IR Information

Third Quarter Financial Results Briefing
for Fiscal Year Ending March 2015
Q & A

Q 3

Please tell me your thoughts on the potential of the existing businesses. You have explained that you would regain Nintendo-like profits in the fiscal year ending March 2017. I would like to know the expected balance between the existing businesses, Nintendo 3DS and Wii U, and new endeavors, such as more active utilization of character IP and QOL. Based on the latest financial results, I presume that it would be difficult to turn a stable and significant profit from the existing businesses because Nintendo 3DS has entered the latter half of its product lifecycle and Wii U is expensive to produce. Would you give me some clues about your outlook for the fiscal year ending March 2017?

A 3


First of all, we have never thought that the future of dedicated video game platforms would be bleak so we should migrate to a new business area. On the contrary, we continue to consider what more and better we can do to attract consumers to our dedicated video game platforms or to have them understand the value of our platforms.

Following the generally accepted theory on platform lifecycles, it is natural for you to presume that the sales of Nintendo 3DS will drop X percent each year or we cannot expect a huge increase in Wii U sales. On another front, we have witnessed one single software title completely change the entire picture of our business many times. I believe one of the most impressive stories was the time when people thought the Game Boy platform was virtually over. However, a software title called "Pokémon" turned things around for the platform and ended up creating the biggest annual sales for Game Boy in the latter half of the platform’s eventual lifecycle. Therefore, we do not believe that the situation so far means that there will not be a bright future. However, we should learn from our experiences of not being able to perfectly respond to certain social changes such as changes in the way consumers collect and receive information.

We recognize that we need to make changes in various areas, and consider how we can take advantage of smart devices and more actively use our character IP. Please do not take it the wrong way. It does not mean that we are going to proactively utilize smart devices and character IP because we are not making enough profits from our dedicated video game platforms. We are willing to do so for that will create a synergy effect to expand our dedicated video game platform business. Of course, we will probably make profits from our character IP business, and amiibo is already having a positive impact in its initial phase of business. Still, it is obvious that we cannot easily achieve the same sales and profit level only with amiibo as the peak times for our dedicated video game platform business. Therefore, we should consider how we can boost our core business, that is the dedicated video game platform and software business. I showed you the initial overseas sales results for New Nintendo 3DS in my presentation today. More than a few of you might have assumed that, based upon the pre-launch situation, the Nintendo 3DS business in the overseas markets could not be changed even with the launch of New Nintendo 3DS. Actually, the initial shipment units sold out quickly in stores around the world. In the presentation, I showed you the preliminary sales figures of New Nintendo 3DS for the first two days in Europe and the first three days in the U.S. More precisely, most of them were sold on the first day, and the sales did not increase much on the second and third day due to a lack of stock. In the U.S., because of an ongoing labor dispute on the west coast, the ports have been crowded and the discharge of cargo has been delayed over the past six months. As a result, not all the quantity we intended to deliver before launch had been imported and the sales figures of New Nintendo 3DS, and certain amiibo, were affected slightly although our software business has not suffered much because we have the option of exporting such lightweight products as software by air. I imagine that consumer electronics companies must have had a hard time with it. Taking this into account, the strong start for New Nintendo 3DS implies it has the potential to create a scenario that deviates from the assumption that the Nintendo 3DS business is going to shrink because it has entered the latter half of its lifecycle.

It is natural that we would like to earn an incremental profit from each new business we start. As for the QOL business, we expect it to contribute to the company’s profits in some way in the fiscal year ending March 2017. However, you cannot expect a company that has been making all of its revenue from the video game business to suddenly turn out half of its revenue through the QOL business in just one year. This kind of change requires several years. Our goal of the fiscal year ending March 2017 will be to make the video game business robust. If our software were not receiving high evaluations from both professional reviewers and consumers, our ability to create marketable products and services itself must be questioned. However, since this is not the case, and our products are receiving high scores but are still not selling as expected, there is much to be done in the way we incorporate aspects into our products that sell themselves, and in the way we communicate with consumers to promote and sell our products. And that is the area we are going to focus on. From this perspective, I give first priority to the improvement of our core business. In addition, I envision added profits from our new businesses and then eventually we will be able to achieve Nintendo-like profits. That is all I can tell you today.

