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Nintendo Conference Q & A Session - September 29, 2010
Q & A
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Q 7 I would like you to elaborate a little more on the revised premises on which you based the revisions to the financial forecasts, as well as your factor analysis of them. Please explain how much of your net sales and operating income forecasts were affected by the revisions of your estimates of the foreign currency exchange rates, and how much foreign currency exchange losses were incurred in the non-operating expense section.
   In addition, I speculate that the lack of software titles and the effects of MagiCom and other illegal software issues have caused the downward revisions in the estimated shipments of hardware and software for Nintendo DS and Wii. Specifically, how large were the negative impacts for Nintendo DS and Wii, respectively?
A 7

Mori (General Manager, Corporate Analysis and Administration Division):

By referring to today's foreign currency exchange rates (on September 29, 2010), we made the revised forecasts for the former 6-month period of this fiscal year. I recall that the yen was traded at around 84 yen per euro and 114 yen per U.S. dollar today. On the other hand, since we are now estimating the U.S. dollar and the euro to be traded at 85 yen and 110 yen, respectively, against the Japanese yen during the latter 6-month period of this fiscal year, when we just focus upon the latter half, we are not anticipating significant impact from the foreign currency exchange losses or gains. As for the first 6 months of this fiscal year, because we have yet to close the account, I am not in a position to explain with concrete figures today, but in very general terms, the effect of foreign currency exchange losses on the former 6 months shall be close to the amount calculated by adding the non-operating income to the balance between the operating income and ordinary income.


Regarding the differences between our original forecasts and today's revisions on hardware and software of Nintendo DS and Wii, and first about Nintendo DS, because we have decided not to launch Nintendo 3DS by the end of this calendar year, the total number of Nintendo 3DS shipments that we now estimate for this fiscal year has decreased. This is one of the factors. Also, in comparison to the former half of last fiscal year, we are expecting fewer shipments of Nintendo DS during the first 6-month period of this fiscal year. We have come up to the new figures based upon these factors. Regarding Wii hardware, the small decrease in the forecast was a result of reassessing the forecast based upon the actual sales so far.

As for the software unit shipment forecasts, we are decreasing them for both Nintendo DS and Wii. Since availability of a hit software title or titles drastically changes the entire picture in this entertainment business, "a lack of hit software titles" may be the more appropriate term to be used here than "lack of software titles." To put it another way, for this fiscal year, we are yet to find new software which can drive the entire software market, software which can encourage those who have felt a bit tired of games to feel like playing, or can attract those who have not played any games before to want to play. With the lack of such hit software titles, we had to come up with the unit shipment forecasts with the assumption of a slower sales pace than when we originally made this year's financial forecasts.

For your information, the slower sales pace of games is not confined to Nintendo, but is now an issue the whole video game market is facing. I understand that it is because consumers are having a hard time finding something new among the proposals video game producers are making today. Nintendo has not been able to produce the titles which can be a great hit in the market, and I have the impression that there are fewer hit software titles in the whole market.

About the illegal software, or, I should probably use the term, "piracy" here, such acts as playing with illegal copies of software are happening for Nintendo DS and Wii. Of course, we are taking various countermeasures, but it has been like a game of cat and mouse, and no decisive solutions have been found yet. Relevant laws cannot completely stop piracy, either. We cannot deny the influence of piracy here. In fact I often hear such arguments as our software is not selling due to piracy. For example, it is said that in Spain it is currently more difficult than in other nations to take effective legal measures against software piracy and that, while the piracy devices are deemed illegal in other nations, it is still challenging to secure similar judgments in Spain. I hear people say that, as the result, Nintendo's market there has shrunk significantly due to rampant piracy. In fact, Nintendo DS software could not make it to the hit software sales chart in the country for sometime. However, when we launched the Nintendo DS software "Art Academy" in Europe this summer, which shows you how to draw pictures, it was ranked No. 1 on the software sales chart covering all the video game platforms in Spain. If one software can attract many people and can become a social topic, that software can sell regardless of piracy. Of course, as a responsibility of the platform holder, we will tackle piracy. For example, when we launch new hardware, such as Nintendo 3DS, it is a good opportunity to beef up the countermeasures, and we are actually working on that now. On the other hand, I do not think we should attribute bad software sales solely to piracy. Even with piracy, as long as we can create products which can attract attention from many consumers and which can greatly entertain them, that software can make it to the No. 1 position of the hit software sales chart. So, we would like to consider it from both perspectives simultaneously. It is true there is always the influence of piracy, but it is important for us to increase the number of our consumers who are willing to shell out their money to purchase our products. So, we do not intend to think that slower sales are solely due to piracy.

