Financial Results Briefing Q & A

Financial Results Briefing for the 68th Fiscal Term Ended March 2008

11	The American economy is slowing down, and people are concerned of similar trends surfacing in Europe. How do you perceive that these factors will affect the sales of Wii and DS?
11	Iwata: Looking back in history, it has been about 25 years since the current form of the U.S. video game business was established, during which economic conditions were good and bad. Based on our experiences, our business has not been largely affected by the ups and downs of economic climate. For example, people may say, "because the economy is bad, I should refrain from big purchases for now," "we should forget about travel this year," or "we will eat at home rather than dining out," but they hardly say, "we should cut back on spending on gaming." Rather, they may have opted for video games as a cheaper alternative. It is only our feeling, but it appears historically that our sales have hardly been affected by economic conditions. When we look at NPD data for this January to March, the whole U.S. video game industry sales were up 27% over the last year. While I assume that many other indexes in other industries in the U.S. for the same time period show downward trends, video games might have been an exception. Therefore, I feel that there will be small direct impact on video games’ sales, if any, of the U.S. recession, which was triggered by sub-prime loans. We are receiving weekly sales reports from the U.S. and Europe, but so far, there has been no sign of slow down for our sales.

The American economy is slowing down, and people are concerned of similar trends surfacing in Europe. How do you perceive that these factors will affect the sales of Wii and DS?

Iwata:

Looking back in history, it has been about 25 years since the current form of the U.S. video game business was established, during which economic conditions were good and bad. Based on our experiences, our business has not been largely affected by the ups and downs of economic climate. For example, people may say, "because the economy is bad, I should refrain from big purchases for now," "we should forget about travel this year," or "we will eat at home rather than dining out," but they hardly say, "we should cut back on spending on gaming." Rather, they may have opted for video games as a cheaper alternative. It is only our feeling, but it appears historically that our sales have hardly been affected by economic conditions.

When we look at NPD data for this January to March, the whole U.S. video game industry sales were up 27% over the last year. While I assume that many other indexes in other industries in the U.S. for the same time period show downward trends, video games might have been an exception. Therefore, I feel that there will be small direct impact on video games’ sales, if any, of the U.S. recession, which was triggered by sub-prime loans. We are receiving weekly sales reports from the U.S. and Europe, but so far, there has been no sign of slow down for our sales.

12	I imagine there are many non-traditional gamers who are purchasing Nintendo’s games. Isn’t there any impact of the economy even among these new customers?
12	Iwata: I am feeling that there have not been direct influences. Of course, we have to be very sensible to any changes in the market and have been carefully monitoring the sales of software that have contribute to expanding the gaming population every week, but we have not found anything. Probably, as long as Nintendo’s projects are concerned, they are less susceptible to the changes in the economy.

I imagine there are many non-traditional gamers who are purchasing Nintendo’s games. Isn’t there any impact of the economy even among these new customers?

Iwata:

I am feeling that there have not been direct influences. Of course, we have to be very sensible to any changes in the market and have been carefully monitoring the sales of software that have contribute to expanding the gaming population every week, but we have not found anything. Probably, as long as Nintendo’s projects are concerned, they are less susceptible to the changes in the economy.

