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Corporate Management Policy Briefing/Semi-Annual Financial Results Briefing for Fiscal Year Ended March 2010
Q & A - Oct. 30, 2009
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Q 6-1   During the presentation today, I heard that game software sales for home console video game machines in Japan have been slowing down. As I interviewed with several people, they say it costs them easily more than 1 billion yen in order to develop a PS3 or an Xbox 360 software, and in terms of the current Japanese video game market size, the resulting software cannot pay off at all. They also say that they are also facing a hard time to recover the development costs even with Wii software as less and less Wii software they are making can sell in Japan and that it is becoming difficult to receive the green light of their Wii software development from the management.
  When you need to intensify the hardware performance, you will probably need to comply with HD (High Definition TV). However, I think that you may rather want to stay with the graphical performance for SD (Standard Definition) and add upscaling functionality to the hardware.
  I would like to know Mr. Takeda's opinion about the future including his assessment on the upscaling on the graphical functionality.

Also, we are now seeing the limit in the advancements in semiconductor technology. Traditionally, we could rely on increasing the clock. However, increasing burden is expected on the developers as parallel processing and others are increasing. I understand that you have been reviewing state-of-the-art technologies as a matter of course and that you are aware the increased burden on the programmers. I would like to know from Mr. Miyamoto, or from Mr. Iwata who has the programming experiences himself, if it will be possible to decrease the burden and to create more stuff with less cost.
A 6-1


  First, from Mr. Takeda, about the hardware.

Genyo Takeda (General Manager, Integrated Research & Development Division) :

  Since our division has been reviewing and developing a number of hardware, we are looking into many different things, including HD and SD. Also included is the review over the systems with which the creators can easily create video games with limited budget and resources. However, we have not come to the stage where we can announce which is the most appropriate means. Since an increasing number of the TV sets at home around the world are becoming HD today, it will be natural for a machine to be able to generate graphics that people will be accustomed to see on HD televisions. Since the ordinary TV programs are now shifting to HD, moving to HD appears to me a natural flow.

Q 6-2   Will it be better to prepare graphics for HD from the beginning, or will it make more sense to prepare the graphical materials for SD and convert them to HD by upscaling? What do you currently compare (in terms of the balance between the quality and the development costs)? When I look at the existing software for other HD video game machines, (even though they say they are HD-applicable,) too many of them, in fact, appears to be the simple upscaling from SD to HD.
A 6-2


  I believe that we should take the most appropriate balance. We are not too much concerned about if the technology itself is the state-of-the-art or rather old-fashioned. If we can find out the most appropriate medium, between SD and HD, and flexibly move around them depending on the game's contents, it will be good, I think.


  As long as my way of making games are concerned, all I am concerned about technologies is, we probably cannot swim against the tide. The customers' tastes will become more and more refined. Even today, many customers who have seen HD once say they cannot go back to SD. On the other hand, quite a few of us are accepting 5.1 channel even though they are not true 5.1 channel or embracing HD even though they are not true HD. In other words, when the majority of people around us say it is OK, we are content with the situation. I have to doubt how many of us can actually tell them apart. As long as graphics are concerned, it is comparatively easier to tell them apart. When they purchase a new TV, they change how the same programs are compared with other programs. So, if we try to intensify that portion, if we are simply intensifying what is actually SD to look like HD with the hardware support, it can be understood rather easily. So, development costs associated with HD graphics will have to further increase.
  We may need to go back to the basics of the issues. If we make a Wii game solely by targeting the Japan market, it will be hard to pay off, and we cannot afford to do so. I explained about Super Mario Bros. games earlier. Looking back the past sales, for example, when it sold about 5 million in Japan, approximately 20 million units were sold globally. In case of Zelda, unfortunately the software does not enjoy the high popularity in Japan that it does elsewhere, and about 5 times as much or more of the Japan sales can be expected in the overseas markets. So, even when the Japanese sales of a Zelda game were about 500,000, there was a case that global sales could reach around 5 million units in the past. In case of Mario, the global sales can be about 4 times larger than that of the Japan sales. So, if we want to, I believe the Japanese companies are still in a position to make games that can be accepted by the overseas markets. There may also be the issues within the companies about how the managers and the developers try to approach the game creations.

  Regarding the question of SD or HD, it must depend on each software. For example, we have to ask ourselves if HD is really necessary to develop Wii Fit. Won't HD be better for the games like Pikmin? The developers should choose the most appropriate graphical format depending on the software they make. To Nintendo, our theme is how we can prepare the SDK library to cater to the needs of the developers, with which the developers can more easily develop their games. In fact, Nintendo has been working with such mission.


