Financial Results Briefing Q & A

Financial Results Briefing for the 67th Fiscal Term Ended March 2007

11	Please tell us how you came up with the annual 14 million Wii hardware production schedule. You mentioned that you are increasing the production capacity. Is 14 million due to the supply limit? How do you estimate the demands in each market?
11	Iwata: We take into consideration many aspects when we make our financial forecasts. In this video game business, everyone is making efforts to become the number one company. Nintendo is making such efforts, and others are making the same efforts. Where everyone is making efforts, each one of us is trying to appeal its hardware and software to the hearts of customers. Naturally, we have to make assumptions on many different scenarios. Though we do not want that to happen, we may be late in developing a key software title that may affect the platform's sales speed. Or, more people than we expected may appreciate our offer and our platform may increase its sales beyond our expectations. Both are always possible. So, we have to first write a variety of different scenarios, ranging from extremely conservative to extremely aggressive ones. In the end, after reviewing all of them, we will decide upon the financial forecast that must be most appropriate to be presented to our investors in terms of the actual market. So, the yearly shipment forecast cannot be directly interpreted as a production limit. It is the target we have chosen as most appropriate among many different scenarios.

Please tell us how you came up with the annual 14 million Wii hardware production schedule. You mentioned that you are increasing the production capacity. Is 14 million due to the supply limit? How do you estimate the demands in each market?

Iwata:

We take into consideration many aspects when we make our financial forecasts. In this video game business, everyone is making efforts to become the number one company. Nintendo is making such efforts, and others are making the same efforts. Where everyone is making efforts, each one of us is trying to appeal its hardware and software to the hearts of customers. Naturally, we have to make assumptions on many different scenarios. Though we do not want that to happen, we may be late in developing a key software title that may affect the platform's sales speed. Or, more people than we expected may appreciate our offer and our platform may increase its sales beyond our expectations. Both are always possible.

So, we have to first write a variety of different scenarios, ranging from extremely conservative to extremely aggressive ones. In the end, after reviewing all of them, we will decide upon the financial forecast that must be most appropriate to be presented to our investors in terms of the actual market. So, the yearly shipment forecast cannot be directly interpreted as a production limit. It is the target we have chosen as most appropriate among many different scenarios.

12	You are forecasting a smaller Nintendo DS shipment than the actual shipment you made during the previous term. If you are aiming to have DS replace Game Boy Advance in the U.S., why do you have to lower the DS sales number? What is the total lifespan of Nintendo DS in your opinion? What kind of mid-term prospect do you have for the product, including the next generation of DS?
12	Iwata: Just looking at the Japanese domestic market in the fiscal year ended March 2007, we sold more than 9 million DS hardware, and we have to say it was an extraordinary case. Nothing can sell this much unless some social phenomena factor is there. In fact, as I see it, no other video game hardware was able to sell 6 million in one year in the past. But DS has sold far beyond this number. If we should try to base our forecasts upon such an extraordinary year, we would end up making too aggressive a target. We had to rather think, now that we sold this many in Japan last year, hitting the ceiling must not be incredibly far ahead. Including this kind of thinking, we had come up to the estimate that others might find a bit conservative, and we think it was appropriate. Speaking of platform life cycle, so far, home console hardware was changing the generation every 5 years or so, and the hand-helds had a comparatively shorter lifespan. This may be the case for the current generation of hardware, and Nintendo is always thinking, "what kind of new proposal can provide the customers with meaningful surprises?" Having said that, however, the actual lifespan of a platform has not been set in advance by anybody. Actually, it can vary depending upon the proposals made by the combination of software and hardware. If Nintendo thinks that we have met all of our challenges with DS and should just repeat the same things to stay conservative, the lifespan of DS as a platform would be rapidly shortened. On the other hand, if we can continue our efforts with DS to challenge the unprecedented, and if we can be successful on some of them, DS may be able to enjoy a far longer lifespan than any hardware in the past. Think if one hardware platform with one single architecture can enjoy very long lifespan on the market, to the extent it can be used as a social infrastructure. For example, it is said that more than 90 million of us have cell phone contracts in this country and that number of cell phones is being used today but, unfortunately, they are not sharing the same architecture. So, when someone is trying to use JAVA to create a game for cell phones, they must make one for one company and another for another company, each in order to comply with the different architectures. In the case of DS, we have yet to hit a 20 million installed base here, but when any software can run on this many hardware based upon a single architecture, I believe that platform will take on a completely different value. So, Nintendo is always working to prolong the lifespan of our existing platforms by exploring a variety of different proposals which create a lot of challenges for us. If we can succeed in these challenges, and if people will start saying, "I did not imagine that Nintendo DS would be used for this purpose" or "You should definitely bring your DS for this occasion because it will make a big difference," DS may enjoy a longer life, and we will continue our efforts to make that happen. On the other hand, the whole world may completely change with a single incident, so Nintendo has to prepare to make the next proposal to the world all the time. Of course, our hardware development teams are thinking about many things in making something new.

