IR Information

Corporate Management Policy Briefing / Semi-Annual Financial Results Briefing
for the 75th Fiscal Term Ending March 2015
Q & A

Q 7

About two years ago, Mr. Iwata mentioned that the ability to judge the future of technology is the company’s lifeline. Since then, has the company’s ability to judge the future of technology improved? To improve this ability, what has the company done? In my opinion, the company might want to take a more aggressive approach and purchase other companies with relevant technologies to turn your huge cash deposits into additional revenue. What is your take on my idea?

A 7


The ability to judge the future of technology (that the company should pursue) and whether individual software under development has the potential to turn into a great product or not are especially important for a company in our line of business. The entertainment business is inherently very different from many other industries that can more easily identify what consumers want next just by asking them. These other industries have a common roadmap and can, say, beef up specs by 10 percent, which will warrant a 10-percent price increase for consumers or contribute to a certain percentage increase in market share. This is not possible in the entertainment industry, and so it is imperative that we are able to find and judge what will grow into something very fun. Regarding this point, I will let both Mr. Takeda and Mr. Miyamoto comment as well, but please allow me to share my opinion. When it comes to judging the future of technology and whether certain ideas have the potential to become great entertainment, a few people who have been with Nintendo for many years have been taking on these roles at the company. It is inevitable, however, that everyone becomes older and there will be a day in the future when we will all have to retire. If the abilities of the people making such important decisions for the company have declined due to aging, or if these people reach retirement age, they might not be able to perform their job duties. It is natural to be concerned about this. To deal with this issue, it is important for us to seek out younger members of the company who have the potential to take on these new tasks and to let them go through the necessary experiences. This ability can be cultivated and obtained only through serious decision-making processes at the relevant positions. It is not something we can make them understand by taking them by the hand and teaching them step-by-step. Perhaps it is an ability that can only be obtained through particular experiences by people who deeply consider numerous areas, excel at observing others’ behavior and always thoroughly analyze cause-and-effect for any phenomenon more than anyone else. To explain this further: As you know, companies today have a number of different means to hear the opinions and reactions of their consumers. One seemingly small judgment that we make on a certain subject can make our consumers highly appreciative of our products and services. On the other hand, when a decision results in a failure to satisfy our consumers, it feels as if the words in consumer complaints go right through our hearts. One example of the special experiences I just referred to is that a seemingly small decision made by these individuals can have a significant effect on whether our products and services succeed or not. To nurture people who might make critical decisions in regard to future technology and prospective software for the company, it is important for us to determine what kind of experiences they should go through, and how they can actually experience them.

Twelve years have passed since I became president of the company in 2002, so it is my 13th year in this position. As part of my job, I always try to identify people who will be able to succeed such people as Mr. Takeda and Mr. Miyamoto, who have been leading hardware and software projects at Nintendo, as well as people who can form teams that will be able to lead the company after the retirements of Mr. Takeda and Mr. Miyamoto. As a result, people who will eventually become eligible for these positions have been steadily demonstrating growth. I believe we will gradually start to see tangible results in the future.

Next, I would like to answer your question about usage of our cash and deposits. After I announced our intention to more aggressively use our own IP in January (at the Corporate Management Policy Briefing), many people approached us with proposals. During our discussions, we made progress even in fields that we have not deployed our IP in the past. However, we are negotiating these deals with other parties. The appropriate timing to make the announcements does not necessarily fall on the dates of our IR-related events, and today is not the day when we can share with you any concrete examples. I hope you understand that these things are happening behind-the-scenes and that we are also discussing how our cash assets should be used.

Regarding the aspect of technology, even though the investment was not a significant amount in comparison to the entire cash and deposits the company owns, we now own a company in France called NERD (Nintendo European Research and Development SAS), which researches and develops advanced element technologies for us. The company originally had a partnership with Nintendo, and we eventually agreed that Nintendo would purchase it so it could become a part of the global Nintendo group. I picked this one example to answer your question and to explain that we are not necessarily taking on the type of tasks you suggested only within our company. When we have a good encounter with a prospective partner who owns promising technology, and if we will be able to establish a good and long-term relationship that is based on trust between the core individuals at the companies, we do not need to be hesitant. In this regard, the actual investments we make may increase in the future.

