Pokémon GO has been a runaway success on mobile since it launched on July 6. It quickly shot up to the most downloaded free game on both the Apple App Store and Google Play. In one week, it was reported by Forbes that Pokémon GO was about to overtake Twitter in daily active users.
This news was fascinating considering Pokémon GO’s launch was a considerable mess due to server issues, various game breaking bugs, and game crashes. Most of these problems are still being fixed by developer Niantic Games at the time of this writing. Despite all of that, the game managed to garner a tremendous user base in a very short period of time. Such success prompted investors to buy large amounts of Nintendo stock, believing Nintendo was directly responsible for the app. Nintendo stock soared, gaining an estimated $7.5 billion dollars (US) in value in the days after Pokémon Go launched.
Nintendo looked poised to make a giant comeback off the back of Pokémon Go. Then on July 22, the company announced to investors that it had only a small percentage in the Pokémon Company, who are the owners of the Pokémon brand and properties, and that Niantic Games was responsible for the mobile title while Nintendo has the franchise Pokémon Sun/Moon games coming to 3DS for the holidays. This announcement resulted in a massive selloff of Nintendo stock by investors, causing Nintendo stock to lose approximately $6.4 billion dollars in value in a single day of trading. As of the time of this writing, Nintendo shares have dropped 25% compared to its value before the investor announcement.
This may have been done ahead of the Q1 2016 earnings report (does not include any licensing revenue from Pokémon GO, since it launched after the quarter), which is in itself very troubling. It’s possible that the company wanted to not have both revelations on the same day. It is clear that Nintendo had to tell its investors the exact nature of where they stand with Pokémon. Even an omission of this information could be considered fraud.
This reveals a larger and more disturbing problem at Nintendo. They displayed a combination of ignorance of what their investors and customers wanted and arrogance that mobile titles would not be directly connected to them. They also proved to be shortsighted by not capitalizing of the explosive success of Pokémon GO to put themselves in a position that would have seen them potentially partnering or buying control of Niantic Games. That deal would have carried a much different message coming into their Q1 2016 earnings report, as they could now legally claim to have direct involvement with the game and developers.
Three days after that revelation, Nintendo had its Q1 2016 earnings report, which revealed that the company in the last quarter had a net income loss of roughly 24.5 billion yen ($234.5 Million USD). This is one of the highest recorded quarterly profit losses for Nintendo since the launch of the Wii U. Nintendo stock is still dropping and has steadily declined since the sharp selloff on June 22.
For some, this news may be boring or trivial. Too much math and “gloom and doom” about Nintendo — that the company will be fine because they are Nintendo. For the rest of us, including analysts, investors, shareholders, creditors, customers, partners, and serious journalists, this news should not just be concerning, it should be downright scary. For too long there has been a myth perpetuated through gaming media and Nintendo fan sites that Nintendo has enough cash and assets to survive losses well into the future. This is entirely false and has no basis in reality. Even though it states some numerical data, that data was conceived to create a narrative. The intention was to placate fans that Nintendo would be fine despite bad financial news and that no future financial news that is bad should be considered because of a false hypothetical.
Let’s dig into the myth of Nintendo’s deep pockets and explore the actual data to arrive at the truth.
Back in early 2012, several online gaming publications and Nintendo enthusiast sites published articles to the effect that Nintendo had enough money in the bank (liquid assets) to sustain considerable losses, on the order of $287 million dollars, every year for approximately 40 years. This was originally based on an article from the now defunct Nintendo Gamer UK. The excerpt cited that Nintendo had approximately $10.2 billion dollars (original printing was in British pounds, which converts to 6.7 billion pounds). This number and the subsequent predictions based on the elementary math used to predict that Nintendo could remain in business despite losses for 40 years was entirely wrong.
The first problem with this myth is that this report, at the time this article, would have been published either in late 2011 or early 2012, only had approximately $7.77 billion dollars ($812.87 billion yen) in cash and deposits at the close of their 2010 Fiscal Year. The cash and deposits value is a company’s actual liquid assets that are used to pay creditors, service providers, and employees. This would have been reported to investors in late April 2011. Fast forward one year to the close of FY 2011, and the financial report from Nintendo shows that at that time, they only had approximately $4.42 billion USD (462 billion Yen) in cash and deposits. Both these actual reported values are far less that the ones reported on from Nintendo Gamer UK.
