Satoru Iwata Financial Briefing Q&A

Following on from Nintendo’s recently released financial report where the company posted record financial results despite the worldwide economic crisis, comes an investor relations interview with the company CEO, Satoru Iwata.

In this question and answer breifing, Iwata provides an in-depth insight into the problems that challenge the company and how Nintendo go about overcoming them.

Grab yourself a coffee and hit the link for the full Q&A.

Under the circumstance where shrinking of video game market may be concerned, your company’s products have been performing well. However, since the start of the financial crisis, I understand that the environment surrounding the company has been drastically changing. With that, have you noticed the changes in the strategies and actions by third parties and retailers? Please advise us including any influences to the company and your countermeasures.

Iwata:
When we revised our annual financial forecast in January this year, we received a number of comments especially on our software and hardware sales projections that Nintendo may be too conservative relative to the actual situation.
At that time, I felt what had been affecting the environments surrounding us the most was that people in the distribution channels around the world were taking a very cautious attitude about holding inventory, and as a result, they were taking a conservative approach when it came to placing orders for products. When this happened, the shipment forecasts by software publishers decreased and we had to lower our production forecast. There really was such a cycle at that time.
On the other hand, as you have noticed, the video game market has been relatively insulated from the changes in the economic circumstance when compared with the other industries. Therefore, many of the products that had actually been shipped to the distributors and retailers have been sold through to the consumers although the sales level varies depending on the product. Products with good sales results receive repeated orders so the products sell even more. We have observed that kind of tendency.
However, there are different types of software. Some are intended to be sold in a short time period so they are meant to make a steep sales peak within a short time range. Others are supposed to sell for a prolonged time period and meant to gradually build up sales in the long run. When distributors and retailers become conservative, the type of the software which must be sold thorough in a short time period receive the inevitable impact. This appears to have affected the software publishers’ businesses.
I felt that this was the biggest external impact. On the other hand, while there seems to have been a sense of panic amongst the distributors and the retailers from the end of last year until the beginning of this year, the situation today looks like it is calming down. So, I think such impacts will gradually weaken from now.
Having said that, when we analyze any businesses, we often make a comparison with the previous year or with the corresponding month a year ago Last year in April, May and June, we launched very compelling software one after another so that the overseas markets enjoyed unusual sales not tied to seasonality. This year, the company has to try and live up to that unusual sales results of last year. However, our major titles will be launched during and after summer this year.
As a result, when we focus upon the first quarter performance of our current fiscal year, it will not be easy to outnumber last year’s result. When you look at our financial forecasts for the mid-term and annual term, you must have noted that the allocation is different from that of last year. The timing for much-anticipated software launches decides our expected sales pattern. We analyzed that this year would be closer to how video games are usually sold within a year (i.e., the sales are mainly made in the year-end holiday season) and made the financial forecasts.
I am neither excessively pessimistic nor optimistic about it but in this ever-changing economic situation, we would like to continue our efforts so that we can maximize our business opportunity.

I’d like to ask you about price. You once said that you do not want to cut price because doing so would make early purchasers feel like they lost their money. But I think you may want to consider a price cut of Nintendo DS Lite in order to increase domestic sales. Including myself, those who have purchased a Nintendo DS Lite early on have also purchased a Nintendo DSi, so they should not feel regret even if you cut the price of Nintendo DS Lite. What is your current thinking on price cuts?

Iwata:
First of all, thank you very much for purchasing several of our products. When I was referring to this subject the last time, it was in the context that it would not be a good idea for price cuts to be expected as a regular practice in the industry. Of course, I have never said that cutting the suggested retail price is not in the cards. However, price cuts in one country can certainly affect other countries. For example, when you say that we should cut the price in Japan due to the current domestic market situation, once the suggested retail price is cut in Japan, people outside Japan will anticipate the same around the world.
10 or 15 years ago, each country could decide its own price policy in the video game market, as you know, however, price policy has become a global subject in the recent years. So, any price policy must be considered with the aim to maximize our global business. Because of this, we do not think just in terms of Japan.
Also, while the price cut is said to surely increase demand, it must be clear from a variety of analysis so far that the effect cannot last very long. Accordingly, if we really do enact a price cut, it must be exactly when it can maximize the business. At least for now, I have no specific ideas about the price cut at all.

