IR Information

Third Quarter Financial Results Briefing for Fiscal Year Ended March 2009
Q & A - Jan. 30, 2009
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Q 1   I thought that Nintendo operational profit might surpass that of Toyota in about three years, and the financial result you announced yesterday was very good because you already achieved the feat this year. You have just explained about the European and the U.S. markets. I would like to know about the current market situations and your perspective on such countries with large populations as South Korea, China, South-East Asian countries, India, and Russia.
A 1

Satoru Iwata (President):

  Naturally, the ultimate market size can be determined by the total population in the market and, in the mid-term, I think countries with large populations have significant potential.

  Around the start of last year, I was hopeful that the company could focus and allocate resources into such markets. However, as it became clear that the markets in Americas and Europe were rapidly expanding, we needed to allocate almost all the Wii hardware consoles we can manufacture to these existing markets. This is how we came to think that the timing of our deployment into the newly-emerging countries should be next fiscal year or thereafter.

  It appears that the drastic changes in the economic climate has been affecting the economies of the newly emerging countries more than others. Given this situation, I now think that we need to have a more long-term perspective in estimating how quickly we may be able to enter into these new markets.

  In case of South Korea, the market has come to the point where DS can sell more than 1 million units in two consecutive calendar years. On the other hand, as you all know, the yen recently appreciated against the Korean won significantly. Therefore, how we can maintain a profitable business in this market has become more challenging to us.

  Having said that, however, countries with large populations from a mid-term prospective have significant market potential for DS, Wii and any future products, so we would like to tackle them as our mid-term issue.

Q 2   You just said that overseas software makers are now taking conservative attitudes in making purchase orders to you. I would like you to explain a little more about the tendency of the third party publishers as the large scale restructuring by overseas software publishers may impact the software sales from now. Nintendo’s gaming population expansion strategy appears to have been accepted by third parties as well, so the impact to the software for Nintendo platforms must be relatively smaller than that for the other hardware manufacturers. Yet, I would like to know if there is a fear that the impact may grow further and affect your software sales in the future.
A 2


  Please understand that I have to refrain from naming individual software manufacturers in order to make that explanation, so that let me talk in generality. As you know, a number of major software manufacturers are reporting that they are experiencing a financially challenging time or that they will be scaling down their operations.

  On the other hand, just a few years ago, a year or two before we launched Wii, I doubt that anyone in the industry was able to correctly forecast the current sales situation of Wii. Of course, Nintendo was hopeful that we would make this new system the best selling hardware in the next generation. Even so, if you ask me if we were able to foresee today’s situation, I am not that optimistic so I have to admit that today’s situation is exceeding even our original expectations.

  To the third party software manufacturers, the surprise must be bigger. As you know, some are reportedly saying that they bet on the wrong horse or that they need to change course. I recognize that each one of the third parties is trying to develop software that can be appealing on DS and Wii systems which have significantly increased the installed bases, while narrowing the overall number of software to develop.

  There are things that show immediate results , and things that need some time to see the results. Overall, we recognize that our relationships with the software manufacturers are shaping up better than before. So, in the mid-term, we believe that more attractive titles will be launched by them for our platforms.

Q 3   Your downward forecast revision announcement of this time was largely due to external elements, and it is becoming increasingly obvious that your strategy, which is based upon gaming population expansion, was simply the right one. Overseas third parties who had significantly invested in software development for other high high-def machines have now ended up downsizing those efforts, which follows what Nintendo has been saying all along: that market development in that direction will be challenging.

  Even so, I think issues are emerging even for Nintendo. I imagine that Nintendo had fairly high expectations for “Wii Music” but actual domestic sales was a little over 400,000 units, so it is not performing as anticipated in Japan. When I got to try “Wii Music” hands-on at your conference, I did not immediately feel the “fun” that I felt with “Wii Fit” and “Wii Sports.” I think that today’s mainstream games are something that offers a feeling of fun as soon as you pick it up, so I would like to hear how you are evaluating the result of “Wii Music.”

  Also, the home console market is shrinking only in Japan. As the first party software manufacturer, Nintendo has the responsibility to grow the market, and I would like to know of your strategy.
A 3


  I agree that Wii Music, as of now, has not achieved its true potential. On the other hand, I feel that “Wii Music” is a software that elicits largely two extremely different reaction from consumers. There are people who highly appreciate it and those who do not appreciate it at all. Usually for other software, if there is a fair amount of people who evaluate the software positively, the appreciation level of that software becomes slightly skewed toward a positive note, but on the other hand, if a number of people evaluate it poorly, the overall reaction to the software is bad. For “Wii Music,” the impression seems to completely depend on each individual player. It is unfortunate that “Wii Music” was not immediately appealing enough to some consumers, but it simply might have not been the right game for them.

