IR Information

Third Quarter Financial Results Briefing
for Fiscal Year Ending March 2015
Q & A

Q 4

To the extent that you can share with us today, I would like you to give us a hint about NX, the dedicated video game system for which you said you would announce the details in 2016. Is it possible that you will both announce it and release it in 2016? Will it be a replacement for any of the existing dedicated game systems, or will it become your third pillar, so to say? Or, in the first place, should we abandon the current notion of thinking about home consoles and handheld devices separately? Also, does the "N" in "NX" stand for "Nintendo"? Does this codename "NX" have any specific meaning?

A 4


We will not announce any details about NX until 2016. I used the name "NX" during our joint press conference with DeNA on March 17 because we thought that our announcing the business alliance with DeNA to start a smart device business could result in such misunderstanding as "Nintendo is making a transfer to smart devices because it is pessimistic about the future for dedicated video game systems." I intentionally chose to announce the development of NX so early because I wanted to confirm the fact that we are developing a new dedicated video game platform, that we have never lost passion regarding the future for dedicated video game systems and that we have bright prospects for them. Though I cannot confirm when it will be launched or any other details of the system, since I have confirmed that it will be "a dedicated video game platform with a brand new concept," it should mean that we do not intend it to become a simple "replacement" for Nintendo 3DS or Wii U.

Your question also included the "current notion of thinking about home consoles and handheld devices." When it comes to how dedicated game systems are being played, the situations have become rather different, especially between Japan and overseas. Since we are always thinking about how to create a new platform that will be accepted by as many people around the world as possible, we would like to offer to them "a dedicated video game platform with a brand new concept" by taking into consideration various factors, including the playing environments that differ by country. This is all that I can confirm today.

Taking this opportunity, because we were often asked if we will make any new announcements about NX, smart device applications or QOL at this year's E3 show, let me confirm that we will not discuss anything about our smart device business or QOL there because, to us, E3 is an event mainly for dedicated video game systems. Also, because we have confirmed that any new information about NX will be announced in 2016, I hope you will understand that if you expect us to discuss NX during the upcoming E3 show, you will just end up being disappointed.

Q 5

My question is about "the new core system." Because it has not been largely picked up by media or investors, I would like Mr. Iwata to explain about it. Specifically, why at this timing you, by collaborating with DeNA, have decided to replace your existing "core system"? I assume that there must be an objective as well as pending issues to be addressed. Also, when you search for a partner to jointly develop "a core system," I think that a systems integrator would be a natural candidate for you to work with, so why have you chosen DeNA as your partner?

A 5


Before answering your question, let me explain for the others that the "core system" the questioner just referred to means the "integrated membership service" that I mentioned in my presentation today that will build a bridge between smart devices and dedicated video game systems.

So far, Nintendo has built its official website, started the Club Nintendo membership service, made its dedicated video game systems network compatible, started Miiverse and has constructed other online services one at a time. When we constructed each one of them, we were trying to create a certain solution to achieve a certain goal or to address to a certain issue. In other words, we did not have an overall vision as to what the final and comprehensive format should be like and, as a result, we cannot say each of these services was connected to one another in an ideal way. Also, when we were designing them, we did not have the idea of building a bridge between smart devices and dedicated video game systems and, at least five years ago, we could not foresee that smart devices would have increased in significance to be the dominant window through which consumers connect with one another and society. When we look at Nintendo's current network services from this perspective and others, they look like patchwork. They are not ideally designed for user convenience, and when we try to improve one, we have to modify not only the portion directly related to that service but also other seemingly unrelated components, so it cannot be done easily. In other words, we have many ideas that we would like to realize but we have not been able to execute them as smoothly as we had hoped.

You pointed out in your question that it would be normal for us to place this sort of order with a systems integrator. I understand that many seemingly similar cases have been dealt with in that fashion. For business affairs in which the requirements can be firmly fixed beforehand, it would generally be fine. However, the circumstances will keep on changing even from now, so it will be rather difficult for us to firmly define the requirements in advance. I understand that there are many system integrators who are pretty good at constructing the systems for which the requirements have been firmly predetermined, namely, when the client can completely identify what kind of specs are to be integrated. On the other hand, many of them are not very good at constructing the systems which are subject to clients' ever-changing demands or if the clients require them to make modifications in accordance with changing circumstances. Of course, there are some systems integrators who are good at such requirements, and I am just talking in general. For this time, Nintendo will operate a smart device business jointly with DeNA, where we create new applications and operate the relevant services. The operations include analysis and feedback, and we will design the structure in a way that we will be able to carry out our consumer management duties based upon this analysis and feedback. We have come to understand that there are great overlaps between this structure and the integrated membership service that Nintendo aims to establish. Also, through the various negotiations leading up to the business and capital alliances, we realized that DeNA's corporate culture is well acquainted with constantly changing requirements and that they are highly capable of flexibly changing the system and then quickly reconstructing it. In addition to carrying out the smart device business, we concluded that we should also construct an integrated membership service together so that the "bridge" will be built more cleanly, because even though we will not be able to perfectly define the requirements in advance, or even when we are faced with further environmental changes, we will be able to construct a structure which can flexibly deal with these changing requirements. We concluded that, even though this is something Nintendo cannot execute with its own internal resources, we can achieve it if we work with DeNA.