Tell me about your view on third party software in this fiscal year. Due to good sales last year, the U.S. and European sales during January-March of this year were little below that of last year. As to your software plan in the latter half of the year which can regain sales momentum, are you mainly considering first party software? Or, are you expecting major third party titles for the plan? Will there be other software unknown to us now?
Also, the shipment forecast for DS software is less than last year. In Japan, the sales of Nintendo DS in the 4th quarter of last fiscal year ended up being the same level shortly before the launch of Nintendo DSi. You showed today the European figures from the UK, Germany and France. Are the European Nintendo DSi sales in the next month coming down to the same level of last year’s Nintendo DS Lite sales? Are you expecting to launch Nintendo DS software that can drive demands for hardware in the latter half of this fiscal year? At when is the company planning to launch software that drives the Nintendo DSi sales?

Iwata:
First of all, please understand that I am not in a position to comment on third parties software, especially when the lineup has not been announced by them.
The reason why I said today that April, May and June sales of Wii will not reach last year’s results but that the situation will change from summer this year was because the company has been preparing for several titles to be launched toward the end of this year that can drive the market.
Since the software publishers, especially Western ones, are telling us that they will focus on developing for Wii, we are of course hopeful that they will launch additional titles of which I am not aware today. On the other hand, we must disclose our financial forecast by publicly confirming the company’s plans with people in the market. We cannot unreasonably increase the expected shipment numbers by relying on software which may or may not be a great hit in the end, so these unknown software have not been taken into my consideration. However, there are possibilities that such titles can emerge, so we are hopeful.
As for Nintendo DS, software in general had experienced an over-exuberant period when any software could sell well as long as they launched. Such an overheated period, of course, cannot last forever. As time goes by, the difference between software which sells and those that cannot becomes obvious. The software that could not sell can become redundant inventory at distributors and retailers.
While there may be a different scenario if a brand new proposal that I am unaware of now would be made by software publishers and become hits, we have prepared our financial forecast based upon figures we were more certain of today. Accordingly, as the market is always changing, the opinion that calls our forecast rather conservative may be right.
We still need some time before we can determine the sales ratio between Nintendo DSi and Nintendo DS Lite. In the U.S. and Europe, portable game machines can sell relatively well in June and first half of July. Sales last year during this period were high, and we expect the same level of sales this year.
Nintendo is of course planning on launching software, and we expect the software publishers to make a variety of proposals, some of which will be appealing enough to attract new customers.

Can you confirm that you are expecting a 40 million unit increase in Wii software unit shipment for the current fiscal year mainly with Nintendo’s first party software?

Iwata:
The company has never disclosed the breakdown between first and the third party software of our software unit shipment forecasts, but I can say that it would be a mistake to think that the increase of 40 million units will be wholly attributed to first party titles. However, we can say that we are expecting the whole market to grow because Nintendo is preparing for its software.

Last year at this stage, I said that I was faced with severe memory shortages due to the lack of Wii’s internal memory because I had downloaded more than 40 applications onto my Wii hardware between Wii Channels and Virtual Console titles. I’d like to first thank you for solving it at last. With that, I have seen your “Wii-no-ma” announcement on Nintendo Channel and noticed that President Iwata sounded like repeatedly apologizing in the video for the delay in software launches for this spring. Also, last time when I asked a question, we discussed the issue that Wii Music was not selling very well. During January to March this year, Wii did not perform well in Japan. In addition, we are now seeing a delay in software launches. Before that, there were some software with bugs. While I highly appreciate your apologetic attitude in the Wii-no-ma video and I believe that Nintendo’s strategy is not wrong per se, I feel small mistakes are surfacing.
What do you think are the reasons why such mistakes take place? Is it due to the lack of resources at the low-level of the organization? Please give me your analysis and the countermeasure.

