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Semi-Annual Financial Results Briefing for Fiscal Year Ending March 2012
Q & A - Oct. 28, 2011
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Q 4

  I’d like to confirm the priorities of your business. In the fiscal years ending March 2012 and March 2013, the Nintendo 3DS is and will continue to be in a significant period of expansion. During these fiscal years, which takes precedence for you: expansion of Nintendo 3DS hardware or financial performance? For example, is it more important for you to accelerate the sales of the Nintendo 3DS by allocating more financial resources to its promotion or will you try to protect your bottom line in terms of making profits? Please let me know your ideas on this.

A 4


First of all, as far as the current term, ending in March 2012, is concerned, we have decided that driving the sales of Nintendo 3DS hardware is our main priority, and in a sense, we can say that by doing this, we have sacrificed our profitability for this fiscal year. We came to the conclusion that we needed to make that bold investment, instead of focusing just on this term’s profitability, so that we would be able to make the Nintendo 3DS an important foundation for Nintendo for years to come. During the fiscal year ending March 2013, we are expecting the profitability of Nintendo 3DS hardware to improve significantly. In other words, we are not anticipating a situation where we must expand the hardware by generating a large loss on the sales of the hardware. As long as we can create sufficient momentum, I think we will be able to come close to our usual course of business operations in the next fiscal year.

  I’d like to take this opportunity to explain one more thing here. The advertising expenses that Nintendo has forecasted in this fiscal year are five billion yen less than our previous advertising expense forecast amount. Some of you may interpret it as though the company is cutting ad costs in order to secure annual operating income by any means, and such an assumption may be the background to the type of question I just received. Let me explain a bit about it: We disclose our advertising expenses in Japanese yen, and among the total advertising expenses, expenses denominated in foreign currencies decrease in Japanese yen value when the Japanese yen appreciates. This is one factor. Also, there are always the ad expenses that are linked to the sales, which are used for promotions. For example, a pre-determined percentage of the sales by an overseas retailer is invested into a fund created by Nintendo and the retailer, and this fund is used for promotional activities which are done in accordance with some pre-determined conditions. Because we made a downward revision to our annual sales forecast, the ad expenses linked to the sales decreased accordingly. In other words, we have not taken a conservative attitude towards advertising and promotion expenditures, which are needed to realize 16 million units of Nintendo 3DS hardware sales in this fiscal year. As a matter of fact, we are making rather aggressive investments in this field, and we have not changed our attitude. Of course, more investment in advertising does not necessarily mean more sales. We are taking cost efficiencies into consideration, and we are trying to spend money at appropriate times and on appropriate promotional activities such as when a strong software title is launched.

Q 5

  We have just heard the strong message from the president that, in the upcoming year-end sales season, the company would like to wipe away the notion that game-dedicated systems are coming to the end. I’d like to ask you a question from the viewpoint of how Nintendo will deal with these changing circumstances. At the Financial Briefing for the first quarter of this fiscal year, you told us that the company would create an environment by the end of this year where the publishers could charge money for add-on items, that the company would like to propose even newer and more attractive communications among people, that the company would like to create special content that would not be easily disposed of and maintain its value, and that the company was thinking about a way to take advantage of smartphones and social networking services (SNS). And today, you mentioned a concrete plan that the Nintendo eShop would become available on the Web so people can also access it from their PCs and smartphones. If possible, I’d like to know the exact progress situation and any other information you have available. Another question I have is about establishing a structure with which the company can offer software title one after another. I think it is a very challenging mission and it may be an eternal issue that Nintendo has to tackle, but what exactly are you doing to accomplish this goal?

A 5


Nintendo eShop

This is a slide that I referred to in my presentation today. When we talk about “charging for items” and “add-on content,” the structure will be the same. More specifically, with the update of the Nintendo eShop scheduled for the end of November, a mechanism, with which the users can separately purchase inexpensive add-on items and content for a game they have purchased, will be incorporated. Maybe I needed to explain in more detail at the end of July this year, but what will be done by the end of this year is not only the publishers’ ability to provide consumers with add-on content but they will also be able to charge for such items.

