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Second Quarter Financial Results Briefing for the 74th Fiscal Term Ending March 2014 - Q & A
Q & A

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Q 1

You just mentioned that your digital business is expanding. As I see that you are deploying various price strategies for your digital business, I would like to know your basic price strategy in that business field. More specifically, I am interested in why you have two price points for “Wii Sports Club” and no packaged version, why you charge a 500-yen annual fee for “Pokémon Bank,” and why players can negotiate discounts in the “Darumeshi Sports Shop” (Japanese title) game. Also, the company is carrying out a one-month pre-release trial campaign globally for “Wii Fit U” as well as another campaign in Japan in which those who purchase two Nintendo 3DS games can receive one additional game. What is your take on the concern that your strategy for the digital business may cause “deflation,” namely, push down the price of video game software overall, including packaged software?

A 1

Satoru Iwata (President):

When we market our packaged products through physical distribution channels, we have to consider physical costs and the subject commodity must generate a certain level of profit margin for distributors and retailers. As a result, we have limited flexibility in setting prices. This is one aspect that does not exist for the digital business. On the other hand, just as the “Free” author Chris Anderson suggests in his book, there are some people who insist that digital products tend to become cheaper and eventually become very close to being offered for free. In other words, deflation in prices in the digital business can increase if you are not careful enough.

Digitalization is progressing in a variety of different entertainment offerings, including Nintendo’s. Here, I am not specifically referring to the games available on smart devices. Such proposals as offering content free of charge or subscription fees to enjoy certain content for a fixed period are becoming more prevalent, so I can understand why some consumers might feel that the prices of packaged software are relatively higher than before. In today’s video game market, packaged software that is well received by consumers tends to have even higher sales than before but, on the other hand, the number of medium-scale hits is decreasing and recent iterations of game franchises that used to sell very well tend to sell fewer copies these days. As a result, game sales tend to polarize.

Under these market conditions, although the mainstream idea regarding the digital business in the industry before we actually started selling software in both digital and packaged formats last year was that the digital version should or must be priced lower than its packaged counterpart, we decided that, since the contents are the same, the company would offer the software at the same price, be it the packaged version or the digital version. This is because we want consumers to value software as highly as possible and because we have been trying to heighten the value of our software whenever we produce it. Prospective consumers can easily anticipate that games from established franchises such as Super Mario and Pokémon are worth the price, even before they start playing them. In fact, “Animal Crossing: New Leaf,” which we released last year in Japan, and “Luigi’s Mansion: Dark Moon,” Capcom’s “Monster Hunter 4” and Nintendo’s “Pokémon X” and “Pokémon Y” released this year, have shown both strong digital download and packaged software sales, which shows that there are a number of people who believe that digital content holds the same value as its packaged counterpart. In addition, we have already found that once consumers have made a digital download purchase, many of them tend to make another one. They notice such conveniences as the ability to always carry around the games and not having to worry about losing the physical game cards. On the other hand, when we offer a new proposal to consumers, say, when we launch a brand-new IP or when we release a game with well-known characters but with brand-new gameplay that our consumers are not familiar with, it is hard for them to anticipate and appreciate the value of the content before actually purchasing and playing with it. For these titles, if we take the ordinary approach of selling the packaged software, the software might not reach its full sales potential, and even when we are able to create something interesting, the games often can just fade away without being noticed by consumers. When we offer our consumers such new play experiences exclusively in a digital format, we intend to have wide flexibility in terms of their prices and ways to market them. With this in mind, as for the software you just mentioned, namely, “Darumeshi Sports Shop,” “Wii Sports Club” and “Pokémon Bank,” we are challenging ourselves with new pricing and sales endeavors. We are hopeful that a wider range of consumers will appreciate these unprecedented offers. Specifically concerning “Wii Sports Club,” we understand that there will be players who will play it almost every day just as they did with its predecessor, “Wii Sports,” while others will only play it when friends visit their home. We are now trying to increase the software’s sales potential by offering two different options for the people who will play it occasionally and those who will play it frequently. I do not deny the possibility that “Wii Sports Club” may become packaged software in the future. However, for the future of Wii U, we have prioritized releasing tennis and bowling by the end of this year.

