IR Information

Financial Results Briefing for the 68th Fiscal Term Ended March 2008
Q & A
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Q 16   Could you explain your idea that the past platform cycle can not be applied today and its relationship to DS’ Japanese sales? Can I assume that DS may someday exceed the peak the Japanese sales realized for the term ending in March 2007? Or, has the Japanese DS sales already entered into different phase?
A 16


  We should not conclude that the Japanese sales of DS have peaked. In our business, one single software can change the entire picture completely. For example, there was a time when people thought the Game Boy platform was virtually over. However, a software called Pokémon single handedly changed the situation and expanded the platform’s lifespan by several years. Just as we were able to do so with Nintendogs and Brain Training, if we are able to provide customers with an unexpected product, the situation can drastically change.

  I said earlier today that the (past) product cycle cannot be applied today, but I did not mean that the notion of product cycle will disappear. What I was trying to say was that, thinking such as "since the past generation’s product cycle was 4 years or 5 years, this generation’s cycle must be 4 years or 5 years too" or "as the past generation hardware followed this path so will the current generation" will not hold as cycle length and patterns will differ with different environment and customers. Simply because the same patterns have taken place for many years in the past, many tend to think that the same pattern should be repeated next. However, when I hear that kind of traditional platform cycle theory, it reminds me of how people opposed our ideas of products for 5 to 95 years old, regardless of age, gender and their past gaming experiences. So, what I really wanted to say today was, isn’t it time for us to rethink of product life cycle in a less static manner.

Q 17   Do you mean that the past platform cycle may or may not be applied in the end? Or, are you saying that Nintendo is making efforts to not repeat the same product cycle? If the answer is the former, how will you cope with the prolonged cycle? If it is the latter, what efforts are you making to prolong the product lifespan?
A 17


  First of all, our traditional customers are mainly those who proactively seek game-related information for themselves, and we could quickly deliver the information they needed. This is because they are acting to obtain the information from their side. On the other hand, what we are attempting today is to ask those who openly states that they have no interests in video games to give Nintendo’s products a chance and enjoy our games, which takes time. From this perspective, I have to wonder if it is all right to think that this current generation of hardware will have a 4-year lifespan just because the past generation’s lifespan was 4 years. I believe a different time cycle must be considered.

  Now that they have kindly purchased hardware, it is desirable for us if they can enjoy the machine as long as possible. We are selling the hardware just because we want our customers to enjoy software. This is something that Mr. Yamauchi (the former president of Nintendo) was saying and not something I myself started. But Nintendo thinks that our customers reluctantly buy our hardware (in order to play software). Accordingly, we would like to offer new proposals one after another as long as that hardware can still provide fresh and pleasant surprises. If such efforts can be resulted in the prolonged lifespan of a hardware, that is good to us.

  So, we are trying to offer new proposals one after another and trying to maintain a high activity ratio of the hardware. At the same time, there are still many people in the world who have not played video games, so if we can reach out to them, the total life cycle will change. The main point of my address today is that, we have reached a stage where an analysis of past businesses that targeted traditional gamers in Japan, the US, and the European markets alone cannot be an appropriate indicator for the future.

Q 18   About DS, I understand that you are trying to increase the hardware operation ratio. When I compare the actual unit shipment result of DS software for the term just ended and your DS software unit shipment forecast for the current fiscal year that has just started, it appears to be flat. Why are you expecting similar software sales while you are expecting to sell 28million more of DS hardware in this fiscal year?
A 18


  As of the time when financial forecasts are made, we only know what we are currently making at Nintendo and the plans of third party software launches shared by software manufacturers. For example, Nintendo launched the Brain Training software in 2005, but at that time, even if we had said that this software could sell tens of millions of units, nobody would have believed it. As a result, the internal expected shipment unit of the title was very conservative in terms of the actual result.

  Among all the software that we are planning to launch from now, if any one of them is going to be an unexpected smash hit all around the world, there is always room for upward revisions. However, we cannot base such unknown factors when we announce our financial forecasts. As the result, we always have to base our forecasts on past trends. If any of them become an unexpected hit, that can contribute to market expansion. Again, we cannot tell which one of the proposals we are going to make may likely become the next smash hit, or how much they can sell beyond our expectations. It is one of my jobs to increase the possibility of making that happen, but I am not in a position to make our financial forecasts based upon such hypothesis, which may result in downward forecast revisions later on. This is the background for our financial forecasts.

Q 19   Tell us about the download distribution business status of WiiWare and Virtual Console. Please also briefly explain the business model of download distribution and existing packaged software as they must have different business structures and profitability scales.
A 19


  The total sales for the fiscal year just ended from Virtual Console and WiiWare, whose service started near the end of the term and were very limited in sales, was 7.8 billion yen. I really cannot tell how this past year sales will evolve in the future. I personally feel that they have the potential to explode sometime in the future, but it is rather difficult to predict when the tipping point will happen. Since there are no inventory risks for WiiWare and Virtual Console, I believe that the business efficiency will get better as soon as the services gain momentum.

  For your information, the business relationships between us and software manufacturers for Virtual Console and WiiWare are very different. As for Virtual Console, Nintendo manages the process to make third party software ready for the download sales at Nintendo’s own business risks. This is because when we started the service, the future prospect of download sales on Wii hardware was totally unknown. Since Nintendo is shouldering a large portion of the business risks, we are also receiving proportionally larger margins.

  In case of WiiWare, all the development risks are absorbed by our software manufacturers. They shoulder the development risks for themselves, they submit the software to the rating board for the appropriate rating to be determined, and they handle their marketing. Accordingly, the software makers’ margins are bigger. We are not in a position to disclose the margins as part of the contracts, but I just wanted to bring up this clear difference between Virtual Console and WiiWare.

Q 20   Will Virtual Console and WiiWare be able to coexist in the future? Or, will WiiWare become the mainstream and is Virtual Console considered as a temporary bridge service until the software download business becomes established?
A 20


  As for Virtual Console, there is a limit in offering new titles as we only have a limited number of past software titles produced for past systems. So, eventually, the day may come when we cannot offer any more Virtual Console software. Gradually, the ratio of WiiWare business may become bigger.

  On the other hand, as more and more Wii hardware are sold, and more customers connect to the Internet and decide to purchase software via download, even games from 25 years ago must feel fresh to these new customers, so these games have room for further sales. While WiiWare business will become proportionally bigger in the future, we are not expecting Virtual Console sales to suddenly fade away. I am of the opinion that Virtual Console will be cherished for a long time.

  As a matter of fact, the ordinary packaged software are sold in the launch week or immediately thereafter and quickly lose sales momentum, except for Nintendo’s Touch Generations series, I hear that the sales decrease is slower for Virtual Console software. I am expecting the same trend can be seen on WiiWare sales, but it is too premature to comment on this concretely. I am hopeful that, sometime in the future, when I can speak to you like this today, I will be able to discuss our analysis on our future prospect of the electronic software distribution business.

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