IR Information

First Quarter Financial Results Briefing for Fiscal Year Ended March 2010
Q & A - July. 31, 2009
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Q 1   Please explain your future vision. I believe that Nintendo's efforts have made games sell well outside of the year-end holiday season. I am wondering if you think this holiday season will be tougher than usual as many of your and third-parties' principal products' launches seem to be concentrated there. Like Wii Sports Resort had been postponed for some months, is there now an increased possibility of re-scheduling launch dates?
A 1

Satoru Iwata (President):

  Please take a look at this slide; it shows Mario Kart Wii and Wii Fit, which were released in the April-June period last year and have sold 15.4 million and 16.37 million units respectively. Of course this is the result of the whole fiscal year. On the other hand, during the same period this year we did not release any software titles which would have sold millions of units worldwide. As you mentioned, we were developing Wii Sports Resort and originally intended to release it earlier. We wanted to release it with enough supply of Wii MotionPlus, and were confident that it would become much better with a little more time and effort. Thus the launch was slightly postponed to the end of June in Japan, and end of last week in July in the U.S. and Europe. For this reason, we are launching Wii Sports Resort in Q2 of this fiscal year, then Wii Fit Plus and New Super Mario Bros. Wii in Q3 of this fiscal year.

  These three titles have already been available for hands-on demonstrations at E3 this year. They were highly evaluated by most of those who actually tried them. Distributors also gave feedback like "The key player of this holiday season will be Nintendo as expected." So I believe each of these three software titles have the potential to surpass 10 million copies worldwide in the whole fiscal year.

  If we could have launched such titles during the last Oct-Dec quarter, it would have been almost impossible to achieve this full-year sales to surpass that of last years with the remaining nine months. However, Wii Music and Animal Crossing: City Folk did not fulfill our expectations and only sold through end 2.65 and 3.38 million copies respectively. Should those two titles have become long-term selling software, we would not have faced a shortage of software titles in the former half of this year.

  Sales of those titles declined in a relatively short period, and Mario Kart Wii and Wii Fit continued to perform better and drove hardware sales. As for the result of last fiscal year, two powerful titles released in the beginning of the year kept driving the market and Wii hardware sales. However, no software title can maintain its momentum after a year or more from its launch. So we find that the reason of downturn in Wii sales can be attributed to two main factors – we could not launch Wii Sports Resort earlier and could not make the software launched in the last holiday season have longer tails. In order to maintain momentum in the market, we of course must release something new periodically, not just before Christmas, but on the other hand, we do not have foresight into the whole situation of a software under development. No one can tell which software titles during the planning phase will be able to deliver fun and surprise in the future. We often run into certain realization after the actual development process begins, which may delay the completion of the product. This time I think we have made such mistakes.

  As for this year, I am not worried about the launch schedules of Wii Fit Plus and Super Mario Bros. Wii. Concentration of major titles in the latter half of this fiscal year can be seen not only with Nintendo but also with other publishers. The NPD Group has been reporting that video game sales in the U.S. in March, April, May and June this year were weaker than last year. It is not simply because of tough economic times; rather other companies released hit titles like Grand Theft Auto 4 and we released Mario Kart Wii and Wii Fit, which all were ten-million-unit class sellers worldwide last year and made a significant difference between last and this year. Conversely for the latter half of this year, we believe we can expect even bigger sales with those ten-million unit class sellers on a worldwide basis. In fact, we recognize this Q1 result as not the strongest and closer to the lower parameters of our expectations, but we expect we can reverse the situation through the full-fiscal year and therefore did not revise our forecast.