Finally, regarding our Nintendo 3DS software campaign in Japan, those who purchase two Nintendo 3DS games and register them in Club Nintendo can select one game from a list of 14 titles and download it free of charge. I should mention that there are two aspects to this campaign. People often want to purchase something, but then do not end up buying it. This must have happened to you with a CD, DVD or a video game. Often you cannot recall any special reason that prevented you from doing so, but you just did not purchase it. Now that many people own a Nintendo 3DS system and we have a rich lineup of quality software for the platform, we really want to do something to encourage our consumers to make the final decision to purchase two games or more instead of one. This is one reason for this campaign.

Another factor I need to mention is that still only a portion of our consumers have actually purchased the download version of a packaged game. Having many consumers experience for themselves the download and installment process will be a positive step towards increasing digital sales in the future. As you pointed out, we discussed whether doing so could potentially destroy our software’s inherent value, but as we have been able to prepare a number of quality games this year, particularly for the end of the year, we have concluded that if many consumers can experience a digital download for themselves, we will be able to maximize the potential of Nintendo 3DS and pave the way for an even brighter future for the system. Of course, we are taking these steps with the understanding that, without the utmost care, these sorts of price tactics can go too far and can ruin the inherent value of software.

Q 2

I would like to ask Mr. Iwata to talk about the external business environment for the company as well as his view on its overall business strategy. Given that smartphones and tablets have grown in popularity exponentially and applications that are offered free of charge have flooded the market, some believe that companies are engaged in a war for consumers’ time and money that is becoming increasingly fiercer. On the other hand, we fear that the market for dedicated gaming systems will diminish rapidly. Could Mr. Iwata share his thoughts on the rate at which the external business environment for the company is changing? Also, the company announced Nintendo 2DS, which, in some sense, abandons 3D altogether, and speaking as an objective third-party observer, I feel that Nintendo is perhaps wavering a bit on its initial plans. Was Nintendo 2DS part of Mr. Iwata’s original vision?

A 2


I use the term “smart device” to refer to both smartphones and tablets, and over the last two years, smart devices have certainly been a central topic in society. On trains, it is common to see people playing on their smartphones, while it is probable that they were playing with handheld gaming devices until recently. There are people who then think that the market for handheld gaming devices may be shrinking, and because there are numerous articles in favor of this notion, some people then conclude that the market for dedicated gaming systems will be eclipsed by smart devices and will diminish quickly. On the other hand, I would like to draw your attention to what I emphasized in my presentation today. In fact, I said the same thing to reporters at the Osaka Securities Exchange yesterday, but while it is true that smart devices drew the most attention in Japan last year and will probably continue to do so this year, Nintendo 3DS sold five and a half million units last year, and I am confident that we will be able to surpass the five million mark this year, too. There have been various dedicated gaming systems in history and each generation had what one might describe as a massive hit. However, even those best-selling systems in their peak year sold around four million units. Previously, the only platform to have sold more than five million units was Nintendo DS, and this time, Nintendo 3DS is set to surpass this mark for two consecutive years. The hypothesis that smart devices will replace dedicated gaming systems, in my view, does not explain this phenomenon. However, while we were able to create great momentum for Nintendo 3DS in the Japanese market, we are yet to do so in the United States and Europe. One reason why the market for dedicated gaming systems appears to have shrunk more drastically in the U.S. and Europe is that home consoles, which occupy a high proportion in their markets, are undergoing a generational shift. Nintendo launched a new hardware system, but we have yet to place Wii U on the right sales track. Others in the industry have already announced that they would launch new gaming systems, meaning that consumers feel that it is not the ideal time to purchase new hardware. The contraction in the market has in part been caused by such factors, and I do not expect this trend to continue.

