IR Information

Corporate Management Policy Briefing / Third Quarter Financial Results Briefing
for the 74th Fiscal Term Ending March 2014
Q & A
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Q 4-1

With Nintendoís three consecutive operating losses in the spotlight, I think Mr. Iwata is in a very difficult position, similar to the time he was tasked with rebuilding HAL Laboratory. I think Mr. Iwata couldíve chosen the easier option, which was to easily take responsibility by just resigning, but he didnít choose that path. I would like Mr. Iwata to tell us his thoughts on this decision. I feel that the drop in the companyís performance was largely due to the fact that Nintendo was not able to communicate the value of Wii U well. Nintendo has consistently failed to release enough titles in the initial launch periods of both Nintendo 3DS and Wii U, and I would like Mr. Miyamoto to tell us what he intends to do about this problem in the future. In response to the drop in the companyís financial performance, people have also described Wii Uís technical specifications as low, and I would like to ask Mr. Takeda to tell us whether he intends to communicate more widely the ideas and philosophy behind the development of the Wii U hardware to dispel such myths. Finally, it appears that Nintendo is struggling to gain third-party support, a point which I would like Mr. Iwata to comment on.

A 4-1

Iwata:

Whether a platform can achieve great market penetration or not depends on its momentum. With momentum, we can expect a lot of synergistic effects. On the other hand, when a platform loses momentum, various forces work against it. Nintendo DS, while it struggled in the beginning, achieved a turnaround later. With Wii, we were fortunate enough to cross the chasm* between early adopters and early majority, something one must overcome in order to popularize products, including video game systems, before we even knew we did. Nintendo 3DS had a difficult beginning, but we managed to turn it around later. So far, we have not been able to do so with Wii U. This is where we stand right now. I have never thought of resignation as an option, and I believe that my job is to do whatever I can do to deliver results, and I am as passionate about this responsibility as ever. However, as we need to take responsibility in some way, we announced that our management would receive compensation cuts. About your comment that we failed to communicate the value of Wii U, I will first ask Mr. Miyamoto to share his thoughts on the game shortages in the launch periods, then Mr. Takeda to share his thoughts on the widespread misunderstandings about the Wii U hardware, and then I will talk about our thoughts on third-party support.
* Reference to “Crossing the Chasm” by Geoffrey A. Moore, published in 1991.

Shigeru Miyamoto (Senior Managing Director):

I interpret the question as asking whether we are making the same mistake every time we launch a new hardware system. While we are always working on this, I think you are right in the sense that we have not been able to deliver results. When we launched Nintendo 3DS and Nintendo DS, we were unable to release any games from any of our main Nintendo franchises to coincide with their launches. With Wii U, however, we released, along with the hardware, “New Super Mario Bros. U,” as well as “Nintendo Land,” which was a very unique proposition. If you look beyond, we also released a new installment in the Pikmin series after a long interval, and we also had “Super Mario 3D World” at the end of last year. By the end of this year, we will have “Mario Kart 8,” as well as “Super Smash Bros.” Therefore, I feel that we have managed to overcome the challenge of releasing enough first-party franchises on Wii U. Also, despite their sales falling below our expectations so far, I do not think that these games were not well-received because they lacked appeal. We received a top score for “Super Mario 3D World” from Metacritic, a site which gives weighted average scores for games, at the end of last year, and our games are highly praised for their quality. The fact that they did not lead to generating wider consumer interest among the general public is, however, something that we have to take very seriously. If you look at just Japan, however, “Super Mario 3D World” was very well-received by children, with Cat Mario gaining ground. Consumers also seem very excited about “Mario Kart 8,” and I am confident that they will want to buy it once they have played it. Our biggest downfall last year was that we failed to communicate the true value of Wii U, failed to make children persuade their parents to buy our products for them, and failed to offer products that parents could not resist. What we can do about it from now on is our theme. As Mr. Iwata explained earlier, we are confident that “Nintendo Land” offered compelling as well as Nintendo-like gameplay experiences for, say, four or five people when they gathered in the living room by taking full advantage of the two screens, but some of the single-player experiences were rather weak. It is my conviction that we will need to put more focus on creating experiences that utilize the GamePad that can also be fully enjoyed when playing alone. The fact that the GamePad and the TV interact as soon as Wii U is switched on is very important as it means that our consumers are always able to enjoy stable gaming experiences. Unlike a tablet device with a TV, the two screens are always connected when they are switched on. In terms of user experience, we are currently working on the amount of time it takes to load a game, but it is very important that we have a guaranteed environment in which the GamePad and the TV are connected. We know that having such an environment allows for various useful propositions for the living room, and we have continued to develop software in this spirit. In terms of our efforts toward ensuring that we supply the market with adequate titles at all times, although it may come across as an excuse, I would like to mention that Wii U has massively evolved from Wii technologically. Using shader technology, for example, has significantly changed our development environment as well as our developers themselves and the time to develop games, all of which are areas toward which we have been making significant reinforcements. Although we have recreated some of our past games for Wii U, we are actually trying to use many outside developers to help us do so, while we focus our internal resources on making new games. I feel confident that we have made a significant improvement in this regard. Moreover, we are trying to cut down the time it takes to create a suitable development environment as it has proven to be a huge bottleneck, and we are continuing to make improvements in this area across the whole company, too. I think that we will be able to smoothly carry out the process of upgrading Nintendo franchises and offering them to our consumers in a stable fashion on future systems.

