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Corporate Management Policy Briefing/Semi-Annual Financial Results Briefing for the 68th Fiscal Term Ended March 2008
Q & A
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Q 16   When will you launch the next generation of DS? Are you having trouble in deciding upon your launch timing?

  What is Mr. Miyamoto interested in now after measuring his weight everyday? Where are you obtaining inspiration for new ideas? Would you give us some hint from your past experiences?
A 16


  Whenever we have developed one hardware system, we start to discuss what we should do with our next hardware. In the past, we had a kind of common sense understanding of the video game industry’s platform cycles, like , say, 5 years for home consoles and a little less time for portable devices. I’m quite doubtful that such a notion of platform cycles can be applied in the future. As I said at the end of my presentation today, what was believed in this industry to be common sense is not actually an unchangeable truth. So, as we continue our research and study for new hardware, when we will be able to launch a new kind of hardware will actually depend on when we can change entertainment completely, and so have a strong impact on people around the world. Or, there will certainly be a time when we have to say that we have done everything possible with the current machine, that we can never propose anything new. Lately, I cannot say I’m making video games on the frontline of development, but as a person who used to develop software, the availability of new hardware means that we possess a new weapon. We long for a new weapon whenever we cry that we cannot fight anymore with the current weapons. But today’s situation is such that we are not desperate for any new weapons at all. Whenever we are working on so-called next generation hardware, we are always thinking in terms of the future. We need to forecast what the future will be like with the expected evolution of new technologies which are available at any given time, and try to identify the so-called “sweet spot” of technology over the next few years. However, not everything we have designed has actually been introduced to the market. We have produced a number of hardware prototypes which did not in the end reach the market place. We are always preparing for new hardware so that we can launch whenever we determine we should do so. However, scheduling for a rather fixed launch date 4 years from today, regardless of future changes in the industry and the market, appears to be too inflexible an approach to us. We are always studying and working on what the new hardware must become in the future, but we are also monitoring changes in circumstances in order to act flexibly. Also, since Nintendo’s hardware engineers and software creators are always communicating closely, only when both teams agree that it is time to challenge the market with new hardware that we will launch it. So, it is not a correct observation that we are having any trouble deciding on the launch timing of the next hardware. Simply, we are not suffering from the shortage of new ideas for DS. I heard that some of the attendees to our October 10th conference were expecting to hear about a new portable machine announcement, but we never had that kind of notion in the first place. And now, I’d like to ask Miyamoto to talk about his hobby (who hit upon the idea of WiiFit from his hobby of measuring his weight everyday.)


  We were discussing that the question about my hobby would surely be asked. Sorry to say, there is no new hobby which I’m into that I can share with you now. Maybe I should consider personal financial management as the next hobby, so I would like to ask for advice from you, the financial experts. Next time, I will visit your places to interview you.

  Seriously, hobbies sometimes can inspire new ideas, but the basic rule of how we develop games today is changing significantly. I understand that the third party developers now share the same feeling. For a long period of time, quite a few game developers started a game development project by asking themselves what type of video games were available on the market then. Then they would discuss who would be the target audience and where the market would be. They would sometimes do market research. But now, the situation has changed greatly. To put this in a simple way, developers start by asking themselves what will make our daily lives more enjoyable or what will be useful in our daily lives? We have great know-how from our past experiences to develop fine applications if we can just start by asking these questions. When we look around at the broader content industry in Japan, the animation industry has cultivated precious know-how and expertise, and so has the video game industry. Now that we have a great many people who have good technological skill and good artistic talents, there is infinite potential to create something new. So, the theme we choose is very important. If the whole development community in Japan can seek themes in their daily lives, in lieu of the traditional way of thinking about the next video game, the Japanese software community still has a great potential to appeal to the world, I believe.


  I agree. The job of developers nowadays is to think about what is going to be a theme that many people are interested in, or why people are interested in such a topic. As an increasing number of the developers are starting to think in this fashion, the approach to make video games is deviating from the traditional way of segmenting potential customers by doing market research, in order to focus development efforts specifically for a narrow market. Not long ago, many in the industry would ask the avid games for their opinions as to what kind of improvements they are hoped for beyond games already available on the market and, based upon this feedback, introduced them to improved software. However, that kind of approach just narrowed the potential customer base in each categorized market. The whole video game market lost overall balance and catered only to a small number of potential customers. Today, I often discuss with our developers what subjects the general public are interested in, even when they may not be showing enthusiasm for them.

