Nintendo: It's HUUUUGE (Part 1) - Monetization Of Pokemon Go

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By Maks Financial Services :

I can finally admit, my childhood best friend was right... Nintendo ( OTCPK:NTDOY ) beats Sega. =)

I am a 33-year-old millennial, professional, who started my own investment advisory practice after years at Ameriprise Financial (AMPF) and UBS (NYSE: UBS ). I do not own any current generation video consoles nor do I consider myself a gamer. The last console I purchased was a Sega Dreamcast more than 10 years ago, on clearance.

So when a few days ago my wife asked me if I heard anything about some Pokemon thing that her Facebook (NASDAQ: FB ) timeline was littered with, I genuinely had no idea, replied "No" and moved on.

Over the next 24 hours I had seen numerous Pokemon Go articles on television, radio and newspaper; countless posts on Twitter; and comments in real life from friends whom I did not even know had played video games.

What really took me by surprise were comments such as "Nintendo gained nearly the entire market cap of Twitter (NYSE: TWTR ) since launching Pokemon Go," and "Pokemon added as many users in 5 days as it took Instagram over a year to do."

Such massive claims were too big to pass up investigating so I took the plunge and download Pokemon Go and spent the next 48 hours playing the game. What I can say now is... it's "HUGE."

I will discuss in future articles the major impacts that this game can have socially, such as encouraging fitness and mental wellness among children, but for now I wanted to focus on the monetization of the Pokemon Go, beyond in-app purchases, that the majority have overlooked or chosen to ignore.

5 Monetization Factors That Are Not Being Taken Into Account

1. Sponsored "PokeSpots" and "Gyms"

There are countless articles in the media about small businesses that have seen double digit growth as they were lucky to be located next to a PokeSpot or a Gym. CNBC has a great article about it here .

If you have not played the game, PokeSpots and Gyms are important -- no, critical -- to the game.

Players go to PokeSpots in order to spin the sign to get free items used in the game, such as balls to capture Pokemon and potions to revive them. They may even be lucky to catch a few eggs that will spawn into Pokemon characters after the player walks between 2 and 10 kilometers.

Gyms are a place where you train and battle Pokemon.

In both cases, you must be in proximity to those locations to use them.

As I am writing this, I am sitting at a Starbucks (NASDAQ: SBUX ), right in between 2 PokeSpots, working on this article. There are currently at least 3 people here, besides me, playing Pokemon Go, all of whom paid $5 or more for a beverage.

Currently there is no way for a business to be added as a PokeSpot, the question is... how many small business owners would have ZERO qualms about paying $100, $200, $500 or $1,000 per month in order to have a PokeSpot at their business, or more importantly, their business made a PokeSpot.

In signs that this may be happening, a Reddit user looking at the code noticed references to McDonald's (NYSE: MCD ) in the game code. While it is not known if this was a deal per say or if this was simply an errant McDonald's near a PokeSpot, how much of a big deal would it be if someone forward thinking like McDonald's or Starbucks signed a deal to have a Gym located at their establishment, where they can offer discounts to the team in control of their Gym, etc.

There is proof that large corporations are taking this seriously. Six Flags (NYSE: SIX ) has put up a great in-depth guide to playing Pokemon Go in its parks, which you can find here .

Side note ... Make that 6 people playing now. A mother and her two daughters just sat down next to me playing.

What's really funny and perfectly makes my point... the young girl just said...

"Mommy, let's stay here, there are lots of PokeSpots around."

2. In-Game Advertising & Offers

Beyond PokeSpots and Gyms, think of the opportunities for businesses were geo-local advertising available when a user walks by their store.

Companies are already doing it on apps such as FourSquare, a social media platform, and Waze, a crowd-sourced traffic and navigation app.

If you are a small business owner in NYC, or heck, even a small downtown area, do you think more people are currently using FourSquare or will be playing Pokemon Go? Wouldn't you be interested in having a message with Pokemon Go specials sent to users, called "trainers," that are walking by your establishment or say in a one-quarter-mile vicinity?

Here, you can apply a number of payment options, cost per click, cost per view, or cost per acquisition.

3. Licensing of Pokemon Characters

It would be extremely silly if you do not believe downloads of Pokemon Go will not turn into sales of Pokemon merchandise, movie tickets, existing games and other ventures.

Pokemon is a huge global brand, with extremely high recognition likely on par with Star Wars. By looking at the Star Wars numbers , it is not too hard to believe that Pokemon can generate $500 million or more in licensing fees.

Furthermore, as the Pokemon franchise grows and individual characters gain new following and recognition, we can start comparing individual Pokemon monsters to Marvel's comic book heroes.

4. Hardware Sales & Partnerships

If you are a parent, or are at least 30 years old, it is not surprising that so many kids today are obese and socially insecure.

For the most part, their entertainment has been an X-Box or a PlayStation attached to their TVs. First person shooters and other violent games have been blamed for challenges in mental health, social anxiety and awkwardness.

Pokemon Go is a game where you MUST go outside and PLAY if you want to get ahead.

More than that, the majority of the PokeSpots and Gyms are at community centers and historical spots, as well as local parks and college campuses.