Iwata:
On behalf of the company I’d like to thank you very much for cherishing our products.
First, when we used recorded video footage to hold a sort of an online announcement for “Wii-no-ma” and explained the concepts of “Wii-no-ma” for viewers, I talked about (the plan for Wii) in the former half of this year. My real intention was not to apologize but to make clear to the viewers that the company is openly accepting that there are problems in the current situation rather than deny them. We thought we should deliver our such message to the people who proactively access our sites to see such a video.
Our Wii customers have kindly purchased our products by expecting new proposals to be made one after another. We must not be sitting back thinking that everything is fine because Wii is the best-selling hardware in the world today, especially when the company has not been able to fully meet their expectations,. Please understand that such a sentiment led to that part of my video presentation. I’d like to make clear, however, that we have not done anything immoral, so if your take away from that video was me repeatedly apologizing, please understand that I need to express my disagreement to your assessment.
As for the small mistakes, no mistakes are supposedly allowed at least for home console game machines, but the truth is, the bar has risen higher each year. It would be a misunderstanding to say that there might be some loosening or delinquencies within Nintendo’s organizations, that we are short staffed at the low-end level, or that the company is not spending sufficient time for testing and debugging as before. The energy that we are spending on testing our product before launch has remained the same. Due to the increase in products we are launching, we are putting much more resources than before as a whole.
If anything, our know-how and approaches may not have fully caught up with the increasing complexity of our products. Accordingly, we have internally set up a flow in which we review why a mistake has happened, what could have prevented it from happening, when could we have prevented it, and so on whenever any issue arises so that we can learn from it and apply to the future in variety of ways. We are making efforts to prevent future recurrences of past problems.
If you have included our inability to launch software in a timely fashion in the former half of this year as one of these mistakes, I have to express my disagreement to such a use of the term. Honestly speaking, whether entertainment software is good enough or not cannot be told until development nears completion. Even amongst the software created by Shigeru Miyamoto of Nintendo, some have turned out to be entertaining enough in line with the original development concept while some turned out to be lacking something in the end.
One of the reasons why Miyamoto is highly praised is because of his ability to stop, rethink about, and fix how he can convey the appeal of a software when he finds out during the latter phase of development that the software will not be good enough. This is why the games he has worked on have a high batting average to produce big hits. However, he is not God and even Miyamoto himself cannot hit the mark every time nor always predict how long it takes to complete development. I believe my management job is to set parameters of the development timeframe, and with this uncertainty in mind, to plan our product launch timings without too much time between each one, but it is not easy to get this down perfectly.
We are making efforts to not miss out on great opportunities. We are always searching for the next fun thing. With luck and some preparations, we hope to identify and catch these opportunities when they appear in front of us. However, no one can tell when these will comes to us, and it is inevitable that we may not always be able to launch our products at the most desirable timings.
While it is always my goal to be able to build development plans so that the company can constantly provide the market with software that surprises consumers in meaningful ways one after another, it is easier said than done and the actual lineup is not always as I had imagined it. Having said that, we have found some seeds of the potential next fun things, and I hope to discuss them sometime in the future.

I assume that you were hoping third party software would fill in the gaps. I’d like to hear about the countermeasure to the lack of third party software for Wii in Japan.

Iwata:
Although I think the financial analysts can receive a more accurate answer by asking the software publishers directly, I understand that two things are different when compared with the situation of Nintendo DS.
One is the time needed for development — it often takes longer to develop software for home console than for a portable system. Another thing is that home console software development teams of third parties were more focused on making software for other companies systems until quite recently, and this fact must be rather obvious to you too. You may want to contact third party publishers for any additional background, but what I can tell you today are these 2 differences.
Nintendo thought that the situation would change in about two years after launch. While our assumption turned out to be correct with the portable system, it did not progress as we anticipated for the domestic home console market. Fortunately, the U.S. and Europe are showing completely different scenarios in this regard. With the current domestic situation as key leanings, we would like to take more time to study what we need to do for the future.

Expansion into newly emerging areas has been one of the company’s themes for sometime now. Due to the limited hardware supply capacity, the company was not able to tackle this theme during last fiscal year. I’d like to know what kind of progress you have made, if any, in South-East Asian and South American countries through the end of last fiscal year. Also, I’d like to know if your forecast for this fiscal year includes plan for new markets.

Iwata:
As you pointed out, we had the hardware supply issue last year, so we were not in a position to actively deploy our products into newly emerging nations even if we wanted to do so. However, we have been doing business in South America from before, and it represents a little more than 5% of the entire business in the American continent, but the actual market potential has yet to be realized. In Asia, we have been selling our products in several countries through sales agents, but they have not become a significant business.
I may call South Korea as an exception. More than 1 million Nintendo DS for two years in a row and more than half a million Wii were sold in South Korea. Sometimes, it pays off when we focus upon one market and pour our efforts to develop the market there. In case of South Korea, we were first approached by chance for the promotion of local video game industry, which gave us the opportunity to interact with local software publishers in regard to the making of video games. With that as the starting point, we were able to start our business in South Korea.
That was the time when Nintendo DS was experiencing significant growth in Japan. We localized two-years worth of Japanese hit software titles to market them in South Korea in about one year. With such a fancy lineup, Nintendo DS was able to secure local supports in a short time period. However, it is not very often that we can find these desirable circumstances where the stars are all aligned in the new markets. When we encounter such a good opportunity, we may try once again, but it is not something we can do immediately.
Also, as I have mentioned this before, developing business in newly emerging nations is becoming a bit harder than before due to the rapid change in economic circumstance since last fall. For one thing, foreign currency exchange rates are fluctuating. I talked about the example of South Korea, but the rapid change in Korean Won’s appreciation against Yen has come to the extent where it now can significantly impact our business structure. Similar tendencies can be observed in a number of other countries. Furthermore, I feel that the recent economic situations have not only impacted the exchange rates but also made it more challenging to propose something new to newly emerging nations than to existing advanced nations.
I remember that around this time a year ago I was telling that deployment in the newly emerging nations would be the theme next year due to supply capabilities for Wii and DS. Due to the changes in the circumstance thereafter, I now feel that the time for us to face this challenge has been delayed a bit. Because of this, we have not accounted for any significant contribution from development in the newly emerging nations into the financial forecast.
Having said that, there is no doubt that there is a business opportunity in the future. When we see the time has come for us to tackle this, just like we have done so in South Korea, we feel the possibility that we will be able to create a new market by pouring massive efforts in a short time period.

