Nintendo Surges by Limit on Plan to Develop New Smartphone Games

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Nintendo 3DS

Attendees play the new Pokemon X and Pokemon Y video games on the Nintendo Co. 3DS at a launch event in New York.

Louis Lanzano/Bloomberg

Nintendo Co. surged by the daily limit at the close of Tokyo trading after announcing the end of its holdout from smartphone games, with plans to develop new titles for mobile devices made by other companies.

The stock, which wasn’t traded all day, jumped 21 percent to 17,080 yen in a closing auction in Tokyo on Wednesday. The Kyoto-based company will team up with DeNA Co., operator of the Mobage network, to create games and operate new membership services that include applications based on Nintendo’s character lineup of plumbers, gorillas and princesses.

President Satoru Iwata’s strategy of selling software only for Nintendo devices has come under pressure as a consumer shift to mobile gaming eats into demand for the Wii U console and 3DS handheld player. Before today, the company’s stock had plunged about 80 percent since 2007, the year Apple Inc.’s iPhone made its debut, as DeNA also lost users to smartphones.

“Finally Nintendo has turned a corner and embraced a huge strategic shift,” Atul Goyal, an analyst at Jefferies Group LLC in Singapore, said in a report as he raised his recommendation on the stock to buy. “We have been waiting for Nintendo to make this move and this will offer large upside.”

DeNA also surged by the daily limit. Shares of Bank of Kyoto Ltd., the fifth-largest investor in Nintendo, surged 15 percent, the biggest gain since 1999.

New Console

Eiji Maeda, an analyst at SMBC Nikko Securities Inc., raised his rating on Nintendo to neutral from underperform and boosted his share-price forecast by 56 percent to 14,000 yen.

The two Japanese companies also agreed to a capital alliance in which they will buy 22 billion yen ($181 million) stakes in each other.

“Nintendo and DeNA are both desperate, so it makes sense for them to join forces,” said Mitsushige Akino, Tokyo-based executive officer of Ichiyoshi Asset Management Co. “There is a chance that they can bring new users to their smartphone platform.”

The companies will develop original games optimized for smart devices rather than taking titles from the Wii U and 3DS, according to a statement. Nintendo also makes the Wii mini and portable 2DS.

Separately, Iwata said Nintendo is working on a successor console code-named NX. He didn’t elaborate.

Free Competition

“There is no reason to be pessimistic about the future of gaming consoles,” Iwata said in Tokyo on Tuesday. “We believe it’s possible to generate synergies by taking advantage of the respective strengths offered by the platforms.”

Iwata has resisted turning to smartphones for years, saying the company’s games are designed for its own machines, where players can use a joystick and physical buttons to move through the virtual world. He has also argued that demand for software will push along hardware sales, and vice versa.

The company’s dilemma is having to distinguish its offerings on smartphones while also using iconic characters to drive demand for in-house devices. Even if successful, Nintendo may struggle to generate significant earnings in a market dominated by free-to-play titles.

“Nintendo is risking diluting its characters and accelerating defections from its own hardware platform,” said Amir Anvarzadeh, a manager of Japanese equity sales at BGC Partners Inc. in Singapore. “Shares will probably still rise in response, just because the market has waited for some kind of a smart device strategy for so long.”

Cutting Forecast

In January, Nintendo halved its operating earnings forecast for this fiscal year to 20 billion yen and lowered its sales outlook by 7 percent amid stalling Wii U sales. The company expects to sell 3.6 million Wii U machines this year.

Rather than a comprehensive plan to increase sales, Tuesday’s announcement was a knee-jerk reaction to market pressures, said Daniel Ernst, an analyst at New York-based Hudson Square Research.

“The reality is that mobile is not very profitable,” said Ernst, who rates Nintendo hold. “DeNA, the partner they choose, their games have been in decline in Japan.”

Amiibo Figurines

Nintendo added a new line of interactive figurines called Amiibo last year to help kick-start the Wii U. Players can use the figurines to enter a Nintendo character into a game through the console’s GamePad tablet.

“I would like to produce several hit titles promptly,” said Iwata, who has been president since 2002. “If many people know Nintendo’s characters and we make a bridge, it would be positive for both game machines and smart devices.”

The Wii U struggled to gain traction after its 2012 debut amid a shortage of new software titles, while Sony Corp. and Microsoft Corp. used advanced graphics and hardware to lure serious gamers when they released new machines about a year later.

There are a total of 9.3 million units of the Wii U in the hands of gamers worldwide as of Feb. 28, according to VGChartz.com, which tracks industry sales. That compares with

20.2 million for Sony’s PlayStation 4 and 11.6 million for Microsoft’s Xbox One.

Sony is due to release its PS4 in China this week, after Microsoft entered the world’s largest market in 2014, following the lifting of a national ban. Nintendo hasn’t announced plans for China. Iwata said last year the company is developing a console for emerging markets.

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