Corporate Management Policy Briefing / Third Quarter Financial Results Briefing for the 73rd Fiscal Term Ending March 2013

Corporate Management Policy Briefing / Third Quarter Financial Results Briefing
for the 73rd Fiscal Term Ending March 2013

Outline | Presentation by the President | Q & A

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4	I have a question about Wii U’s architecture and development of the hardware. After the launch of Wii U, there are few games in the release schedule now. As Mr. Miyamoto said about the high-definition graphics of "Pikmin 3," the graphics of the version I tried at a preview event last year, including lighting, were pretty rich. In addition, although most people might place little value on the graphics of "Nintendo Land," they seem to take full advantage of the GPU (graphics processing unit) of the console. With all these factors, I think that the architecture of Wii U is much different from previous trends and that therefore development, including the development of game engines, was harder, in particular, in the aspect of tuning. Would Mr. Miyamoto let me know the difficulties of development in the early stages? Also, I would like Mr. Takeda to tell me about the architecture of Wii U. After reading the "Iwata Asks" interviews, I felt you value the GPU more than the CPU (central processing unit). My impression is that, for previous consoles, the sizes of the CPU and the GPU were not so different. Why did you choose such architecture for Wii U? In light of the integration of architectures in today’s presentation, the portion of the CPU is probably smaller. It would be helpful if he could comment on this point.
4	Miyamoto: Lighting is an inevitable factor to make use of high-definition images. We did not actively use technologies to render high-end graphics in real time for software development for Wii and previous consoles. Therefore, although the name "Wii" was handed down from Wii to Wii U, we needed to hold many workshops to learn about such technologies. We already went through this initial learning phase and are now tackling how to take full advantage of high-definition graphics. In this sense, retraining our developers used to be a great hurdle. Thank you for appreciating the video we disclosed last May. All of our development team would be glad to hear that. (Iwata: I am sure the graphics are now much better.) We really enjoy creating images that are so lifelike that it is as if Pikmin were actually living there. We think Pikmin is suitable for computer graphics. At the last E3 show, we showed video footage of Pikmin wandering around me in my room backstage and then I actually appeared on stage with them. We would like more people to experience videos featuring Pikmin. In this effort, when you visit movie theaters operated by a movie chain, TOHO Cinemas, you will see Pikmin with the logo of TOHO Cinemas before a movie starts. Also, when you see a 3D movie there, you will see Pikmin and a monster called Bulborb racing around in a demo video to urge you to wear 3D glasses. I hope you will go to see it and look forward to the game which features Pikmin. (Questioner: Is the current development structure suitable for the new architecture?) Miyamoto: We have not specifically changed it. We have just put the right development staff members in the right place to raise the level of each development phase. The other point is that many of our third-party software developers have been dedicated to technologies like shaders. As Wii U is designed to bring out their real strengths, there have recently been more cases where we develop something with their help. It has been more convenient for us to work together with them because they have been able to more smoothly utilize their know-how for development for Wii U. Iwata: I may add that each game console has its own unique qualities, and developers must go through a trial and error phase to acquire the knack of taking full advantage of them. This time does not come until a final version of the hardware and development tools for the version have been made available and then a base for software development has been established. For Wii U, such a time finally came in the latter half of last year. In this sense, we could not avoid the trial and error stage to create games which take full advantage of the hardware. I think that this is true for third-party software developers as well as Nintendo’s. The home consoles of other companies are six or seven years old and software developers have sufficiently studied them and know how to take full advantage of them well. As Wii U is new to them, some developers have already acquired the knack and made good use of its features and others have not. You might see this gap among the games that are currently available. However, we are not much concerned about this problem because time will eventually solve it. Actually, we believe that our in-house development teams have almost reached the next stage. It is not true that we are deadlocked with a lot of trouble in our development. Otherwise, we could not aim for 100 billion yen or more in operating profit for the next fiscal year. Here, I would like Mr. Takeda to tell you about the architecture of the Wii U hardware. Genyo Takeda (Senior Managing Director, General Manager of Integrated Research and Development Division): I don’t want to talk about anything too technical, but in my view, Wii U is a console with low power consumption and has fairly high performance. Regarding your comment that we focus on the GPU and that the CPU is a little poor, we have a different view. It depends on how to evaluate a processing unit. In terms of die size (area a chip occupies), the GPU certainly occupies a much larger space than the CPU. As you can see CPUs used for the latest PCs and servers, however, it is usual for current CPUs that the logic part for actual calculations is really small and that the cache memory called SRAM around it covers a large area. From this angle, we don’t think that the performance of the Wii U’s CPU is worse than that of the GPU. In other words, we have taken a so-called "memory-intensified" design approach for the Wii U hardware. It is no use saying much about hardware which should remain in the background in our entertainment offerings, but at least we think that Wii U performs pretty well. In regard to GPUs, they are so advanced that other companies in the video game market seem to be on the same path. Developers have also been accustomed to programmable shaders to create games. In this sense, we think that the entire industry, including Nintendo, has had less trouble in this field than in the time when shaders were emerging.