On the other hand, I believe that the era has ended when people play all kinds of games only on dedicated gaming systems. For example, I think it is natural that many people feel that it is more convenient to use smart devices, as opposed to dedicated gaming systems, to play games to kill a bit of time. That is to say, there are some areas in which dedicated gaming systems were once used that now have greater potential on smart devices. On the other hand, dedicated gaming systems are developed by considering the software that is designed to run on the hardware, enabling us to make unique propositions. With that in mind, my view is that the gaming market will be segregated to a fair degree. However, this does not mean that smart devices will simply compete with dedicated gaming systems. Given their growth, I feel that we should make an effort to take advantage of their existence. For instance, we already made it possible to browse Wii U’s networking service called Miiverse on smart devices. Starting with this attempt, we are discussing among us how we can expand the use of smart devices to help drive the business of dedicated gaming systems. Smart devices have already played a central role in creating buzz among consumers above a certain age with respect to, for example, “Animal Crossing: New Leaf,” “Monster Hunter 4” or “Pokémon X/Pokémon Y.” Twitter timelines filled with tweets about Monster Hunter and Pokémon can certainly help create awareness for the products, and we also know that many watch Nintendo Direct on their smart devices. Rather than simply viewing smart devices as competitors, we should consider ways in which we can use them for our business.

I would now like to turn to your comment that Nintendo is perhaps wavering in its vision by launching Nintendo 2DS, which abandons 3D, the biggest differentiator of the product. However, launching Nintendo 2DS at this point in time requires its development work to have begun a long time ago. Generally speaking, it takes approximately one and a half years before we can bring a new hardware system onto the market, and we already realized beforehand that it would be difficult to maximize the sales potential of Nintendo 3DS without an entry-level product ready in time for the release of a new Pokémon title. Because we already knew that the range of price options for Nintendo 3DS was not sufficient in light of the highly appreciated yen at the time, we had been preparing for this launch. Incidentally the yen is now somewhat depreciated and we are able to offer Nintendo 2DS without facing profitability problems. This is very fortunate considering our business structure. We are offering such an option in order to further propel the popularity of the Nintendo 3DS platform in the overseas markets. Nintendo 2DS is, however, simply one of the options for consumers and we will continue to offer the existing Nintendo 3DS and Nintendo 3DS XL platforms in the overseas markets, and we are not saying that we will abandon 3D or cease to make new propositions in 3D. “The Legend of Zelda” title that we are going to release toward the end of the year is a superb showcase of the 3D effect, featuring a top-down style and offering a new form of gameplay by taking advantage of the 3D effect vertically.

Q 3

Please tell us about Wii U marketing activities. Software for Wii U will presumably expand from the end of the year and start of the new year, but can you tell us how Wii U will be marketed as the transition to new generations of competing consoles develops, particularly in the U. S. and Europe? In conjunction, please also tell us whether there will be some upward and downward swings in the advertising expenses forecast for this fiscal year’s plan in accordance with the marketing activities.

A 3


We have an offering of software for the end of this calendar year that encourages family fun at home. Nintendo is preparing a number of Wii U games for next year that greatly appeal to highly skilled users, but at the end of this calendar year, we have quite a few offerings that can be played by the whole family, dad and the kids, or grandparents and the kids. Other companies will launch new consoles (in the overseas markets at the end of this year), but I think they focus on targeting highly skilled users. Therefore, in that sense, though the competition will heat up because new game consoles will come out and there will be a “war of the game consoles” played out in media articles, we wonder if the target user will actually be the same. The games available at the end of this calendar year, “Super Mario 3D World,” “Wii Party U,” “Mario & Sonic at the Sochi 2014 Olympic Winter Games,” “Wii Sports Club” and “Wii Fit U,” all lean more toward family use, and we are targeting those who bought Wii and would be interested in the Wii U offerings. That is slightly different than what other companies are aiming for. Thus, in the sense that we attract consumers interested in this category of video games, I think the launch of other video game systems is also good for us because they energize the video game industry as a whole. Though there are some who take the view that intensified competition means overseas competition will be tough for Nintendo, no matter how Nintendo does domestically, I do not necessarily see it that way. This year, what Nintendo is promoting is, conversely, to stand out in the game industry for individuality. I believe we have become a unique value.

In regard to marketing expenses, at this point we do not plan on any particularly significant changes to the current forecast. However, there are probably many who look at the current first half-year financial results and feel that marketing expenses are increasing. In fact, there is a reason for this. Our financial results are all converted into yen. With the recent depreciation of the yen, marketing expenses spent in the overseas markets, when converted to yen, have increased. Please understand that the depreciated yen adds to sales while it also adds to expenses such as foreign currency marketing expenses when converted to yen. Given the current management environment, funds should naturally be used intelligently, so in that sense, we do not particularly foresee a significant deviation in marketing expenses at this point.


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