What’s the Go with Pokemon?
You may be wondering why Pokemon is suddenly everywhere. Wasn’t that a fad 20 years ago? The popularity of the Pokemon Go app has not only turbo-charged Nintendo’s share price. It has also shown us, yet again, the significance of the ‘network effect’ – where a good or service becomes more valuable when more people use it.
I want to start by saying this isn’t a discussion on valuation, but I will be discussing how this phenomenon is relevant to investing and the power of network effects. I haven’t done the analysis on Nintendo, and I cannot tell you if it’s a worthwhile investment. Many analysts are trying to understand it though, particularly since Nintendo’s share price is 70 per cent higher since Pokemon Go was released.
I’ve also read a number of articles from senior journalists attempting to explain this phenomenon, yet they still seem mystified with how this fad re-emerged, and convinced that this craze will pass. To properly understand Pokemon, you need to have grown up with the game.
The Pokemon franchise is 20 years old and I cannot understate the role it played in defining childhoods. The first game was released on the Game Boy when I was 8 years old, alongside a cartoon series which shared a similar story line. There were two broad objectives with the game – collect Pokemon and battle Pokemon. You basically wanted to build a strong team of pocket monsters to defeat other trainers and use your team to capture every Pokemon within the game.
It seems rather rudimentary on the surface, but players would form very real emotional bonds with these characters. This bond is similar to the affinity people have with characters from Disney and Pixar, but you may not be aware of this because films weren’t the primary medium for the franchise. As new Pokemon games were released, players would port their favourite companions from the other games to continue on their journey (in much the same way that Pikachu is still by Ash’s side). To understand how strong these emotional bonds can be, check out the Nuzlocke Challenge.
The franchise hasn’t done a good job in growing with the original players – many long-running cartoons will age their main character as their core demographic ages, but in Pokemon’s case the main character is still (technically) 10 years old. And while there have been generation after generation of game releases, the core mechanics of the game have remained relatively unchanged over two decades, and so they haven’t replicated the mass excitement of the first generation.
But each iteration catered in some way to this loyal fan base, while also attracting new Pokemon trainers. And now, after 20 years, Nintendo has amassed an immense fan base which virtually existed underground – until now.
The franchise has released the latest game, Pokemon Go, as an app for mobile devices. Put simply, Nintendo has successfully ported the console game into the real world, allowing users to capture and battle Pokemon on their phones at physical locations. Every single player of the console games wanted to embark on their own journey, and now the whole world is an adventure.
I was familiar with Pokemon Go’s pending release, and was actually in two minds about downloading it, because (quite frankly) I was cautious about how addictive it may be. My caution was justified, and I had to delete the app after one day. It elicits an incredible wave of nostalgia, and the game has been cleverly structured to encourage users to play for as long as possible.
These themes are important to understand with investing. Nintendo has created a significant network effect with Pokemon, and with this platform it is able to release new titles on a sizeable scale. But at the end of the day, this phenomenon is only valuable if it can be monetised, and I have no idea about the profitability of this latest venture, nor could I tell you if Nintendo is a good investment. But I will say this.
Right now Pokemon Go is confined to a phone, but I think fans would be very keen to be fully immersed in their own Pokemon world. If the next platform for this network provides a full virtual experience, I’m sure this craze will ‘blast off again’…
Ben MacNevin is an Analyst with Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Kelvin Ng
:
Hi Ben, I know you said this isn’t a discussion on valuation – but on that topic here’s a link:
http://www.marketwatch.com/story/nintendo-stock-a-sell-despite-huge-success-of-pokemon-go-2016-07-14
Kind regards,
Kelvin
wealth from
:
It is fascinating watching the current Pokemon craze play out. I didn’t play it when I was a kid but I knew how popular it was – my brother had a copy on Gameboy and I’d watch him play (it was that good). One aspect of interest is the dual age market, I imagine Pokemon appealing to adults in their 20’s and 30’s who played as kids, but also kids of today who might be just as enthralled by the Pokemon series the older generation. Whether it’s long-lived or not is an interesting question.
That it has addictive qualities though there is no doubt, there have already been reports of car accidents and police fines due to drivers playing Pokemon Go whilst driving.
Joe
:
I have very limited experience of the Pokemon franchise (I missed the initial childhood ‘bubble’ by a couple of years), however the thing I find interesting is the potential health benefits of this new app.
One of the often cited criticisms (not one I necessaily share) is that video games are anti-social (not always) and prevent players from getting outdoors (generally true!) – Pokemon Go appears to be very effective in bringing both strangers and friends together, it’s also getting kids out of their houses pounding the pavement.
A colleague at work told me that one of his friends walked 30km in his first day whilst playing the game and couldn’t understand why his legs were sore the next day. As my colleague said ‘it was great, he needs to lose weight and he just walked 30 clicks without even realising!’.
I wonder if we are going to see similar games in the future that harness addictive computer gameplay whilst providing physical and social health benefits.
Brad Joe
:
Good article but I think there may be a small case of ‘hammeritis’ – while Pokemon Go clearly benefits from network effects (and will benefit more so when trading functionality arrives), in this case, I think you may be over-indexing on the benefits.
The deeper value a product generates from a network effect is when there is true lock-in as a result of the network. I could quit Pokemon Go to play another game without much problem. However, I would have serious problems functioning within my family or social group if I were to try to switch from WhatsApp to WeChat or Google+ to Facebook as all my family’s events and photos are posted to Facebook and all my friends communicate on WhatsApp.
David
:
I first encountered Pokemon just as my son was starting school (he is now in 4th year uni). Niantic had a similar game previously with nowhere near the success, it is the combination of the characters and the game that has made it popular.The appeal of the game initially is that the characters are well known to a wide demographic. The second appeal is that it is a scavenger hunt for these characters involving physical activity and discovery. That being said, I think the initial popularity will fall away quickly as the interaction develops a sameness “Not another zubat”.
The potential for in-game advertising and selling companies items to draw in players/customers give some option for revenue but the quick boredom factor possibly means this is limited.
This is however a whole new style of game, I am old enough to remember Wolfenstein which at the time was a new experience and the forerunner of today’s most popular games. With such a large section of the community now familiar with the platform and style, it is not hard to imagine similar product releases based around “My Little Pony”, Disney/Marvel Characters or even as promotions for particular events like movie releases.