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Second Quarter Financial Results Briefing for the 73rd Fiscal Term Ending March 2013
Q & A
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Q 1

My question is on what conversations have taken place between Nintendo and outside partners about Wii U. There is strong third-party support in the U.S. launch lineup. Do you think that third-party publishers are launching their titles on Wii U simply as part of their multi-platform strategy, or are they looking into the new form of entertainment that Wii U offers? Furthermore, do you think that they share Nintendoís vision for what it believes is the raison d'Ítre for dedicated gaming platforms? Also, you announced that you would launch a service named "Nintendo TVii" with Netflix and Hulu Plus, among others. What do your non-gaming partners think of the Wii U system?

A 1

Satoru Iwata (President):

Let me first explain how software publishers in the video game industry are seeing the Wii U system. Naturally there are publishers that simply fell in love with the possibilities of Wii U, and as exemplified in "ZombiU" by Ubisoft, some are developing Wii U-exclusive titles. In addition to this, there are multi-platform titles that nevertheless take advantage of the Wii U GamePad or the Wii U system itself, and at the same time, there are purely multi-platform titles, so it is true that our publishers have varying degrees of commitment. However, the fact that we were able to announce such a rich launch lineup of games, particularly from overseas software publishers, does give us confidence. While the future of dedicated gaming platforms is now widely discussed, as the graphs for the U.S. market justify, I believe that this lineup proves that Nintendoís vision is shared by many, and there is active support for that too. My aim is to set a successful example towards and after the end of the year that rewards the investment our third-party publishers put into their titles and will then create a chain of other successful titles. Establishing this kind of example at an early stage is crucial since it gives others the incentive to follow suit, while failing to do so casts a dark shadow over their future prospects of the platform. We should therefore not be content with having a good game lineup. It is important to produce examples of success from these titles.

I will now move onto the second question about our outside partners. You mentioned Netflix and Hulu Plus, which are VOD service providers. Since we created Wii U, because it is located right next to the TV set and is connected to the Internet, we have been thinking of ways to turn Wii U into a system that changes the relationship between the TV, the Internet and the user. And in fact, this has been our goal since we launched Wii. However, the Wii hardware did not have a screen of its own, and while the controller allowed for intuitive gameplay which enabled one to move his/her body, it was not suited for typing. This time, we thought that we would be able to create a new service using the Wii U GamePad and announced what is known as "Nintendo TVii" in the United States. Thanks to the success of cable television in the United States, there are numerous TV channels as well as VOD services, including Netflix and Hulu Plus, and we therefore thought that a universal search feature that enables you to look for programs to watch in one unified way would be suited to how people watch television in the United States. Indeed, it might be more probable for the system to spread among consumers if it is successful in providing services and putting smiles on the faces of our consumers even when it is not being used to play games in the living room. In fact, services like Netflix in the U.S. and BBC iPlayer in the U.K. are already popular on Wii, and many people are still actively using these services. As a result, VOD service providers are aware that the Wii system and Wii users go very well with VOD services. Everyone in the VOD industry recognizes the possibilities of Wii U, and we are receiving other proposals which we have not announced yet.

By the way, one thing to note is that the way people watch television is significantly different in each country. In Japan, for example, television watching is usually limited to a handful of terrestrial television channels, whereas in the United States, where cable television has grown in popularity, there are literally hundreds of channels to choose from, so what we mean by making television easier to watch and more enjoyable should not be the same in every region. We did consider making Wii U into such a system in Japan, as it will be located right next to the TV and will be connected to the Internet, but I feel that Japanese consumers would not appreciate a service that is designed for the U.S. market. The same applies to Europe. We are currently considering offering "Nintendo TVii" in Japan and Europe by taking into account how people watch television in each region, and I believe I will be able to share more details in the not-so-distant future. In this sense, many partners, including third-party publishers and non-gaming partners, as exemplified by VOD service providers, are seeing a lot of potential in Wii U, especially because it can also be used freely in the living room even if the TV is in use, and there are many possibilities, such as a shopping service or some other service that uses the Internet. Also I regret having to have used Nintendoís limited game development resources in order to provide non-gaming features on Wii. This time, we are working to see how we can enrich our services without having to rely on Nintendoís internal development resources, and because the Wii U system itself is now fairly powerful, I believe that standard web technologies can be applied to achieve a sufficient degree of speed and convenience, and we will deploy our services in this fashion in the future.

Q 2

You provided us all with a detailed explanation of the Wii U hardware. Assuming that the exchange rate and the selling price stay the same, when do you expect to start to sell Wii U hardware at a profit?

A 2

Iwata:

I do not yet have all the necessary information to be able to say exactly when Wii U hardware will start to be sold at a profit. If you just look at this fiscal year, I do not expect Wii U to make a big contribution to our profits since the software sales will be rather limited due to a rather limited installed base of the hardware and, even as a whole, we cannot be optimistic about their combined profit contribution either when we take into consideration the fact that we need to invest a lot into our advertising activities at first. However, in the next fiscal year, we will have a larger installed base. We will have a richer array of software and manufacturing costs will also decrease. Therefore I believe that, as opposed to simply asking when we will be able to sell Wii U at a profit, the focus should be on constructing a healthy profit structure for the business as a whole by launching a sufficient amount of quality software at fast enough a pace for our home console, on which we can look to achieve a higher tie ratio* than on handheld systems, and selling as many units of software as possible. I believe this is a goal we can achieve in the next fiscal year. While I cannot say exactly when the Wii U hardware will become profitable, I am confident that in the next fiscal year we can improve our Wii U business to a level where the platform business as a whole (when we include both the hardware and the software) makes solid contributions to our profits.

