IR Information

The 72nd Annual General Meeting of Shareholders
Q & A

Q 6   Regarding profitability of the Nintendo 3DS hardware, Nintendo will add the new value of bigger screens to the Nintendo 3DS hardware by introducing the Nintendo 3DS XL. In order to improve the profitability of the Nintendo 3DS hardware, will you consider adding value to the system like a waterproof function, high sound quality and so on in the future?
A 6


  I understood your question as whether or not we plan to launch more value-added models to improve profitability of the hardware. First, the issue is if consumers would accept a rise in production costs that match added value of the product because adding value leads to production costs going up. In consideration of the Nintendo business model, if we introduce more and more types of game hardware devices, consumers may have trouble choosing which device in a store is best suited to them. For example, what is happening today is there are too many options of cell phone devices for people to choose from. Curiously enough, we, as human beings, feel happy to have incremental options to some extent, but when the number of options surpasses a certain level, we fall into a situation where we have trouble identifying just one that we should select. Since we have to also consider such an aspect, we don’t have any concrete plans to develop another value-added model at this point. Looking at a longer range of the future, we won’t deny the possibility, though. Another point I should mention is: Nintendo produces one model of a product in much larger quantities than the companies in other industries can possibly do. As a result, considering the components included in our products, we have been able to contain the total production costs. In recent years, Japanese companies doing business in the U.S. and Europe are facing the significant issues with the yen’s appreciation. In the age when one U.S. dollar was equivalent to 120 yen, the sale of a product for 200 U.S. dollars generated 24,000 yen in sales, but it is around 80 yen per one U.S. dollar now, so the sale of the same product yields only 16,000 yen in sales. The Japanese export industry is struggling with that difficulty today. We have been making efforts to decrease the impact of the yen’s appreciation by doing all kinds of things like changing the payments of production costs from Japanese yen to U.S. dollars (for the payment of procurement of components and labor costs). But we can’t do the same for the payment of costs denominated in Japanese yen, to be specific, the payment of parts made in Japan, costs to develop products in Japan and so forth. On the other hand, no matter how strong the yen becomes, consumers in the U.S. have nothing to do with the fluctuation of foreign currency exchange, which means, for them, 100 dollars is 100 dollars, and 200 dollars is 200 dollars. Therefore, we can’t raise the price of our product (because the yen is appreciating). Accordingly, it is important to reduce production costs by the volume efficiency of mass production. As such, we can’t afford to deploy so many model variations in our business. Under such a circumstance, we had a great deal of requests from consumers that they wanted larger screens on the Nintendo 3DS. Also, when we introduced a larger screen version of the Nintendo DSi in the past, it was very much appreciated by consumers, and the Nintendo DS market expanded. This is why we decided to introduce a new variation model of the Nintendo 3DS for this time.

Q 7  Please let me discuss the sales method of “Fire Emblem Kakusei Special Pack” (Japanese title). You sold it online in small quantities several times without notifying us what time you would start selling it on those sales days. I was wondering if those who truly wanted it were able to successfully buy it in this way. Why did you choose this sales method, rather than selling it by accepting pre-orders or by having a lottery?
A 7


 We are very sorry that some people, probably including you, were not able to buy “Fire Emblem Kakusei Special Pack” (Japanese title), a set containing a special version of the hardware and the software, in spite of visiting our online sales website many times.

 We completely failed to anticipate the demand for such kind of special packaged deal of the Nintendo 3DS hardware decorated with a certain video game character on its surface and the software. We first forecasted the consumer demand, prepared for manufacture and began selling the product in limited quantities. To give consumers everywhere a fair chance to purchase such a limited edition offer, we decided to sell it on our online sales website. Unfortunately, however, the server for the site did not work well at the initial sales time due to an unexpectedly large number of people accessing the site and many people could not reach the purchase screen or proceed to payment after adding the product to their shopping carts.