In one year, from the end of FY 2010 to FY 2011, Nintendo lost an estimated $3.44 billion dollars in cash alone. The excerpt from Nintendo Gamer UK attempted to skew expectations of losses by making up a hypothetical net loss year-over-year for Nintendo, which according to my research of the last six years of fiscal earnings reports, was based on nothing. They proposed that Nintendo could lose up to $287 million dollars (3 billion yen) every year, and manage to survive till the year 2052 (40 years from 2012). Both the cash assets, or “in the bank” value, and the net loss values cited by Nintendo Gamer UK, has no factual backing.
Net income loss is not a value that is fixed, nor can it be accurately predicted even quarterly. The heart of the matter is that this myth started by Nintendo Gamer UK was passed along the channels of gaming media and fan sites like a bad game of telephone. This elementary and false financial math has perpetuated the myth that Nintendo is practically invincible from any financial downturn for the foreseeable future. Even a reasonable person would realize this could not be the case, and has never been the case in history of business, which include examples of some of the largest companies in the world.
Companies like Pan Am, Kodak, TWA, Sega, Arthur Andersen, and Enron were all either the largest or close to largest companies in their respective field of business. Pan Am was arguably the largest passenger airline company in the world from 1927 to 1991 when they folded due to enormous losses during the 1980’s. And while some of these examples crumbled due to massive fraud, others closed their doors or operated in a significantly diminished capacity simply due to mounting financial losses. None of them lasted longer that ten years under those conditions.
Since the launch of the Wii U, Nintendo’s financials has been turbulent at best. Even though there were bright spots in the quarterly financials of certain years between then and today, the losses that Nintendo has suffered have far outweighed the gains. To elaborate that picture, I’ve charted Nintendo’s Fiscal Year values (represented in US dollars) from FY 2010 to FY 2015 (April 2011 – April 2016) to show their total cash and total current assets, which includes cash as well as securities (stocks, bonds, options), inventories, and miscellaneous other incomes (licensing fees, payable credits from other companies).
The overall trend of cash dips sharply and rises slowly, but overall Nintendo has lost significant cash from FY 2010 to FY 2015. Also note the total asset values, which trend downward with small upturns but significant downturns leading to an overall loss in total asset value for Nintendo. These trends are actual values and really put into perspective that Nintendo is losing money rapidly.
In their latest financial report released a few days ago for Q1 2016, Nintendo reported that their cash assets were approximately $5.57 billion dollars US (582.53 billion Yen). While this shows they’ve been building their cash assets since the end of FY 2011, they are still far below where they were in the previous year. Even more disturbing is their total current assets in this Q1 2016 report is valued at $8.75 billion dollars US (915.7 billion yen). This is a significant decline, and looking at things from the end of FY 2010 to Q1 2016, that is a loss of 37.65% in 6 years.
This is where looking at all these figures and trends, the future of Nintendo doesn’t look too bright. In fact, there are three more quarters ahead of the NX launch next year. The NX and games like Zelda: Breath of the Wild, could potentially do very well and reverse this trend. Q2 2016 looks to have no major releases on Wii U or 3DS, which could likely be another bad quarter. Considering that Q1 was coming off of the E3 2016 Zelda hype, the release of Star Fox Zero, The Legend of Zelda: Twilight Princess HD, and Mario & Sonic, it is unlikely that Nintendo will see net income gains in Q2. The rest of this year is very sparse on both Wii U and 3DS with only the Classic NES Mini and Pokémon Sun / Moon really standing out as the releases for holiday 2016.
This is very concerning to me, because it looks like Nintendo may bleed out money and not survive another six year period. I don’t want to see Nintendo go the way of Sega or THQ. I have mentioned in the past about Nintendo going third party, but that was in the context of them restructuring on their own terms to focus on games, not the way Sega was forced to drop the hardware market and is now a shell of its former self.
Some have confused my past editorials and podcasts as hate against Nintendo. This is not true and that was never my intention. I don’t sit at my computer and wring my hands thinking of how to say bad things about any company. My responsibility as a contributing writer, journalist, and podcaster for gaming and tech news is to report the facts and formulate opinions based on those facts. It is clear to me that there are other journalists who would rather perpetuate myths to foster complacency in order to placate fans or their own beliefs.
Anyone who reads this doesn’t have to like it, and they don’t have to agree with it. Just do myself and others the consideration of studying all the facts for yourselves and coming to an informed conclusion that may very well counter what I have stated. At least it will be informed and based on fact and not a blind devotion to a brand and misinformation.