I have a question about Wii U’s architecture and development of the hardware. After the launch of Wii U, there are few games in the release schedule now. As Mr. Miyamoto said about the high-definition graphics of "Pikmin 3," the graphics of the version I tried at a preview event last year, including lighting, were pretty rich. In addition, although most people might place little value on the graphics of "Nintendo Land," they seem to take full advantage of the GPU (graphics processing unit) of the console. With all these factors, I think that the architecture of Wii U is much different from previous trends and that therefore development, including the development of game engines, was harder, in particular, in the aspect of tuning. Would Mr. Miyamoto let me know the difficulties of development in the early stages? Also, I would like Mr. Takeda to tell me about the architecture of Wii U. After reading the "Iwata Asks" interviews, I felt you value the GPU more than the CPU (central processing unit). My impression is that, for previous consoles, the sizes of the CPU and the GPU were not so different. Why did you choose such architecture for Wii U? In light of the integration of architectures in today’s presentation, the portion of the CPU is probably smaller. It would be helpful if he could comment on this point.

Miyamoto:

Lighting is an inevitable factor to make use of high-definition images. We did not actively use technologies to render high-end graphics in real time for software development for Wii and previous consoles. Therefore, although the name "Wii" was handed down from Wii to Wii U, we needed to hold many workshops to learn about such technologies. We already went through this initial learning phase and are now tackling how to take full advantage of high-definition graphics. In this sense, retraining our developers used to be a great hurdle. Thank you for appreciating the video we disclosed last May. All of our development team would be glad to hear that. (Iwata: I am sure the graphics are now much better.) We really enjoy creating images that are so lifelike that it is as if Pikmin were actually living there. We think Pikmin is suitable for computer graphics. At the last E3 show, we showed video footage of Pikmin wandering around me in my room backstage and then I actually appeared on stage with them. We would like more people to experience videos featuring Pikmin. In this effort, when you visit movie theaters operated by a movie chain, TOHO Cinemas, you will see Pikmin with the logo of TOHO Cinemas before a movie starts. Also, when you see a 3D movie there, you will see Pikmin and a monster called Bulborb racing around in a demo video to urge you to wear 3D glasses. I hope you will go to see it and look forward to the game which features Pikmin.

(Questioner: Is the current development structure suitable for the new architecture?)

Miyamoto:

We have not specifically changed it. We have just put the right development staff members in the right place to raise the level of each development phase. The other point is that many of our third-party software developers have been dedicated to technologies like shaders. As Wii U is designed to bring out their real strengths, there have recently been more cases where we develop something with their help. It has been more convenient for us to work together with them because they have been able to more smoothly utilize their know-how for development for Wii U.