  Next, let me talk a bit from an engineer's viewpoint. I want Mr. Hatano to follow up from a business perspective. I was originally a software engineer. Among all the 6 members sitting here on the podium today, I think I have the most experiences when it comes to making computer software. To put it rather simply, there are two types of computer programs: One is a program that the programmers wonder why a person is going through this trouble when this sort of thing can and/or should have been done by a computer. Another type is a program which naturally makes us feel that it is the programmer's job, not PC's, to make them. When we say we were able to design a good hardware, it is the hardware which gives least amount of trouble to the programmers in order to make the required applications. Of course, there is the opposite case.

  I hate to tell this as Mr. Takeda is sitting next to me today, but in the days of Nintendo64, we were not able to make the program run properly without us making a lot of extra and seemingly unnecessary efforts. However, Nintendo GameCube and Wii are made so that programmers do not have to beat our brains out or making many extra works, so I feel that the programming has become fairly easy. Mr. Takeda himself has learned from Nintendo64 and has been specifically focusing on how possibly the hardware people can make the platform which gives the least amount of hardship to software engineers. I would like to believe that he will keep this spirit for any future products.

  Finally about the business perspective, I previously showed an example of Professor Layton. I wonder how many in this industry were able to foresee the current sales situation in the overseas market even after observing the domestic sales in Japan. I also wonder if anybody was able to feel that Nintendogs and Brain Training software could be a success even after seeing the great sales in Japan. Aside from how we develop a new software, there is the point in asking how we market the software. In terms of our relationship with the third party partners, that aspect is becoming increasingly important. The number of opportunity when I discuss this with Mr. Hatano internally within our headquarters is increasing lately. So, I would like to ask Mr. Hatano (who has a long history of communicating and negotiating with the software makers) to express what he thinks lately.

Shinji Hatano (General Manager, Marketing Division) :

  Each company and each developer must have its own opinion about how they develop games as well as how they conduct their businesses. Some companies have internally consistent opinions, and some others have different opinions among the developers and engineers as to HD or more sophisticated graphics. When a company believes in the need of advanced graphics in order to differentiate itself from the others, which is commonplace, the development cost naturally increases.

  It may not be an appropriate comparison, but in the early days of NES, a typical software had a memory size of 24 kilo bytes. Today, when you try to use up the memory capacity of Blue-ray disc of PS3, you will need to make the program worth 54 giga bytes. If 24 kilo bytes of NES software can fit into 200cc tea cup, you will need enough water to fill a 25 meter swimming pool in order to make full use of a PS3 disc because the memory size of a game software has increased 2.25 million times as large as an early NES game. Of course, this is just a comparison, and I am not saying that everyone is trying to fill this large memory size although it must make sense for them to challenge this. But the general trend appears to be increasing memory size for a software. On the other hand, what has become of the sales per software? It has increased for sure, but it has not increased 1 million times, let alone 2 million times. It can easily be understood that making profits is becoming harder and harder.

  If the trend shall continue like this, what kind of relationship should Nintendo establish?

  Mr. Iwata explained a little bit about the example of Professor Layton. It has become challenging for one software to pay off the development cost with the Japan sales alone. The presence of the Japanese software companies is not what it used to be. The Japanese domestic sales are, of course, important. But the third parties have better grip on the Japanese market, so it may make sense for Nintendo to cooperate in their overseas marketing, for example, by us cooperating in both promotional and marketing activities.

  We have been thinking in this manner, and we have already cooperated with some third parties. We did it last year and will do so this year on Mario & Sonic Olympic Games with Sega. The original Nintendo DS and Wii versions of Mario & Sonic Beijing Olympic Games together sold more than 11 million units last year. This year, the new Mario & Sonic Winter Olympic Games will be marketed by Nintendo in Japan and by Sega in the overseas markets. Nintendo is also doing some supportive activities for their overseas promotions too.

  So, at a certain time in their development phase, when we can learn the substance of the software from the third parties, we try to think what we can do and how in order to maximize the sales. In the days when it is difficult for a software to pay off in Japan alone, we need to tackle the challenges with the software publishers. As I explained by comparing the memory sizes of a NES game and Blue-ray as an example, the development costs are increasing for the third parties. Recognizing the circumstance, our position is to cooperate wherever appropriate in order to realize the most desirable results.


  In that regard, I anticipate the relationship between software makers and Nintendo as a hardware manufacturer to change from now. In regard to the relationship, I often discuss with Mr. Hatano lately that we cannot foresee the future by saying, "It must be like this because it used to be that way in the past." It is time we have to invent new ways.