Q 8 How do you see the rapid expansion of social games? Is their effect on your business rather limited, or do you perceive them as a growing threat?
A 8


I've heard the concern that the rapid expansion of social games might have negative effects upon Nintendo's business so often that we took some time in order to investigate the actual situation. Let me use the slides here.

Some media have reported that Nintendo's business performance has gone down due to the boom of social games. Time-wise, Nintendo's business rapidly expanded with Wii and Nintendo DS, and just when it was leveling off, the social games business for mobile phones in Japan showed rapid expansion. Newspapers seem to write articles by assuming that there may be a causal correlation between the two and that a number of Nintendo DS and Wii consumers may be drifting away because they can now play video games free of charge, unlike with Nintendo DS and Wii. If what they are writing is true, it is an issue Nintendo has to deal with in one way or the other. If it is not true, it is better for me to explain so. Accordingly, I investigated this issue.

If I may start from the conclusion: I couldn't find any causal relationship. The two events happened at the same time, but it is not logically correct to insist that these two are directly related. First, let me talk about the number of users. Nintendo periodically surveys the game user population. Because Nintendo's basic strategy is to expand the gaming population, it is very important to know how many people are playing video games. We have been conducting these surveys about twice a year. By continuing these surveys, we are checking where we are in terms of our gaming population expansion objective. If this goal is stagnating, we need to be aware of it, so that is why we are gathering quantitative data.

We conducted the most recent survey in July 2010, and according to the face to face interviews we conducted with 3,021 people in Tokyo and Osaka, we estimated that there were 36.78 million Nintendo DS users in Japan between the ages of 7 to 74, and there were 29.89 million Wii users. As for the social network service (SNS) game players at the bottom, 14.93 million users in Japan were playing with one or two of the two major service providers. Those who responded by saying that they used to play before but hardly do so anymore were excluded from this chart. In other words, what we call "sleep users" are not included as the users of SNS games, which is the same condition as the users for Wii and Nintendo DS here.

Let's see how large an overlap can be found between the users of Nintendo DS and those of social games. About 21% of Nintendo DS users were playing both Nintendo DS and social games, and 79% were playing only with Nintendo DS. So, if there were the data which attest that those users, who were playing both Nintendo DS and social games, started to play with Nintendo DS less frequently or it became less likely that they would purchase Nintendo DS software, the assumption of a causal relationship between the two may be established. We checked this point.

This is the average number of Nintendo DS software titles purchased in the last twelve months. The number is per consumer, not per Nintendo DS hardware unit. One handheld game device is used by several people. Looking at a chart like this, it appears that, on average, those who play both Nintendo DS and social games are purchasing more software. In other words, those who are playing with both are more fond of video games. Looking at these materials alone, it appears to be rather weak reasoning to conclude that free social games are causing users to play with Nintendo DS with less frequency.

We have also been investigating the active use ratio of Nintendo DS, or how often the users are playing with Nintendo DS. We dug a bit deeper into the research in order to learn if there was any meaningful gap between those who were also playing with social games and those who were not. As a result, we couldn't find a difference here either. As we have been periodically surveying the Nintendo DS user population, we know that it shows a slight increase immediately after the year-end, and that a slight decrease is found in summer. It's because video games are most often played during the year-end and New Year period and less people are playing with them during summer. When we look at the survey results with such seasonality in mind, July this year once again showed a slight decrease in comparison to the survey we conducted in January this year, but it was not an unusual change. Accordingly, we could not find proof (of a causal relationship), either.

As a result, I cannot agree with the hypothesis which suggests that free social games are contributing to the decrease in Nintendo DS consumers. However, we understand that there is a large amount of software which is allegedly free of charge, so we strongly believe that we have to maintain an environment where our consumers appreciate that our products are fun enough to warrant purchases.

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