Google and Niantic Labs: the Professional Entrepreneur and Innovation in the Silicon Valley (B)

B5869 Date: July 1st, 2016

JEROME S. ENGEL

Google and Niantic Labs: The Professional Entrepreneur and Innovation in the Silicon Valley (B)

Two roads diverged in a wood. And I— I took the one less traveled by And that has made all the difference.

—R OBERT F ROST “THE R OAD NOT TAKEN”

In early January 2016, John Hanke (MBA ’96) reflected upon the Niantic’s activities over the past 12 months and wondered what opportunities and challenges the new year might bring. The prior year had begun with a mutual agreement to spin Niantic Labs out of Google as an independent company. By mid-October 2015, the transaction was completed and an initial round of Series A financing was finalized, with Niantic taking in $30 million from three corporate investors: The Pokémon Company, Nintendo, and Google.1

Looking Forward

As Hanke looked out of Niantic’s new second floor offices along San Francisco’s Embarcadero, toward the San Francisco-Oakland Bay Bridge and the East Bay hills beyond, the 41-member Niantic team had been hard at work since last summer on developing “Pokémon Go”—the first- ever augmented-reality (AR) game for the Pokémon Company and Nintendo—for a 2016 release. With this MMO2-based game, participants could virtually find, capture, trade, or battle any one of Pokémon’s 721 characters—Pikachu, Jigglypuff, and Charizard among them—at various geographic locations around the globe by using a customized bracelet that would connect wirelessly with a smart phone. The bracelet would alert players when there are Pokémon characters nearby so that they can find and catch them3. The more characters that a Pokémon Go player acquires, the more points he or she would accumulate, a digital extension of the madly popular Pokémon trading cards. In building Pokémon Go, Niantic would apply the same four

1 Nick Wingfield, “A Game Maker Lands Investors,” The New York Times, October 19, 2015. 2 The acronym MMO stands for “massively multi-player online.” 3 Wingfield, op. cit.

Professor Jerome S. Engel prepared this case study with Case Writer Dickson L. Louie of the ClearLake Group as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. DoCopyright © 2016Not by University of California Copy at Berkeley Haas School of Business. or All rights reserved.Post No part of this publication may be reproduced, stored, or transmitted in any form or by any means without the express written permission of the Berkeley-Haas Case Series.

This document is authorized for educator review use only by Gerald Kane, Boston College until June 2017. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860 GOOGLE AND NIANTIC LABS: THE PROFESSIONAL ENTREPRENEUR AND INNOVATION IN THE SILICON VALLEY (B) 2

design elements that they had applied to Ingress: The World is the Game; Move to Play; Urban Exploration; and Social. Reflecting on Niantic’s keiretsu4-like relationship with the two Japanese companies, Hanke noted:

[The spin-out from Google allowed] us to do something like this with Nintendo and Pokémon. They can invest and be a co-owner of the company and feel like they have a very tight relationship. [The Pokémon Company and Nintendo are] putting the number two video game franchise of all time5 in the hands of this project. It would be more difficult to do if they didn’t at least own a portion of the company. They feel like there’s a good alignment of interest.6

Both Japanese companies have been two of most dominant global players in the modern gaming history. Launched in 1995, the Pokémon franchise has since become a worldwide phenomenon as millions of fans sought to collect, train, and trade the Pokémon characters—each brought to life with their own light-hearted backstory—across multiple media platforms: video games, handheld consoles, and trading cards.7 Nintendo has been the long-time manufacturer of video game consoles—Game Boy, Nintendo DS, and the Wii—and had partnered with the Pokémon franchise since its inception. With both companies providing financing and having an equity stake in Niantic—and Niantic not having to focus on VC funding—Hanke hoped to tap into the deep gaming capabilities possessed by each company. Hanke noted:

[The interest in Niantic] was driven in large part by Mr. [Tsunekazu] Ishihara and the Pokémon Company. They’ve been involved in developing all the Pokémon games through the years. They guide the IP [intellectual property]. But a lot of what they do is through partnerships. They partnered initially with Wizards of the Coast to bring out the Pokémon card game, which has now sold something like 21 billion cards. They have animation partners who do the TV show. They’re a partnering type of company. Mr. Ishihara [who was also a huge fan of the Ingress game] ushered us into the halls at Nintendo.8

Through this partnership with Pokémon’s fan base of millions, Niantic also hoped that it would be able to raise the brand awareness for its portfolio of future AR games.9

“[In working with companies like Pokémon], part of what we’re trying to do is show people that breadth of game play styles and genres you can fit into this real-world gaming category,” continued Hanke. “Ingress is one data point. Pokémon is a data point. There will be some other interesting ones as well. It’s been fun to watch the phone ring after the Pokémon announcement.”10