Q 6-3   Would you give us more concrete timing for the change?
A 6-3


  I do not foresee that to happen too far away in the future because quite a few of the software makers are significantly concerned about the current situation.


  I cannot elaborate on the details, but let me talk about one title with which we have come to a basic agreement. Nintendo will collaborate with Square-Enix on the overseas sales of Dragon Quest IX that they launched in Japan for Nintendo DS in July this year. For the U.S. and European sales, we would like to fully cooperate with them.

  Nintendo would like to play a key role in expanding the Dragon Quest title in these markets because our preposition is that such quality title could and should sell more in the overseas markets. That is the basic agreement, and we will decide the details from now.

Q 7   You mentioned the lack of strong software titles as a reason of not having been able to meet your expectation for Wii hardware unit shipment and of having lowered the annual shipment forecast. However, I understand that the company has launched titles that were originally anticipated. In spite of that, how do you analyze the reason why you were not able to increase the unit shipment? Why were you not able to launch strong software titles while you had been aware of the importance of doing so and had raised it as an important theme? What will you do to tackle with the status quo? Won't you change, or do you have different strategy? Please advise.
A 7


  First, Nintendo's basic business structure is to have a relatively small number of titles that sells all over the world for a very long time and that each sells a large volume to drive hardware and software sales and, as the result, revitalize the market.

  Talking about Wii, if Wii Music and Animal Crossing: City Folk that we launched late last year had been able to sell for a long time and to build up a steady sales volume, we might not have to say that we lacked strong software in the former half of this year. One year ago, Wii Fit and Mario Kart Wii continued their strong sales. However, if they had not sold in that fashion, we might have said that Wii had lacked the software to support the hardware at that time. In other words, it is not the question of the quantity of the titles. What matters here is, whether or not we have the software that continuously sell, and whether or not we are able to construct the circumstance in which these titles can steadily make their ways into the hands of new customers.

  Of course, Nintendo wants to have a perfect batting average, and I believe Nintendo's developers have been trying to pick up interesting ideas and themes, polish them and to offer them as the final product. Unfortunately, since we are human beings, we cannot make every one of them a 100% hit title. That, and also other factors did not work well, either. The atmosphere toward the entire gaming industry had been cooled down for a while, more so than we had anticipated. As of spring this year, we were already anticipating the general atmosphere to cool down. Honestly speaking, I thought in summer that I didn't expect the extent to which the market had be cooled down, on that, I had misjudged. However, as I shared the data with you today, Wii Sports Resort has been functioning in order to regain the momentum in the excessively cooled-down market. I understand that it takes time to heat it up again once it has been cooled down this much. The general atmosphere in the world is not that people want to snap up a Wii, so it will take time. Thinking in this way, we came to conclude that we would not be able to reach the unit hardware and software shipment that we had originally expected, and we revised our forecasts downwardly.

  Next about the question of how we will prevent the situation where we are unable to prepare the strong software lineup, as a matter of course, we are preparing for our arsenals for the next year right now and, we are confident that we have a fair chance of winning. We are currently considering how we should prepare our weapons the year after rather than next year.

  Right now, as a marketer, we are focusing upon how we can maximize Wii Fit Plus sales around the world and how we should sell New Super Mario Bros, Wii. As a manufacturer, we are preparing for next year so that what software we will be able to sell then are already in sight to a certain extent. In other words, if we cannot be very sure right now if we will be able to sell them next year, these titles probably won't hit the market next year. As of now, we have been considering what we need to prepare in order to do our business in 2011. Of course, the fact that we were unable to put long tails to the software we had launched in late 2008 was what we regret and we would like to make efforts not to let it happen once again.

Q 8   Even after your presentation, I cannot completely understand how you are going to learn from the past mistakes and what you will change and how. I agree that it is impossible to make every single game you develop the great success, and I do not think that the mistake that was made was detrimental. However, when I think about the examples of Facebook application, surge of iPhone, motion sensor introduced by Sony and Microsoft at the E3 show and other changes in competitive landscape, I have the impression that you are one step behind in taking such countermeasures as the following markdown of Wii, if I can be rather blunt.
  I also feel that you are a bit late in addressing changes in the industry structure such as polarization of software that can sell and that cannot sell, the cautious attitude that major retailers take toward the purchase of the stock and illegal copying of software. While I fully understand the potential room for the gaming population expansion including those in newly emerging nations that you have been explaining to us for some time, I still cannot foresee the product or the service that can trigger the expansion or re-expansion.
  I know I should not ask today about the details of the new proposals that will surprise us, but when I was reading the articles this morning regarding your financial announcement, I came across such expressions as the turning point. So, I would like to know if a decrease in the current financial performance is rather temporary and, with the strong software lineup, will you be able to put the company back to the growth orbit?
A 8


  Our business is to challenge something that others would think that our commonsense tells that it won't work. And when that something can make the great unexpected hit for any reason, our business has the potential to significantly grow.

