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Financial Results Briefing for the 73rd Fiscal Term Ended March 2013 - Q & A
Q & A

Q 4

You plan to increase your operating profits by almost 140 billion yen this fiscal year on a year-on-year basis (Result of last fiscal year: operating loss of 36.4 billion yen, forecast for this fiscal year: profit of 100 billion yen). To the extent possible, could you please tell us more specifically how you will achieve this? The total software sales unit forecast is almost the same as the fiscal year that just ended. If we assume that the basic cost structure will not change, this forecast must be based on a premise such as that first-party software will take up a higher percentage of the total sales this year. In addition, how will the current situation of selling the Wii U hardware below cost change? What influence will foreign currency exchange fluctuations, which I believe could have a large impact, have on your business? Please give us as detailed a breakdown as possible for our analysis.

A 4


Game hardware in general becomes less expensive to produce as we produce more, and the price of semiconductors goes down at a fairly constant rate each year. Moreover, we are estimating that first-party titles will take up a higher proportion of the total projected software sales than the previous year, as you pointed out. The reason why we made this assumption is that we now have a clearer idea of which first-party titles Nintendo can bring to market.
Also, the exchange rates, which were approximately 80 yen to the U.S. dollar and 100-105 yen to the Euro last fiscal year and are now 90 yen to the U.S. dollar and 120 yen to the Euro in our forecast for this fiscal year, have a major impact on our profitability overseas. Appreciation of the U.S. dollar, however, does not always have a positive impact on our financial results. For example, last fiscal year we bought more in dollars than we sold in dollars and the advantages of the stronger dollar/weaker yen did not quite show last year. But we predict that our North American operations will make a big improvement this year, so we are expecting to enjoy the advantages of a weaker yen.

Q 5

I have some questions about the changes of directors. I am wondering if the shortage of game titles, which has led to slow sales of Wii U, is because President Iwata oversees too many sections. I think it would be better for Mr. Iwata to concentrate on supervising software development in Japan instead of placing the overseas operations under his direct control. Was this decision made based on the idea that it will not only enable you to boost sales overseas by releasing software but also strengthen relationships with overseas video game developers and retailers? Also, does the retirement of two representative directors in charge of business administration mean a more development-oriented management style?

A 5


It is a fact that Wii U currently has lost momentum owing to longer-than-expected intervals between software releases. We were faced with the alternatives of taking time to refine our products or launching them without too many intervals, and after careful consideration, we selected the first option because we believe that from a mid-and-long term perspective it is more important to improve customer satisfaction with each game. Development always bears many uncertainties and a delay in release is not necessarily a consequence of insufficient management of development teams. Needless to say, our new management will appropriately supervise our development teams. I have always been involved in many sections of the company, and the Software Planning & Development Division, one of our two software development divisions, has been under my direct control since 2004. After the changes of directors we announced, Mr. Shinya Takahashi will replace me in that position to oversee the daily management of that division, which I believe will spare me enough time to supervise our overseas operations.

With regard to the changes of representative directors, we have no intention of creating a more development-led management. It is a coincidence that among the five representative directors, the three directors in charge of development are younger than the two in charge of administration and marketing. As we grow older, it inevitably becomes more challenging to top the performance of our peak years, so for many years we have been considering a suitable time for the generational change. Although the changes of directors this time may sound sudden to some, it is in fact the conclusion of a long-standing discussion inside the management. You might feel that, considering the experience, stability and total performance of the current management team at this point, it would be safer to maintain the status quo this year. However, we are now in the position to take up various challenges to adapt to a fast-changing business environment. Considering our aim, I think it is never too early to change to a younger management. This is why we decided on the generational change.

I believe that development of novel and attractive products is the largest factor contributing to our competitive edge. Therefore, if we made our management full of clerical, administrative and sales staff members who are unfamiliar with development of products, people might see it as being unbalanced. From the standpoint of our competitive edge, we think it is not at all unbalanced because the three remaining representative directors have been leading Nintendo for the past 11 years. Although our business decisions have not been made by representative directors alone in the past, we are thinking of supplementing the decreased number of representative directors by having Mr. Kimishima, a new managing director, join the executive management committee and by inviting heads of departments to take more active roles in the decision-making process. I hope these efforts will address your concerns over our corporate governance.

I appreciate your opinion that I should concentrate on supervising software development in Japan, but we would like to achieve good results so that later you will understand that the change in management was indeed a good decision.

Q 6

My question is on advertising expenses. Both 3DS and Wii U are expected to grow significantly in hardware and software sales this fiscal year, but advertising expenses are not expected to grow by a large amount. Does this mean that you are confident about the quality of your software, or are you trying to advertise your products more effectively? Or is it the case that when you break the figure down into the first and second half-year periods, you simply find that it is more concentrated towards the second? I would like you to talk about the expected return on advertising expenses by considering it in terms of efficiency and timing.

A 6


First, I don’t think increasing advertising expenses necessarily increases hardware sales, and I don’t think that decreasing advertising expenses necessarily decreases sales either. In particular, when we launch a new hardware system from scratch, we typically need to make intensive investments just to have the name of the system recognized, but we are not planning to launch new hardware this fiscal year, and therefore we will not need to invest in this type of activity.

Moreover, given that we are facing difficult financial results, we are devoting our energies to using our advertising expenses effectively. As I explained in the presentation before, when people view Nintendo Direct on the Nintendo eShop, it is a very effective advertisement, but it has only minimal media costs. What I mean by "minimal" is that whenever one wants to transmit information on the Internet, one needs to pay a CDN (content delivery network), where one is charged according to the flow volume of data, so it can never be cost-free. However, this is much more inexpensive than media such as television or print media for which we need to pay advertising costs. What’s more, people who are interested in our games watch our videos for as long as 15 or 30 minutes. We can divide advertising media into two types, namely, activities more geared towards gaining awareness, including TV commercials where we need to explain one message in 15 or 30 seconds, and those which can be used to attract potential consumers and have them understand a product to the point where they make the decision to purchase it. We will continue to utilize TV commercials to raise awareness of our products, but we are now in a position to use different methods for product understanding and buying motivation. We initially launched Nintendo Direct in Japan, and we first began to receive positive feedback here, but this year we are also starting to get very positive reactions in the U.S. and Europe too, so I feel that our advertising activities will continue to change and become more effective. And I am not just talking about Nintendo Direct. We can say the same thing about social media marketing activities using Facebook and Twitter.

In terms of the breakdown into the half-year periods, we don’t have any first-party key software for Wii U until July. We will, to some extent, concentrate our marketing activities from the summer towards the end of the year. With regard to Nintendo 3DS, in contrast, we will synchronize our promotional activities with the release of each much-anticipated title. By the nature of Nintendo’s business structure, sales grow most significantly around the year-end sales season, and as consumers around this period do not necessarily seek information proactively, we need to employ fairly large-scale advertising activities. Instead of pursuing similar advertising endeavors throughout the year, we strive to adapt them accordingly.


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