  I have already shared with you Nintendo’s position on this kind of activity. (During the Q&A session of the last Financial Briefing, I said, for one thing, that add-on stages and content, for which the developers have poured a significant amount of their creative resources into, should be offered for the consumers to purchase separately.) Nintendo will also offer something like this for the titles Nintendo publishes next year, in a way that should be appreciated by our consumers. I also hear that some of the software publishers are intending to launch titles that incorporate this new structure of the Nintendo eShop from early next year. I would like to wait for each publisher to make their relevant announcements as to such details as what each of their software titles will do specifically, but I just wanted you to be aware of the general schedule.
(Some have reported that Nintendo is intending to launch software for which the company will charge consumers for “add-on items” in exactly the same way as other social game providers, but it is not true.)

  About our intention to make use of smartphones and social networking services, we have, for example, already notified the public of Nintendo Direct by using SNS. More specifically, we made an announcement through Twitter two days before the broadcast of Nintendo Direct on the Internet and, as a result, hundreds of thousands of people watched it. So, we have already started using SNS. When it comes to experiencing Nintendo software, we want people to do so only on our platforms. On the other hand, I explained about our plan to make Nintendo eShop available on the Internet too. When it comes to the ways people can access our software information, it used to be that we were solely dependent upon TV ads and print ads. Now that social media plays a new role in spreading information, it would be a shame if we could not make use of them. Smartphones are quickly spreading as a means used mainly by the younger generations. In Japan, we may feel that this is the year that smartphones are starting to expand significantly, but in the United States, that trend was already seen before this year. Making use of them is one example of how we would like to take advantage of SNS. For the launch of the Wii U, we will be able to do even more. Today, so many companies are trying to attract the public to a broad variety of different products. We are all fighting to grab people’s attention. So, our idea is that, in such a circumstance, the company should try to use SNS vigorously so that it can help to remind people about our products, or we should offer people a situation where they can more easily find out about our products that suit their lifestyle, tastes and values.

  As for your second question, just as you pointed out, offering software one after another is a never-ending challenge we have to try to overcome. We failed to offer strong software titles without long intervals in the first half of this year, but it was not because we did not place importance on offering them one after another. Even when we understand the significance of this, we are sometimes unable to do so. We should have prepared a more thorough backup plan. We were planning to launch software in the first half of this year without too many intervals. However, we ended up delaying the launches of multiple software titles, and we could not make up for it. Around the same time, the third-party titles did not become huge hits, either.

  For us to provide software titles one after another, one idea is, “Isn’t it possible for Nintendo to stock some of its software titles instead of launching them as soon as the development is completed?” Video games need to stay fresh, so it is not practical for us to put them on hold for too long, but we think that some of them may be held for a certain amount of time so that there will be a short interval between when they are completed and when they are launched. We are taking on this sort of challenge for the Nintendo 3DS. For example, when we look at the software lineup for the year-end sales season, it is so dense that, if we added any more software, the total sales would not increase. Accordingly, we have intentionally delayed the launch of some software titles to early next year.

  Another idea is for us to further intensify our collaborations with the software developers and the third-party publishers. When we launched the Nintendo DS and the Wii, Nintendo made some very unique proposals which were not in alliance with the mainstream concepts held in the video game industry at that time. As a result, there was no choice but for us to invigorate these platforms through Nintendo’s own efforts so that they could be up and running. And, the initial purchasers of the products were mainly Nintendo fans. Particularly in Japan, for the Wii, we struggled to create the circumstance early on where third-party Wii titles sold in huge volumes. Because we could not show a good sales record for third-party Wii titles, third-party developers did not sustain their passion to create software for the Wii. In the overseas markets, there have been a number of third-party hit titles on the Wii. However, there was also a challenge that the Wii was not fully capable of catering to the needs of, for example, first person shooter games, the users of which prefer platforms compatible with HD TVs. For these challenges, we will be able to improve the situation with the Wii U and the Nintendo 3DS. In fact, a number of software publishers and developers have recognized this fact and have started working on their software in a variety of ways. Overall, I think that we will be able to establish an environment where we will not repeat the same mistake that strong titles were not released until about six months after the launch of the hardware.