 At that time, I received a report from my staff that some consumers had asked us to sell it by accepting pre-orders or by having in a lottery, as you mentioned, and others complained about us creating the situation that avid fans of “Fire Emblem” were disappointed with not being able to successfully buy it on Nintendo’s site while there were resellers in Internet auctions. As we obtained so many opinions, we actually considered if we could change the sales method to something different afterward. According to an outside attorney, however, if we changed the sales method to accepting pre-orders or having a lottery, those who had purchased it at the beginning might complain that they bought it just because it was a limited edition, and this would be likely to break the Japanese Law for Preventing Unjustifiable Extra or Unexpected Benefit and Misleading Representation. We would like to comply with as many consumer requests as possible, but at the same time we are highly responsible for compliance with Japanese laws. Therefore we were not allowed to change the sales method no matter how much we would have liked to do that. This is totally because we did not successfully forecast the number of the products consumers would want to buy when we planned to sell the product. We would like to make our best effort to decide an appropriate sales method suitable to the characteristics of a product and consumer demand so that fans of our video games will never be disappointed like they were this time. I sincerely hope you can forgive us on this matter.

Q 8  I would like to know about the current situation of the company’s operations in China and what problems you have in doing business there. Apart from this specific question, I have an idea for you: I would like you to energetically create software filled with dreams that is exciting for both children and adults. On NHK (Japan Broadcasting Corporation), I watched the news that Mr. Miyamoto, a senior director of the company, recently won a globally acclaimed award. To create such excellent games, I hope Mr. Iwata and Mr. Miyamoto will go through various experiences, including deadly adventures like crossing the Sahara on camelback or exploring the Amazon, full of piranhas, anacondas and crocodiles, together with the company’s other game creators.
A 8


 As for the business in China, we have a local corporation named iQue which works to deliver our products to Chinese consumers. Under the name of iQue, we launched the Nintendo DS in July 2005, the Nintendo DS Lite in June 2006 and the Nintendo DSi in December 2009. We plan that iQue will release our future products as well, but I am afraid I should not talk about any future plans here. Messages dispatched by a Japanese company in regard to China can often be first translated into English and, then, further translated into Chinese to be spread throughout China. In this process, I myself experienced several times in the past that what I said in Japanese was reported in China in a different context and meaning from my original Japanese messages, which were conceived by the people there as rather unpleasant although, as a matter of course, I had never meant to say such things at all. Through these experiences, we have learned that any business announcements about China should be made in China. It seems that a number of the Japanese companies doing business there also make it a rule to talk only about a general plan in Japan, but the detailed plans are announced by their local corporations. Therefore, although iQue will continue its businesses there, please let me refrain from talking about specific strategies here.

 One of the challenges in doing business in China is related to the fact that video game systems today are instantaneously distributed to so many different countries in the world as soon as they are launched somewhere on the Earth. Game systems are also available in China, but I hear that most of them are unofficially imported items without paying any value-added tax, which is equivalent to the consumption tax in Japan. Of course, as we are trying to do our best in order to conduct legitimate operations with no legal issues, iQue sells our systems with the value-added tax. This makes a price gap between official products and unofficial ones. Therefore, we have to tackle the challenge of how to add a special attraction to official products so that consumers will choose them. We would like to find a productive solution this year. I hope you will wait for our announcement on the result.

 In addition, I would like to thank you for suggesting some interesting ideas full of dreams. Please let me supplement your comments on the award to Mr. Miyamoto, as some here may be unaware of it. It was reported the other day that he was selected as one of the recipients of this year’s Prince of Asturias Awards in Spain, which are also referred to as Spanish Nobel Prizes. The award ceremony will be held in late October this year, so I understand that Mr. Miyamoto will visit there to officially accept his award. The awards are presented in several categories like Nobel Prizes, and he will be awarded for “Communication and Humanities.” As the reason for his selection, The Prince of Asturias Foundation cited in its statement, “Shigeru Miyamoto is the main architect of the revolution in teaching, educational and constructive video games. He is noted for excluding violence from his creations and for innovating through programs and formats that help exercise the mind in its many facets, in addition to being of great value from an educational standpoint. Miyamoto is not only the father of the modern video game. Thanks to his great imagination, he has managed to create virtual dreams that enable millions of people of all ages to interact, generating new forms of communication and relationships capable of bridging ideological, ethnic and geographic boundaries.”

