Shigeru Miyamoto (Senior Managing Director, General Manager of Entertainment Analysis and Development Division):

A big question from the beginning. Speaking as a developer, giving no comment is the typical answer. But let me try to tell you something. Nintendo has been making its best efforts to raise the Internet-connection ratio for years. In addition to our efforts, network connections have rapidly become widespread, like cell phones which are always connected to the network. The connection ratio for the Nintendo 3DS (as Mr. Iwata explained in his presentation today) has reached approximately 60%(*), and we feel that the network environment has improved significantly. We also put importance on safety and reliability of the network because many people use it. We have concentrated on developing packaged software, but there are some who like the excitement of being together with a lot of people online. Electronic mail and chat are typical examples. Although you might not know it well, "Flipnote" has become a hidden hit among our products. Millions of children who do not communicate on the Internet use this software. We are taking on various challenges including how to operate the system of note exchanges by children freely in a safe manner. In short, we trust the great potential of the network, but we are still in pursuit of originality through trial and error.

(*) In the actual Q&A session he mentioned the connection ratio for the Nintendo DS. Since his intention was that for the Nintendo 3DS, the statement here has been modified accordingly.

Miyamoto:

I am not the right person to talk about the payment system... (Looking at Mr. Iwata)

Satoru Iwata (President):

Please let me answer your question then. I mentioned the NFC (Near Field Communication) function for the Wii U (in my presentation today). In Japan FeliCa-based e-money is used the most, but the NFC standard compatible with FeliCa has been very popular. If we can provide a system in which consumers can use such e-money, they will far more easily be able to make payments than by entering credit card numbers or purchasing the Nintendo Prepaid Cards at stores. "SpotPass," in which consumers unconsciously get connected online, is enjoyable, but a system in which they unconsciously make payments online is unacceptable, we believe. Therefore, one answer to your question could be to build a solid system in which consumers will make payments at their will and with a minimal amount of effort.

Additionally, in connection with the flow from watching the "Nintendo Direct" presentation to trying the demo versions I mentioned, it was a new discovery for us that so many people watched the presentation via the Nintendo eShop. If we can construct a seamless flow in guiding consumers to watch the Nintendo Direct presentation on their Nintendo 3DS and then voluntarily try 3D trailers and demo versions (that were introduced in "Nintendo Direct"), this is a fairly powerful and efficient system. One of our reflections on why we could not bring our network business up to the level we had anticipated is that each step consumers had to take was not simple enough. It is said that with each extra step, the number of consumers drops by one-tenth. Our challenge is how to improve such steps one by one.

I understand that the former question was the idea to surprise people using the network. This is the last thing we can tell you until our product is actually available. It is so difficult to amaze consumers if we give prior notice way ahead of time, so we are hesitant to say anything. Thank you for your understanding.

By the way, "Swapnote" for the Nintendo 3DS is another attempt in addition to "Flipnote" for the Nintendo DSi. This is the software of exchanging handwritten notes, including photos and sound, with the friends who are registered on your Nintendo 3DS. Previously, if you took an interesting 3D photo with your Nintendo 3DS, it was not easy to share it with other people. But now people are actively using this software for that purpose. This is another key example of how we offer users more and more opportunities to communicate with each other. Furthermore, if the collaboration between the forum for communications and the place for new information on games starts to work well, we will be able to figure out a vital response to the concern you sometimes shared that Nintendo may be behind the social age. To the views that Nintendo is cautious, conservative, or even negative about business on a network, our answer is, in short, that we will make a bold attempt when the time is ripe. Unless the timing is right, we will lose the consumers who do not have an Internet connection. We have not gone so far yet because our developers have a belief that our products should be available to as many people as possible. However, now that the network connection ratio for the Nintendo 3DS is much higher than the past handheld systems and that a lot of people watched the Nintendo Direct presentation, we have a strong impression that the foundation for business on a network for us to take on various challenges on it has been steadily put into place today.

Iwata:

When I was appointed as the president of Nintendo about ten years ago, its sales were approximately 500 billion yen with the operating income of approximately 100 billion yen. I therefore understand the point you made that it is extraordinary that Nintendo will post an operating loss even with sales of no less than 660 billion yen. The result will mainly derive from the decision to mark down the price of the Nintendo 3DS and sell it below cost, sacrificing our profitability for this fiscal year, so that we can get it back on track to its originally-anticipated sales pace so as not to shrink our future business (of the Nintendo 3DS). In addition, I want you to know about some big changes in our business conditions.

This slide shows the sales in foreign currencies and foreign exchange rates against the Japanese yen for the past five fiscal years. Please pay attention to the difference in the foreign exchange rates between the time of the launch of the Wii and the present. Our overseas sales represent about 80% of the total sales. However, we cannot easily raise the prices of our video game systems even if the yen appreciates. If we manufactured commercial-use products without any alternatives in the world, we might have gone to the extreme to increase their prices to respond the stronger yen. But our products are not of that kind. 199 dollars remains the same value for the U.S. consumers both in the past and in the present, and how much our products are worth in yen is of no concern to these consumers. This is also true of the consumers in Europe. I hope you first understand the considerable impact of the yen’s appreciation on our profits. Also, the existence of new devices like smartphones might be considered another change in our business conditions. Having said that, I am not saying that we cannot help going into the red. Naturally, we have to find ways to gain profits even with such changes. It is clear that, however, in the next fiscal year, the sales of Nintendo 3DS hardware will not give us much profit even if we will be able to cease selling it below cost. It means that we need to make it with the software sales. There are two methods to gain profits from software: one is to sell as many units of a product as possible with fixed development and marketing costs; the other is to get as much money from a product as possible, or to increase the ARPU you mentioned.

Which has the priority depends on the types of games and users. However, if we put too much emphasis on increasing the ARPU, we cannot leverage our strengths. Our basic strategy is to increase the number of users, which leads to brisk sales of one product for a long time and will eventually create high profitability. In this fiscal year, we are in the transitional phase of platforms when a new platform has not penetrated well and even the software with the most potential for the platform can only sell as much as the number of hardware systems sold so far. In other words, however, such software could sell for a long time to come. For instance, we anticipate that “Super Mario 3D Land” and “Mario Kart 7” will bring in a substantial profit in the next fiscal year and the year after that. On the other hand, we will be able to do various things in the field of digital business. Up until now, once consumers who had bought a game got tired of it, they would never play it and it would never draw public attention again. Even if the game had the sales potential to other new consumers, they rarely actually bought it because the consumers who already had bought it would never talk about it again and the game would be considered an old one. Having said that, what if we could provide add-on content through the network? As I referred to before, for example, this is the idea of supplying new stages to Super Mario users who want to play the game more but have completed the game and lost interest in the existing stages. This will not only give us new profits but will lengthen the life of a product, in that it will never be out of fashion and can keep attracting public attention as long as many people play it. We should not aim to just increase the ARPU, but at the same time, to give our products a longer lifespan and a larger number of total sales. “Wii Fit Plus,” which we released as packaged software as the upgraded version of “Wii Fit,” could be another example. Under the current network environment, we might be able to provide such upgrades to consumers through the network as opposed to just providing the content in a disc form. We can recommend that “Wii Fit” users try new trainings and games, and continue to play the software with a fresh mind, which will give the software a longer life and bring us slightly more revenue.

After all, our basic policy is that we create products which appeal to a wide variety of consumers and sell for a long time. We should take advantage of add-on content for this purpose, which could give us a higher ARPU as a consequence. If we focus on the increase of the ARPU only, we could possibly narrow the range of our consumers and fail to succeed in the long run.