Now I would like Mr. Takeda and Mr. Miyamoto to share their thoughts on judging the future of technology and whether ideas have entertainment potential.

Genyo Takeda (Senior Managing Director):

In recent years, I have been trying to let younger people make decisions as much as possible. While there are times when I want to give input, I have been trying to be patient and focus on observing how the younger people work.

Even in Silicon Valley, the core technology that is researched and developed has shifted from the area of semi-conductors. Engineers and developers should not do their research just by thinking about what technology has traditionally been relevant to them. Today’s engineers and developers must look into more diverse fields, including cloud and software-related technology. We discussed a bit about our QOL project today, which uses different technology than what Nintendo has traditionally used. And each one of these different technologies is showing independent progress in its own field. The world of technology has been quickly evolving – every one of us has to be as flexible as possible, even to the extent that we have to rethink what we have firmly said before. This is a global movement. We cannot afford to say things such as, “We are Japanese and we only need to think about Japan.” We are having these talks inside the company and nurturing individuals who will be able to make decisions as to what technology we should pursue. I say “individuals” because I believe that the right decisions (to judge the future of technology) cannot be made by a majority vote. I personally want to make sure that the individuals who succeed us will take on challenges that even if they eventually end up being failures, will not be felt as if they were throwing money down the drain. In other words, even if these challenges fail, they will gain something valuable they can use in future projects. This is the spirit we have at Nintendo that, in my opinion, might even be thought as a part of our DNA: If we spend money as if we are throwing it down the drain, we won’t be able to seize the right opportunity when it, by a stroke of good fortune, is presented to us. I hope this sprit will be inherited and that future challenges will still be bold ones. For this next generation of individuals, I am being patient, and I believe Mr. Miyamoto sitting next to me is as well. I believe that we are now at a stage where the next generation is steadily growing.


I need to be very careful about answering this question, or my answers may result in articles titled, “Mr. Miyamoto to retire,” again. Jokes aside, just like Mr. Takeda, I have been trying to assign as many responsibilities as possible to the people who are working in the forefront of software development. We often use the term “Nintendo DNA” when we have internal meetings. While the people who have worked at Nintendo for many years and have made things unique to Nintendo are gradually reaching their retirement ages and leaving the company, people like me are currently taking the position of a sort of “guardian” for the younger developers who want to discuss philosophical agenda items such as “What makes our products Nintendo-like?” by watching and giving them advice from time to time.

Including the QOL project that we explained today, we have been internally researching and reviewing the possibility of certain technologies to be used in new and different ways and discussing what the optimal technology will be for solving the technical issues we face now. When we have meetings to discuss these subjects with many people, however, the opinions and the possible conclusions of the meetings tend to move forward in the same direction. Specifically, they tend to revolve around “Which one of these possible technologies is of the highest performance?” and “Which one will eventually be the most affordable?” When younger people start talking in this fashion, people like me make a point of stressing the importance of the product having one very clear-cut unique point. If we can materialize and commercialize that unique point, and if we can receive and correctly analyze public reaction, we can exercise operations that will not “throw money down the drain” if I can use the expression Mr. Takeda just mentioned. When our attempts fail, we approach the person who made the decision and ask, “What went wrong, what should have been done and what do we need to do now?” And we also make a point of jointly discussing the next moves we should take. We are making efforts to repeat this process. I am now trying to establish internal systems that can primarily operate by the decisions made by people who are 20 years younger than I am, not just 10 years younger. We are preparing for a bright future.

Q 8

It takes a certain amount of time and costs a large sum of money to make any mid-term strategies profitable. What are you considering for your cost-cutting plan for the future? I think the way to spend money may vary significantly in view of business field expansion or collaborations with external organizations. I would like to know in what field efficiencies or operations reviews can be made.

