IR Information

Financial Results Briefing for the 68th Fiscal Term Ended March 2008
Q & A
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Q 21   Tell us about your thoughts on M&A. Also, apart from the conventional method you are using to take advantage of outside resources, is there anything you really want to acquire as your own property even by spending significant amount of money, or is there any particular technology or rights that you do not currently have but would really want to own in order to entertain or surprise your customer?
A 21


  Many people point out what we will do with increased money or that we own too much money. First of all, please understand that Nintendo’s business shoulders huge business risks. For example, when we were still developing Wii or DS, no one could tell these products would be successful. Of course, Nintendo was doing its best to make them successful, but as of the time of developments, the reactions from the industry were rather skeptical. It was even said around that time that Nintendo was running counter to the commonsense in the world.

  What if Nintendo did not have enough money at that time? Our partner corporations that have been providing us with many different technologies and components and our partner subcontractors to manufacture our products must have held grave concerns. If they had been concerned and feared that Nintendo might not succeed and that Nintendo might not be able to pay as promised, they would not have maximized their cooperation with us when we really needed their efforts.

  Also, if we had to disclose all of our plans on the new unique hardware a year and half or two years before its completion in order to solicit for necessary money from the stock market or banks, what would otherwise have been a unexpected surprise would not have generated the positive effects on the potential customers when we would have finally demonstrated the tangible product. In terms of the traditional efficiency of funds operations, especially for those who are reading our financial statements from the outside of the industry, our situation may appear inefficient. However, it is the unique characteristic of our business operations that you cannot dare to challenge some bold tactics unless you have a strong enough financial backing.

  To this end, we need our own capital adequacy. Also, the business risks in our business are increasing year after year. If we can come to the stage where no more risk increase can be forecasted, we may be able to tell our shareholders that we will return everything to them because we do not need them any more. But the fact is, we are not expecting such a day can come for sure. For now, therefore, our position is that, because Nintendo has been announcing one of the most aggressive policies as a listed Japanese companies to return our profits to our stockholders by making the higher amount of 50% of consolidated net profit or 33% of consolidated operational profit as the source of dividend, we are asking you to allow Nintendo to keep holding a large amount of cash reserves and to continue investing in us.

  Sometimes, some people say that Nintendo’s position will become even more solid if it purchased software companies by M&A, but I have no such intention because buying such companies will not contribute to strengthening Nintendo in the true sense. I believe that it is not the company but the skills of the employees that matters most, and therefore regard M&A as meaningless.

  There are the cases where M&A is effective. For example, if a company holds a very important patent that Nintendo wants to obtain that will help fight future battles in the video games business with a huge advantage, that would be a time when Nintendo would consider the possibility of M&A. When we determine we should, we should not hesitate to work on the M&A at that time.

  Once again, however, it shall be confined to the situation where owning a specific expertise or intellectual property right which belongs to the company will be critical. I do not think that rapidly increasing the number of people who cannot share Nintendo’s unique way of thinking or Nintendo DNA will do us any good. I have never thought that we should do an M&A just because, for example, we have recently not been able to make the significant sales growth. Neither do I have such intention in the future.

  Of course, there are technologies and rights that we are paying special attention to, but we cannot disclose them.

Q 22   Tell me about the hardware profitability. I understand that you are not planning on a price cut in the current fiscal year. Are you taking into account the hardware production cost factors or are you anticipating the further cost down for the hardware?
A 22


  As a matter of course, when we make more hardware, costs will go down as time goes by. On the other hand, whenever I read reports written by a number of people outside the company, I always have the impression that our video game business would be much easier if the cost decrease could be realized as quickly as the writers are predicting. I mean, the costs cannot be decreased that easily at all. From the very beginning, the number of hardware units Nintendo guarantees to produce are fairly large in the first place. Because we guarantee a fairly big amount for a fairly long time period, video game hardware have been manufactured and sold with the relatively low costs for the functions realized by the machines.

  So, the costs are actually coming down, but if you ask me if the cost of DS Lite will be going down the way it did since the time Nintendo started manufacturing it until today, I have to answer that there will not be that much of a cost decrease in the future. The costs of DS Lite cannot be drastically decreased from now. The costs cut we have experienced before cannot be repeated in the same way. That is how I am feeling today. Having said that, as a matter of course, we are constantly making efforts to cut costs and we are constantly making efforts to improve profits.

  Likewise, the costs for Wii are expected to decrease. However, when we compare Wii with other machines, whose core semi-conductor chip comprises a comparatively big share of the costs, there is a difference in how a price decrease of these semiconductor chips contributes to the total price cut, as the chip price is not a dominant factor in deciding Wii hardware’s price. So, I think this gap in the premise must make the cost down predictions made by people outside the company look rather fast in comparison with the actual cost down process we are making.