“It’s not just a [developer] for hire thing,” added Mike Quigley, Niantic’s chief marketing officer. “[The Pokémon Company and Nintendo] know where we’re going. They know what true north

4 Keirestsu is the Japanese term for a set of companies with interlocking business relationships and shareholdings that often act as an informal business group. Keiretsu-type companies emerged during he 19h century and remain dominant in Japan’s present day economy. 5 Nintendo’s “Mario”, launched in 1983, is the all-time best selling game of all-time. 6 Dean Takahashi, “How Pokémon Go will benefit from Niantic’s lessons from Ingress on location-based game design,” VentureBeat, December 16, 2015. 7 Howard Chua-Eoan and Tim Larimer, “Beware of the Pokemania” TIME, November 14, 1999. 8 Takahashi, op. cit. 9 Wingfield, op. cit. 10 Dean Takahashi, “How Pokémon Go will benefit from Niantic’s lessons from Ingress on location-based game Dodesign,” Venture Not Beat, December 16, 2015.Copy or Post

is. This is ultimately about the platform and enabling lots of other games to do this. To me that’s good. It’s what we wanted to do on day one.”11

Looking Back

Four months earlier in mid-August 2015, Google itself had announced a reorganization, by announcing that all of its businesses—including its Google search core business—would be now run as independent entities under a new parent company, called Alphabet. While Google had already existed as an ambidextrous-type organization12 for a while—with some of the company’s profit centers dedicated on the present and the other units devoted to the future—the announcement formalized it.

“Alphabet is mostly a collection of companies,’ wrote Google CEO Larry Page at the time of the announcement. “The largest of which, of course, is Google. This newer Google is a bit slimmed down, with the companies that are pretty far afield of our main Internet products contained in Alphabet instead. What do we mean by far afield? Good examples are our health efforts: Life Sciences (that works on the glucose-sensing contact lens), and Calico (focused on longevity). Fundamentally, we believe this allows us more management scale, as we can run things independently that aren’t very related. Alphabet is about businesses prospering through strong leaders and independence. In general, our model is to have a strong CEO who runs each business, with Sergey and me in service to them as needed.”13

Could Niantic have stayed inside of Google [Alphabet], under this new organizational structure? Hanke explained both the pros and cons:

“Being inside of Google we have infrastructure: offices around the world; great talents from which we could assemble the team very easily; and real estate, IT, legal, and accounting support—all those functions were available to us. We didn’t have to go out and try to create those ourselves. We could focus on just the product. Obviously being part of a parent company like Google has a tremendous advantage when you're trying to introduce a new product. There were synergies with other parts of Google, the other [internal] teams that we could leverage.

“On the other hand, there were a number of cons over a longer term. We found over time that our interests and our focus were diverging from the interests of the core part of [Google], so the synergies weren’t as great as maybe we initially anticipated, and it added to the luster of doing this spin out. The things that I’ve been wrestling with for the past several months were around the issue of IP ownership: what gets transitioned out, what licenses back are made to the company, what rights the company has, how does that trade-off against investor interests. These are very complicated things to unravel, even though we had sort of anticipated we might spin it out someday. When you start writing up those agreements, it gets very complicated very quickly.”

11 Dean Takahashi, “How Pokémon Go will benefit from Niantic’s lessons from Ingress on location-based game design,” Venture Beat, December 16, 2015. 12 Also see Charles A. O’Reilly III and Michael Tushman, “The Ambidextrous Organization,” Harvard Business Review, 82/4 (April 2004): 74-81. Do13 Google, pressNot release, August 10, 2015. Copy or Post

Coming Full Circle

As Hanke walked away from his office window and back to his office, he reflected on the decision to spinout of Google:

“I came in as entrepreneur. I got to see what it was like to be a vice president in a large public company with a large staff, lot of responsibilities, and I decided that the idea of going out and making new products was more interesting to me, given a choice, than continuing to run a large organization in which a lot of that is administrative. People management is fun to some degree, but it doesn't have a lot to do with the product innovation, which was the thing that originally interested me. I was at a point where I was lucky to be able to have a choice, so I created this new thing where I could do what I wanted to do.”

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Discussion Questions

1. Evaluate the pros and cons of Niantic's current structure involving the Pokémon Company, Nintendo, and Google.

2. How does Niantic's current structure provide John Hanke and his management team with more flexibility to create additional value for its partners and employees?

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This document is authorized for educator review use only by Gerald Kane, Boston College until June 2017. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860