I’d like to ask about your company’s online strategy as a whole. During the last Game Developers Conference, so many third parties were showing iPhone applications that I expected a surge in their download sales. How does President Iwata evaluate iPhone? How do you feel about the current situation of Nintendo’s WiiWare and DSiWare? What is your future prospect?

Iwata:
People often said that Nintendo and Apple share much in common and I’ve often been asked how I feel about Apple products because I myself have been using Apple products.
Quite recently, media have been reporting that iPhone is a rival to Nintendo DS, but I do not strongly agree mainly because of the difference in the customers. For the customers with whom we have the most strength, it must be rather difficult for Apple to reach, and for the customer base where Apple has the biggest strength, Nintendo products would have a hard time in receiving their appreciations.
About online sales in general, if people ask such extreme question as, “Do you think that 20 years from now, customers will still be visiting retail outlets in order to purchase the majority of software in packaged format?”, I will then have to answer, “well, perhaps, the situation will be different.” However, if I am told, “within a couple of years from today, there will be no retail outlets which will be selling packaged software,” my reaction must be, “there’s got to be something wrong with that assumption because I do not believe people’s behaviors can change in such a short time.”
Already today, a number of people are aware of and appreciate the convenience of online shopping. Accordingly, Nintendo must be making efforts to provide them with the new mode of shopping. Simultaneously, however, I do not believe the competitive edge that packaged software has today will easily be taken up anytime soon.
Also, I do not imagine that iPhone will dominate the Nintendo DS market at once. My impression as the person who has used iPhone is, it is very attractive but, frankly, I did not feel that it was designed to be appreciated by a wide variety of people like how Nintendo has been designing its products.

Please tell us about the current situation of your online sales including WiiWare. Has it been progressing as you originally expected? If there have been more challenges than expected, what kind of countermeasures are you going to take?

Iwata:
To answer your question, I really hope that every one of you will experience our services for yourself. We have been offering the 1000 point giveaway campaign where, if you access the Nintendo DSi Shop with your Nintendo DSi, you will receive 1000 Nintendo DSi points. You don’t have to have Wi-Fi environment in your house. You can go to a retailer with Nintendo DS Station to access the Nintendo DSi Shop. Because of this, we had certain expectation as to the number of Wi-Fi connections for Nintendo DSi, but our expectation has not been met so far in Japan. On the other hand, in the U.S., relatively high connection ratio has been reported from the start.
This gap (between our expectation and actual connection rate) must have been caused by the differences in the speed with which the customers can realize the advantage of doing so and in how the information can spread. By all means, we need to encourage Nintendo DSi customers to try at least once, and only then can we push forward with the new appeal of Nintendo DSi that is added value to just playing packaged software and with the new concept of Nintendo DSi to make it your own DS. . We really want to make progress on this front. We will continue to offer new ways by all possible means in order to encourage our customers to be able to appreciate the real attractions of the Wi-Fi connections.
I personally like new things and am a typical early adapter type who purchases a lot of new things on the market and try them out for myself. If everyone in the world were like me, companies which are offering something new would have an easier time with their businesses. But in reality, such customers like me are not many. So, we have to wrack our brains in order to come up with smart ways to deliver our messages effectively to a wide variety of different consumers. This thinking applies not only to Nintendo DS but also to Wii.
A number of early purchasers of new video game hardware tend to be those who love something new on the market, so the net connection ratio can be high at the beginning, but if we do nothing about it, it can gradually go down as the hardware increases its installed base. In case of Nintendo platforms, (because the company has been challenging itself with several measures), net connection ratios have gradually been increasing as time goes by. We are making efforts with the hope that it will someday reach and go beyond the tipping point. The current situation, however, is that we are observing only a gradual increase.