A 8


Considering the business scale of Nintendo, the number of employees is not so large. Therefore, the prevalent notion around the world that companies should first and foremost decrease the number of employees in order to reduce costs cannot be effectively applied to this company in the same way, I believe. Spending on marketing and R&D is an overwhelmingly large part of our total expenses. While we always try not to waste money, there were indeed some cases that our attempts were in vain. The important thing is to seek efficiencies to the extent possible to bring the same effect. We emphasized that restoration of the balance of revenue and expenses is a priority this fiscal year, and in our view, the second quarter financial results were in line with that to some extent. Having said that, we think eliminating marketing and R&D inefficiencies is the most important issue for the time being. The idea that restructuring the workforce leads to cost cutting and strengthening our future competitiveness does not apply to us. While TV media advertising was considered the only way to reach the mass audience in the past, even without TV ads these days, many consumers are proactive about obtaining information from us thanks to the popularization of the Internet and smart devices. For example, when Nintendo produces a film to introduce games or makes new TV commercials, consumers take the time to view our YouTube programs or visit the Nintendo websites. Also, we put effort into “Nintendo Direct” and one of our video productions called “The Cat Mario Show,” which can be viewed on the Web and is regularly updated, has become so popular that many people watch this video program. Many consumers in Japan now make the conscious choice to view our video programs in the Nintendo eShop of Nintendo 3DS every week. Unlike TV commercials for games that suddenly appear on your TV screens without notice, consumers actually pay attention to our programs, so the effect of one viewing is much larger. By having consumers watch our TV commercials and encouraging them to proactively view our programs by creating interesting content on the Web, they might become excited about certain topics and share that information through social media, resulting in others, who were not originally interested in our offerings, watching our programs. Our marketing activities for games can still become more efficient. As an additional note, with the recent depreciation of the yen on a period-average basis for this fiscal year so far compared to the previous year, marketing expenses in the overseas markets, when they were converted to yen, have increased. Please understand that while it’s difficult to grasp the spending in local currencies after such amount is converted into yen, we have improved profitability by making marketing activities more efficient in the second quarter compared to the first quarter of this fiscal year.

Q 9

My question is about development costs. From the number of games you have been releasing, I have noticed that the pace at which the company is able to produce software has slowed down. Since the amount of time and the number of developers needed to make one game are increasing in general, this is a difficult challenge unless you can increase your entire development resources. I have heard before that architectural integration of your future home console and handheld video game hardware would also lower software development costs. As I am not aware of any recent updates on this topic, I would like to hear from Mr. Takeda if the company is taking significant steps to deal with this on a semi-conductor level. I would also like to hear from Mr. Miyamoto to see if he has found any dramatic countermeasures to developing games or how much progress has been made to increase development efficiency.

A 9


First, we quite agree with your point that we need to improve game development efficiency where necessary. On the other hand, what our consumers are looking forward to is not merely a great number of games. What is critical to us is that each consumer feels that the content of the games he/she plays is sufficient, and when the player has completed one game, the next one is offered at the right time. We don’t believe that simply increasing the number of games or just containing the development costs per game are necessarily good for our company, because if we try to simply decrease the per-software development costs just for the sake of minimizing overall costs, the final product will become less-appealing and it will not sell over a long period after its release. On the other hand, when there is software that sells for a long period of time, or is talked about for a long time, this can increase consumers’ motivation to continue playing these games and invite new purchasers. Even if we increase the total number of games, it does not make sense if each one of them becomes less compelling for the consumer. Nintendo offers new downloadable content to increase the number of karts, courses and characters in “Mario Kart 8.” Our primary objective is to have “Mario Kart 8” played continually by consumers. Since many players have already played “Mario Kart 8” with energy and enthusiasm, we realized that we would need a certain level of reinforcement to make people want to play it again. Technologically speaking, this is now possible. When we compare making a new “Mario Kart” game and digitally distributing new courses and characters as add-on content, the required number of developers, development costs and development terms are very different. We believe it is important to create triggers for our consumers to frequently play their favorite games while minimizing development costs on our side. We can now include amiibo to our arsenal, which can also be a trigger to excite people to once again play games they might have already finished. All of these additions are crafted to extend the life of key software, which is very important to us.

As for architecture integration, since we have already announced that plan, we have been making the relevant preparations to avoid the situation in the past in which various software assets could not be leveraged when we launched a new hardware system because making software on the new hardware was significantly different from that of previous systems. Confirming when we will make announcements about these new products or what kind of products they are is quite another story, though. All we can say today is that our position on architecture integration has not changed at all and that we have been making progress on it.

Now, I will invite comments from the people representing our hardware and software developers.