13	I think it was last year when you said that you wanted to challenge the old convention that increased hardware install base will result in lower hardware-software tie ratio, by expanding the dynamic range of software both in terms of play volume and price, but I feel that your efforts seem slow to progress. I do not know if this has something to do with it directly or indirectly, but you reportedly spent 37 billion yen for R&D in the fiscal year that just ended although you had originally planned to spend 45 million, and the actual result was similar to the result of a year ago. I heard that the reasons behind this are focus upon select titles and delays of some software launch timings. However I have another hypothesis here, and that is the lack of man power. On a consolidated basis, you increased your employees by around 400 people during the fiscal year just ended but most of them were people from Monolith Software, newly grads and people employed by your foreign subsidiaries. My question is, can you further increase productivity per capita? You are not engaged in physical labor, so you do not have a limit for that, but I also understand that only increasing the number of people will not do any good. I just want to know if there is room for improvement in individual productivity.
13	Iwata: I think there are few past examples of a company our size with a unique business style that has tripled its sales in two years. Without much reference I am thinking how to move forward day by day. When one business rapidly expands, there is always the issue of labor shortage. On the other hand, we also have to consider whether increasing the number of people where we feel are short-staffed will really solve the issue. If we could split one person into two in order to double the number of employees, it should probably work out. However, merely recruiting a large number of external people who is not familiar with what Nintendo is about nor with the unique characteristics of the video game business would pose a danger to us because we would see a sudden increase of people at Nintendo who could not comprehend the unique Nintendo way or DNA which is sometimes regarded by the public as offbeat. So, I have been trying to reinforce Nintendo’s workforce by identifying the fine line between increasing head count and keeping the Nintendo culture intact. Having said that however, I do not think that we have done everything possible to maximize individual productivity yet, even though we believe Nintendo is one of the more efficiently-operated companies. Although there is less now, there is still wasted energy in Nintendo. Also, I think we can do better in identifying what tasks Nintendo should take care of internally and what we’d like to share with our partners. Also, as being explained in the Theory of Constraints, the phenomenon that one bottleneck situation can determine the overall performance and through-put is found in a variety of businesses including ours. So, we have to always think, "What is the bottleneck?" and "How we can strengthen that area?" It is true that our business has expanded rapidly in a short time period, so our workload has increased along with our potentials. There are things that we may want to do but have to refrain from doing so because we know that if we attempt to do everything that we want to, many of them would end up being just halfway done, so the final outcome will be worse. So, there are things that we could have done but have refrained from doing so. From an external point of view, Nintendo may be criticized as slow in development, but Nintendo would like to carefully identify our limit as to how far we can expand without losing our Nintendo style. However, please understand that we are aware of opinion like yours, and we have been making efforts and trying to implement our own unique tweaks in order to strengthen our productivity. I think I can also be proud of the fact that the total number of Nintendo’s productivity today is significantly higher than that of a few years ago.

I think it was last year when you said that you wanted to challenge the old convention that increased hardware install base will result in lower hardware-software tie ratio, by expanding the dynamic range of software both in terms of play volume and price, but I feel that your efforts seem slow to progress. I do not know if this has something to do with it directly or indirectly, but you reportedly spent 37 billion yen for R&D in the fiscal year that just ended although you had originally planned to spend 45 million, and the actual result was similar to the result of a year ago. I heard that the reasons behind this are focus upon select titles and delays of some software launch timings. However I have another hypothesis here, and that is the lack of man power. On a consolidated basis, you increased your employees by around 400 people during the fiscal year just ended but most of them were people from Monolith Software, newly grads and people employed by your foreign subsidiaries.
My question is, can you further increase productivity per capita? You are not engaged in physical labor, so you do not have a limit for that, but I also understand that only increasing the number of people will not do any good. I just want to know if there is room for improvement in individual productivity.

Iwata:

I think there are few past examples of a company our size with a unique business style that has tripled its sales in two years. Without much reference I am thinking how to move forward day by day. When one business rapidly expands, there is always the issue of labor shortage.

On the other hand, we also have to consider whether increasing the number of people where we feel are short-staffed will really solve the issue. If we could split one person into two in order to double the number of employees, it should probably work out. However, merely recruiting a large number of external people who is not familiar with what Nintendo is about nor with the unique characteristics of the video game business would pose a danger to us because we would see a sudden increase of people at Nintendo who could not comprehend the unique Nintendo way or DNA which is sometimes regarded by the public as offbeat. So, I have been trying to reinforce Nintendo’s workforce by identifying the fine line between increasing head count and keeping the Nintendo culture intact.

Having said that however, I do not think that we have done everything possible to maximize individual productivity yet, even though we believe Nintendo is one of the more efficiently-operated companies. Although there is less now, there is still wasted energy in Nintendo. Also, I think we can do better in identifying what tasks Nintendo should take care of internally and what we’d like to share with our partners. Also, as being explained in the Theory of Constraints, the phenomenon that one bottleneck situation can determine the overall performance and through-put is found in a variety of businesses including ours. So, we have to always think, "What is the bottleneck?" and "How we can strengthen that area?"