Q 23   Could you tell us Wii’s internet connection rate in each territory? Also, about WiiWare, I had the impression from today’s presentation that you would like to use it as a platform to discover new software and new developers as well. Who are the main WiiWare user targets in your opinion?
A 23


  The Internet connection rate is high at the early stage of the product’s availability in the market because the most avid customers are willing to purchase the machine first. If we did not make any efforts to increase the net connection ratio, the rate will decrease gradually. We have been making various efforts, such as our collaboration with NTT in order to increase the rate. What our efforts have realized is the situation where we can just maintain or increase the net rate by a small margin which could have been decreased if we had done nothing. If we do not take any measures, the ratio of people who are willing to connect their Wii to the Internet will decrease as the total number of Wii shipment increases.

  For this reason, when we look at the overall internet connection rate on a global scale, it has not changed drastically since the last time I disclosed these figures. In general, the internet connection rate is comparatively high in the U.S., and comparatively low in Japan. The types of Wii user might be a small factor for this. In other words, the ratio of avid gamers is high among the total Wii purchasers in the U.S. and the types of software which are selling in the U.S. are also different. European internet connection rate is between the U.S.’s and the Japan’s, but I have not brought with me any concrete figures to share today.

  As for WiiWare, just as you pointed out, one of the missions is to discover new developers and new software. We would like WiiWare to become the platform that can provide a unique opportunity to developers to create games that they cannot otherwise on other platforms. From the game players’ perspective, we would like to increase the possibility for them to experience unique new games.

  So, when it comes to WiiWare, rather than outlining who our primary target customers will be, we may want to consider unique software and services that can only be provided only on WiiWare. It is possible that companies from completely different industry may start an unprecedented service on WiiWare. As this should be something our partner corporations should announce, I cannot identify their names today, but in Japan for example, we have already received a proposal from a company which has nothing to do with the video game industry for WiiWare software that looks exactly like a Wii Channel. I think there will possibly be WiiWare software that people cannot think as video games at all when they are publicly announced. It is one of the unique characteristics of WiiWare that such software services can be started with a small risk and with a small start.

Q 24   I am concerned of two risks. One is about the rumor that Microsoft will launch a controller which will resemble a Wii Remote by the end of this year. What are your thoughts on this? The second is, even though this may be the matter of next year or thereafter, they often refer to Apple and others as potential companies to enter into home console and handheld game businesses. What is Mr. Iwata’s opinion to this kind of move?
A 24


  I am also aware of the rumor and have seen a fake image made by a fan on the web which looks like a Wii Remote with the rumor that such a controller may be launched, However there is no way for us to comment on such speculations. All I can say today is, it is not that easy to develop software which leverages the characteristics of Wii Remote. We are not concerned about what other companies may do but rather more concerned with presenting them with new ideas to our customers based on the prospect that our existing customers will surely get tired of the plays enabled by Wii Remote if we do not try to improve the experience. In other words, what matters to us is whether or not we can continue to constantly create and offer new surprises one after another. If we can, then (other company’s attempt to launch Wii Remote-like controller) should not be a big threat. The efforts in this field to try to appeal to a wide variety of customers are something in which we saw potential early on and that we have been working on the longest, so there appears to be no reason whatsoever why we need to be concerned.

  About your next question about what we will do if other companies enter into the market, as I said earlier, the game business comes with huge business risks and it is becoming increasingly more difficult for new entrants. You mentioned the name of Apple, but until any one of them can actually demonstrate what they are willing to do in this game market, I cannot make any comment.

  Just like I said now, what matters to us is not who may be entering into the video game market with what kind of risks but how we can keep the interests of our customers because these customers, even though they are appreciating our offers today, will get tired of them if we cannot provide them with new proposals before they get tired of them. If we can provide them with new surprises, they will continue to support Nintendo for longer, and if not, they will say in the near future, "That was Nintendo’s peak." So, we want to make sure we will do our job right.

Q 25   Could you tell us what kind of criterion do you have regarding the licensing of Mii? For example, I imagine that there is a possibility of difference in sales between sports titles where Mii appears or not. Have you already planned and disclosed such conditions from the outset?
A 25


  To Nintendo, licensing Mii is identical to licensing Mario. If you read Iwata Asks interview series in website, you can understand how Mii was created in detail, so I hope you can read them if you have time. Mii is actually the result of more than 10 years of efforts.

  Mr. Miyamoto, the inventor of Mii, himself has been saying that, "In a sense, licensing Mii is same as licensing Mario - Nintendo should grant the license when we can conclude that the proposed project is worthwhile. Should we allow any and all the licensees to use Mii license for whichever projects, Mii’s brand image will be hurt. Because we are not granting Mario license to any and all, we should not do so with Mii either."

  This is the current policy of Nintendo. So, at the software development stage, we are consulting with the developers as to how they would like to make use of Mii, and our Licensing Department handles on a case-by-case basis.

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