Q 2   Please explain in detail about sales situation in July, especially in America and Europe, where Wii Sports Resort launched just a week ago. How do you see the shipment, sell-thru and future forecast for the title, and how are consumers responding to it?
A 2


  As Wii Sports Resort just launched, I think it is too early to tell its performance potential with to-date results. If Wii Sports Resort was a type of fast-selling software at launch selling two to three million copies in the initial week, I could tell you the result today for your peace of mind. However, this title is not the case and rather it's a kind of product which will build significant result in the very long term. As for how Wii Sports Resort will affect Wii hardware sales, I hear it's slightly driving the hardware sales, but not significantly. It has not doubled or tripled sales and I do not expect it to do so in the following weeks. We have developed some titles which sell well in the long term while driving hardware sales, starting with Brain Age. These software have some things in common; they take six to eight weeks to start driving the hardware sales. We can not logically explain why they take exactly six or eight weeks, however, we actually have data from our customers through Club Nintendo that shows whether a customer registered their hardware purchase on the week when they registered software purchase. We research the "hardware driving ratio" from that data. Almost every title has a very low hardware driving ratio right after its launch. After six or eight weeks from launch, if the title still maintains its sales momentum, its driving ratio starts to rise. That is, such long-term selling titles motivate customers to purchase hardware or to consider purchasing the title with the hardware.

  In that sense, it is too early to tell if Wii Sports Resort is driving hardware sales now to what degree, before we have enough data in two months or so. With our past experiences and expectations for Wii Sports Resort given the earlier launch in Japan, I'm sure we will get some solid result in the next two months to share with you.

  Home console business tends to slow down in July and August, and pick up again in September. So in these months, except for very seasonal sports titles like EA's Madden series that launches around the end of August every year, big home console titles tend not to launch.

  In September, which people overseas call "back-to-school," people start to pay more attention to home consoles. If we can convey the appeal of Wii Sports Resort to existing customers then, it will surely contribute to the sales of hardware and generate good momentum toward the holiday season. So we feel that Wii Sports Resort will drive hardware sales mainly in Q3 from October to December. Last year, we had some internal discussions about the close launch period of Mario Kart Wii and Wii Fit but we ended up launching them with the hypothesis that several major title launches in close proximity can produce a synergetic effect. As a result, it went very well. This year we hope to do well again as we will be launching three ten-million class titles consecutively, and would love to hear that "Holiday 2009 was the best one ever for Nintendo!"

Q 3   I would like to ask your fundamental thoughts on home consoles. SNES was launched in 1990 in Japan and in 1991 in the U.S., Nintendo 64 was in 1996, Nintendo GameCube was in 2001, and most recently, Wii in 2006. Utilizing this five-year formula, the next-generation home console can be predicted to launch in the holiday season of 2011. Calculating backwards from that, we expect some announcement at next year's E3 or so. How do you perceive the launch cycles of the new home consoles? Wii has been the "winner" of this generation on the contrary to N64 and NGC, which were overwhelmed by PlayStation. Are you considering extending the five-year lifespan this time? I believe the whole market is awaiting news coming from Nintendo.
A 3


  As I have mentioned in past corporate management policy briefings and financial results briefings a number of times, it is my view that the historical lifespan of home consoles in no way decides the lifespan of future home consoles. However, it may be a fact that they are people who see five years as the console lifespan since SNES, N64, NGC, and Wii have all been released nearly every five years. In the past, home consoles followed such cycles because the fifth year saw market saturation and customers were impressed with the improvement in graphics quality due to the advancement in semiconductors made with the same cost, Such factors created the five-year lifespan and the cycle continued.

  There are two major characteristics of the current generation; one is that improvement in graphics is not apparent for general customers and its value is not appreciated as much. Another is the expansion of user population and the change in its composition. As we try to expand the gaming population, we have seen those who have been relatively less interested in video games, do not proactively gather video game information, and do not dare spend until they find it interesting, become new game players. Expansion of user population means possibility of increased annual sales or changes in cumulative sales, which are actually taking place with the Wii and DS markets. With such circumstances, we are trying to think outside of the five-year lifespan.

  In relation to this, as sales slowdown actually begins to take place, people might wonder if the expansion of gaming population has come to its limit.

  These slides show the estimated population of customers in Japan, U.S. and six major countries in Europe, based on a research of video games involvement among general consumers. There are several groups of people – those who currently play video games, those who think they may want to play them and those who think they never want to play them. As some may change their mind as time goes by, fixed-point observation shows interesting changes. Now you are seeing the data collected in spring this year. Of those who currently play video games (or active users). 53.8 million of them are in Japan, 98.1 million in six major European countries and 143.7 million in the U.S. On top of those people, there are also those who are interested in video games, or who are ready to become active users (or potential users) – 24.6 million of them are in Japan, 71.5 million in Europe and 53.4 million in the U.S. The European market especially has a larger potential, considering the current market size.

