IR Information

Financial Results Briefing for the 69th Fiscal Term Ended March 2009
Q & A
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Q 11   It is important for a manager to see operations in perspective. About the results of the survey you showed (during the presentation today), those who are most willing to participate in this type of surveys must be those who are actually using (the video games), and there must be other groups of people who have purchased video games but have gradually used it less and less. While, on one hand, you have been very successful in appealing to a wide age demographics, you also have software that deal with health or exercises that can easily go in and out of style and accompanied by risks. Have you ever surveyed the group of people who have purchased video games but no longer play and do not want to participate in such a survey? What does the changing age demographic mean at all? Is it meaningless to survey those who quit using video games as they will not start using them again? Please advise me about these.
  In relation to that, we have so far seen a certain platform for several years until the transitions to a new, revolutionary platform happens. Now that you have captured a wider population, do you think the current platforms can last a bit longer? Will we at least see the current platforms in the next two or three years on the market? Or, do you think that people in the higher age group will appreciate the next revolutionary platform and that you can transition them to the new ones soon?
A 11


  Before publicly disclosing our internal surveys in this fashion today, I myself have considered many things.and, as a matter of fact, have thought that some may question its credibility and ask us whether the company was manipulating the result to our favor.

  First, I myself have been involved and concerned about the accuracy of the survey results with extreme attention. To tell you the truth, our U.S. subsidiary had conducted a different survey once, prior to the ones I showed you today, but it did not provide the accuracy that I was looking for. Let me tell you how we are checking the account. We are asking about 3000 people in Japan and 4500 to 5000 people overseas to cooperate. Whether they really represent the entire citizens in the country or not matters most in order for us to make management judgments. If they were biased, the results of the sampling survey can never show a meaningful gaming population transitions at all.

  Here is an effective way to check the accuracy: Because we can learn (from survey results) many things including who owns which hardware or uses at home, we compare how the survey result measure up against the installed base of the hardware with the sell-thru data of that hardware. If the balance is within a certain range, we can tell that those who were sampled represent the entire population. If the accuracy is not within the predetermined range, we can tell that we have chosen the wrong people for the purpose of the survey.

  We have been paying special attention to this point. Accordingly, the surveys have not been biased as you might be concerned to those who are Nintendo's loyal customers or who appreciate games (and not the ones who do not play anymore). We have been checking the accountability of the survey with a variety of different ways and now have become able to come up with survey results with a certain level of accuracy. What I have shared today are the results of the surveys only after we thought that we were starting to come up with accurate ones. So, as the premise, let me confirm that we are confident about these survey results.

  As a matter of course, there is no guarantee that anybody who has purchased a video game hardware will continue playing with it. This is not anything new, nor did it start with Wii or Nintendo DS. As you might recall, when NES, Super NES or Sony's Playstation was leading the market, people brought out their game systems from the closet in order to play with a Dragon Quest software after its launch, just to put away the system after playing the game through to the end.

  Of course, whether or not a game hardware is actively used is of great concern to us so we investigate it. You may have some vague assumptions that those who started playing video games with Brain Training or Wii Fit must have stopped playing with any video games as soon as they got tired of these initial software and that those who have been long gaming fans must continuously be playing one game after another. Well, the actual situation is not that simple.

  We are, in fact, using several other data in our variety of analysis, including the data obtained through our Club Nintendo, and we have come to understand that there has never been a situation where people who started playing video games with any particular game tend to quit playing soon. Regardless of the first software, those who continuously purchase additional software maintain their active game plays, and those who opt not to purchase software repeatedly will stop playing. Likewise, we have not been able to identify any particular software, of which its purchase discourages the player to play frequently or becomes the primary cause for the purchaser to stop playing. In other words, when people stop playing with video games, they do so without any apparent reason.

  Nintendo has been doing a number of researches about what degree and frequency our customers stop playing video games and how we can rebuild the market by offering new proposals with what intervals (in order to once again encourage those who quit to resume their game plays or prevent those who are going to drift away from doing so). We have yet to come up with any concrete answers yet. At least, it appears to be not as simple as you said that software dealing with health or brain training tend to be a short time fad with a big risk of going in and out of style easily. Video games are, or any entertainment commodities are, supposed to go in and out of styles easily so we must periodically make new offers. If we fail to offer new proposals, a good market condition today can instantaneously turn into a very bad one, which is characteristic of this industry.


  In the past, there were so-called platform cycles for the video game hardware. It was said that 4 or 5 years for a portable hardware and 5 or 6 years for a home console hardware were the platform cycles, within which new hardware are sold and gone.

