long Apple via AAPL common stock and options
Long Nintendo via NTDOY ADR