Iwata:

Many people say that when a platform loses its momentum, it tends to receive little third-party support, but I think it is not a matter of the number of titles but the real problem lies in the availability of popular software that is selling explosively. You might somehow misunderstand that Wii had a lot of games from the start, but Wii and Wii U had a similar number of titles in their launch periods. However, Wii had “Wii Sports,” a title that could be enjoyed alone or with a group of people, whose appeal was easy to understand and communicated itself widely. Many people have said that “Nintendo Land” is a great game to play with a group of people, but its single-player experiences have not been received as well. As a result, “Nintendo Land” differed in its ability to appeal to consumers and communicate its simplicity. Of course, we have to learn from our mistake in the first half of last year in which we failed to release a sufficient amount of software, but the reason that became such a serious problem was because there werenít enough titles that sold over an extended period, continued to provide buzz in society and remained active. This is more of a question of quality, not quantity, and the problem is that we have not been able to release winning hits. Creating winning hits is something that I always discuss with Mr. Miyamoto.

Next, I would like Mr. Takeda to respond to your comment that we should be more proactive in communicating the technical aspects of Wii U as people say, among many other misunderstandings, that Wii Uís technical specifications are low and it is difficult to develop games on Wii U.

Genyo Takeda (Senior Managing Director):

Mr. Iwata just explained that Nintendo leads an integrated hardware-software business. To put it differently, combining technology with entertainment creates machines. Under such circumstances, Nintendo tries not to emphasize the raw technical specifications of our hardware. We have focused on how we can use technology to amplify the value of our entertainment offerings, and in this sense, technology for us is something that stays in the background. Therefore, I do not wish to make excuses for having so far failed to offer the “amplifier” that our consumers can regard as having true entertainment value. Whether a machine is powerful or not only has meaning in the context of whether that can express itself in terms of gameplay to consumers, and I therefore do not intend to go into fine detail about the specific numbers. I apologize for not directly answering your question, but it is my personal belief that explanations of such a nature have little relevance to consumers.

Q 4-2

People seem to misunderstand what Nintendo wanted to offer by launching that new hardware. Would it not make sense for you to tell people why you developed Wii U and what kind of philosophy went into its design?

A 4-2

Takeda:

Rather than thinking differently between hardware and software, I would like to continue to use technology in order to amplify the overall entertainment value in ways that are easy to understand for our consumers, and the technologies we should investigate will be more and more different from in the past. It is not just the computational power of a computer that is important, but it is the way in which technology can connect with entertainment in ways that are easy for consumers to understand. It is my hope to communicate the value of the Wii U hardware with concrete examples with which consumers can feel, “Oh, so, this is it!”

Iwata:

We developed Wii U in an attempt to change the way people play with a video game system on TV. Traditionally, the players needed to be in front of a TV in order to play a home console, meaning that it was impossible to play when others were watching TV. Under these conditions, especially in Japan, handheld game devices increased their share and the home console market became smaller. With Wii, we managed, to a certain degree, to bring everyone back into the living room to play games. However, while you could occupy the TV screen and enjoy games when you were playing with the others, it was still difficult to occupy the TV screen when you are playing alone, which was a huge issue for us. On the other hand, battery-powered handheld devices only allowed for a limited range of gaming experiences. The starting point for the Wii U GamePad was the question of how we can offer rich gaming experiences anywhere in the house without being restricted to the TV screen. In addition, we have considered, for example, what is made possible by having two screens or a mechanism in which there is a screen only one person can see, and combined these propositions to develop Wii U. However, I feel it is our fault that we failed to ensure that these features were explicit to our consumers. What Mr. Miyamoto and I are trying to achieve is a product whose concept people can easily understand, which is linked to what I said earlier today about developing titles that are only made possible by the Wii U GamePad.