Q 4

Mr. Iwata, you continually stated that Gaming Population Expansion was Nintendo’s corporate strategy. However, it seems as though you have not mentioned it recently. If you have set a new strategic goal for the company, I would like you to tell us about it. I understand that when you started to discuss Gaming Population Expansion about 10 years ago, it was to ensure that people didn’t stop playing video games. What challenges is the company currently facing?

A 4


I aimed to talk about Gaming Population Expansion persistently, both internally at Nintendo and externally, until people thoroughly understood it. I would show the slides with the Gaming Population Expansion message on them whenever I made a presentation. I verbally used this term so often that even I myself was concerned whether the audience would be fed up with it. I did so because, as the leader of an organization, I believe that my message cannot soak deeply into people’s minds if I do not repeatedly convey the same message to the point that the audience are fed up with it. At some point in the past, I decided that I would dare to repeat the same message without worrying about people saying, "he’s been saying the same thing again and again" or "he must have forgotten that he has said that before." Only after I had repeatedly talked about Gaming Population Expansion, people both inside and outside the company finally started to be aware of it even when I did not talk about it. On the other hand, for the last few years I have been wondering whether people inside the company have a clear image as to exactly how we could expand the gaming population. We could not show a significant difference to our consumers as long as we were repeating similar things that we had done with Nintendo DS and Wii. We released "Wii Sports Club" and "Wii Fit U" for the Wii U system, but they did not have the same strong impact that the original Wii versions had. Those who have tried these Wii U games know that we have actually realized a variety of new things, but at a glance, they look just similar to their predecessors. I realized that we would have to redefine our definition of video games in order to cope with this situation. When we were aiming to expand the gaming population, we were, in fact, also announcing that we would expand the definition of video games, and we actually made video games out of nurturing dogs, training your brain, playing sports by moving a remote control, and weighing yourself and exercising every day. I know I do not need to explain to you the games to which I am referring. So, even though we had been expanding the definition of video games, I recognized that we would need to expand this definition further.

Specifically, the real issue seemed to be that people inside the company appeared to be obsessed with the belief that Nintendo is a company that makes video games and should make nothing else. This is one of the reasons we revised our definition of entertainment and why I announced that Nintendo’s goal for the next 10 years is to "improve people’s QOL in enjoyable ways." Actually, I made this announcement as early as January 2014, when we held our Corporate Management Policy Briefing. Shortly before that briefing last year, however, speculation spread that Nintendo might announce it would give up on its dedicated video game business and release its game software on smartphones. Perhaps, since I made the announcement to redefine entertainment at such timing, my message did not leave a strong impression on people outside the company. However, in the past year, I have been repeatedly saying this message internally at Nintendo. As a result, such a misbelief that Nintendo is solely a video game company that can make games and nothing else has waned a bit inside the company. They have started to think more broadly about what they can do at the company. Nintendo celebrated its 125th anniversary last year. We were originally a traditional Japanese Hanafuda playing card company. We then started making western-style playing cards too. Many of us, me included, must have played Nintendo’s playing cards and Hanafuda in our childhood. Nintendo later became a toy company. It then started to use electric and electronic technologies for its toys and, by adapting the newly emerging technologies, it created Game & Watch and then the company became associated with the video game technologies too. Since the company created and launched Family Computer System or Famicom (sold as Nintendo Entertainment System or NES overseas), this video game hardware platform changed Nintendo dramatically. We launched Famicom in Japan in 1983, so it has been only 32 years since this change. By the way, September 13 of this year will mark the 30th anniversary of "Super Mario Bros." During the past 30 years, Mario has been recognized by many people all over the world as the character representative of the world of video games and the "Super Mario Bros." franchise as the representative game software. We believe that we should be proud of this fact. On the other hand, our history attests that Nintendo is not a company that has only made video games. Making video games is the path the company chose because it was the most effective business and because it was where the company was able to capitalize on its strengths. However, before we knew it, people who were newly hired by the company, as well as the people who had been working many years at the company, started to think that Nintendo is a company which should only make video games. The fact of the matter is, however, video games have a variety of different strengths. When you play a video game, we should try to create a situation that you can do so without reading the instruction manual. I am sorry to say this for the people who are working very hard to make instruction manuals for our games, but my impression is that only around 5 percent of consumers bother to read the instruction manual when they start playing a video game. To put this in another way, when we create and release a game, if 95 percent or more of the purchasers cannot play it without reading the instruction manual, our consumers would say it were no good and would not play with it.