You are forecasting a smaller Nintendo DS shipment than the actual shipment you made during the previous term. If you are aiming to have DS replace Game Boy Advance in the U.S., why do you have to lower the DS sales number? What is the total lifespan of Nintendo DS in your opinion? What kind of mid-term prospect do you have for the product, including the next generation of DS?

Iwata:

Just looking at the Japanese domestic market in the fiscal year ended March 2007, we sold more than 9 million DS hardware, and we have to say it was an extraordinary case. Nothing can sell this much unless some social phenomena factor is there. In fact, as I see it, no other video game hardware was able to sell 6 million in one year in the past. But DS has sold far beyond this number. If we should try to base our forecasts upon such an extraordinary year, we would end up making too aggressive a target. We had to rather think, now that we sold this many in Japan last year, hitting the ceiling must not be incredibly far ahead. Including this kind of thinking, we had come up to the estimate that others might find a bit conservative, and we think it was appropriate. Speaking of platform life cycle, so far, home console hardware was changing the generation every 5 years or so, and the hand-helds had a comparatively shorter lifespan. This may be the case for the current generation of hardware, and Nintendo is always thinking, "what kind of new proposal can provide the customers with meaningful surprises?"

Having said that, however, the actual lifespan of a platform has not been set in advance by anybody. Actually, it can vary depending upon the proposals made by the combination of software and hardware. If Nintendo thinks that we have met all of our challenges with DS and should just repeat the same things to stay conservative, the lifespan of DS as a platform would be rapidly shortened. On the other hand, if we can continue our efforts with DS to challenge the unprecedented, and if we can be successful on some of them, DS may be able to enjoy a far longer lifespan than any hardware in the past.

Think if one hardware platform with one single architecture can enjoy very long lifespan on the market, to the extent it can be used as a social infrastructure. For example, it is said that more than 90 million of us have cell phone contracts in this country and that number of cell phones is being used today but, unfortunately, they are not sharing the same architecture. So, when someone is trying to use JAVA to create a game for cell phones, they must make one for one company and another for another company, each in order to comply with the different architectures.

In the case of DS, we have yet to hit a 20 million installed base here, but when any software can run on this many hardware based upon a single architecture, I believe that platform will take on a completely different value. So, Nintendo is always working to prolong the lifespan of our existing platforms by exploring a variety of different proposals which create a lot of challenges for us. If we can succeed in these challenges, and if people will start saying, "I did not imagine that Nintendo DS would be used for this purpose" or "You should definitely bring your DS for this occasion because it will make a big difference," DS may enjoy a longer life, and we will continue our efforts to make that happen.

On the other hand, the whole world may completely change with a single incident, so Nintendo has to prepare to make the next proposal to the world all the time. Of course, our hardware development teams are thinking about many things in making something new.

13	Nintendo has been taking very cautious attitudes on doing anything other than game entertainment. I also understand that this is not the year when you should explore something completely different in a public way, as you should focus upon the expansion of Wii hardware. However, I would like Mr. Iwata to tell us what kind of image you have about the challenge, schedule and size of these non-gaming efforts.
13	Iwata: You said that Nintendo has been cautious in doing anything other than games. It is true that Nintendo is an entertainment company and that Nintendo should focus upon entertainment. However, my understanding is that entertainment is expanding its framework. In the past no one would think that training your brain or studying English could be a video game, but they do now. Even cooking is a video game today. Compared with how Nintendo defined video games 5 or 10 years ago, we are now involved in far greater fields. When many of one hardware platform are used, and always bringing the hardware with you will make your life more efficient or interesting, it will further promote the expansion of the hardware. When great many numbers of a portable machine with one single architecture are there in the real world, the things that can be done with the hardware will also increase. I do not know if this is a good example, but Nippon Television hosted the Escher exhibition at the end of last year. When visitors visited the museum to see the illusionism paintings of Escher, they were temporary given a DS that Nintendo provided. Museums often let you borrow earphones so that you can listen to the explanations of the articles on display. Nippon TV provided the interactive version of this. Visitors could learn about the Escher's works. One of the exhibitions was Escher's note, but it was so valuable that it was contained in a glass case, but you could read the contents of the note by touching and turning the pages contained in the DS and appearing on the screen. Nippon Television was glad about the outcome and told us that only the thing they had failed to estimate at the beginning was that visitors ended up spending a longer time in the museums than expected. This is just one of the many proposals we have received, and an increasing number of inquiries are being made to our Licensing department regarding new uses of DS. We cannot review any proposals that may harm our existing business model of video games. On the other hand, as long as they do not interfere with our business model, I think we should review any such possibility. I am afraid but I cannot give you any concrete example today, but Nintendo is not reluctant in this kind of approach. With the increased numbers of a hardware with one architecture, there will be a variety of different possibilities for the machine to be used for the better sake of society, and it can be a step to make DS "the machine that enriches the owners' daily lives."

