IR Information

Second Quarter Financial Results Briefing for the 73rd Fiscal Term Ending March 2013
Q & A

Q 4

My question is on how you plan to market Wii U and what tactics you will employ. With Wii you were able to create a lot of buzz around the time of its launch, particularly in the U.S., and I believe there was a considerable stock shortage between January and March after its year-end launch. On the other hand, while Nintendo 3DS did well at launch, the following three months was a particularly difficult period for the system. With these two points in mind, what kind of marketing message are you planning to send out, and how are you going to market Wii U in terms of software? You also mentioned the home console business is very important in the U.S. market. What kind of marketing strategy do you plan to take in the U.S.?

A 4


In retrospect, one important aspect of Wii was that it came bundled with "Wii Sports" for everyone who purchased the system in the overseas markets to experience. Of course there were some people who praised "Wii Sports" as being revolutionary even before its launch, but if we had simply expected everyone who bought a Wii system to play, say, a Zelda game, to also buy "Wii Sports," I don’t think we would have been able to deliver this title to everyone. However, at the risk of sounding extreme, everyone in the overseas markets received a copy of "Wii Sports" even if they did not want to as it was bundled with Wii hardware for quite some time. And it was only natural for them to have a go at the game at least once since they had it in their possession. It was not hard to see instantly that "Wii Sports" was vastly different from any game they had played before, and it was also very easy to pick up and play. People who purchase new gaming platforms are usually the ones in the family that love games, and they purchase them because they have a game in mind that they want to play. But with "Wii Sports," they started to engage others to play and have fun together, and as things turned out, I think this chain of new consumers was the reason behind why things progressed well with Wii. It would indeed be nice if we could say that we planned everything from the start. But the truth of the matter is that we did not know how to attract everyone to "Wii Sports," but we thought about how we could achieve it, and came up with some ideas. I would be lying if I said that we had a firm belief of what was going to happen, but this is our analysis of what has happened with Wii.

As for Nintendo 3DS, the problem was that consumers could not experience 3D unless they actually took it in their hands. We could not advertise it on TV as TV images did not pop out. So, we concluded that if we could have people experience and be excited about Nintendo 3DS, they would share their excitement with others. As is the case with any new product, the first people to buy a new platform are the ones that are eager to experience new things. Then it gradually spreads to other consumers, but there are two types of consumers: those we can directly deliver our messages to, and those who don’t have the intention of listening to our messages in the first place. Among the second category of consumers, some are nevertheless interested in what other people are doing around them. I think the difference between Wii and Nintendo 3DS was that while Wii resonated well with such consumers too, Nintendo 3DS did not. For a product to achieve a high level of market penetration, this is a hurdle that it must overcome, and in Japan we are already past that stage, and in a sense, more and more people are saying that Nintendo 3DS is the platform to play games. If you look at how pre-orders are doing at the moment, it is not an exaggeration to say that Wii U is sure to sell well in this holiday season, as many of you are probably thinking. But we realize the biggest challenge is to make sure that Wii U sells well even in the next year after the holiday season, and we are working on that too. Nintendo tends to release too many titles at the launch of a hardware system and as a result suffers a drop in new games for quite some time after launch, and for the Wii U launch, we are being very careful not to let it happen. Fortunately, third-party publishers overseas are launching many titles for us this time, and we were able to push back the release of some of the titles that we had originally intended to release as launch titles until next year. We are also looking to have many people experience "Nintendo Land," which comes bundled with the Wii U DELUXE SET in the overseas markets, as this is a title that the actual players will appreciate more than the spectators. While we have no way of telling whether "Nintendo Land" will do what "Wii Sports" did, we are hoping to promote word-of-mouth communication among consumers, and at the same time, we will continue to supply software to provide new content that consumers will talk about even after January. The combination of these two things is what we think will keep our momentum going after January next year.

Q 5

My question is about your thoughts on profit structures. For about 30 years up until around the fiscal year ended March 2010, the company’s operating profit ratio had almost always been more than 20 percent; however, the proportion of fixed expenses is rising due to prior investments. I would like to know your view on cost management under this situation. At the same time, it is also important how you will grow the company’s sales. You mentioned the digital distribution of the Nintendo 3DS and Wii U software would be one means of increasing the sales. Please let us know if the cycle of hypothesis, verification and execution is revolving faster and faster or, in other words, if your strategy has to be adjusted with incomplete prototypes being made and if your way to develop and sell products has changed.

A 5


In our business, it is very difficult to foresee how well a product will be sold while it is under development. For instance, after the sales result of "Wii Fit" came out, if a person said that prior to its release he or she had completely predicted that it would sell at such high levels, he or she would not necessarily be telling the truth. A hit title becomes a great hit title when several events that are beyond our control occur after the title’s release. Nintendo is a company that has been blessed with many great hit titles over the years, which partly stems from our continued efforts to increase the chances of making a hit into a great hit, and we are not planning to change this stance in the future.