* Tie ratio shows how many software units are sold per hardware system.

Q 3

Mr. Iwata mentioned that "Nintendo Direct" has just celebrated its first anniversary. How would Mr. Iwata rate Nintendo Direct at the moment?


Also, I feel that Nintendo Direct is for a more core audience, and I wonder whether introducing such titles as "Brain Age: Concentration Training" for casual gamers there has any effect on your sales. What is your take on my opinion?


Lastly, you mentioned that the Wii U hardware will be sold below cost. Does it mean that the loss is booked when the Wii U hardware manufacturing is taking place and the loss or expenses at the time of the actual hardware sales will only be operating expenses? I would like to ask Mr. Mori to answer this question.

A 3

Iwata:

One important reason why we launched Nintendo Direct is that we had a very difficult problem where new game information that we announced was quickly distorted and then spread before we could put it up on the Internet. Consumers did not receive our messages as they were, and I remember remarking one year ago at the Financial Briefing that perhaps the information wanted by consumers, including game content, should be delivered directly to them. On the other hand, it would be wrong to say that I do not find any value in talking to analysts as I am doing now or talking to the media as I did at the Osaka Securities Exchange yesterday during our financial announcement press conference. It all depends on the content. To elaborate, while details like new game features which are different from its previous iteration are something that consumers find valuable and use to decide whether to buy the game or not, they are not necessarily valuable to reporters who write about Nintendo or analysts who are thinking of investing in Nintendo. Until recently, we simply had no other choice but to deliver our messages through the media, but today, thanks to the advent of the Internet, watching videos (online) is nothing out of the ordinary, and it has created new ways in which to make announcements. When we launched Nintendo Direct a year ago, we did not know how many people would care to watch it, but now it appears that as many as 600 thousand to 1 million people watch our Nintendo Direct videos in a week. Because Nintendo Direct can reach out to such a wide audience, we feel that it is definitely worthwhile to devote our energy to continuing our Nintendo Direct endeavors. In fact, each time we do a Nintendo Direct broadcast, more people visit the Nintendo eShop to download game demos and 3D videos, and it has become clear that it also leads to a higher use rate of the hardware, and even higher hardware sales. This convinces us that it is worthwhile to do regular broadcasts. I do not know when people will become bored with an average man in his fifties talking at length about games, but at the moment it appears that many people are enjoying and paying attention to our Nintendo Direct broadcasts, and while this is the case, we will continue to air them.

You mentioned that perhaps Nintendo Direct does not reach our casual audience. It is true that Nintendo fans or game fans are aware of Nintendo Direct and when they learn that Nintendo is going to broadcast a new installment of Nintendo Direct, they tune in and watch it live. We are very grateful that people gather to watch Nintendo Direct and become very excited about it, but it would be wrong to say that Nintendo Direct has no effect on a more passive audience who do not actively look for game information. And there are numbers to show that. Here in Japan, we have what is called the "Nintendo Direct Channel" on YouTube and after we finish our live broadcasts, we upload the videos themselves onto the channel. Nintendo Direct broadcasts which excited a number of fans who watched them live do not necessarily attract a number of others to watch the same videos on YouTube. However, there is an exception to that. The "Animal Crossing: New Leaf Direct" video (Japanese only) that we broadcast in Japan the other day has attracted more than 1.1 million views. It is not exceptional for a three-minute music video to have 1 million views, but for a 47-minute video, which only explains in detail about a game, this figure is phenomenal, and whatís more, 65 percent of the views came from smart devices. This means our audience goes beyond our fans who watch our broadcasts live for information. We can then, for example, attract those who are very interested in the Animal Crossing series but perhaps have no interest in Nintendo Direct, or those who know nothing about Nintendo Direct but heard about the video somewhere else. The "Animal Crossing: New Leaf Direct" video seems to have been quite popular, and it even made its way into the charts on YouTube (in Japan). This means that one could simply visit YouTube without any specific purpose and find a video which they think might be interesting to watch. This is what is happening. The idea that Nintendo Direct does not reach out to the casual audience is in fact a stereotypical one, and we are learning that when certain conditions are met, we can reach a wider audience.

On the other hand, it does not mean we can now dispense with other means of marketing because of Nintendo Direct. Our answer to your question at the moment is that Nintendo Direct is a new pillar for us, but we will pursue other activities at the same time. However, Nintendo Direct is a marketing channel which we discovered, tried and have made some progress on from last year through this year, and we do not know whether this endeavor will continue to work in the future. Just as some marketing methods lose their appeal over time, people will become bored if we simply continue to do the same thing, as is the case throughout the entertainment industry. In a sense, I feel that Nintendo Direct has an entertainment aspect too, so I think the challenge is whether we can continue to innovate successfully.

I would now like to ask Mr. Mori here to answer your question about the negative margin of the Wii U hardware.

Yoshihiro Mori (Senior Managing Director/General Manager, Corporate Analysis & Administration Division):

Now that the suggested retail price and our wholesale price of the Wii U hardware have been determined, taking the product manufacturing as a base, the loss on a gross margin level has been booked for the future sales of the product. There is no reflection to the operating expenses this time.



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