  It is already a long time ago, but did any one of us think that Pokémon would be a global hit? Who was able to tell that "Brain Training" could sell all around the world? How many people in the world were able to foresee the actual sales number of Wii Fit before its launch? The fact that the original purchase orders for "Tomodachi Collection" from the Japanese wholesalers were 100,000 meant that the Japanese experts determined 100,000 would be enough to comply with the demand for a while. What matters is how we can create something which can destroy such a notion, but the software development does not always work out as calculated.

  On the other hand, since I am managing a listed company, I am responsible for realizing a certain high level of batting average and for aiming to increase sales and profits. Naturally, I understand that there are such criticisms that Nintendo was late in addressing various issues. However, I also have to analyze if the company really owns enough resources in order to take the first move in any and all the fields. Since Nintendo does not have very many employees, we have to focus upon the things which we are good at. If we had to take measures and countermeasures in any and all the possible business fields, our resources could be dispersed very quickly and easily. Rather, my job is to find out the potentials in something that others could not find a possibility, to secretly pour the resources into them and to realize the situation that the products have already become great hits before no one else know. If we can realize such a situation at or above a certain level, the company can be publicly appreciated. If not, people would look back and say, "It was certainly a turning point for the company."

  We are developing one product after another, and we are aiming to make each one of them an unexpected hit. Otherwise, we would not have spent more than 3 years developing "Tomodachi Collection." However, not all the software can be a hit like "Tomodachi Collection" just because we spend three or more years for their developments. Identifying such potentials is one of the most important jobs for me and for Mr. Miyamoto. The fact that we have actually been able to make them unexpected hits at a certain percentage so far has pushed Nintendo to where we are today. So, for us to be able to dispatch our messages in the market, we need to ask you to believe in our records in the past few years to identify the unknown potentials and ask you to trust the possibility that the company will continuously propose something that may eventually be unexpected hits in the future as well.

  Nintendo cannot afford to disclose all of our business secrets that we are preparing for you next year and two years later and still to insist to all of you that you have to be surprised when we actually launch them. So, we cannot constantly deliver the message (as to precisely what we are making now.) Also, we ourselves are finding out the seeds just while we are running. We internally exchange such conversations as, "I can feel something uniquely interesting potential with this idea." The charm of some of these ideas suddenly emerges to the surface during development, when we make the decision whether or not we will further challenge with that. Mr. Miyamoto and I often say at such an occasion, "well, with this idea at the current stage of the development, we will be able to finish the development and launch this in 8 months or 10 months." That is a kind of timescale with which we think about the developments.

  So, when I said earlier today that the company has already made the preparation for the arsenals for the next fiscal year and, right now, we must think about the year after, it was my real feeling. It is not that we do not have a means to reinvigorate our sales from now. Please at least understand this point.

  I cannot understand at all why some people come to think that Nintendo has lost its edge as soon as they hear such news that other companies are newly applying for motion sensing technology. If fun and interesting software to take advantage of the technology could be created that easily, a number of other titles which are more fun than Wii Sports must have been already launched for Wii. Why in real life are not so many? The total power factor to combine both the technologies and software at the appropriate level must be the reason why Nintendo has been appreciated in the marketplace, and when someone argues that Nintendo has lost its edge when the actual products have not been launched yet, I feel something must be wrong here.

  The same thing can be said about the talks over iPhone and iPod Touch. Some articles suggest that Nintendo is trying to leverage the Nintendo DS business because iPhone and other game machines are gaining momentum. As I explained to you with some data today, it is true that the current Nintendo DS business is not that heated up as it used to be sometime ago, when no one could tell how far ahead Nintendo DS might be able to grow. On the other hand, the data also showed that Nintendo DS has not lost its footing at all. Actually, it has been even increasing its footing all around the world. Under such a circumstance, I do not know why some people make such a remark. I have to feel that, probably, there are people who want to write the story that Nintendo is competing against Apple, and they are picking up fragmented information here and there and connect them to write their own stories. I cannot agree to such an argument. I want to believe that some of you who have listened to my presentation were able to understand our position.

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