Q 6

  Is my understanding correct that the drop in the financial performance of the current fiscal year is mainly due to the need for development resources to be allocated between Nintendo DS, Nintendo 3DS, Wii and Wii U so that anticipated titles could not be launched in a timely fashion, in addition to the fact that the company is now selling the Nintendo 3DS below cost? Looking at what you have done with the Nintendo 3DS Conference and Nintendo Direct, I get the impression that you are shifting your marketing focus to appeal more directly to your consumers. When we read the media reports of your financial announcement, they are attributing the poor financial results simply to the slow sales of the Nintendo 3DS. Is there a possibility that you will focus more on marketing activities in which you will deliver your messages yourselves instead of being delivered through analysts and mass media reports?

A 6


Let me first explain the reason for the software shortage. As you just pointed out, the period when we needed to shift from the Nintendo DS to the Nintendo 3DS overlapped with the period when we had to prepare for the Wii U. If there had been no overlap, or if there had been a three or four year interval, Nintendo could have focused upon just one new hardware system while also taking care of two existing platforms. However, as we have had to take care of two existing platforms and two new ones, it has been more of a challenge. We need to face these hardware transitions from time to time, but the intervals between these transitions are not fixed. The Nintendo DS, for example, has been able to maintain a large presence in the market for a relatively long period of time, which has resulted in a huge installed base of the hardware and an unprecedented number of software sales in the history of portable video games. So, it is not a good idea that we stick with past product cycles. But we think it is true that the longevity of the Nintendo DS has created this challenging aspect for us today.

  In such a circumstance, we are more conscious that we must once again re-think how we can create a good balance between what we do internally at Nintendo and what can be done externally. Looking back, certain experiences enabled by the Nintendo DS and the Wii were created just because Nintendo took on these challenges internally, and these experiences were able to drive the overall sales of these platforms. Nintendo was fortunate to have that kind of successful experience. Although I try not to use the term “success” at all, and particularly for this kind of opportunity, but this time I’d like to use this expression. With the experience of success, we tended to have the mindset that it would be the safest and most secure if we took care of everything by ourselves. As I said, however, the time always comes when we must prepare for the next platform. When that time comes, rather than trying to do everything by ourselves, we must try to narrow down what we really have to do inside the company and think of how we can best collaborate with people from other companies. For example, the teams led by Shigeru Miyamoto of Nintendo’s Entertainment Analysis & Development Division have already been cooperating with external developers in order to create titles which would have been developed internally at Nintendo in the past. Now that we realize there may be times when we need to take care of four platforms at once, we are initiating these new challenges, and I believe that such a fixed notion as, “we have to do everything by ourselves,” has faded inside the company to a large degree. So, I am expecting the situation to further improve from now. On a similar note, we often receive criticism that Nintendo is not good at deploying its services on the Internet. We are also internally discussing whether it is the best use of our development resources if those developers who are capable of making hit video game titles have to devote themselves to Nintendo’s Net-related services. Our basic idea today is that our internal game developers should focus on making new, unique and fun software while we collaborate with outside resources, especially in the fields for which Nintendo is not specialized in.

 As for our direct communications with consumers, there aren’t many things I can discuss other than what I confirmed at the beginning of my presentation today, but, in a few words, we believe that, depending on the information, we have to separate the places where we communicate our messages. For example, as for the information and details of the game contents that we shared during Nintendo Direct we held last week, it does not make sense for us to explain this information to those who do not play video games and ask them to report about it. Now that we have the means to deliver this kind of information directly to our consumers, we believe we should take that approach. On the other hand, we are not saying that any and all information should be delivered by us directly to consumers. After all, there is always a certain limit in the number of people who are willing to access our messages through such media. When it comes to messages which we wish to spread as widely as possible, we must depend upon the mass media. For us to deliver our messages to our investors, we have to ask for help from those who are attending meetings like this one. We have no notion that we will be all right in directly dispatching any and all the information. We are trying to change the way we communicate, depending on the nature of the information. Depending on the recipients of the message, we identify the information that is relevant to them, and we will structure our messages so that these recipients will be able to receive information they want to know and deliver it to them at the most appropriate opportunities, such as at our events or through various other methods.

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