 Although Mr. Miyamoto himself prepared his comment as soon as the subject announcement was made by the foundation, he is, in fact, very humbled whenever he receives such an honorable award because he cannot create video games all by himself. I am always asked by him not to voluntarily talk about the prize unless someone mentions it. On the other hand, I told you today that Nintendo aims to increase the gaming population and I think that this award is a very significant step for our final goal of improvement of the social acceptance of video games. We are happy that the award can be regarded as the appreciation of what we have been trying to do. As one of his co-workers, I am very proud of him receiving such a prestigious award.

Q 9  Comparing the company’s stock price of a year ago with the price now, it’s dropped more than 50%. This means that the company’s assets have shrunk in the same proportion and, as the result, the asset per share has decreased as well. How is Nintendo dealing with this share price drop situation?
A 9


 First of all, we acknowledge that our shareholders are worried about the recent share price situation. We regrettably feel that our shareholders are attending this meeting with the feeling that the stock price today is not what they were expecting it to be. As a representative of our company, I would like to express my sincere apologies that we are not meeting your expectations.

 Share price is determined in principle by the evaluations in the market, taking the company’s earnings situation into basic consideration. There was a remark from a person who asked this question that the company’s assets must have been decreased because the share price has dropped, but whether the company’s asset is decreased or increased is, in fact, a different story. In our understanding, the stock price has fallen because the investors are skeptical about the size of the profits Nintendo can make from now on. If you look at the recent situation in particular, as we reported in the results of the fiscal year ended March this year, it was a net loss situation which has never taken place since the company’s stock was listed in 1962. Nintendo expects to return to being profitable in this current fiscal year but Nintendo has a constant track record of making over 100 billion yen of operating income annually. By comparing the current year’s forecast with the historic level of profit, we assume that, as an overall view of the stock market, it’s premature to say Nintendo’s profit level will reach the level of what Nintendo is usually supposed to reach. We also know some investors are even thinking that it’s difficult to achieve the forecasted profit. We believe this situation has led to the current (share price) situation. Here, we would like to elaborate on Nintendo’s view with respect to what sort of concern the stock market has about Nintendo, as we believe this subject is of interest to all of you.

Market Concern for Nintendo at Present

 What we should say first is that while the Nintendo 3DS has a certain degree of sales momentum in Japan, the momentum in the U.S. and Europe is currently weak. To be more specific, sales of the Nintendo 3DS are constant in Japan and in fact we could say the sales volume is exceeding our forecast at the start of this fiscal year. After the beginning of this calendar year, the average unit sales have been 83,000 units on a weekly basis. This means that about 55% of all gaming hardware sales in Japan consist of the Nintendo 3DS. Now, with the level of sales momentum for the Nintendo 3DS created since the last year end, we would say the center of the Japanese video game market has been the Nintendo 3DS. This scenario is the scenario we were drawing at the beginning and in that regard, the growth is steady. On the other hand, sales momentum in the U.S and Europe is not so good. Considering that the U.S. and European markets are larger than the Japanese market in terms of the size of the population, sales in the U.S. and Europe are supposed to be larger. At the year end of 2011 the sales momentum in those markets increased in the same way as in Japan; however, the sales pace went down after the beginning of 2012. As a result, the sales proportion of the Nintendo 3DS is now about 20% of the total video game sales in those markets. Thus, solid sales momentum has not been created. For those investors who understand this situation, they might think that our earnings situation will not turn around in the way we have mentioned, or they might think it will take a much longer time than we expect to revitalize the profit situation. With the Nintendo 3DS XL I just spoke about and our key titles, such as “New Super Mario Bros. 2,” to be released globally this summer, one of our immediate top-priority missions is to create sales momentum which can wipe this type of concern away at an early stage.