  However, I would like you to recall the case of “Brain Training” software. Nintendo launched the first “Brain Training” software in May in Japan, and it was only around the time Nintendo launched “More Brain Training” at the end of the year, when the original “Brain Training” started to show explosive sales.

  Currently, I think that the appeal of “Wii Music” has not yet been fully conveyed and accepted by those who could be interested. We do not like to think that we failed with Wii Music nor that we should abandon sales support. If we had approached “Brain Training” with that mentality, the software would have not achieved the current sales situation. The first week unit sales of the original “Brain Training” in Japan was just around 45,000. We should not have the attitude that a game does not have sales potential because the first week or first month sales were small.

  On the other hand, the comment that it is difficult for a software to become popular unless it is easy to be understood is right on target. Something good can spread when a cycle is born where people who have hands-on experience can immediately understand its appeal, easily explain the positive experience they had to those around them, who then spread that information to the others. Nintendo was blessed with certain products that created this positive cycle, which has made Nintendo what it is today. In that sense, I feel like we need to reevaluate why the software (“Wii Music”) has not been able to clear that hurdle.

  Another thing I would like to explain is the home console market. Perhaps, the Japanese market is the least robust market in the world today with regard to home console systems. In the U.S., the home console market is very robust. If the U.S. sold two or three times as much as Japan, it would be tolerable. Yet, I feel that something is wrong when the U.S. is selling ten times as much as Japan on a weekly basis. So, I do not believe Nintendo should be content with the current situation in the Japanese market and believe that we have other methods to confront this.

  One thing I can tell you about this is that, compared to the past when home consoles were selling better in Japan, all the Japanese are getting busier for a number of reasons, so we are seeing an overall lifestyle shift where many forms of entertainment are enjoyed while on the go or during spare time. In these times, we need to provide the Japanese market with entertainment that only a home console can realize.

  At the end of last year, Nintendo launched two Wii titles, “Animal Crossing” and “Wii Music,” in hopes that the Japanese consumers would appreciate them and revitalize the Wii market in Japan. Our efforts have not lived up to our expectation. While Wii had very strong momentum in the overseas markets, the Wii market in Japan (during the year-end sales season) showed a slow start, did not show sharp trajectory in sales, and ended up moving back to the sales level of non-sales-season level quickly.

  Nintendo has always tried many unprecedented things. As we offer new proposals one after another, sometimes they are accepted just as we had expected, sometimes it falls below our expectations, and sometimes it explodes far beyond our expectations. After all, in the video game market, I believe that a company which successfully creates just one product with astonishing sales.

  I shudder at the thought of what if Nintendo DS had not had “Brain Training” or “Nintendogs,” and if Wii had not had “Wii Sports” and “Wii Fit.” For each of these products, we create them hoping for a winner, but it is impossible to hit a bulls eye every time.

  So, what happened at the end of last year in Japan was simply that it did not go as we had planned. To generate strong sales, we need to effectively communicate Nintendo’s messages to our consumers. Of course, the level of sales of “Wii Music” and “Animal Crossing” are nowhere near that of failing software. However, because there is a software that clicks with everyone, you get one consumer after another who want to play with it by purchasing the hardware. As these people invite those around them to have the same positive experience, a product spreads. We have observed what they call DS phenomenon and Wii phenomenon precisely because such a cycle was in place, and we need to make an effort to create yet another one.

  This is not a structural issue which can happen on home console alone. Rather, what matters here is whether or not we can periodically deliver such a product and/or service. Of course, we will offer new proposals and try to live up to people’s expectations this year again.

Q 4   I think Nintendo has been strengthening the development of User Generated Contents that utilizes the Internet, as witnessed in your collaboration with Hatena Company (on “Flipbook,” a DSiWare software). Also, when I looked at the Japanese year-end sales, Girls Mode for DS sold very well. I understand that this software played a significant role in revitalizing the DS market in Japan. I would like to know how you evaluate this software and the possibility of launching such titles in the overseas markets in the future.
A 4


  First of all, the reason why we feel the potential of the User Generate Content (UGC) through the Internet is because the fun that is generated by UGC can be appreciated by a higher percentage of our consumers as a fresh experience.

  In the dawn of video game history, consumers used to react positively to the ideas that game creators incorporated into the software, but they gradually got accustomed to the existing surprises. Then, an increasing number of people started to come to expect the surprises in the software and it became increasingly difficult to offer them fresh surprises. What’s worse, once they experienced almost all the game elements, they felt that there was nothing more for them to experience. Once they see the game creators’ ideas, they give up playing with the video games or sell the hardware to the second-hand shop.

