Since its Australian/New Zealand release earlier this month, Pokémon Go has been undeniably huge. Within a week, it had almost more daily users than Twitter, while it's now been downloaded more times than Tinder. But in little over a fortnight there are signs the app's popularity may have peaked.
For evidence of this, you just have to follow the money. Pokémon Go was released on Wednesday, July 6. When markets opened on July 11, after players had their first weekend roaming around their neighbourhoods, Nintendo's net worth went up nearly two thirds from US$17 billion to US$28 billion. Earlier this week the company had more than doubled in a value to around $42 billion. A share in Nintendo at that time would set you back $296. For comparison, shares in Apple—the world's most valuable company—cost a measly $99 each.
Han Joon Kim, an investment researcher at Deutsche Bank, was pretty skeptical about these numbers and decided to look into Pokémon Go. He found that Nintendo's value was based almost entirely on hype. "Nintendo's share price jump only makes sense if the app is downloaded by every second person on planet Earth," Kim wrote in an email to clients. For those playing along at home, that would mean a cool 3.7 billion players. But best estimates put the number of downloads closer to 30 million.
Yesterday, there were signs the frenzy gripping the market was fading. Shares tumbled 13 percent to $255, the biggest fall in Nintendo shares in five years.
But why were Nintendo's shares so overpriced in the first place? As mentioned earlier: hype. The Japanese tech giant's share price had started surging before Pokémon Go was even released.
Dr John Vaz, a senior finance lecturer at Monash University, explained to VICE how hype can have a huge impact on the market. "People watch the news for anticipation effects filtering through, and make purchases based on what they think will happen next," he said. "The market lives on anticipation at times. It's not uncommon."
I asked Dr Vaz what might happen if the Pokémon Go bubble were to burst. "It's been a bit of an overreaction so far, and share prices are going down because people are starting to see that," he said. "It's reached a resistance level where people realise they were a little too optimistic, so share prices will drop as more and more people sell, that's all."
However, the question of why investors were so wrong about Pokémon Go still remains. Part of the problem is that it's a free app, and one with no ads. The game simply generates money by collecting data from its millions of users, which Nintendo then sells on. Therefore the amount of money it can make is directly tied to the scale of its user base. As the number of active daily users drops off, so too will Nintendo's profits. Re/Code estimates there are only about 9.5 million people in the US actively using the app.
Pokémon Go also makes money with in-app micro purchases. Players can buy things—like Pokéballs, potions, and eggs—to help them train up their pokémon. But you still have to factor in that whatever money is made this way, the App Store and Google Play are going to skim off around 30 percent of the profit.
But that's not to say there's no money to be made in free apps. Forbes estimates Kim Kardashian pocketed around US$40 million in two years from her free mobile game, Kim Kardashian: Hollywood.
Candy Crush also earned US$1.5 billion in its second year on the app store. The game accounted for 78 percent of developer King's annual revenue in 2013. But in 2015 after the hype surrounding Candy Crush had died down, King still netted slightly under US$2 billion in revenue.
So maybe things aren't so bleak for Nintendo, which owns 33 percent of the Pokémon Company and has an estimated five to 10 percent stake in Niantic, the developer of the Pokémon Go app. But as Kim wrote to his Deutsche Bank investors,"Nintendo must generate US$3.3 billion of earnings this year" for its shares to stay stable. Even optimistically, that's not going to happen.
To make money out of Pokémon Go it looks like your best option is to become a Pokémaster and sell off your account to someone looking to skip a few levels. A Level 12 account will fetch you around US$100—enough to buy you a share in Apple.
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