  This graph shows the sales transitions of Game Boy Advance and Nintendo DS each year from their launches. The right end of Nintendo DS is our forecast, so it is not realized yet, but do you think if these two hardware are showing identical cycles? I think they are completely different. Similarly, the software for these platforms shows different sales trends. When the customer base has largely expanded and the expansion is happening at a different trajectory, the past platform cycle should not be automatically applied to the current platform.

  Of course, we have no intention of disbanding our hardware teams since we do not think that Nintendo DS and Wii will last forever. Our internal hardware teams are always researching and working on new hardware so that we can launch them whenever we find an very interesting idea that can make people all over the world to feel like purchasing our new hardware just to play with the software, or when Nintendo or third parties developers come to the conclusion that, after all these different endeavors, there are no more ideas nor tricks with Nintendo DS and Wii to make software to surprise people in meaningful ways.

  You may not be able to believe this, but even when Nintendo has completed a hardware, it does not mean that we will surely launch it. From the initial concept building phase, it normally takes two to three years in order to develop a hardware. So, as soon as a new hardware is completed and introduced to the market, a team is established within the company which starts reviewing what the next hardware will be. Following a completion of a new hardware development, if the company determines that it will be better to continue with the sales of the existing hardware on the market after reviewing the circumstance comprehensively, it can no longer be used as it is in the future because that new hardware was optimized to be launched at that time. Some of the ideas may be used again in a new hardware. However, at the very least, we have had certain custom chips completed that ended up being unused, and it can happen again in the future.

  So, Nintendo has always been prepared for the launch of new hardware. However, that hardware is not needed until the time our software developers see the end in making new software with the existing hardware, or unless we have no more new market to explore and all the potential consumers have purchased our hardware. The ordinary technology-driven companies would write the technology road map to anticipate what kind of technology will emerge in the future in order to determine a new hardware launch timing based mainly upon the convenience of hardware developers. In Nintendo's case, however, the more decisive factor is when the software developers will start demanding for new hardware as they cannot create any more software with surprise factors with the existing one. Nintendo has always been making the hardware in order to prepare for that day to come.

  Accordingly, we have not been working with such a mindset of "what to do in the next few years." However, when we observe today's situation, I have the impression that the cycle for this time appears to be a bit longer than in the past. I also have the impression that an increasing number of those who used to believe in the past platform cycles are starting to say that the shift to the newer generations may take place a bit later than previously believed.

Q 12   I have been thinking about two concerns for the company: One is about the expansion of used game business overseas. I heard somewhere that they now have about the 30% of the market share in Japan and also that the secondhand market is rapidly expanding, especially in the U.S. We would like to know your understanding on this issue and countermeasures, if any.
  Another one is concerning the development. I may sound a bit too severe, but I do not see constant launches of major titles. Isn't it true that you are running out of ideas? Maybe it is due to the high hurdle that has been set. I mean, for your own titles to be called killer applications, unlike other ordinary companies, the unit sales must surpass 10 million today.
  You have a legendary leading creator called Mr. Miyamoto within the company, but I am also concerned that young talents have not been fostered to follow or exceed him. I am even starting to wonder if the company is at its early stage of big-company disease. Please advise me of your understanding and countermeasures.
A 12


  First, we tend to agree with your understanding that the secondhand market is expanding abroad. I have heard a strong sense of concern from management of overseas software publisher over the situation that the number of major retailers who are beginning to place more importance on the used markets is increasing and that Amazon recently started to seriously deal with secondhand products. One of the reasons why more overseas software publishers than in Japan are having greater expectations over download sales must be because of the fear that today's issues surrounding the used business can grow to be a major problem in the future.

  If it were illegal acts like piracies, we could criticize them. But, however hard we may express our concern about the secondhand market, as long as they are not illegal, it does not do us any good. With video games, because people do not see much deterioration in the quality when they purchase as secondhand, it may give publishers a hard time if the used product market grows.

  On the other hand, this is one of the changes in the social circumstance, and it is our job as publishers to think of how to cope with the changes. When you ask me how we will cope with this issue specifically, our answer is that Nintendo must continuously craft ideas so that our consumers will feel like owning the purchased products or think about how to motivate the customers to purchase new products instead of used ones.

  You also pointed out that we may be running out of new ideas in developing our products. I think Nintendo must be the only company in the world that, immediately after announcing record sales and profits in all accounts, is criticized for a potential lack of new ideas. I think this is because the company has been continuously making new proposals one after another and has raised the bar so high. We understand that we are always challenging ourselves with higher hurdles in order to give more surprises to people than ever. So, regarding your concern of the "big company disease", I should say that we are continuously raising the bar so that we don't even have the time to get this disease.