  We hope that the consumers don’t reach a point where they would feel that they’ve experienced all that is there to enjoy. We would like our consumers to enjoy a software as long as possible. If one game can be played for a long time, it means that the consumers have a high level of satisfaction. More importantly, if one product can continuously provide consumers with fresh surprises, it can lay out a good foundation for our next steps.

  When we thought about the many possibilities of games in this way, we started to think beyond the configuration where game creators develop all the experiences. This was supposed to be the appeal of network gaming. However, before UGC surfaced, network gaming had usually meant that a number of people were gathered in one place in order to compete with each other. With competitive games while some people become very excited, we saw that the platform became too intense for novice players to join as they felt the widening gap in the skill levels between an experienced and a new player.

  Because Nintendo has been striving to expand the gaming population, the more we went towards that direction in network gaming, we felt that the hurdle became higher for those who were not accustomed to playing video games to enter into the market, and that this was not the solution to the problem While we can solve the issue of having others develop game experiences, we could not solve the other issue of having as many people as possible enjoy video games.

  This is where UGC comes in. There are some people, although they may be a minority, who love to create something creative, share that with others, and enjoy seeing other people being entertained or responding positively to their creation. At the same time, great majority of people are rather passive and love to applaud the creative efforts by others and enjoy playing with them. In other words, UGC has the unique characteristic that, regardless of their game skills, people on both sides can enjoy.

  An example from Nintendo is a DS game called “Band Brothers”, which has a music composition mode. Players can compose music and submit the music to our server, which can then be downloaded and enjoyed by others. Roughly 10 times or even 30 times more people are enjoying the downloaded music as much as the number of people who are submitting, and both sides are happy. This is exactly what we would like to realize with the DSiWare software called “Flip Book.”

  The reason why we have seen the results that we’ve had with the “Girls Mode” software you just mentioned must partially be because we were just fortunate to some extent, and also because the consumers were there where we thought they might be, responded to it, and received our message. Plus, a number of fans were able to enjoy a very unique and unprecedented experience for them where they are able to operate their own shops on the Internet, have people visit their shops, and purchase products there. Such an extra note of surprise appears to have acted as a trigger to let the fans enjoy the whole experience.

  By the way, when we announce that a new “Mario” or “Pokemon” software is developed, marketers of Nintendo products all over the world naturally look forward to the launches even when they do not know the contents of the game. On the other hand, when we make a presentation to the same people about software which has had no previous track record and no name recognition, their reactions are not positive for most cases. I am not trying to offend our people in overseas marketing companies at all, and actually, their attitude is quite natural. If one is presented with two products, and the successful sales of one of them is guaranteed, and if they have to anticipate allocating a lot of resources to sell another, it is only natural that people have higher expectations for the one guaranteed to sell.

  As examples, “Nintendogs” and “Brain Training” were initially launched overseas with low expectations from the local marketing people. Their natural reaction at first was to question whether a software like this would really sell in their local market. Then, some of them started to believe in the new market potential of the product and, as a result of their hard work, we have the situations like today. We had similar histories with “Rhythm Heaven” and “Girls Mode.” While we were developing these software and before we were able to show some results in Japan, I do not like to admit this but they received relatively cool reactions. However, once we were able to show some result in Japan, they started to understand that there must be something unique about the software that will make it sell. Then, they start the serious analysis, and the number of people who start to show positive reaction increases locally. Those who show positive reaction then explain to those around them the reason why the software is unique. Before you know it, there are many supporters of our products overseas.

  Once again, it is very natural that these unprecedented things are hard to comprehend. I have never thought that there is something wrong in the ability of our overseas marketers to review our products. Rather, we are establishing a system where we produce some tangible results in Japan first and thereby encourage overseas people to get excited in order to sell them locally, and I see no issue with this system. Overseas subsidiaries are looking forward to the launch of “Girls Mode” and “Rhythm Heaven” as strategically important products in the next fiscal year.

Q 5   I’d like to ask about the financial forecast of the current fiscal year and your prospect on the next fiscal years and afterward. As for this fiscal year, you said that Wii and DS hardware are increasing its sales even after the turn of the year. However, when I subtract the shipment numbers of the past 9-months from your annual shipment forecasts, both DS and Wii show slowing ratio of growth. You are also expecting approximately a 20% decrease in software for both platforms in comparison with the corresponding quarter a year ago. Tell me about the reason of this discrepancy, and how have the software sales been going since the start of this new calendar year?