  Also, there are two kinds of active users; those who regularly use Wii or Nintendo DS and those who do not. In the Japanese market there are more than 80% of active users who regularly use them, which is the highest worldwide, though there is also a fair amount of game players who play only on game systems other than Nintendo's. That rate is especially high in the U.S., as 50 million out of 143.7 million are potential customers for Nintendo. We are making an effort to have them purchase our Wii and DS. Among the 295.6 million active users, 209.5 million people are playing with our products. To tell you the truth, we at Nintendo had set 200 million as an internal milestone, and we already surpassed it this spring! In addition, among 149.5 million of potential users – another room of expansion – there are 86.1 million people who have never tried Wii or DS yet. So numerically there is still a possibility to even double the current user population of Wii and DS. Thus we do not believe at all that the expansion has come to an end nor do we need a new console any time soon. So we have not set specific years for the lifespan of current game systems. Of course our employees are researching hardware and those in charge of hardware are already working on developing it. When our internal ideas and trend in the world match up, and when it's clear that we would be able to manufacture an abundant amount at an affordable price, we will be able to publicly speak about next hardware. At this time, we do not think that is in the near future.

Q 4   I watched all three console manufacturers' E3 media briefings. I am worried that many people will be short of money and time with an overcrowded lineup of titles starting in September, and the titles will cannibalize one another. How are you assessing this situation? Do you think the risk is smaller for Nintendo because you can further expand the gaming population? And as for your E3 presentation of New Super Mario Bros. Wii, I didn't find it appealing enough for customers, but reports from those who actually played it say that it was actually very good. Like last year, my impression of your E3 media briefing was not that strong. How are you perceiving this situation internally at Nintendo?
A 4


  As for the overcrowding of titles after E3, if a customer is interested in all the titles we are going to release, and also those from other companies, I agree that there is a fair amount of title available during the latter half of this year. Of course money to be spent is of a concern, but these days, time spent is the issue. It's quite natural to demand for a game that you would spend money on to be enjoyable and to last a long time. I am very conscious of the fact that game players have to find time in their busy schedule in order to play. And while we see customers as individuals, we also see how many people get involved in game play per household. For instance, in a family of three, a father, a mother and a child's preference for games may not necessarily overlap. As for our 3 upcoming major titles – Wii Sports Resort, Wii Fit Plus and New Super Mario Bros. Wii – they don't seem to overlap with titles from other companies and are not likely to cannibalize one another. We have shown various titles at E3, and so have other companies. Therefore, this may create a challenge with so many titles coexisting and the sales potential could diminish. In this situation we can only try to convey the unique characteristics of each title clearly to those who would accept and enjoy it. We developed these games under the concept of "Everyone's game" with the goal that they would satisfy everyone, from veteran gamers to the novice players. We are confident that they have turned out that way and will make a significant impact in the market.

  As for the media briefing at E3, of course we had many internal discussions after that. Honestly speaking, none of us at Nintendo thought that our presentation at E3 was as good as it could have been. It is apparent that we could not fully convey the charm of our products. In the past, Wii Sports and Wii Fit were naturally able to convey their appeal on stage since it was something no one had ever seen or imagined before. People seemed to capture the appeal of Wii Sports instantly and although there was some initial confusion with Wii Fit, its appeal did get through to the audience afterwards. This year, however, with the New Super Mario Bros. Wii, four people lined up with Wii Remotes was not a scene that no one had ever seen. Those who actually had the chance to play understood how the game would change with four people playing simultaneously, but we could not address that fun sentiment at the media briefing. Now we strongly feel that we need to look into finding a better way to demonstrate the products' appeal better at E3 in these times where more people are watching it online via web cast not only in the U.S. but all around the world, than the number of audience who actually watch it in the theatre. In that sense, we learned many lessons from this year's E3 show. After the media briefing, we had a domestic trade briefing in Japan. There we disclosed the black Wii console and red Nintendo DSi, which made a big buzz among game fans. It is also an important lesson for next year.