For this fiscal year, a sudden change in the environment that was completely out of our control was the impact of foreign exchange rates. In terms of cost management, we made a great effort to pay in U.S. dollars (instead of Japanese yen) as much as possible. However, as I mentioned before, it is very difficult to hedge a decrease in sales due to the weakened euro, and it is an extremely rare case that, like Nintendo 3DS, the price of a hardware system is cut by such a large margin at once in order to drastically improve the sales momentum after the launch and get the sales on the anticipated track. Since we had such an experience, we had to set a price for the Wii U hardware that would not make consumers feel anxious that there would be a price cut if it didn’t sell well. Our experience with Nintendo 3DS last year obviously affected our Wii U pricing decision. Under such circumstances, we have not met the expectations people in the stock market have in terms of the operating profit ratio. As for cost management, if we simply manage costs, our profit structure will be the same as that of normal companies which are engaged in the hardware business, and if that way of cost management is not suitable for us, our business will shrink, so what we have in mind in terms of cost management is "being sharp." In other words, we spend money in areas that we should, and we don’t spend money in areas that we shouldn’t, after carefully considering if things have potential or not.

In terms of the speed of the PDCA cycle or the hypothesis verification cycle* for download sales of the Nintendo 3DS and Wii U software, Nintendo has been developing and selling packaged software for so many years. As the software was in (un-rewritable) ROM format and therefore the content could not be changed even if the hypothesis verification was made, in the past we ensured that the games we created were as polished as possible since no modifications could be made after they were published. Meanwhile, majority of game systems began to be connected to the Internet, which gave birth to the digital business. We talked about outside partners earlier today. If the past Nintendo way of development is followed, fully developed client software for game systems is sold after brushing it up further and minimal work is done on the server. Now that machines are becoming increasingly powerful, many in society are choosing to limit the client software while frequently changing the content from the server. This is the same approach as the one that web-based companies are taking. They release the beta version and then make many changes as they go along. This approach cannot be taken for the ROM-equipped packaged software distribution business; however, it is possible for the digital business. We don’t think consumers would pay Nintendo for unfinished products, so we don’t intend to change our business style in distributing packaged software. On the other hand, we learned that when we start a new network service business, such as "Wii no Ma" (Japan only), it will not go well if it takes a year to upgrade client software which runs on a game system. On the other hand, as for the Wii U network services, "Miiverse," which we are going to start with, and "Nintendo TVii," as we mentioned earlier, a big portion of the specifications are designed on the server, so these services will change a lot according to what is done on the server. We believe that the hypothesis verification cycle is going to run very fast.

From a totally different perspective, when the previously mentioned Nintendo Direct is broadcasted in this frequency, we can very frequently make discoveries by analyzing the data created by consumers’ responses to our actions. Like this, what we need to do in our marketing activities are also changing at a more rapid pace than in the past, and many people in our office must be noticing that we are increasing the speed at which we deal with these processes.

* "PDCA cycle or the hypothesis verification cycle" means the repetition of a cycle consisting of "Plan," "Do," "Check" and "Act."

Q 6

As far as I see from the hit chart you showed us in the presentation, the games using traditional IPs (Intellectual Properties) like Mario and Pokémon seem to be selling well while completely new titles seem to have little presence. I believe you are constantly developing such brand-new titles, so please tell me what you think about them and what specific plans you have.

A 6


Let me start by saying that you will definitely find some perfectly new game titles when you check out our software lineup. Naturally, however, consumers tend to choose a famous IP with accumulated high visibility and popularity because they cannot afford all the games available in the market. The only method in which we offered brand-new games to consumers in the past was packaged software available only on the shelves in retail stores, but we can now offer them as download software, for which our retailers do not have to stock inventory, and some of them have been well-received by consumers. There are some games born as download software which have then evolved into packaged software. One great example is "Art Academy." This game was originally released as "DSiWare," which was only available for download on the Nintendo DSi system, and was highly-praised among consumers. We therefore recreated it as packaged software and it eventually became a million-unit selling title worldwide. It is important to us how many of such positive outcomes we can achieve in this way. I wish business in the entertainment industry were so easy and lucrative that we could make a brand-new title as big of a blockbuster as Mario and Pokémon just by keeping the package of the game next to the packages of Mario or Pokémon games on the shelves in retail stores. We have to take one step at a time for a completely new big hit, but it is true that our products might be stereotyped if we don’t add to our lineup.

One thing I would like to add, though, is that it might be true that Mario and Pokémon are franchises with long histories and tradition behind them, but we are trying to push the boundaries every time we develop a series title. In other words, the reason Pokémon has been continuously popular for about 15 years and Mario for almost 30 years now is that each sequel has something novel. So I frankly think that those who assume that Nintendo lacks innovation might be making judgments by looking at our game titles without actually experiencing them. Without ongoing innovation, even Mario and Pokémon would have lost their popularity long before.


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