Because you started “Wii-no-ma” Channel on May 1 in Japan, I was watching the programs everyday throughout the Japanese Golden Week holidays. I have also watched Mr. Iwata’s video announcement, and just as you said there, it gave me the expectation that Wii-no-ma can be a platform on which professional video creators will be able to break the curse of TV viewer ratings and to exercise their creativities freely.
A few years ago, when I asked Mr. Iwata about the company’s policy on M&A and joint ventures, you answered me by using the expression that you didn’t want others to take shelter with the eaves of your house just to see your entire house taken by them in the end (ref.: a Japanese expression similar to “give him an inch and he’ll take a yard”). The impression I got with Wii-no-ma was, although I may sound eccentric, you are constructing a house with solar panel roofs with the other companies in order to feed more light inside the house. However, I can also assume that the fact that you had to work on this could be a remote cause for the reason why you were not able to make new proposals in the early half of this year.
I can anticipate a number of new challenges with the company such as touch-generation titles made in overseas markets and your tackles with the newly emerging markets. In any case, word-of-mouth will have greater significance, and how many of the software and so-called incendiary devices you can build in at what timing will become increasingly important.
Under such a circumstance, how do you allocate the limited management resources in terms of such different factors as products, regions, targeted user demographics and new services? To put it in a much simpler way, what is the thing that excites Mr. Iwata most at this point in time?

Iwata:
Very profound question, I should say. First of all, regarding your assumption that Nintendo could have filled the opening of software lineup if it had used the same amount of management resources only to create more number of packages software, you may be right in terms of the outcome accountability since there were openings between software launches in the end.
It was not just “Wii-no-ma” but also other projects on Wii Channel services and relating to WiiWare and Nintendo DSiWare that require software developers outside the company to cooperate with us for these efforts. Since the resulting works are introduced as Nintendo products, there has always been Nintendo’s involvement. Especially with testing and others that were another topic today already, Nintendo always has to conduct the final checks before any of our products are introduced to the public. In that sense, there are limited resource and so must be fought over within the company.
On the other hand, if you ask me if there will be a bright future for the video game market only by continuously offering products with the same structure but with different quality, or just by launching sequels to the previous big hit titles one after another, I would have to answer no.
I brought what I really wanted to tell you today most to the final part of my presentation. That is, why Nintendo thinks much of the number of user per household and what it means if that number is high. In the past 5 years or so, Nintendo has been challenging itself to expand the gaming population, and we have come to believe that gaming population expansion can happen only when word of mouth recommendations can take place between different age demographics and between genders and that the future potential of the market will shrink if we are just looking at the people who are proactively accessing game-related information.
Because of our belief that future of video games as a whole will not be bright unless we can encourage new customers to join, we challenged ourselves with many different things. During that course about three years ago was when we came to notice that the number of users per household could become an important criterion, and since then, we have been making much of this number.
Therefore, if you ask me what excites me most today, I must answer that it is the increase in number of users per household. To put this in other ways, I get excited when we find out some ideas with which our products can be talked about more at home, or people feel like encouraging other family members to try out, or feel like talking about it.
However, such a bud of an idea is not guaranteed to be a commercial hit. For example, Brain Training software in some sense may have drastically changed the Japanese, or even the global video game market. However, the concept of training your brain must have already been there before our Brain Training DS software. There might have been other people who had thought about the possibility of turning such ideas into game software. It was just by a chance that we were the first ones to propose the idea to the mass-market and receive strong support from the market.
Whenever I encounter such an idea, I am excited. However, mere excitement cannot make a product. For example, I myself have several ideas that excite me now. But they have not been materialized. If they were completed and ready to be launched tomorrow, I could say today, “Look at what we have for you.” You might then have a better prospect with the future of the company. Although we have several new proposals (that we are developing) today, they have not reached the point where we can announce today when they will be launched or show how completed they are.
Because I myself come from a developer background, I am making it a point to meet with development teams whenever I find any exciting ideas and sharing the reason why I am excited about it and where I can find the potential. Furthermore, I ask the developers to let me experience first-hands the products they are working on in order to tell them how I feel about it as a customer or how I expect my family members will feel about it. To be involved in this development process itself is the most exciting thing for me.
So, the answer to the question of what excites me most is not such simplistic answers, not categories like online business nor video delivery service. I am excited when I find a new opportunity that may increase the frequency at which our products is discussed amongst family members at home or that may encourage the people categorized with a pink color (non-users in the game population compositions graphs used in the presentation) to become blue (active users in the same graphs).
Perhaps, the video game market in the past simply concluded that these people in pink were not our customers, period, and conducted our businesses with the people in blue in mind. However, Nintendo has been thinking about how people in pink and yellow (sleep users in the graphs) might come to appreciate video games by some means even though it would not be easy. And the fact that we were able to do that to some extent was the big factor behind the changes taken place in the U.S. and Europe. Even today, there are many more people in pink and yellow, but until all the customers shit to blue, our challenge will continue.

