Niantic Labs is selling its video-game division to Saudi Arabia-owned Scopely for $3.5 billion US, as the American augmented reality firm shifts focus to geospatial technology after failing to recreate the success of its 2016 smash hit Pokemon Go.

The deal, announced Wednesday, also advances Saudi Arabia's ambitions to become the "ultimate global hub" for gaming.

The kingdom's sovereign wealth fund, via Savvy Games, bought Scopely for $4.9 billion US in 2023 as part of a broader push by the country to diversify beyond fossil fuels.

Niantic, an American software development company based in San Francisco, was once a part of Google, but became independent in 2015.

The company said it would distribute an extra $350 million US to its equity holders under the deal.

It will also spin off its geospatial artificial intelligence business into a new firm called Niantic Spatial, which will be led by Niantic founder and CEO John Hanke, who was once a key leader of the Google division responsible for Google Maps, Google Earth and Google Street View.

Geospatial AI, or just GeoAI, combines traditional geospatial analysis and mapping with AI, to come up with faster and deeper analysis of data.

Niantic Spatial will be funded with $250 million US of capital — $200 million from Niantic's balance sheet and $50 million from Scopely. All of Niantic's original investors will also continue to be shareholders of Niantic Spatial.

The move follows several tough years for Niantic.

After Pokemon Go became one of the most successful mobile games, the company struggled to replicate its success and had to lay off employees in 2022 and 2023. It also axed its Harry Potter: Wizards Unite mobile game in 2022.

For Saudi Arabia, already a growing hub for gaming and home to the Esports World Cup, the deal builds on a plan to invest nearly $38 billion US in initiatives related to the industry through its Savvy Games Group.

Savvy Games is a major investor in global video-game companies, including Nintendo, in which it has a stake of around 7.54 per cent after a small cut in its interest last year.