For any video games, it is also very important to encourage the players to continue something. I think all the game players can agree that they voluntarily continue their mission because of the rewards they can receive in the form of output as a result of their input. In that regard, Nintendo has been going through a form of severe training to get into shape. So, how can we take advantage of such strengths? How can we leverage our ability to create something brand new by creating both hardware and software, which we are also good at? What will be the new course that we can take by using our strengths? By repeatedly asking these questions, we started to review the possibilities and concluded that we should first make a proposal related to "health" and the theme of "sleep" and "fatigue" because we would be able to capitalize on our strengths. Let me assure you that Nintendo is not trying to distance itself from video games. We have never ever lost our passion for video games and will continue to make them. On the other hand, if people inside the company think that Nintendo is a company which cannot make anything other than video games, and believe that video game controllers remain a certain way because that is the way they have been for 30 years, video games should be created in a certain way or video games must start with a tutorial, end in a particular way and have a lot of hard-at-work elements in between, a high mental wall would stand in front of us when we tried to create a brand new video game genre with which many people would be amazed or when we try to create an unprecedented user interface that pleasantly surprises people. I have been constantly asking myself whether being bound by such ideas really does us any good when we are actually required to think out of the box and have a broader perspective, so we have redefined our definition of entertainment as "things which improve people’s QOL in enjoyable ways" and encouraged our developers to take on this challenge. As a result, just as I expected, people started to make various proposals. I cannot elaborate on anything new today as these proposals are yet to take on a concrete shape, but people inside the company have started to make proposals by asking me whether they are in line with the company’s vision. This is something Nintendo has to keep on doing for the long run. Our strategy for the next 10 years is to change the definition of entertainment and expand the area that Nintendo can do business in, and with this strategy, I believe we can capitalize on our strengths.

For your information, the primary reason why we chose "health" as our first QOL project is due to the fact that a large number of people are interested in their health. Also, while people in general understand what we should do to improve our health, it is hard for many of us to continue these good practices. As the Japanese expression goes, "Most people tend to quit after three days." Many of us are concerned with not being able to continue something even though we recognize its importance for our health. There are several reasons for this such as something cannot be continued when it is hard to do in the first place. Another is that good things cannot be continued if you do not receive any feedback or rewards. Yet other things cannot be continued because we cannot find the motivation or the connection that will encourage us to continue it to the next level. There are many different reasons, but for most of them, video games can provide a solution. Inside Nintendo, people have the know-how that could contribute to society. This know-how and mastery would, however, mean nothing as long as they have the mindset that it is not part of their job. On the other hand, if they recognize that it is something they could do, Nintendo’s output could dramatically change. At the same time, if an external company has new and interesting ideas but do not know how to use them, Nintendo could be the company for them to approach.

This is just an example, but the person who invented the accelerometer must not have imagined that it would be included in a remote and used to enjoy tennis. The inventor must have conceived a completely different objective. But Nintendo invented a completely different use for the accelerometer and, as a result, because there must be 200 million or so Wii Remotes in the world now, and with the economic and mass-production effect, we must have contributed to the fact that the accelerometer is included in a variety of different devices in the world today. As I said, it is just an example, but as this example shows, we cannot think about what the company can do too narrowly. In the next 10 years, the company will continue its efforts to expand the gaming population as our natural mission but, at the same time, for us to take the next step forward, it is of the utmost importance to us that we must not narrowly think about what we should do in order to expand the gaming population. I really wanted to get this message across at the Corporate Management Policy Briefing we held at the end of January 2014. Probably, partly because I failed to adequately explain at that time, however, the questioner must have asked about our current basic strategy today.


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