Most Attractive Gaming Device

 On your note, one of the difficulties Nintendo is facing in terms of spreading the Nintendo 3DS is the difference of the mainstream products between Japan, where the handheld video games are the main products, and the U.S., where the home console video games are the main ones. Please take a look at this chart. The top bar represents Japan and the bottom bar represents the U.S. We are conducting surveys on a regular basis to consumers regardless of whether they play games or not by asking if they have played games during the past 12 months, with what game system they played games and how often they played games. This chart is the outcome of one of our regular surveys to consumers who played games during the last 12 months by asking, “What is the most attractive game hardware system for you?” The light blue area on the left represents the Wii, the grey one next to the Wii is PlayStation 3 for SONY, and the green one means Xbox 360 for Microsoft. To the right, the red area is the Nintendo 3DS, the pink one is the Nintendo DS, the dark blue one is PlayStation Vita, the light grey one is PlayStation Portable and the remaining colors represent games played on social networks, games for smartphones and games played on PC social networks. Now it’s been said that the competition is not just among dedicated game systems of Nintendo, Microsoft and SONY, so we intentionally added other choices to our survey. As you can see from the U.S. situation in the bottom bar, an overwhelming portion is covered by the three home console type video game systems. In the U.S., “video games” means home console video games. However, in Japan, those who say that video games mean home console games are only about half of all respondents, and handheld-type games have more significant appeal. The data we showed you are based on the survey in January this year in Japan and in March in the U.S. When we have updated information about the same survey and if there is a chance in the future, we would like to show you the results during occasions like the Financial Results Briefings. We think the difference in the sizes of the red areas represents the difference of the current momentum of the Nintendo 3DS. Meanwhile, for those who are well aware of the current video game business, the result appears not to reflect the present sales status at all. The reason why the Wii’s proportion is so high despite its sales situation not being so strong is, memories of playing with the Wii make such a strong impression on people that they remain in their minds, so the Wii is chosen as the most attractive game system even now. Conversely, for us to launch the Wii U, this is a very valuable asset and is considered favorable data. Since the shareholders and investors do not have these kinds of data, when they have pessimistic views on the Wii U, we think we may need to present the data like this to overcome such a view. For your reference, as it was the case with the Nintendo DS, it took a much longer time for the platform to gain sales momentum in the U.S. than in Japan. The Nintendo DS gained momentum within a year in Japan; however, it took more than two years in the U.S. and in the end the total sales of the Nintendo DS exceeded the Wii there. We believe the best possible measure for the share price to appreciate is to show a turn of the trend of the video game market.

Market Concern for Nintendo at Present

 When I read the reports by newspapers and other media, there are stories which say that social gaming has caused Nintendo’s earnings to go down. As a matter of fact, in Japan, there are quite a few people who are concerned about the impact of these social games and when I take interviews with domestic media reporters, most of the time they ask me about competition with social games. However, when I go outside Japan, nobody asks such a question. Instead, what they ask is, “Given the situation that smartphones have spread so widely and people don’t have to buy video game hardware and, at the same time, game software can be purchased at inexpensive prices, what will Nintendo do from now on?” The truth is that the issue of social games is a Japan-only phenomenon. So, at E3 this year, nobody asked me about the competition with social games. In this opportunity, I would like to tell you that the perception in Japan and that in the overseas countries are different as a matter of fact. Needless to say, because smartphones are spreading widely, the time has come when people do not have to buy video game hardware to play games that have certain appeal and have very inexpensive prices. In order for dedicated video game hardware to be needed continuously, it is necessary to provide games with fun elements unique to a certain video game system which cannot be realized on smartphone devices. We would like to introduce such games one after another.