It is important for a manager to see operations in perspective. About the results of the survey you showed (during the presentation today), those who are most willing to participate in this type of surveys must be those who are actually using (the video games), and there must be other groups of people who have purchased video games but have gradually used it less and less. While, on one hand, you have been very successful in appealing to a wide age demographics, you also have software that deal with health or exercises that can easily go in and out of style and accompanied by risks. Have you ever surveyed the group of people who have purchased video games but no longer play and do not want to participate in such a survey? What does the changing age demographic mean at all? Is it meaningless to survey those who quit using video games as they will not start using them again? Please advise me about these.
In relation to that, we have so far seen a certain platform for several years until the transitions to a new, revolutionary platform happens. Now that you have captured a wider population, do you think the current platforms can last a bit longer? Will we at least see the current platforms in the next two or three years on the market? Or, do you think that people in the higher age group will appreciate the next revolutionary platform and that you can transition them to the new ones soon?

Iwata:
Before publicly disclosing our internal surveys in this fashion today, I myself have considered many things.and, as a matter of fact, have thought that some may question its credibility and ask us whether the company was manipulating the result to our favor.
First, I myself have been involved and concerned about the accuracy of the survey results with extreme attention. To tell you the truth, our U.S. subsidiary had conducted a different survey once, prior to the ones I showed you today, but it did not provide the accuracy that I was looking for. Let me tell you how we are checking the account. We are asking about 3000 people in Japan and 4500 to 5000 people overseas to cooperate. Whether they really represent the entire citizens in the country or not matters most in order for us to make management judgments. If they were biased, the results of the sampling survey can never show a meaningful gaming population transitions at all.
Here is an effective way to check the accuracy: Because we can learn (from survey results) many things including who owns which hardware or uses at home, we compare how the survey result measure up against the installed base of the hardware with the sell-thru data of that hardware. If the balance is within a certain range, we can tell that those who were sampled represent the entire population. If the accuracy is not within the predetermined range, we can tell that we have chosen the wrong people for the purpose of the survey.
We have been paying special attention to this point. Accordingly, the surveys have not been biased as you might be concerned to those who are Nintendo’s loyal customers or who appreciate games (and not the ones who do not play anymore). We have been checking the accountability of the survey with a variety of different ways and now have become able to come up with survey results with a certain level of accuracy. What I have shared today are the results of the surveys only after we thought that we were starting to come up with accurate ones. So, as the premise, let me confirm that we are confident about these survey results.
As a matter of course, there is no guarantee that anybody who has purchased a video game hardware will continue playing with it. This is not anything new, nor did it start with Wii or Nintendo DS. As you might recall, when NES, Super NES or Sony’s Playstation was leading the market, people brought out their game systems from the closet in order to play with a Dragon Quest software after its launch, just to put away the system after playing the game through to the end.
Of course, whether or not a game hardware is actively used is of great concern to us so we investigate it. You may have some vague assumptions that those who started playing video games with Brain Training or Wii Fit must have stopped playing with any video games as soon as they got tired of these initial software and that those who have been long gaming fans must continuously be playing one game after another. Well, the actual situation is not that simple.
We are, in fact, using several other data in our variety of analysis, including the data obtained through our Club Nintendo, and we have come to understand that there has never been a situation where people who started playing video games with any particular game tend to quit playing soon. Regardless of the first software, those who continuously purchase additional software maintain their active game plays, and those who opt not to purchase software repeatedly will stop playing. Likewise, we have not been able to identify any particular software, of which its purchase discourages the player to play frequently or becomes the primary cause for the purchaser to stop playing. In other words, when people stop playing with video games, they do so without any apparent reason.
Nintendo has been doing a number of researches about what degree and frequency our customers stop playing video games and how we can rebuild the market by offering new proposals with what intervals (in order to once again encourage those who quit to resume their game plays or prevent those who are going to drift away from doing so). We have yet to come up with any concrete answers yet. At least, it appears to be not as simple as you said that software dealing with health or brain training tend to be a short time fad with a big risk of going in and out of style easily. Video games are, or any entertainment commodities are, supposed to go in and out of styles easily so we must periodically make new offers. If we fail to offer new proposals, a good market condition today can instantaneously turn into a very bad one, which is characteristic of this industry.
In the past, there were so-called platform cycles for the video game hardware. It was said that 4 or 5 years for a portable hardware and 5 or 6 years for a home console hardware were the platform cycles, within which new hardware are sold and gone.