  People's expectation for us is also definitely rising. I have to feel that the world has changed. Not a few years ago, I thought that the job of corporate spokespeople and marketers was to raise the expectations of people and of the public toward the company and its future. Recently, however, I am feeling with increasing frequency that it cannot be applied to Nintendo. Today, if I should make such comments like "the next product we will launch will be great," that other CEOs are often making, people would have extraordinarily high expectations toward it and will end up feeling that it was not up to their expectations regardless of whatever product we will have launched. Of course, we cannot afford to lower the customers' expectations of us too much, but we have to communicate with everyone so that people's expectations will not be too big. We are currently in such a phase.

  Also, the speed at which something new is regarded obsolete is becoming incredibly faster. Should we advertise and create a lot of buzz from many months before launch, the customers may feel as if they have gotten tired of the product even before the product launches. There is a risk today that they may feel that they have already experienced it enough and are done with it prior to launch.

  In today's circumstance where we need to refrain from making a big announcement or sharing information much in advance of the actual launch in the marketplace, it may appear that Nintendo is not making as many new proposals as before and that the company might be running out of new ideas. Objectively, we do not believe that the pace at which the company has been making new proposals has greatly slowed down. Also, whether our new proposals become a great hit or not sometimes depends on luck. Furthermore, just as you pointed out, Nintendo software today has a higher unit sales criterion to be called a killer application, so it is becoming increasingly challenging to clear that bar.

  As to your question of whether the successor of Shigeru Miyamoto has been groomed or not, even though there has been a number of Nintendo products which accompany his name or that has been sold by identifying Mr. Miyamoto as the producer. However, he is just another human being, so it is not possible that every single idea contained in these software was the sole creation of Shigeru Miyamoto.

  Certainly, when it comes to identifying and verbalizing some of the important major findings, few people can easily succeed him. For example, few people other than Shigeru Miyamoto can declare that weighing yourself everyday must be fun for everyone. However, the fact that Nintendo software is always full of unique and fun ideas attest to the fact that there are many good game creators at Nintendo. Together with Shigeru Miyamoto, all of them have been making what are called Nintendo software. So, I have never thought that we have not fostered game creators at the company.

  On the other hand, I know that people like Shigeru Miyamoto and I have lived in very fortunate times. Specifically, we were able to experience video game development as forerunners in this industry when we were young. It is one of the big themes for us to think about how we can transfer what we have learned to the younger generation who will never have the same experiences. We have been tackling with this mission in a variety of different ways, but I'd like to talk about them only when we can come up with some concrete result and when we will be able to tell you this developer or that, who has been trained through this way, has made such a software. We do not have any pessimistic view about it, and we have never had hard times trying to come up with new ideas. It is just that it has become increasingly harder to talk about new ideas much in advance of the actual launch of the product. Thank you for your understanding on this.

Q 13   The company is in very healthy financial condition and you once again confirmed net cash in the range of 1 trillion yen. I know you have always been asked of the usage of the cash in the future, but as I notice the changes in the environment, hardware sales and competitions, I'd like to listen to your ideas on how you would want to spend your cash, including the possibility of stock buy backs and others, or if you intend to maintain the current cash level.
A 13


  As you know, video game business is a very high risk business. It takes only one product to change the landscape all at once. Today's video game market is advancing with a scenario which was unimaginable just a few years ago. Several years ago, some people in the stock market used to openly announce that there was no need for companies to keep cash deposits because you could borrow them whenever necessary. I think I can today say that the situation in the last 6 months has proved that they were wrong. As long as we are doing business where we have great risk at times, my belief is that we have to be cash-rich if we commit ourselves to continuing our business.

  So, it is very hard for me to imagine that Nintendo will abandon its cash-rich position all together anytime soon because doing so will significantly narrow down the options we can choose from in the future, which will weaken the competitive edge of the company towards the future and, as a result, the company will have a harder time being appreciated by the shareholders. This is my basic stance.

  Being able to hold sufficient cash means that the company has a number of different options. The possibility of stock buyback that you mentioned is one of them, and when we feel the need to do so, we will. Or, even though we do not have any such concrete plan today, if we encounter a great technology or patent that could give us a great edge for future challenges, Nintendo may be able to exercise the option of M&A even though we have hardly done so in the past. When that one technology or one patent is going to be the decisive factor for our future, we want to be able to exercise our option to take it. We hope that people invest in Nintendo by understanding that being able to have the freedom to choose our business structure and our operational structure is one of the most important factors and strengths that allows us to move towards our challenging goals.

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