As you pointed out, this project has neither been widely reported nor covered, and although it might not have captured a lot of media attention yet, I believe this is going to be a very important challenge for us. The better the system can operate, the more smoothly and frequently our consumers will be able to travel between smart devices and dedicated game systems. It will increase the number of reasons for our consumers to keep on playing games or to keep on playing with their friends and relatives, increase the opportunities where one can recommend some games to others and vice versa or where people can exchange game-related information. Today, the speed at which information can spread is extremely fast. Anything that experiences a boom in today's world is almost always riding on the wave of this information spread, so we have to construct a system which matches today's environment. In the past, TV ads and word of mouth might have been the main components of that system, but today, people argue how we should add the Internet to a system and how we should combine these efforts with smart devices, and we are aiming to construct such kind of comprehensive system. So far, we have been offering a loyalty program in which we offer corresponding points to those who have purchased our products, and we have been offering some rewards based on these points. What we are aiming to establish is not a simple extension of the existing loyalty program but a loyalty program with, say, the entertainment elements where the members feel that they have received certain rewards as a result of not only their purchases but also the history of their gameplay and how each consumer has interacted with others. Since it is impossible to define the requirements for this sort of loyalty program 100 percent in advance, we see it very advantageous that we are able to work with DeNA who will be able to flexibly deal with such requirements. We have not decided if the next meeting with you will be a Financial Results Briefing or a Corporate Management Policy Briefing, but around the end of October this year, we will probably have the next opportunity to communicate with you. We will prepare for that so we will be able to disclose more concrete information at that time.

Q 6

I would like to clarify the current situation of Nintendo 3DS. It was mentioned in today's presentation that there is still room for growth regarding Nintendo 3DS in the overseas markets. However, the company forecasts a unit sales decline for both hardware and software for this fiscal year. The forecast for R&D expenses does not show a large increase. Are there plans to shift development resources or are they simply conservative figures? What is the background to the company's Nintendo 3DS sales unit forecast?

A 6


First, I believe there is a great difference between Japan and overseas markets in terms of how much actual demand has been created based on the market potential for Nintendo 3DS. In Japan, Nintendo DS hardware sold more than 30 million units. Compared to this, some may point out that 19 million units are not enough. On the other hand, historically, there are not many gaming systems that have sold 19 million units four years after their launch. Also, considering the current Japanese market situation, it can be said that actual demand has been created considerably based on the market potential. However, there is still room for actual demand to be created from the female demographic. During the Nintendo DS and Wii era, the gender ratio of Nintendo consumers was 1:1. For Nintendo 3DS, this ratio has shifted toward the male side to some extent. In comparison to the gaming platforms of other companies, we have more female consumers, but I do think that this area is slightly weak considering the strength Nintendo has and also considering the trend following the gaming population expansion approach in which games can be accepted regardless of age or gender. Therefore, the challenge for the Japanese market is to be able to appeal to female consumers with ages ranging from young children to women over a certain age and even seniors. I believe this is what will determine the future growth.

As for the overseas markets, from the market potential point of view, the number of Nintendo 3DS units distributed is still small. In addition, in the overseas video game markets, consumer attention tends to focus on home consoles and we have not yet been able to overcome this hurdle. By observing the market reactions after the launch of New Nintendo 3DS, we started to see that with good software and hardware offerings we will almost be able to overcome that hurdle. This year, we intend to open that door. On the other hand, if we were to set forecasts assuming that this door is open, we could provide more aggressive figures, but Nintendo has not been able to meet its earnings forecasts a number of times during the past three periods that resulted in operating losses. Therefore, releasing a forecast resembling a target effort was not in my mind. Based on figures collected by sales teams from each sales region on "attainable targets," the forecasts we prepared are realistic targets for which we should aim. Therefore, please consider our sales units forecast to be based on not what we believe is the maximum market potential but rather sufficiently attainable targets.


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