Of course, we have no intention of disbanding our hardware teams since we do not think that Nintendo DS and Wii will last forever. Our internal hardware teams are always researching and working on new hardware so that we can launch them whenever we find an very interesting idea that can make people all over the world to feel like purchasing our new hardware just to play with the software, or when Nintendo or third parties developers come to the conclusion that, after all these different endeavors, there are no more ideas nor tricks with Nintendo DS and Wii to make software to surprise people in meaningful ways.
You may not be able to believe this, but even when Nintendo has completed a hardware, it does not mean that we will surely launch it. From the initial concept building phase, it normally takes two to three years in order to develop a hardware. So, as soon as a new hardware is completed and introduced to the market, a team is established within the company which starts reviewing what the next hardware will be. Following a completion of a new hardware development, if the company determines that it will be better to continue with the sales of the existing hardware on the market after reviewing the circumstance comprehensively, it can no longer be used as it is in the future because that new hardware was optimized to be launched at that time. Some of the ideas may be used again in a new hardware. However, at the very least, we have had certain custom chips completed that ended up being unused, and it can happen again in the future.
So, Nintendo has always been prepared for the launch of new hardware. However, that hardware is not needed until the time our software developers see the end in making new software with the existing hardware, or unless we have no more new market to explore and all the potential consumers have purchased our hardware. The ordinary technology-driven companies would write the technology road map to anticipate what kind of technology will emerge in the future in order to determine a new hardware launch timing based mainly upon the convenience of hardware developers. In Nintendo’s case, however, the more decisive factor is when the software developers will start demanding for new hardware as they cannot create any more software with surprise factors with the existing one. Nintendo has always been making the hardware in order to prepare for that day to come.
Accordingly, we have not been working with such a mindset of “what to do in the next few years.” However, when we observe today’s situation, I have the impression that the cycle for this time appears to be a bit longer than in the past. I also have the impression that an increasing number of those who used to believe in the past platform cycles are starting to say that the shift to the newer generations may take place a bit later than previously believed.

I have been thinking about two concerns for the company: One is about the expansion of used game business overseas. I heard somewhere that they now have about the 30% of the market share in Japan and also that the secondhand market is rapidly expanding, especially in the U.S. We would like to know your understanding on this issue and countermeasures, if any.
Another one is concerning the development. I may sound a bit too severe, but I do not see constant launches of major titles. Isn’t it true that you are running out of ideas? Maybe it is due to the high hurdle that has been set. I mean, for your own titles to be called killer applications, unlike other ordinary companies, the unit sales must surpass 10 million today.
You have a legendary leading creator called Mr. Miyamoto within the company, but I am also concerned that young talents have not been fostered to follow or exceed him. I am even starting to wonder if the company is at its early stage of big-company disease. Please advise me of your understanding and countermeasures.

