Nintendo Co., Ltd. - Corporate Management Policy Briefing : Q&A (2)

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Q7	Nintendo has increased R&D budgets in the last couple years. What will be the R&D spending like in the coming years?

Iwata:		Technologies evolve and change very rapidly today. Our internal development resources alone are not enough to make attractive enough commodities for the customers. We need to invest our R&D budgets to a variety of different fields. Some of the investments will be materialized as software to be sold this year, some of them will be launched three years later and some of them may be introduced many more years later. This is how we had to increase the R&D costs in the last few years. When we launched GameCube, the initial sales were good, and all the hardware we manufactured at that time were sold through. However, after this period, we could not provide the market with strong software titles in a timely fashion. As a result we could not leverage the initial launch time momentum, and sales of GameCube slowed down. To avoid repeating this with Wii, we have been intensifying the software development, both internally at Nintendo and at developers outside the company, in order to prepare aggressive software lineup for Wii at and after the launch. In case of DS, I don't know if Miyamoto agrees if I say this but I'd like to use the term, "slowly" here (laugh). We want them to take sufficient time but while Miyamoto and others are "slowly" developing Mario Kart DS and Animal Crossing DS, we still need to provide the market with sufficient amount of software and, to make this happen, we spent R&D costs. Basically, we are doing the same thing for Wii. We believe it is important to provide the market with strong software without a long interval in order to keep the launch time momentum. Accordingly, I expect the R&D costs to increase a little bit rather than decrease significantly. On the other hand, I do not expect our R&D spending to be doubled or tripled because we do not have any immediate intention to build semiconductor manufacturing plant or something like that.
Takeda:		We have been discussing what range of R&D costs will be the most appropriate one for the company from both hardware and software perspectives. What we are targeting to realize is to make the Wii hardware relevant to each one of the different family members in one household. As we are trying to reach out to people beyond the traditional game players, we need to spend on other fields than the traditional game hardware and software developments in order to make Wii the nontraditional home video game console with dynamic appeal to anyone. Another thing I should add is that we are taking advantage of the new technologies in untraditional ways. We believe that we are spending appropriate amount of money to make the Nintendo Difference, and we are always trying to be more efficient in doing so.
Miyamoto:		Yes, I've been developing games "slowly" (laugh), thank you very much. When we started working on Nintendo DS, it was going to be the third important product for Nintendo in addition to the existing two home console and portable platforms, so I felt that we would have issues with our ability to produce a sufficient amount of software for all three platforms. The addition of Wii makes it four that we need to make software for. While I feel that we need more internal software development resources at Nintendo, we have not increased the number greatly. When we combine the total number of people working for Nintendo's first-party and second-party titles, however, there are far more than 1,500 people working on the titles today. Looking outside of this group, to tell you the truth, a number of people are having a difficult time selling the traditional types of game software. Whenever we can find people who have good talents and experiences, we are eager to support them so that they make games for Nintendo. That kind of R&D spending is also happening. This may sound imprudent but, honestly, I don't know how much we will need to spend in the end. As a software maker, the primary goal is to make great hit games. If there is a possibility of yielding a great profit, we should not hesitate to invest in that title. My own philosophy is that we should invest in people if they have the potential to make something interesting. I myself thought that I would work for Nintendo because the company could be a good patron for me to make something I would really want to make. To make hit software, we will need to spend on R&D in the future as well. Having said that, however, I am a very cost-conscious person, as you know by now. I have never spent money for non-prospective activities such as for building a movie studio. I'd like to decide the field where we can expect the efficient return for our investment so that our investors will be happy. Rest assured that I won't spend money the way you feel worried.

Q8	This question may be rather vague one, but is Nintendo really challenging when you look around the world?

Iwata:

This may have something to do with what Miyamoto told you right now, but our business is very special in various ways because our customers can never tell what we should make. In the majority of the other businesses, you are told, "You should ask the customers because they know the truth." So, you will thoroughly ask your customers what are the issues they feel about your products and try to make a hit product by solving the identified problems. In case of video games our job, in a sense, is to surprise the customers. Asking our customers, "what will surprise you," is the silliest question. Our customers will be surprised and happy when we can provide them with something they have never expected. For us developers, there is no way to expect what will sell and what won't. Having foresight, or the ability to forecast what works out well and what won't is a very important talent for the software planners in the entertainment business. Fortunately, Nintendo has been recognizing the importance of foresight for many years to run the company. This hasn't changed even after I succeeded Mr. Yamauchi's position, and Nintendo has been able to succeed in introducing a variety of unprecedented products. Of course, not every new unprecedented products Nintendo launched was a success. Something worked out, something didn't. In the end, however, the overall success ratio was higher than the average in the world, I think, and it must be because Nintendo has been sharpening up its ability to determine which unprecedented things may be likely to succeed. Miyamoto was talking about this when he said that he would like to invest efficiently. For example, we would forecast that making huge investment to that company won't yield the due sales result, so we shouldn't make the investment. As a result, those who are looking Nintendo from the outside may misunderstand that Nintendo is always investing on the safe-looking fields. The fact of the matter is, on the contrary, Nintendo has been investing in the unprecedented areas where no result is assured.

