Presentation - 2011 E3 Expo Analyst Q & A Session

2011 E3 Expo Analyst Q & A Session - June 8, 2011

7	As an investor, when I look at the Nintendo 3DS launch, you launched a product that had a very similar form factor to what has been in the marketplace for many years now, at a US$250 price point with relatively little software, and had an advertising program that I think was rather small. What did you think was going to happen at this launch that didn't happen? And, is there potentially a larger issue that the form factor of Nintendo's handheld platform is, at this point, dated? Maybe it's time for a revolutionary Nintendo moment as opposed to what is showing itself to be only an incremental change that the consumer doesn't seem to be embracing.
7	Iwata: So, first I think it's fair to say that while Nintendo 3DS had a strong launch day, the results since then have not met our expectations. By which I mean to say that although pre-orders for this system were very strong and initial impressions of this system were very positive, those early indicators stand in conflict with where the system is at today. So, I can't say there are no issues at present. So, what we have analyzed up to this point is that the initial move by the early adopters has not translated into broader movement by the broader market in the ways that we had expected. The current situation resulted from the fact that the delay of developing Nintendo 3DS software and launching online services, like Nintendo eShop, 3D video services and so forth, occurred simultaneously, so we could not meet people's high expectations that they had before its launch, and we did not see momentum after the launch. I think that we'll be able to show you that as Nintendo eShop and 3D video services come online, and a number of key software titles become available, we'll be able to regain momentum for this hardware. Regarding the form factor, I think that people who purchase video game systems tend to purchase it for the experience that the system offers, so while I do agree that it's important for us to work on creating products with appealing form factors, I don't think that the current state of the Nintendo 3DS is because of a result of not having a significantly different form factor from our other handheld systems. But, as you have pointed out that you have a concern about the form factor, then as we continue to look at what we do with the system, we'll continue to take that into account and see what we can do to satisfy that concern.

As an investor, when I look at the Nintendo 3DS launch, you launched a product that had a very similar form factor to what has been in the marketplace for many years now, at a US$250 price point with relatively little software, and had an advertising program that I think was rather small. What did you think was going to happen at this launch that didn't happen? And, is there potentially a larger issue that the form factor of Nintendo's handheld platform is, at this point, dated? Maybe it's time for a revolutionary Nintendo moment as opposed to what is showing itself to be only an incremental change that the consumer doesn't seem to be embracing.

Iwata:

So, first I think it's fair to say that while Nintendo 3DS had a strong launch day, the results since then have not met our expectations.

By which I mean to say that although pre-orders for this system were very strong and initial impressions of this system were very positive, those early indicators stand in conflict with where the system is at today. So, I can't say there are no issues at present.

So, what we have analyzed up to this point is that the initial move by the early adopters has not translated into broader movement by the broader market in the ways that we had expected.

The current situation resulted from the fact that the delay of developing Nintendo 3DS software and launching online services, like Nintendo eShop, 3D video services and so forth, occurred simultaneously, so we could not meet people's high expectations that they had before its launch, and we did not see momentum after the launch.

I think that we'll be able to show you that as Nintendo eShop and 3D video services come online, and a number of key software titles become available, we'll be able to regain momentum for this hardware.

Regarding the form factor, I think that people who purchase video game systems tend to purchase it for the experience that the system offers, so while I do agree that it's important for us to work on creating products with appealing form factors, I don't think that the current state of the Nintendo 3DS is because of a result of not having a significantly different form factor from our other handheld systems.

But, as you have pointed out that you have a concern about the form factor, then as we continue to look at what we do with the system, we'll continue to take that into account and see what we can do to satisfy that concern.

8	Are you planning on making the Wii U more of a home entertainment console by including Blu-ray or DVD drives, or is it going to be more like the Wii, and just be more of a pure gaming console?
8	Iwata: Wii U does not have DVD or Blu-ray playback capabilities. The reason for that is that we feel that enough people already have devices that are capable of playing DVDs and Blu-ray, such that it didn't warrant the cost involved to build that functionality into the Wii U console because of the patents related to those technologies.