Finally, in terms of third-party support, while many point out that Nintendo has traditionally been weak in terms of acquiring it, if you consider the Japanese market, it is fair to say that the number one dedicated video game system that Japanese third-party publishers are focusing on is Nintendo 3DS. This is because Nintendo 3DS has an overwhelmingly strong presence in the hardware as well as software markets for dedicated game systems, meaning that it would be illogical not to do business on Nintendo 3DS, and we are cooperating with third-party publishers in a variety of ways as long as we can establish win-win relationships. On the other hand, if you turn to the overseas markets, as home consoles are more popular, many publishers are not as focused on handheld devices. In such an environment, while we are certainly not satisfied with its overall unit sales or the results from the last year-end sales season, the fact that Nintendo 3DS has now sold over 10 million units in both the U.S. and Europe seems to be news for third-party publishers, and we have recently been receiving more proposals from third-party publishers. However, as many overseas software publishers are specialized in developing games for high-end home consoles, while they are very interested in Nintendo 3DS, it appears that they are currently investigating what they want to develop on our platform. Also, we sometimes distribute, or even publish depending on the circumstances, games that were made by Japanese software publishers in the overseas markets, and you can expect to see more examples of this this year and the next. As for Nintendo 3DS, as I mentioned before, its total global sales have already exceeded 40 million units. As for Wii U, opinions significantly differ among third-party publishers. Software publishers that develop content that has great affinity with audiences that Nintendo has historically been strong with, namely children and families, are still very active supporters of Wii U, and their enthusiasm for Wii U can also been seen from the fact that they have even reached out to us to help people upgrade from Wii to Wii U. On the other hand, software publishers are not necessarily keen on making games in genres that have weaker affinity with audiences that Nintendo has not been as strong with, where making a huge investment does not guarantee a sufficient return. With regard to Wii U, we first need to create a strong foundation in areas Nintendo excels at and achieve a sufficient sales volume. If we manage to do so, those publishers in the overseas markets who are currently not interested in Wii U will be attracted to the Wii U platform, as they were to Nintendo 3DS. This is going to be our approach in the near future.

Q 5

You have explained your concern about users being divided by hardware. Currently, you have both a handheld device business and a home console business. I would like to know whether the organizational changes that took place last year are going to lead to, for example, the integration of handheld devices and home consoles into one system over the medium term, or a focus on cost saving and the improvement of resource efficiency in the medium run. Please also explain if you still have room to reduce research and development expenses.

A 5

Iwata:

Last year Nintendo reorganized its R&D divisions and integrated the handheld device and home console development teams into one division under Mr. Takeda. Previously, our handheld video game devices and home video game consoles had to be developed separately as the technological requirements of each system, whether it was battery-powered or connected to a power supply, differed greatly, leading to completely different architectures and, hence, divergent methods of software development. However, because of vast technological advances, it became possible to achieve a fair degree of architectural integration. We discussed this point, and we ultimately concluded that it was the right time to integrate the two teams.

For example, currently it requires a huge amount of effort to port Wii software to Nintendo 3DS because not only their resolutions but also the methods of software development are entirely different. The same thing happens when we try to port Nintendo 3DS software to Wii U. If the transition of software from platform to platform can be made simpler, this will help solve the problem of game shortages in the launch periods of new platforms. Also, as technological advances took place at such a dramatic rate, and we were forced to choose the best technologies for video games under cost restrictions, each time we developed a new platform, we always ended up developing a system that was completely different from its predecessor. The only exception was when we went from Nintendo GameCube to Wii. Though the controller changed completely, the actual computer and graphics chips were developed very smoothly as they were very similar to those of Nintendo GameCube, but all the other systems required ground-up effort. However, I think that we no longer need this kind of effort under the current circumstances. In this perspective, while we are only going to be able to start this with the next system, it will become important for us to accurately take advantage of what we have done with the Wii U architecture. It of course does not mean that we are going to use exactly the same architecture as Wii U, but we are going to create a system that can absorb the Wii U architecture adequately. When this happens, home consoles and handheld devices will no longer be completely different, and they will become like brothers in a family of systems.

Still, I am not sure if the form factor (the size and configuration of the hardware) will be integrated. In contrast, the number of form factors might increase. Currently, we can only provide two form factors because if we had three or four different architectures, we would face serious shortages of software on every platform. To cite a specific case, Apple is able to release smart devices with various form factors one after another because there is one way of programming adopted by all platforms. Apple has a common platform called iOS. Another example is Android. Though there are various models, Android does not face software shortages because there is one common way of programming on the Android platform that works with various models. The point is, Nintendo platforms should be like those two examples. Whether we will ultimately need just one device will be determined by what consumers demand in the future, and that is not something we know at the moment. However, we are hoping to change and correct the situation in which we develop games for different platforms individually and sometimes disappoint consumers with game shortages as we attempt to move from one platform to another, and we believe that we will be able to deliver tangible results in the future.

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