It is true that our business has expanded rapidly in a short time period, so our workload has increased along with our potentials. There are things that we may want to do but have to refrain from doing so because we know that if we attempt to do everything that we want to, many of them would end up being just halfway done, so the final outcome will be worse. So, there are things that we could have done but have refrained from doing so. From an external point of view, Nintendo may be criticized as slow in development, but Nintendo would like to carefully identify our limit as to how far we can expand without losing our Nintendo style. However, please understand that we are aware of opinion like yours, and we have been making efforts and trying to implement our own unique tweaks in order to strengthen our productivity. I think I can also be proud of the fact that the total number of Nintendo’s productivity today is significantly higher than that of a few years ago.

14	You said that platform cycle may change. What are the things you can identify as the factors to generate the new platform cycle today?
14	Iwata: I personally feel that, when software creators have done everything possible with one hardware platform to offer ideas and tricks to generate pleasant surprises to the customers, it is the end of the hardware lifecycle. As Nintendo has its own hardware development team, they are always researching into new hardware. Also, while they are working on new video game hardware, they are also working on hardware accessory to the video game hardware, such as Wii Balance Board, which can add extra functions to the original hardware in order to add an element of surprise for people. Such developments by the hardware team can be considered as a way to expand the hardware platform’s lifespan. Most recently, the wheel accessory for Mario Kart Wii falls in that same category. On the other hand, any technology has a breakthrough point. Even today, there are many things that we want to materialize, but that is limited by the currently available technologies or that can be done today but would be costly to be sold as a game console. But when a breakthrough takes place in the future, that technology can be incorporated into a hardware that can be reasonably priced for our customers. At that time, if the software developers believe they have done everything possible on the current platform to surprise the customers but cannot do anything further, that is when a new hardware platform is needed. As semiconductor technology makes progress and the width of the process rule has become thinner, we can put more transistors and the total functionality will increase. However, that alone will hardly surprise the customers any more. So, we have to think in terms of other elements as well.

You said that platform cycle may change. What are the things you can identify as the factors to generate the new platform cycle today?

Iwata:

I personally feel that, when software creators have done everything possible with one hardware platform to offer ideas and tricks to generate pleasant surprises to the customers, it is the end of the hardware lifecycle. As Nintendo has its own hardware development team, they are always researching into new hardware. Also, while they are working on new video game hardware, they are also working on hardware accessory to the video game hardware, such as Wii Balance Board, which can add extra functions to the original hardware in order to add an element of surprise for people. Such developments by the hardware team can be considered as a way to expand the hardware platform’s lifespan. Most recently, the wheel accessory for Mario Kart Wii falls in that same category.

On the other hand, any technology has a breakthrough point. Even today, there are many things that we want to materialize, but that is limited by the currently available technologies or that can be done today but would be costly to be sold as a game console. But when a breakthrough takes place in the future, that technology can be incorporated into a hardware that can be reasonably priced for our customers. At that time, if the software developers believe they have done everything possible on the current platform to surprise the customers but cannot do anything further, that is when a new hardware platform is needed.

As semiconductor technology makes progress and the width of the process rule has become thinner, we can put more transistors and the total functionality will increase. However, that alone will hardly surprise the customers any more. So, we have to think in terms of other elements as well.

15	Do you mean that the factor which will trigger the new platform to emerge into the market will be from within the company and not initiated from outside?
15	Iwata: We are always trying to be the first to offer fun proposals to our customers, and many companies in this industry are eager to do the same and putting in the utmost efforts in order to find the concept that can give pleasant surprises. From that perspective, when another company comes up with an idea that can totally surprise customers, our way of thinking on what we should do might be altered. So, as principle, we would like to generate such (factors to initiate the new product cycle) from among ourselves, but we cannot say for sure that the trigger won’t result from action of other companies.

Do you mean that the factor which will trigger the new platform to emerge into the market will be from within the company and not initiated from outside?

Iwata:

We are always trying to be the first to offer fun proposals to our customers, and many companies in this industry are eager to do the same and putting in the utmost efforts in order to find the concept that can give pleasant surprises. From that perspective, when another company comes up with an idea that can totally surprise customers, our way of thinking on what we should do might be altered. So, as principle, we would like to generate such (factors to initiate the new product cycle) from among ourselves, but we cannot say for sure that the trigger won’t result from action of other companies.

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