Are you planning on making the Wii U more of a home entertainment console by including Blu-ray or DVD drives, or is it going to be more like the Wii, and just be more of a pure gaming console?

Iwata:

Wii U does not have DVD or Blu-ray playback capabilities.

The reason for that is that we feel that enough people already have devices that are capable of playing DVDs and Blu-ray, such that it didn't warrant the cost involved to build that functionality into the Wii U console because of the patents related to those technologies.

9-1	Has the strength in the yen made the manufacturing process more difficult for Nintendo? How difficult will the manufacturing process be for the Wii U?
9-1	Iwata: It is true that any time you have an appreciation of the yen, it has a negative impact on our business here in the U.S. So, because the U.S. market is the largest market in the world for video games, and understanding the situation with the appreciation of the yen and the impact that that would have, we of course have to take measures to try to mitigate that, otherwise, our competitiveness in the U.S. market would become weaker and weaker. One of the measures that we are taking is that, for instance, where we are procuring parts and components or outsourcing manufacturing to EMS (Electronics Manufacturing Services), we have negotiated to make payments in U.S. dollars rather than in yen to the extent possible, and we are making further efforts to use U.S. dollars for the payments going forward. So, within the breakdown of our cost of goods manufactured and the extent to which we're paying in U.S. dollars versus yen, the situation has changed perhaps from what it was in the past where we were primarily paying in yen to one where we're now paying in U.S. dollars to a large degree. So, I believe on our investor relations page, we have some supplementary information that we release when we do our financial announcements that does include the information as to how much we are making purchases in U.S. dollars, and that I hope will give you an understanding of the degree to which we're addressing the issue.

9-1

Has the strength in the yen made the manufacturing process more difficult for Nintendo? How difficult will the manufacturing process be for the Wii U?

9-1

Iwata:

It is true that any time you have an appreciation of the yen, it has a negative impact on our business here in the U.S.

So, because the U.S. market is the largest market in the world for video games, and understanding the situation with the appreciation of the yen and the impact that that would have, we of course have to take measures to try to mitigate that, otherwise, our competitiveness in the U.S. market would become weaker and weaker. One of the measures that we are taking is that, for instance, where we are procuring parts and components or outsourcing manufacturing to EMS (Electronics Manufacturing Services), we have negotiated to make payments in U.S. dollars rather than in yen to the extent possible, and we are making further efforts to use U.S. dollars for the payments going forward.

So, within the breakdown of our cost of goods manufactured and the extent to which we're paying in U.S. dollars versus yen, the situation has changed perhaps from what it was in the past where we were primarily paying in yen to one where we're now paying in U.S. dollars to a large degree.

So, I believe on our investor relations page, we have some supplementary information that we release when we do our financial announcements that does include the information as to how much we are making purchases in U.S. dollars, and that I hope will give you an understanding of the degree to which we're addressing the issue.

9-2	How about the Wii U? Is it hard to manufacture?
9-2	Iwata: One of the reasons that we're talking about Wii U at the show this year is because our estimates of when we would be able to manufacture it and the timeline for launching the hardware are such that we feel confident that we'll be able to meet those timelines. So, if perhaps you were worried about a boom in smartphones that might use LCD screens having an impact on our business, with the current estimates that we have, I am not seeing any significant manufacturing issues.

9-2

How about the Wii U? Is it hard to manufacture?

9-2

Iwata:

One of the reasons that we're talking about Wii U at the show this year is because our estimates of when we would be able to manufacture it and the timeline for launching the hardware are such that we feel confident that we'll be able to meet those timelines. So, if perhaps you were worried about a boom in smartphones that might use LCD screens having an impact on our business, with the current estimates that we have, I am not seeing any significant manufacturing issues.

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