Something wonderful has happened. Our oldest son, Alex, is playing outdoors. Like all parents in a world dominated by video games and other sedentary diversions, we are always looking for opportunities to get him out of the house and moving. Alex tends to stay indoors, and his avocations of choice are playing the guitar or Counterstrike Global Offensive or GS GO. While his 14 year-old metabolism can process seemingly endless quantities of food without significant weight gain, all adults know that that gravy train runs off the rails sooner or later – and usually runs off HARD. So, we are constantly imploring, begging, ordering him to do things that get him exercising so he doesn’t become a Discovery Channel documentary in his 30’s.
Seemingly, out of nowhere, comes the exercise messiah – in the form of an augmented reality game called Pokemon-Go. Let’s take a breath so I can catch you up on the vocabulary. Augmented reality (“AR”) is the juxtaposition of digitally-created images or animations on some view of the real world. In a way, a heads-up display in an aircraft cockpit could be considered a sort of neanderthal AR. In the present day, AR is being viewed through mobile devices – cell phones, tablets, etc., so when you look through a camera viewfinder or screen, an AR program would superimpose an image on top of that view.
Pokemon is a long-running series of games by Nintendo. The game involves finding and capturing cute creatures (called Pokemon) with various combat abilities, training the creatures, and fighting other Pokemon owners (trainers) with their respective creatures. Combat helps the Pokemons improve their abilities and even evolve into more advanced Pokemon. Pokemon-Go, released on July 6, 2016 allows players to hunt, capture, and collect their Pokemon via AR. You go to your street corner (or a McDonald’s – more on that later), turn on the app, look at the real-world place through your phone viewfinder, and there might be an image of a Pokemon waiting for you to capture it. As a nice kicker, the more walking around you do, the greater your potential for leveling up your Pokemon.
The game has done pretty well. Already (released less than 3 weeks ago, mind you), Pokemon-Go has an estimated 10 million to 20 million users and is installed on 5% of Android phones. The game is only now just going live in Japan. Pokemon-Go is expected to surpass Twitter in terms of daily users by the end of this week. Leveled up accounts are already being sold for $100. The game is also creating safety challenges, ranging from walking off cliffs while staring at your phone, to attracting pedophiles.
The business model appears to be to sell locations to drive traffic to physical locations – called “sponsored locations“. Suppose you wanted to get more kids to visit your pizza place – you might pay Nintendo to make a habit of placing Pokemon inside your store. If you pay more, perhaps there is a greater likelihood that a rare Pokemon will show up – so you can become like the convenience store that sells the winning Powerball ticket. It’s a fascinating (and rare) instance where an Internet business model is transferred to the analog world. Instead of clicking through, you actually go someplace. McDonald’s is trying this out and it will be fascinating to see how effective this model is, or isn’t. Rumor has it that the cantina at Mos Eisley is a sponsored location, so if you don’t find the droids you are looking for, perhaps you can capture a Pikachu.
Investors are capturing Nintendo shares. Since Pokemon-Go’s release, the company’s market capitalization has doubled. This isn’t a small company – that means that, since July 6, Pokemon-Go has added $17 billion of value to Nintendo ($21 billion before a correction on July 20). Nintendo is now more valuable than Sony. A market valuation this high for a single game is extraordinary. Here are some comps:
- Zynga (Words with Friends) had its IPO at $7 billion in 2011.
- King Digital Entertainment (Candy Crush) was bought by Activision for $5.9 billion in November 2015.
- Mojang (Minecraft) was bought by Microsoft for $2.5 billion in September 2014.
- Supercell (Clash of Clans) was bought by Softbank for $3 billion in 2013.
- Rove Entertainment (Angry Birds) turned down a $2.5 billion offer from Zynga in 2012.
- Machine Zone (Mobile Strike) raised money recently at a rumored $6 billion – $10 billion valuation.
None of these valuations even reach half the value that Pokemon-Go has created for Nintendo. The only analog I see is Activision buying out Blizzard (Diablo, World of Warcraft) for $18 billion in 2008. Diablo has been a successful franchise in its own right, but I guesstimate that of that $18 billion in value, $15 billion was for World of Warcraft. World of Warcraft is the most commercially successful MMO of all time. Even over a decade after its release, World of Warcraft has over 5 million paying subscribers, although Blizzard/Activision have likely given themselves the kiss of death by releasing a movie. Movies based on video games are generally awful. I dare you to watch the entirety of Wing Commander. I will admit to liking the Doom movie, but few others will – and I’m kind of in the tank for Rosamund Pike.
The per-user implied value is breathtaking. Even if you assume that another 10 million users are added, that’s still over $850 per user (roughly $17 billion in value divided by 20 million users). You would have to subscribe to World of Warcraft for 4.7 years at $15/month just to reach that revenue level. That’s clearly not viable, so the market must be expecting Pokemon-Go to attract at least 100 million users. That’s a lot of users, of course, but chew on this – Google searches for Pokemon-Go have overtaken searches for porn.
Is Pokemon-Go justifiably the most valuable game in history? You can’t argue with the adoption curve. I observe the impact its had in our own neighborhood. When I take our dog for a walk, I see kids wandering around the neighborhood, searching for Pokemon. The fact that it takes the Internet click-through model and transfers it into the analog world is fascinating and should be immensely valuable, if successful. I can see SEO-like bidding wars taking place for the rights to host the most valuable Pokemon finds. And, this might be the first game to truly promote exercise. In a time where obesity (including for children) is an epidemic across the Western world, if this even half cracks the code to create a link between video games and movement, it’s going to do well as kids’ and parents’ interests will be closely aligned. And Nintendo knows how to milk a franchise.
As a parent, I know this: Alex is getting exercise, and he’s not spending hours playing first person shooters anymore. He and his friends are roaming the streets of Chamblee like a Star Trek landing party using their tricorders. And all I needed was a $15 activation fee and an extra $15/month on our existing plan? Go catch ’em all!