The integration of architecture is our fundamental policy, and we have been making progress. Now that our new hardware systems are on the market, I would need to comment in terms of our next hardware, but I’m afraid I have to refrain from talking about that today. However, one thing I can confirm today, even though this is something relating more to the software side, is that we have not put any restrictions on the technological fields that we research. We have even been studying software development methods and technologies used for smart devices and other products from the viewpoint of how we may be able to establish applicable content to be programmed and produced efficiently at a low cost. Apart from the business models used by smart devices, we are actively researching and learning about a variety of different technological fields.


Although architecture integration is very important, there is nothing I can add to this topic today.

As for the number of software titles, as Mr. Iwata said, the more important thing is how many of them are interesting to consumers. The current situation concerning Wii U is that more and more people are purchasing the hardware. The company has deployed a number of campaigns inside and outside of Japan, such as offering consumers free demos of Wii U games for a limited time period or a free download codes for a Wii U game after purchasing “Mario Kart 8.” As we continually promote Wii U through a variety of different campaigns, we are increasing the number of opportunities for potential Wii U hardware and software consumers to experience different Wii U software. Throughout our history, Nintendo has offered consumers games that they can continually play over long periods. This has helped maintain hardware value at a high level for consumers, and we will not deviate from our efforts in this endeavor. One of these efforts is downloadable add-on content for already-released software. As a part of that effort, the main staff members who created “Mario Kart 8” formed an expert team to develop downloadable add-on content with a lot of energy and enthusiasm even after completion of the game.

If I am allowed to do a little bit of PR here, we released a series of short films called “Pikmin Short Movies” on October 25 at the Tokyo International Film Festival. If you have not seen it yet, I hope you will check out the information on the Internet. The short film is only about 20 minutes, but this is our very first animated movie that uses “Pikmin” as its theme. We’re planning to make this 3D movie available on Nintendo 3DS and make the HD version of the movie available on Wii U in the near future. At the same time, we have also prepared a demo version of “Pikmin 3” so anyone who hasn’t played Pikmin can experience its unique joy. Continually launching campaigns after the release of software will lay the groundwork for the next iteration of “Pikmin” in the future. And needless to say, we want it to be one of the motivations for potential consumers to purchase Wii U. We are making a variety of different efforts.

In short, we believe it is very important to make the most of each game and extend its life as long as possible. Since the days of Nintendo DSi and Wii, we have been marketing digital downloadable content, and at our development studios, “Make more!” has become a rallying cry of sorts – we have been aggressively challenging ourselves with many new things. Recently, however, we have reaffirmed the recognition among Nintendo developers that the most important thing for Nintendo is to painstakingly create products that our consumers want to purchase.

As for the time needed to develop software, our software developers have mastered new skills and processes. Accordingly, the development delays while software developers get accustomed to new hardware is not anticipated. Our theme today is how effectively we can materialize our experiences to commercialize our products. This is something I often internally refer to as “spinoff software,” but while we make use of our major game franchises, we want to support our character IP and increase the number of games we develop and release by also creating relatively smaller-scale but fun to play games. We’re making preparations to release software within a franchise so that fans of the series will not need to wait for, say, three years in order to play a new experience in that franchise.

Finally, even when creating our own franchises, we have been working with a number of outside companies. Looking at this year alone, we have started to work with second- and third-parties that we have not collaborated with before. Since we can collaborate with an increasing number of outside companies, we are now making progress to develop a number of games that will become key software for us. I have a solid feeling that Wii U will have a rich software lineup in 2015. We will do our best!


Our output speed is, of course, important. At the same time, we believe that maintaining the active use rate of our platform carries the same level of importance. I think you can relate when I say, when we keep touching a video game system, we tend to look for the next software we want to play. As a result, it becomes easier for consumers to purchase their next games. On the other hand, if the game system is out of our daily routine, we tend to lose interest, making it less probable that a new game will come to light. When we look back at previous hardware that did not succeed, they always failed to maintain the active use rate. On the contrary, the platforms that sold a lot established their respective positions in the market not because they had a lot of games – many games were offered for the hardware as a result of the hardware selling well and it establishing itself as a lucrative platform for publishers to sell their software on. We believe that the real key is whether the hardware is able to maintain the active use rate. I should have mentioned in my earlier remarks that Nintendo wants to operate our platforms by focusing more on maintaining the active use rate, so please allow me to make this comment now.


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