Iwata:

I may add that each game console has its own unique qualities, and developers must go through a trial and error phase to acquire the knack of taking full advantage of them. This time does not come until a final version of the hardware and development tools for the version have been made available and then a base for software development has been established. For Wii U, such a time finally came in the latter half of last year. In this sense, we could not avoid the trial and error stage to create games which take full advantage of the hardware. I think that this is true for third-party software developers as well as Nintendo’s. The home consoles of other companies are six or seven years old and software developers have sufficiently studied them and know how to take full advantage of them well. As Wii U is new to them, some developers have already acquired the knack and made good use of its features and others have not. You might see this gap among the games that are currently available. However, we are not much concerned about this problem because time will eventually solve it. Actually, we believe that our in-house development teams have almost reached the next stage. It is not true that we are deadlocked with a lot of trouble in our development. Otherwise, we could not aim for 100 billion yen or more in operating profit for the next fiscal year. Here, I would like Mr. Takeda to tell you about the architecture of the Wii U hardware.

Genyo Takeda (Senior Managing Director, General Manager of Integrated Research and Development Division):

I don’t want to talk about anything too technical, but in my view, Wii U is a console with low power consumption and has fairly high performance. Regarding your comment that we focus on the GPU and that the CPU is a little poor, we have a different view. It depends on how to evaluate a processing unit. In terms of die size (area a chip occupies), the GPU certainly occupies a much larger space than the CPU. As you can see CPUs used for the latest PCs and servers, however, it is usual for current CPUs that the logic part for actual calculations is really small and that the cache memory called SRAM around it covers a large area. From this angle, we don’t think that the performance of the Wii U’s CPU is worse than that of the GPU. In other words, we have taken a so-called "memory-intensified" design approach for the Wii U hardware. It is no use saying much about hardware which should remain in the background in our entertainment offerings, but at least we think that Wii U performs pretty well.

In regard to GPUs, they are so advanced that other companies in the video game market seem to be on the same path. Developers have also been accustomed to programmable shaders to create games. In this sense, we think that the entire industry, including Nintendo, has had less trouble in this field than in the time when shaders were emerging.

5	My question is about your new endeavor of download sales of packaged software. When you discussed your digital distribution business today, I think you mentioned that it is not something which would replace your package software business altogether anytime soon but that the company intends to intensify it. Although your digital sales still occupy only a small percentage of the entire software sales, with the successful digital distribution of "Animal Crossing: New Leaf" for Nintendo 3DS, I would like to know your perspective on how the digital distribution business will contribute to your earnings and profits in the future. Also, I would like you to tell us about your plans for China, a country which happens to have had some media coverage in the last few days. In the Q & A session at the mid-term Financial Results Briefing for the fiscal year ending in March 2008, I recall you said that Wii appeared to be the most appropriate system for this market among all of your hardware systems and that you would like to work in that regard in the medium run. I would like to know about your plans for this new market with regard to the current Chinese laws and regulations, the growth of local software publishers or the existence of any bottlenecks.
5	Iwata: This shows the digital download sales transitions. For the current fiscal year, we have just finished the third quarter, but the digital sales have already reached 11.1 billion yen so far, and it is certain that in this fiscal year we will see our largest digital download sales. Another peak in digital sales you can see around the center of this graph is when Wii was widespread and Nintendo DSi had just been launched. In spite of the fact that the current installed base of Nintendo 3DS is still much smaller than how popular Wii was back then, we are already seeing the growth in digital download sales mainly for Nintendo 3DS, which, I believe, is an encouraging trend. I have no intention of simply replacing the packaged business with the digital download one, but it is also true that there are several issues with the current packaged software distribution business. For example, before launching a software title, no one can precisely forecast how many units of software will sell in the market. Everyone develops and launches a software title with the hope to make it a smash hit, but when it comes to the actual sales in the market, even the most seasoned marketers cannot forecast the figures accurately. As a result, retailers are often left with surplus stock, which ends up being sold at a huge discount or, in contrast, software shortages could cause lost sales opportunities for retailers. With these kinds of issues becoming increasingly challenging, retailers are less willing to accept the inventory risk. In this situation, even when a developer has created software with high potential to become a smash hit, it is likely to fall short of its real sales potential. Or, even though a quality software title can successfully attract the interest of potential fans, making and shipping just a little more than the actual demand can lead to a big discount in the marketplace and, thus, destroy the game’s brand. We have seen repeated cases of these. When I discussed with Shinji Hatano (Senior Managing Director, General Manager of Marketing Division) the company’s endeavors with the POSA card to expand our digital download sales outlets to retail shops, he stressed that it would provide distributors with a huge opportunity to solve the existing issues. A fairly large volume of "Animal Crossing: New Leaf" for Nintendo 3DS was sold in the form of a POSA card, which is activated only when it goes through POS registers at retailers and therefore the retailers do not have to shoulder the physical inventory risk. The growing sales of the POSA version of this game must have helped retailers see the business opportunity for video games with such a business structure. We therefore expect that our publishers may be interested in selling POSA cards for some titles they are publishing as download-only titles and that they will want to make more games available in POSA card format. Although convenience stores have limited shelf space to spare for a number of video game POSA cards, retailers with more shelf space might expand the areas designated to the video game POSA cards. They might even educate their customers who are not familiar with digital download software. We can expect to see a number of new possibilities. We expect our digital distribution to increase in importance and become an important revenue source. Regarding China, we certainly saw some articles the other day. On the other hand, we do not think that the situation has actually changed drastically. Of course, if a drastic change is made, there will be some opportunities for us. We have been preparing for that, but we have not obtained any confirmation of the recent media reports. In the future, if we receive any official confirmation in this regard, the company will make an announcement from inside China. At this point in time, please just understand that there will be some options we may be able to take if the situation has actually changed.