Q 17   Tell us about how strong you are now feeling about 3rd quarter business including the year-end holiday sales season for both DS and Wii. Which software are you putting big expectations on?
A 17


  I have to ask you to come up with your own judgment by reading our financial forecasts. As for Wii software, we are expecting we will launch the new Mario Galaxy game all around the world, which was developed by the team headed by Miyamoto. When game fans talk about 3D Mario or 3D action games in general, they sometime complain that they get motion sickness, that they easily get lost in 3D stages, or that anyone can play 2D Mario but 3D Mario is difficult. Nintendo’s team has made a great effort to make this game with the hope that a variety of different people can play, so we want as many people as possible to try it. At the same time, we hear or read that some veteran gamers are concerned that Nintendo has been looking at casual games and not at them, but this is not true at all. We do not think they will say this after playing Mario Galaxy. We are looking forward to see how this Super Mario Galaxy will be reviewed by veteran gamers as an authentic successor to Super Mario Brothers. Although we can only launch WiiFit by the end of this year in Japan, if it can be successful in Japan, we will be able to create strong momentum in the overseas markets as well, and we will be able to explore its market potential in the next year. So, I often discuss with Hatano the importance of the Japanese WiiFit sales this year. So, as for Wii, these two titles will be exceptionally important, I believe. As for DS, since a significant time period has now passed since its launch, the past situation where only Nintendo’s first party software showed prominent sales will unlikely be reproduced. The other day, one of our wholesalers commented that Nintendo did not have very strong first party software for this year-end sales season. However, when we include the third parties software lineup, the whole DS software lineup is richer than ever. Also, the distributors traditionally tend to focus only upon the new products and do not count existing popular titles. DS is the platform which has a number of constant sales titles that were originally introduced some time ago. You know, I am referring to those titles which keep constant sales even months after launch. When we look at the top selling software chart for this year, many titles were launched last year or even the year before, including New Super Mario Brothers and More Brain Training and English Training. These titles are maintaining steady sales for a long time period. Also, now that DS has this huge installed base, software makers have now been able to develop software which can leverage the unique features of DS, and such titles are now becoming richer in the DS’s library and we are expecting better sales with them. We would like to make further efforts so that our customers will find a very well-balanced DS software portfolio. As long as Nintendo’s internal marketing groups are concerned, they are globally competing with each other for as many hardware units as possible, and our capacity is still limited in the face of the great demand. As the person who needs to determine allocations, I will work to see that each allocation will be sold through to customers.

Q 18   When you said that it’s a shame if you can’t use a game machine with that great installed base as an infrastructure, were you referring about DS or Wii both? Also, are you thinking only about your internal development when it comes to new ways of usage? Or, will you increase collaboration with other companies such as with the TV Program Schedule Channel? Will you also seek the possibility of purchasing other companies with imperative know-how? Finally, when will you add the gift-giving function to the Shopping Channel and when will you start the TV Program Schedule outside Japan?
A 18


  While changes in markets are taking place for both DS and Wii, DS has much larger installed base today. With the larger installed DS, the market changes for DS have been greater. But, I’m now referring to the Japanese market. When I visit the U.S. and observe how Wii has been sold through in that market, or when I visit the UK and see how frequently people are talking about Wii, I myself have to feel that something very different is taking place there. And I’ve also heard of unique anecdotes that attest to my feelings. People at Nintendo’s overseas markets were also telling us that family members and friends who had never talked about video games before are now offering nice comments about Wii to them. We really appreciate their comments. So, the markets are starting to change significantly right now. So, I understand that we should not narrowly consider the possibility of just one hardware system. As for the Wii Channels, there will naturally be a limit in making the applications just by ourselves, so we will increase collaboration with others, I believe. How closely we will collaborate with others will occur in different degrees, and we would like to be flexible in seeking which kind of Channel functionality will make our customers happier. The possibility of buying out another company is often asked as we have a significant amount of cash, but we think that company buy-outs can not produce good results if several conditions can not be met. If all these conditions can be met, we are willing to carry out a plan. However, if I can use an extreme example for this, if the merger and acquisition is done solely in order to allow the company to do whatever we order them to do, we do not think that will bring about a good result for us. Some may say that Nintendo has been too careful about M&A, but only when we can determine that the result can surely work for the future of Nintendo, that is when we will not hesitate. As for overseas development, the gift-giving function is scheduled to be added simultaneously around the world. As for the download of the TV Program Schedule Channel, each country in the world has its own environment. In the U.S., for example, digital cable TV set-top boxes are widespread, so digital TV program guides are already available for households there. So, the service that the local users can appreciate must be different from that in Japan. As we need to alter the specs themselves, we are not expecting to start a simultaneous launch across the world. Also, our partner here, IPG, is a Japanese entity that we have chosen as our partner to deploy the subject Channel in Japan.