Q 5   What is the idea or concept behind the Wii Vitality Sensor? Do you have a feeling that it will become a world-wide phenomenon like Wii Sports or Wii Fit? To the extent you can disclose now, what can you let us know about the launch timing?
A 5


  It seems like the Wii Vitality Sensor is a kind of product which we are having some difficulty in addressing its product concept. The majority of the audience at E3 responded to it like "what in the world is Nintendo planning with a single pulse meter?" A human pulse not only contains information as to how many times a heart beats in a minute, but also various kinds of information such as the condition of automatic nerve.

  Traditionally, great games has made people excited and stimulated. Wii Vitality Sensor has great potential for various applications like measuring how horrified a player is in a horror title. What we are trying to propose first is a video game with a theme of relaxation, which is completely opposite from traditional ones, to enrich the users' lives. Especially among those who are constantly busy, I am sure you have experienced not being able to go to bed even when you are so tired after a busy day at work and coming home late at night... What if you were able to visualize how to unwind and relax, or check the condition of your automatic nerve by simply inserting your finger in the device once a day? We are conducting some tests internally at Nintendo, and found some patterns among our employees, like improving automatic nerve condition as the weekend nears or vice versa. Seeing what their condition is actually like, they can "visualize" how they are looking forward to weekend. And see completely different patterns on each individual person. And I think you have all had an experience where you are not in tune with how your body is doing or aware of how exhausted you body may be in a busy, strained period, but if you can visibly measure your condition every day, you can start to see how you're doing. It would be like stepping up on a scale every day and seeing the change of your weight. Our new challenge that is different from past software development is to make a video game by using the visible activities of your automatic nerve.

  Before Wii Fit launched, everyone doubted how well it could sell. As for Wii Vitality Sensor, I think it will face similar doubts as to whether such a product will sell well in the video game market. Of course no one can tell how people respond to it before the launch. We understand everyone wants to enjoy a vibrant lifestyle, so I believe if the product could support that desire, it would make a large impact in society. We are hoping to make one such proposals a year, or every two years at best, to try and realize what no one has ever done before. As there was concern at E3 this year that people might misunderstand us as makers developing sequels only, we decided to make it (Wii Vitality Sensor) public at the media briefing. We would like to deliver the actual product not too late in the year next year. As I have mentioned, last-minute polishing is crucial for developing video games, so please understand that we'll need to refrain from commenting on an exact release date.

Q 6   Do you have any plans or thoughts about discounting hardware?
A 6


  We are attributing the current slowing sales trend of hardware to the difference in sales standard when strong titles launch in the market to when those titles have been in the market a while, and not to the lack of competitiveness due to overvalue pricing or weak product appeal. Thus we are not planning on changing anything on prices right now.

Q 7   I understand that there is currently an undeniable threat of copyright infringement issues in China. Do you expect at any future point when your products will sell well in China?
A 7


  Of course from a long-term perspective, we see there is a large business potential for us in mainland China. I am always saying that the total population is ultimately a very important factor for a business, as it is harder to sell more products than the number of the total population. Hardly anyone purchases more than one of the same console, so largely populated markets are very important in a long-term view. I used to think that this year would have been when the Chinese market became critical for our business. However, due to the economic crisis since last year, even though some positive indicators are showing recovery of the Chinese economy, the speedy increase of entertainment consumption among the Chinese actually seems slowing down. Personally I now see that our decisive moment in China has been postponed a bit. Nonetheless, the Chinese market is still one of our most important long-term targets.

  Regarding the copyright infringement issue, it is not a China-specific issue, but rather a worldwide one with varying degrees. We are taking two actions against this issue: a technological one and a legal one. Technological protective measures against piracy is nothing but a cat-and-mouse game. However, even when the method of how to elude our anti-copy protection is discovered, not all owners of copying devices will take the same measure. So I find that technological protective measures for our products have certain degree of meaning and value. I think we need much time to implement improved technological protective measures, to gain acceptance by local residents, and for those countries to implement stricter enforcement. Currently we face piracy issues in any Asian nations including China where we are trying to do business, and we would like to improve the situation little by little.

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