Nintendo has been taking very cautious attitudes on doing anything other than game entertainment. I also understand that this is not the year when you should explore something completely different in a public way, as you should focus upon the expansion of Wii hardware. However, I would like Mr. Iwata to tell us what kind of image you have about the challenge, schedule and size of these non-gaming efforts.

Iwata:

You said that Nintendo has been cautious in doing anything other than games. It is true that Nintendo is an entertainment company and that Nintendo should focus upon entertainment. However, my understanding is that entertainment is expanding its framework. In the past no one would think that training your brain or studying English could be a video game, but they do now. Even cooking is a video game today. Compared with how Nintendo defined video games 5 or 10 years ago, we are now involved in far greater fields.

When many of one hardware platform are used, and always bringing the hardware with you will make your life more efficient or interesting, it will further promote the expansion of the hardware. When great many numbers of a portable machine with one single architecture are there in the real world, the things that can be done with the hardware will also increase.

I do not know if this is a good example, but Nippon Television hosted the Escher exhibition at the end of last year. When visitors visited the museum to see the illusionism paintings of Escher, they were temporary given a DS that Nintendo provided. Museums often let you borrow earphones so that you can listen to the explanations of the articles on display. Nippon TV provided the interactive version of this. Visitors could learn about the Escher's works. One of the exhibitions was Escher's note, but it was so valuable that it was contained in a glass case, but you could read the contents of the note by touching and turning the pages contained in the DS and appearing on the screen. Nippon Television was glad about the outcome and told us that only the thing they had failed to estimate at the beginning was that visitors ended up spending a longer time in the museums than expected.

This is just one of the many proposals we have received, and an increasing number of inquiries are being made to our Licensing department regarding new uses of DS. We cannot review any proposals that may harm our existing business model of video games. On the other hand, as long as they do not interfere with our business model, I think we should review any such possibility. I am afraid but I cannot give you any concrete example today, but Nintendo is not reluctant in this kind of approach. With the increased numbers of a hardware with one architecture, there will be a variety of different possibilities for the machine to be used for the better sake of society, and it can be a step to make DS "the machine that enriches the owners' daily lives."

14	Our family bought Wii last year and is enjoying it. But as far as I'm concerned, I have many DS software to play with, but I have hardly played with Wii yet. Also, I found Virtual Console software so interesting that I have hardly purchased Wii's packaged software. I am concerned that this may be a cause to have lowered the software tie ratio of Wii in Japan. What does Mr. Iwata think about this? Also, I often hear such comments from my friends who own DS, "DS is so handy and interesting that I do not feel like buying Wii, which will be time-consuming." What is your approach to this type of people this year?
14	Iwata: Thank you very much for buying and enjoying so many of our products. Each customer has his or her own needs, and one platform, in order for it to succeed, must cater to so many different needs. So, for some customers, Virtual Console appears to be the optimal system and I personally know several people like that who have already filled almost all the 48 channels with Virtual Console software. For those kind of people, Wii is already like a dream machine, and they have a number of 5,000 Wii Points cards and think they are content with the existing features of Wii. At the same time, of course, there are other people who have shown no interest in Virtual Console. Some people make votes in the Everybody Votes Channel but do not play video games. Some people just play Wii Sports, and some others just watch weather forecasts. Currently, there are so many different types of Wii owners, but as for now, we want as many people as possible to make it a point of just touching the Wii Remote by whatever means. If people make it a point of touching a Wii Remote, when we can have a software that can later be regarded as a social phenomena, such as Brain Training for DS, it can be a solid foundation for the software and the hardware to spread. For those who have not touched a video game controller, the notion that they have to try to do anything on video game hardware in front of TV set is a huge hurdle to clear. However, if you are regularly checking weather forecasts with the Wii Remote, simply touching an icon next to Forecast Channel is much easier. This is where we are at now, I think. Even after people started to say that DS has successfully expanded into the Japanese market, I have been repeatedly saying, "the success of DS cannot guarantee anything for Wii" even though Wii has similar concepts with DS, or "asking customers to try and appreciate something unprecedented is a tremendously huge hurdle especially when we need them to try it in front of a TV set" and "that is why we need to ask them to touch Wii by any means in the first place." Probably, this is something we will need to focus on in the first half of this year. Later this year, as I said, we will launch hard-core gamers' games and, as we referred to on several occasions, we will also introduce "software with a health theme." At that time those who have gotten used to touching a Wii Remote will find it relatively easy to try these new software applications, we hope.