Iwata:
First, we tend to agree with your understanding that the secondhand market is expanding abroad. I have heard a strong sense of concern from management of overseas software publisher over the situation that the number of major retailers who are beginning to place more importance on the used markets is increasing and that Amazon recently started to seriously deal with secondhand products. One of the reasons why more overseas software publishers than in Japan are having greater expectations over download sales must be because of the fear that today’s issues surrounding the used business can grow to be a major problem in the future.
If it were illegal acts like piracies, we could criticize them. But, however hard we may express our concern about the secondhand market, as long as they are not illegal, it does not do us any good. With video games, because people do not see much deterioration in the quality when they purchase as secondhand, it may give publishers a hard time if the used product market grows.
On the other hand, this is one of the changes in the social circumstance, and it is our job as publishers to think of how to cope with the changes. When you ask me how we will cope with this issue specifically, our answer is that Nintendo must continuously craft ideas so that our consumers will feel like owning the purchased products or think about how to motivate the customers to purchase new products instead of used ones.
You also pointed out that we may be running out of new ideas in developing our products. I think Nintendo must be the only company in the world that, immediately after announcing record sales and profits in all accounts, is criticized for a potential lack of new ideas. I think this is because the company has been continuously making new proposals one after another and has raised the bar so high. We understand that we are always challenging ourselves with higher hurdles in order to give more surprises to people than ever. So, regarding your concern of the “big company disease”, I should say that we are continuously raising the bar so that we don’t even have the time to get this disease.
People’s expectation for us is also definitely rising. I have to feel that the world has changed. Not a few years ago, I thought that the job of corporate spokespeople and marketers was to raise the expectations of people and of the public toward the company and its future. Recently, however, I am feeling with increasing frequency that it cannot be applied to Nintendo. Today, if I should make such comments like “the next product we will launch will be great,” that other CEOs are often making, people would have extraordinarily high expectations toward it and will end up feeling that it was not up to their expectations regardless of whatever product we will have launched. Of course, we cannot afford to lower the customers’ expectations of us too much, but we have to communicate with everyone so that people’s expectations will not be too big. We are currently in such a phase.
Also, the speed at which something new is regarded obsolete is becoming incredibly faster. Should we advertise and create a lot of buzz from many months before launch, the customers may feel as if they have gotten tired of the product even before the product launches. There is a risk today that they may feel that they have already experienced it enough and are done with it prior to launch.
In today’s circumstance where we need to refrain from making a big announcement or sharing information much in advance of the actual launch in the marketplace, it may appear that Nintendo is not making as many new proposals as before and that the company might be running out of new ideas. Objectively, we do not believe that the pace at which the company has been making new proposals has greatly slowed down. Also, whether our new proposals become a great hit or not sometimes depends on luck. Furthermore, just as you pointed out, Nintendo software today has a higher unit sales criterion to be called a killer application, so it is becoming increasingly challenging to clear that bar.
As to your question of whether the successor of Shigeru Miyamoto has been groomed or not, even though there has been a number of Nintendo products which accompany his name or that has been sold by identifying Mr. Miyamoto as the producer. However, he is just another human being, so it is not possible that every single idea contained in these software was the sole creation of Shigeru Miyamoto.
Certainly, when it comes to identifying and verbalizing some of the important major findings, few people can easily succeed him. For example, few people other than Shigeru Miyamoto can declare that weighing yourself everyday must be fun for everyone. However, the fact that Nintendo software is always full of unique and fun ideas attest to the fact that there are many good game creators at Nintendo. Together with Shigeru Miyamoto, all of them have been making what are called Nintendo software. So, I have never thought that we have not fostered game creators at the company.
On the other hand, I know that people like Shigeru Miyamoto and I have lived in very fortunate times. Specifically, we were able to experience video game development as forerunners in this industry when we were young. It is one of the big themes for us to think about how we can transfer what we have learned to the younger generation who will never have the same experiences. We have been tackling with this mission in a variety of different ways, but I’d like to talk about them only when we can come up with some concrete result and when we will be able to tell you this developer or that, who has been trained through this way, has made such a software. We do not have any pessimistic view about it, and we have never had hard times trying to come up with new ideas. It is just that it has become increasingly harder to talk about new ideas much in advance of the actual launch of the product. Thank you for your understanding on this.

The company is in very healthy financial condition and you once again confirmed net cash in the range of 1 trillion yen. I know you have always been asked of the usage of the cash in the future, but as I notice the changes in the environment, hardware sales and competitions, I’d like to listen to your ideas on how you would want to spend your cash, including the possibility of stock buy backs and others, or if you intend to maintain the current cash level.

Iwata:
As you know, video game business is a very high risk business. It takes only one product to change the landscape all at once. Today’s video game market is advancing with a scenario which was unimaginable just a few years ago. Several years ago, some people in the stock market used to openly announce that there was no need for companies to keep cash deposits because you could borrow them whenever necessary. I think I can today say that the situation in the last 6 months has proved that they were wrong. As long as we are doing business where we have great risk at times, my belief is that we have to be cash-rich if we commit ourselves to continuing our business.
So, it is very hard for me to imagine that Nintendo will abandon its cash-rich position all together anytime soon because doing so will significantly narrow down the options we can choose from in the future, which will weaken the competitive edge of the company towards the future and, as a result, the company will have a harder time being appreciated by the shareholders. This is my basic stance.
Being able to hold sufficient cash means that the company has a number of different options. The possibility of stock buyback that you mentioned is one of them, and when we feel the need to do so, we will. Or, even though we do not have any such concrete plan today, if we encounter a great technology or patent that could give us a great edge for future challenges, Nintendo may be able to exercise the option of M&A even though we have hardly done so in the past. When that one technology or one patent is going to be the decisive factor for our future, we want to be able to exercise our option to take it. We hope that people invest in Nintendo by understanding that being able to have the freedom to choose our business structure and our operational structure is one of the most important factors and strengths that allows us to move towards our challenging goals.

Source: Nintendo Co. Ltd