What’s Next after Pokémon GO?

By Vijay Govindarajan, Yoshi Maruyama, and Anita Warren

If you don’t know what a Squirtle, a Psyduck, or a Jigglypuff is, you may be among the few who haven’t been captivated yet by Pokémon GO, a sort of virtual scavenger hunt. Briefly, the game layers computer-generated creatures over real-time maps on a player’s iOS or Android smartphone. The technology, called augmented reality (AR), is a far cry from the falling puzzle tiles of Tetris, which dominated game consoles and computer screens in the 1980s. Its success raises a lot of questions, not the least of which is, where do video games go from here? And where will these innovations come from?

Pokémon GO is the brainchild of San Francisco–based Niantic, Inc. in partnership with Nintendo and the Pokémon Company. It wasn’t Niantic’s first foray into the AR world. Four years ago the company created and released Ingress, which warns visitors to its website that “the world around you is not what it seems.” Innovative as it was, Ingress didn’t generate the level of global frenzy that Pokémon GO has. Available now in 31 countries, players have turned out by the millions to track and “capture” the elusive Pokémon critters. Even people who pointedly have avoided video games in the past have got hooked. Within a week of its July 6 release, more people were using Pokémon GO on a daily basis than Twitter or Facebook. Apple has reported that the app was downloaded more in its first week than any other app in history, including Candy Crush Saga.

It’s proving to be something of a game changer, especially for the companies tied to it. Niantic is hoping to generate a new revenue stream from retailers willing to pay for placement as PokéStops on the virtual map. Shares in Nintendo, which has investments in Niantic and owns a 32 percent stake in the Pokémon Co., rose 120 percent within two weeks of the game’s release. It was a much-needed shot in the arm for the Japanese multinational company, which had ruled the 1980s with its Game Boy and Nintendo Entertainment System (NES) and had a comeback 10 years ago with the popular exergame Wii. Apple and Google may be the biggest winners of the Pokémon GO craze. Both companies get an estimated 30 percent of revenue from the purchase of PokéCoins on their app stores. (The app itself is free but the coins buy virtual items that gamers need during the hunt.) Needham & Company analyst Laura Martin said her company estimates Apple could generate $3 billion of “incremental high-margin revenue from Pokémon Go over the next 12–24 months.”

Why is Pokémon GO so wildly successful? Maybe because it’s a perfect storm. First, the game has strong nostalgia appeal. Many of the players roaming the streets in search of the 151 Pokémon on the loose are adults who enjoyed Pokémon toys and animation when they were children. Pokémon GO gives them a chance to relive those happy days; no surprise that many do so with friends. Nintendo is hoping to capitalize on those memories with the release this fall of a mini version of its NES­, the NES Classic Edition, equipped with 30 built-in games, including Donkey Kong, Pac-Man, and Super Mario Bros.

Second, smartphones, which offer increasingly sophisticated capabilities, created a platform that supports augmented reality technology. Plus, they are mobile and convenient to carry. The single drawback may be the app’s drain on phone batteries, which is considerable (but a boon for RadioShack and GameStop, which reported a 45 percent increase in mobile charging equipment in the two weeks following Pokémon GO’s release).

Third, smartphone usage is ubiquitous. People of all ages around the world depend on their smartphones for communication, logistics, information, shopping, entertainment—just about everything. An Ericsson report released this summer predicts that over the next five years, smartphone subscriptions will nearly double to 6.3 billion globally by 2021.

The success of Pokémon GO will likely open the floodgates for innovation in the video gaming industry, particularly products that incorporate AR technology. Certainly the game will spawn copycat editions, perhaps tapping into other childhood memories (Transformers, anyone?) or integrating characters from movies and TV shows. Niantic product marketing manager Archit Bhargava told Gamespot he’d like to see a Game of Thrones iteration “where Westeros is mapped out on Earth and you join House Stark or whatever.” A Walking Dead version might be a good (albeit unnerving) idea given the television show’s huge fan base.

Future AR game apps also could tie the game concept to real businesses, such as stores and restaurants. Certainly some of them already have shown a willingness to pay to participate. Other companies are experimenting with workplace AR visuals. In a pilot project last year, DHL staff used smart glasses equipped with an AR app to navigate the firm’s warehouse and improve the “picking” process. Another innovation might be virtual curators—perhaps digital images of long-departed artists—who guide visitors through museums and historical sites.

It makes sense to expect some of the firms that have benefitted most from Pokémon GO would leverage their success to create new innovations. But others will enter the market as well. The Apple’s App Store and Google’s Play Store have made it possible for smaller game companies to release their games to worldwide markets. Non-game companies, such as Amazon, also have entered into the game business to capture their share of the industry.

And that’s just the software component. Pokémon GO would have been a no-go without the advanced capabilities of smartphones. More sophisticated apps will require innovative hardware. Optimally, people may want to be able to create their own augmented reality, layering images of friends and family over familiar surroundings and producing their own virtual universe, and they may need more than a smartphone to do so. The next generation might even be a marriage of AR and holography. Star Trek fans may not have to wait until the 24^th century after all to enjoy a holodeck of their own creation.

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Vijay Govindarajan is the Coxe Distinguished Professor at Dartmouth’s Tuck School of Business and a Marvin Bower Fellow at Harvard Business School. He is the author of Three Box Solution: A Strategy for Leading Innovation, HBR Press, April 2016.

Yoshi Maruyama is a management consultant who previously worked for several companies, including Mitsubishi Corporation, McKinsey, and Microsoft’s Xbox division.

Anita Warren is a business writer and marketing consultant in New Hampshire.