  In addition, you mentioned that this year will not be the peak year of the sales. While the official announcement for the forecast must wait, what is you current feeling about how many hardware you would like to sell in the next fiscal year?
A 5


  First, about your question on how we see the growth of Wii and DS, the reason why our January sales are better in comparison to that of last year’s is because, for one thing, the hardware stocks were depleted during a rather early part of December a year ago and stock shortage continued for a fairly long time into the following January. Due to such a background, even when our January 2009 sales are twice as much that of a year ago, we cannot say that twice the amount of February and March 2008 sales can be made in the next two months.

  More realistically, in order to come up with the forecasts for the unit shipment numbers, we have to think in terms of our past sales each week by taking into considerations the seasonality in the past, when Nintendo was able to achieve a fairly big number of yearly shipments, and also by considering the current Japanese market situation. As a result, we announced the forecasts as rather realistic figures.

  There would be no end if we started to explain about the situation of each software. However, as long as Nintendo’s first party titles are concerned, a number of different types of software are selling constantly in the U.S. One thing I would like to note, however, is that the software unit sales numbers Nintendo is disclosing are the number of shipments Nintendo has made to the companies outside Nintendo. In case of Nintendo’s first party titles, Nintendo ships the software to the distributors and retailers who then sell the products to the consumers.

  In case of third parties software, Nintendo receives orders from them of discs and ROM cards and, when Nintendo delivers them to the third parties, Nintendo counts them as our own sales. The software, however, needs to be shipped to the third parties’ distributors before the consumers can purchase the software from the retailers.

  Accordingly, if the unit shipment numbers as of the end of December we announced had actually been purchased by the end-consumers, the forecast we made could appear to be rather conservative. In reality, though, the distributors and even software publishers might have inventories. Especially when it comes to these numbers relating to the third parties software, Nintendo does not know for certain.

  For sometime now, I have repeatedly said that the game business is comparatively less susceptible to the changes in the economy but the gap between what sells and what doesn’t sell become obvious (in an economic downturn.) The products that are listed at the top of a consumers’ wish list can sell at the same level in a good economic time as during a bad economy. But those ranked #5 or #10 on the list become the receiving end of the impact of the changing economies. As a result, I am pretty certain that there must be software that our third parties have prepared to sell, which did not live up to their original expectations. The rather conservative impression Nintendo received during our preliminary meetings with software publishers must have reflected such background (as software publishers are making a purchase order plan based upon the intentions of their distributors and retailers as well as by taking into considerations the situations surrounding the distributors.)

  When we analyze the Japanese market, for example, and look at the top 100 best selling software in 2008, last year’s sales of the top 5 software were even more than that of a year ago, but other software around the middle of the list showed significant sales decreases on a year-on-year basis, which attests to our point that the gap between what sells and what doesn’t is widening. So, when the distributors hold significant inventories, that can affect many aspects in this industry.

  We announced the new financial forecast as the result of reviewing many aspects comprehensively, including what I just mentioned. So, the current situation includes an aspect that it is experiencing a momentary repercussion of the large shipments the software publishers made at the end of 2008 by looking forward to large sales volume. I do not think that the industry has entered into a structural spiral where software cannot sell. In fact, in the U.S., (even in this bad economy,) they realized approximately 20% growth over 2007. So, I believe there is nothing for us to be pessimistic about.

  Next, about the next fiscal year, now that the situation surrounding us is rapidly changing, I do not want to make any irresponsible forecast today. So, I do not intend to offer any concrete figures, but one thing I can say is, if Nintendo does not act, we will be in a more difficult situation regarding our sales in the next fiscal year because we are expecting a high appreciation of yen from the start. In case of the current fiscal year, yen was comparatively weak at the start of the term and suddenly started to significantly appreciate during the term, which gradually increased the average yen appreciation for the fiscal year. If the yen appreciates at the current level for the next fiscal year, although we wish it will not be that way, it will have the effect of decreasing our sales figure (when converted into Japanese yen for financial reporting purpose.)

  On the other hand, the number of hardware we can produce this year is larger from the start when compared with last year’s production level. Some analysts have reportedly mentioned that “Nintendo could have sold 3 or even 4 million units of Wii hardware in December in the U.S. if it had enough inventories.” But we could not make that happen because we were not able to ship that much to the U.S.

  It is too premature to tell how much momentum Wii will have at the end of this calendar year. My job is to consider how we can prevent sales from sliding even with today’s appreciation of the yen and even consider how we can increase sales. I will not provide you with any concrete figures today because this is not our financial forecast announcement conference for the next fiscal year. I am, however, enthused to come up with plans in order to realize our ideal sales in the next fiscal year and, to do so, to identify and start executing the necessary plans from the start of this year.

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