I don't know if this is a good example, but when we announced Nintendo DS, the unanimous reaction were, "What are we supposed to do with two screens?" and "I don't think the touch-panel can change the way how we play games nor create new entertainment because that technology has been available in the world for many years." Nintendo alone was thinking differently and betting that our unprecedented approach would succeed and be the right one. The handwriting recognition application for DS had been developed at Nintendo even before we started discussing the possibility of making Brain Age software at all simply because we thought that such an application could surely be useful someday in the future. When we decided to work on the Brain Age theme, the necessary technologies were already available to be used for the software and, accordingly, we were able to complete the Brain Age development in such a short time like 3 to 4 months and the software was launched in a timely fashion.

We have been working on a variety of different products, even when no exact usage is anticipated, as long as our foresight tells us that we should go for it and that it will be useful someday. So, I cannot agree to the idea that Nintendo is not challenging.

When I am surfing on the net, I often see such terms as "Web2.0" lately and feel that the world of the internet has entered into a new phase since last year. Looking at how video game companies are using Internet technologies, we have been wondering if it is the right approach to consistently use them just to compete against each gamer for 5 or 10 years. This is how we came to propose WiiConnect24, which will use the Internet for people to enjoy sharing information. I am yet to know what kind of revolutionary entertainment can be created with WiiConnect24, but we will not stop challenging these unprecedented things. You may feel that Nintendo has been doing things that it did not used to. You will be feeling the same way in the future as well. Whenever we sense that users' new needs must be there or there's got to be unique opportunity for us to surprise customers, we would always like to be an aggressive challenger.

Q9	You said that you received a variety of different reactions about the name, "Wii." Do you think you should have named it differently?

Iwata:

I am one of the people who have decided this final product name. Of course, I am not the only person to make this decision, but I have never thought that it was a mistake to name it, "Wii." I understand that a great many people have already accepted this product name. When someone has some hesitation today, we'd like to make efforts so that they will come to like this name in the end.

Q10	How many DS hardware units will you ship in Europe and America during this summer?

Iwata:

I can't make the regional breakdown today, but we will be in a position to produce more than 2 million DS Lite hardware per month during the summer. We will allocate them for the global markets and that includes the ones to be kept for the year-end sales in each territory.

As I said before, our top priority is to solve the severe shortage problem in Japan so that our consumers won't have difficulties in purchasing DS Lite at retail outlets. When I said, "more than 2 million," it is the monthly production number for the global markets. For your information, at the peak time of Game Boy Advance, I recall that the monthly production was around 2.3 million. In other words, monthly production of DS Lite will quickly reach the level of one of Nintendo's best selling game machines in the past .

Q11	What are the reasons why Nintendo cannot produce sufficient amount of DS to meet its demand? Is it due to the limited manufacturing capability? Or, couldn't you obtain sufficient components? Will things be different with Wii productions?

Iwata:

As for the launch time shortage of DS Lite, a major issue we faced was that we could not achieve the expected level of the yield ratio with the bicolor molding. We could have made a lot more DS Lite if we had had compromised on the quality level, but we have never wanted to do so. We do not want to compromise on the quality level of our commodities. Because we wanted to market only the commodities that we could be satisfied with, the initial shipments were limited.

When we are talking about 2.2 million monthly production, no single element can determine the whole picture. Any further addition to this will require the drastic change in how to secure each and every component. We may be able to add a little more, but if you ask me whether or not we will be able to double the production, I have to say that we will have to face major supply issues for major components.

Talking about Wii, as I said today, whenever we launch new game machine, there are always initial early adapter demand, and that exists in Japan, Europe, America and elsewhere. We announced that we are planning to ship 6 million Wii hardware during this fiscal year and, among them, we are intending to ship 4 million or more by the end of this calendar year, and we are preparing to make the productions. If we can ship this number and if no product shortage will be experienced anywhere in the world, it can be regarded as a failure for a new game machine's launch. In other words, we will be making efforts to keep the constant shipment to the markets so that severe shortage situation will not go on for a long time.

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