Not only will children... ok and adults, get a good workout, but they will also learn about their community and its history.

Nintendo has announced a Pokemon Go Plus device which you can use on the go that will notify you of nearby Pokemon by vibrating. It will further allow you to capture them without having to look at your phone if you ran across them in the past.

While this would be a great device for anyone playing the game, an even better extension would be a partnership with wearables makers such as FitBit (NYSE: FIT ), Apple (NASDAQ: AAPL ) with the Apple Watch, Samsung's Gear ( SSNLF ) or even Nike ( NKE ), Under Armour ( UA ) or Garmin ( GRMN ) to create a fitness tracker that integrates with the game.

If you visit the reddit groups, you will find many fitness people combining their regular runs/jogs/walks with Pokemon Go.

Over the last two days, inspired by the game, I did a 2 and a 3.5 mile run outside looking for Pokemon, rather than doing a cardio class at the gym or hitting the treadmill.

Thinking bigger, sporting goods retailers can create Pokemon Go-inspired campaigns to take advantage of the craze.

The reality is, many people take their Pokemon Go hunting seriously. Just look at this YouTube video showing a stampede in Central Park.


#5. Apply the Pokemon Go Augmented Reality Model To The Rest Of The Nintendo Catalog

Yes... Pokemon is a BIG franchise but in time... it may not be the most popular thing out there. Then again... the Facebook fad is still here and Pokemon Go picked up a lot more users in the week it has been out than Facebook did in its history.

The real story here is that this mobile game model is being proven with Pokemon. Where there is perhaps even more money and opportunity is in applying this model to the rest of Nintendo's catalog.

Can you imagine running around through your town on a Zelda quest? It would be the LARGEST MASSIVE Multi Player Role Playing game.

What about walking down the street dodging barrels thrown at you by Donkey Kong?

Last and certainly not least... how many ways can you imagine of bringing Mario Brothers to life?

Our Take & Bottom Line

What Nintendo and partners have accomplished here is nothing short of game changing, pun intended.

Pokemon Go represents the pinnacle of "video games" that every parent can be proud of. It is a clean video game that can be enjoyed by anyone of any age, without profanity or excess violence. Most of all, if you want to succeed, you are going to get up, off of the sofa and go OUTSIDE and play.

For anyone socially awkward, you have an easy avenue to talk to others and build bonds over something you both enjoy -- the hunt for pocket monsters.

It is a franchise that is a WIN WIN WIN for everyone involved. A win for the players spending quality time outside and socializing while getting fit at the same time. It is an opportunity for parents to spend time with their children to bond and explore the local community and perhaps uncover little known facts hidden away through the history of time. It is a win for small business in the communities who have more people coming in to visit their establishments, and most of all, it is a win for Nintendo and its shareholders.

The final question that remains is exactly who will profit from Pokemon Go and the add on sales. Is Nintendo the only player or are there others?

Pokemon Go is a joint development between Niantic Labs and Pokemon Co.

Niantic is the developer and distributor of the game, while Pokemon Co is the producer of the game.

Originally, Niantic was part of Google and later spun off. In 2015, they raised equity, with Pokemon Co, Google and Nintendo being the investors.

Nintendo further owns between 32% and 33% of Pokemon Co.

For all of the game-related revenues, Nintendo is exposed two ways, through its ownership in Niantic, as well as its 33% stake in Pokemon Co.

For all of the licensing, Nintendo would earn revenues through its one-third ownership of Pokemon Co.

Finally, for the hardware side, such as for the Pokemon Go Plus device, Nintendo is seemingly earning all of the revenue for itself.

I believe that what Pokemon Go represents is the evolution of video games, much like the MP3 format and what Apple iTunes has done for the music and recording industry.

It is my intention to purchase shares of Nintendo across various accounts for both short- and long-term purposes over the next week, after publication.

For direct revenues from Pokemon Go and the rest of the Pokemon franchise, Nintendo is the most direct way to go, particularly as the vast majority of investors are not able to buy directly into Niantic or Pokemon Co.

Another way of playing this craze would be buying Apple or Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ) for their share of in-app purchasing.

Finally, for a more speculative investment thesis, you could invest in businesses that would potentially benefit from this Pokemon craze, such as potential partners like McDonald's and Starbucks for food, or at least more Pokemon players coming in to play the game. You can go out further and invest in fitness apparel producers such as Nike and retailers like Walmart (NYSE: WMT ), Dicks Sporting Goods (NYSE: DKS ) and Big 5 Sporting Goods (NASDAQ: BGFV ).

Final Note: I hope you found this article helpful. I am a believer in active management that works and I am here to help you find those opportunities. Please follow me here on Seeking Alpha as we look for those opportunities and sort out the good managers from the mediocre.

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Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Additional disclosure: Maks Financial Services is a registered investment advisor and our Form ADV Part 2 is available upon request. We certify that the opinions and predictions in these articles are our professional beliefs at the time of publication and should not be construed as personal investment advice. Please consult your financial professional to see how anything discussed here applies to you. Furthermore this is not a solicitation to buy or sell any securities. This is not Tax Advice. Please consult your tax professional.

See also Freeport-McMoRan: Not The Time To Sell on

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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