Our family bought Wii last year and is enjoying it. But as far as I'm concerned, I have many DS software to play with, but I have hardly played with Wii yet. Also, I found Virtual Console software so interesting that I have hardly purchased Wii's packaged software. I am concerned that this may be a cause to have lowered the software tie ratio of Wii in Japan. What does Mr. Iwata think about this? Also, I often hear such comments from my friends who own DS, "DS is so handy and interesting that I do not feel like buying Wii, which will be time-consuming." What is your approach to this type of people this year?

Iwata:

Thank you very much for buying and enjoying so many of our products. Each customer has his or her own needs, and one platform, in order for it to succeed, must cater to so many different needs. So, for some customers, Virtual Console appears to be the optimal system and I personally know several people like that who have already filled almost all the 48 channels with Virtual Console software. For those kind of people, Wii is already like a dream machine, and they have a number of 5,000 Wii Points cards and think they are content with the existing features of Wii. At the same time, of course, there are other people who have shown no interest in Virtual Console. Some people make votes in the Everybody Votes Channel but do not play video games. Some people just play Wii Sports, and some others just watch weather forecasts.

Currently, there are so many different types of Wii owners, but as for now, we want as many people as possible to make it a point of just touching the Wii Remote by whatever means. If people make it a point of touching a Wii Remote, when we can have a software that can later be regarded as a social phenomena, such as Brain Training for DS, it can be a solid foundation for the software and the hardware to spread. For those who have not touched a video game controller, the notion that they have to try to do anything on video game hardware in front of TV set is a huge hurdle to clear. However, if you are regularly checking weather forecasts with the Wii Remote, simply touching an icon next to Forecast Channel is much easier. This is where we are at now, I think.

Even after people started to say that DS has successfully expanded into the Japanese market, I have been repeatedly saying, "the success of DS cannot guarantee anything for Wii" even though Wii has similar concepts with DS, or "asking customers to try and appreciate something unprecedented is a tremendously huge hurdle especially when we need them to try it in front of a TV set" and "that is why we need to ask them to touch Wii by any means in the first place." Probably, this is something we will need to focus on in the first half of this year.

Later this year, as I said, we will launch hard-core gamers' games and, as we referred to on several occasions, we will also introduce "software with a health theme." At that time those who have gotten used to touching a Wii Remote will find it relatively easy to try these new software applications, we hope.

15	You said you want people to touch Wii, but there are few places where people can have a hands-on demo of Wii at retail shops. How do you cope with this situation?
15	Iwata: It is always difficult to let visitors have a hands-on experiences when wireless controllers are used (for the controller security reason). Also, when Wii Sports is the most wanted product for the demonstration, the retailers have to secure a large enough space to avoid physical contact with bystanders. These are the primary reasons why Nintendo is not doing hands-on demos for Wii right now in Japan. When we have Wii software for hands-on demos that does not require dynamic actions of the players, and if a wired controller will not diminish the feel of play, we may want to more proactively consider that possibility.

You said you want people to touch Wii, but there are few places where people can have a hands-on demo of Wii at retail shops. How do you cope with this situation?

Iwata:

It is always difficult to let visitors have a hands-on experiences when wireless controllers are used (for the controller security reason). Also, when Wii Sports is the most wanted product for the demonstration, the retailers have to secure a large enough space to avoid physical contact with bystanders. These are the primary reasons why Nintendo is not doing hands-on demos for Wii right now in Japan. When we have Wii software for hands-on demos that does not require dynamic actions of the players, and if a wired controller will not diminish the feel of play, we may want to more proactively consider that possibility.

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