Q 19   How important is the China market for Nintendo? Do you have any concrete plan to significantly advance into the market? What kind of countermeasures do you have against piracy that is supposed to create fairly large hurdles for non-Chinese companies in entering into the market?
A 19


  Nintendo has established a company called iQue, which has been doing business in the China market for about three years now. In terms of the different business practices and the piracy issues you mentioned, Wii appears to be most appropriate for this market among all the hardware we have. But if you ask me when we will launch Wii in China, the sheer demand in the existing markets around the world is already higher than the supply we can provide. Currently, we are responsible for supplying as many systems as possible to the markets where Wii has already been launched. So, we think that we will be able to launch Wii in next year, not this year. However, we are not able to comment on how fast we would be able to create a certain size of market there. iQue has come to a stage where it can earn profits from its business, but it has not contributed greatly to Nintendo’s sales and profits. In the long run, we would like to tackle that market. However, as I have said repeatedly today, the point in the end is how we can increase the total number of people who are willing to try video games. Since China has a great population and its economy is growing with incredible speed, there must be huge potential. However, we do not think we can be successful if we simply start selling what we are selling somewhere else. We will need to plan with people in China on how we together can grow the local software market. Hatano is currently in charge of our Korean operations. When Nintendo was opening its Korean subsidiary, the first thing he clearly told us is that we must create circumstances where local Korean software makers can grow with us, or we will have a very hard time finding business opportunity there.” I could not agree with him more about that point.

Q 20   When you were referring to the future possibility of DS, you mentioned that DS has the potential to be used in a variety of useful ways and you may actually introduce some of them next year. Are they a linear extension of the way DS is currently used, or will you introduce some new hardware for that purpose? Another question: when we look at the sales of Wii and DS, the 2nd quarter showed smaller DS and Wii sales in Japan. However, since the global annual shipment forecasts were revised upwardly, was the Japanese market decline simply a seasonality thing? Or, has the Japan market leveled off a bit?
A 20


  I’ll answer the first question and let Hatano answer the 2nd one.

When I referred to the next year’s developments for DS, I was not talking about any new hardware launch, of course. As I just emphasized the importance of the great installed base of DS and the advantage that nothing in the past had this installed base with a single architecture, we could not leverage that if we introduced new hardware.

  So, what we were hinting about must be new services that we can offer with the existing hardware. With that as the premise, we would like to establish a circumstance where people can find new joy in carrying around DS all the time. Such services should contribute to making DS an actively used hardware and, also, to make the leap from one DS per household to one DS per individual.


  As for the fact that 2nd quarter sales were less than that for the 1st quarter in Japan, I think I should explain it with respect to the available titles in each quarter. In general, DS has created an atypical market where there are long-term sellers including Brain Training and More Brain Training, as has been discussed today. Super Mario which we launched last year is still selling today. However, overall software sales can always be influenced by the availability of certain software titles which can attract gamers’ attention. Specifically in the 2nd quarter, we did not have a sufficient number of titles to cater to the needs of avid gamers, for example, between 13 or 14 to around 20. This is a kind of theme we always face, not just confined to this 2nd quarter alone. But we have more such titles ready for the year-end sales season. So, we would like you to see a bigger picture than just comparing the 1st and 2nd quarters. As for Wii, Wii Sports has played an important role in the 1st and 2nd quarters once again, although the software was launched December of last year. Ideally, anyone wants a constant flow of strong software in the year after the launch of new hardware, but the history of the video game industry has shown us how difficult it is. If that could happen, the hardware sales would be driven up. However, even DS did not have that kind of situation in the 12 months from its launch. So, once again, we would like you to see a much longer period of time rather than comparing the 1st and the 2nd quarters. Some software needs a long period of development time. For example, how well will Super Mario Galaxy, to be launched on November 1, sell? What will become of WiiFit? It would be easier for us to talk about the yearly plan, as few people can grasp the total picture merely by focusing upon the short 1st or 2nd quarters.

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