Market Concern for Nintendo at Present

 Another subject is the Wii U. There are some media reports saying the Wii U may not be a revolutionary product like the Wii. When I was interviewed by media reporters overseas at E3 recently, their comment was, “The Wii appeared to be a promising product to succeed from the beginning; however, Wii U does not look that way.” People have forgotten what the real story was. For the Wii, before its launch and right after its announcement, the feedback was similar to that of the Wii U. In other words, when something unique comes up, it’s difficult for people to understand it at the beginning. A lot of misunderstandings and pessimistic observations, like, “Will a product like this really spread in the market?” prevail and then after some time, after being able to experience it, the atmosphere changes. In fact, when the Wii was showcased at E3 in 2006, there were a lot of news stories which reported the strong receptions of the Wii by the visitors to the show; however, the questions I was asked then and there were all tough questions. Almost every one of the reporters asked, “How in the world are you going to compete with SONY or Microsoft with a product like this?” Everyone has forgotten what the real situation was. Then, in hindsight, I think some people say, “I was convinced about the success of the Wii from the beginning” only after looking at the results. Nintendo has to fight the lasting impression of the Wii business that once exploded. We know as our mission that we have to fight strongly before the launch time and overcome this situation. However, we ask you to understand the aspect I just described.

 Among some news reports, a report I was particularly disappointed with was that the announcement of the launch date and the price (of the Wii U) was postponed. We made a statement in public before E3 that we would announce neither the launch date nor the price (of the Wii U) at E3. It’s nothing new at all because, when we introduced the Wii, the Nintendo DS and the Nintendo 3DS, we didn’t announce the launch date or the price at the E3 shows, either. Nevertheless, what was reported in the media was that, in the context, postponement of the announcement regarding the launch date and the price was due to lack of confidence. This type of news somehow affects consumers’ minds and that would have had an impact on the share price as a result.

 Finally, another issue is that the visibility of the future software lineup is unclear. During E3, titles for the overseas markets were highlighted and the titles we introduced then were only the ones to be available at the launch time and within the launch window period, which might make you wonder, “What will become of the software in the next year?” It is our intention to convey a strong message this fall with the information about the price and the launch date and then to create momentum good enough to convince our consumers to buy (the Wii U), but currently, there must be some concerns. Overall, we believe that the current share price has been determined based on what I mentioned today. In the near term, with the introduction of the Nintendo 3DS XL followed by new software titles in July and August, the most important issue is to what degree we can change the business momentum of the Nintendo 3DS in the world. Then, subsequently, when we launch the Wii U, we intend to announce the next step by saying what will happen in the future, and by doing this, we would like to change the evaluation in the market.

 Finally, this is not directly related to your question, but please let me take this opportunity to tell you something. Today, we will give you a chance to see the Nintendo 3DS XL after this shareholders’ meeting. Please let me remind you that we will guide you after this meeting and therefore you cannot see it during this meeting even if you leave here now. Also, you might be wondering why we won’t let you try the Wii U. We had intensively explored the possibilities of doing that, but in consideration of the number of expected shareholders, the time necessary for each person and the space required to play it – the Wii U needs a much larger space with a TV screen to play than a handheld device – we are afraid that we reached a negative conclusion in the end. Instead, we prepared a mock-up model of the Wii U and promotion videos for E3 in the lobby on the first floor. The E3 show was held overseas and we have not yet publicly given such a show even to the Japanese media, except for some closed opportunities for a limited number of people in the Japanese industry. I hope you will like the Nintendo 3DS XL. A person in charge will show you where to go after this meeting.

Q 10  Even though Nintendo has five representative directors on the board, some of the board of directors own around 100 or 200 stocks, and many own just 1,000 stocks. Isn’t the management interested in Nintendo stock?
A 10


 At past shareholders’ meetings, I received a question about the number of stocks the board members held and received the opinion that such numbers were too small in light of their responsibilities. However, our current managerial system selects a director for the board according to his/her aptitude and competency rather than whether he/she owns stocks. In that sense, I believe firmly that the current nine members we propose carry out sound management and are capable of leading Nintendo in the fiscal year ahead, and I assure you that the difference in the number of stocks they own does not affect their attitude toward their managerial roles. I would highly appreciate your understanding of this point.


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