My question is about your new endeavor of download sales of packaged software. When you discussed your digital distribution business today, I think you mentioned that it is not something which would replace your package software business altogether anytime soon but that the company intends to intensify it. Although your digital sales still occupy only a small percentage of the entire software sales, with the successful digital distribution of "Animal Crossing: New Leaf" for Nintendo 3DS, I would like to know your perspective on how the digital distribution business will contribute to your earnings and profits in the future.

Also, I would like you to tell us about your plans for China, a country which happens to have had some media coverage in the last few days. In the Q & A session at the mid-term Financial Results Briefing for the fiscal year ending in March 2008, I recall you said that Wii appeared to be the most appropriate system for this market among all of your hardware systems and that you would like to work in that regard in the medium run. I would like to know about your plans for this new market with regard to the current Chinese laws and regulations, the growth of local software publishers or the existence of any bottlenecks.

Iwata:

This shows the digital download sales transitions. For the current fiscal year, we have just finished the third quarter, but the digital sales have already reached 11.1 billion yen so far, and it is certain that in this fiscal year we will see our largest digital download sales. Another peak in digital sales you can see around the center of this graph is when Wii was widespread and Nintendo DSi had just been launched. In spite of the fact that the current installed base of Nintendo 3DS is still much smaller than how popular Wii was back then, we are already seeing the growth in digital download sales mainly for Nintendo 3DS, which, I believe, is an encouraging trend. I have no intention of simply replacing the packaged business with the digital download one, but it is also true that there are several issues with the current packaged software distribution business. For example, before launching a software title, no one can precisely forecast how many units of software will sell in the market. Everyone develops and launches a software title with the hope to make it a smash hit, but when it comes to the actual sales in the market, even the most seasoned marketers cannot forecast the figures accurately. As a result, retailers are often left with surplus stock, which ends up being sold at a huge discount or, in contrast, software shortages could cause lost sales opportunities for retailers. With these kinds of issues becoming increasingly challenging, retailers are less willing to accept the inventory risk. In this situation, even when a developer has created software with high potential to become a smash hit, it is likely to fall short of its real sales potential. Or, even though a quality software title can successfully attract the interest of potential fans, making and shipping just a little more than the actual demand can lead to a big discount in the marketplace and, thus, destroy the game’s brand. We have seen repeated cases of these. When I discussed with Shinji Hatano (Senior Managing Director, General Manager of Marketing Division) the company’s endeavors with the POSA card to expand our digital download sales outlets to retail shops, he stressed that it would provide distributors with a huge opportunity to solve the existing issues. A fairly large volume of "Animal Crossing: New Leaf" for Nintendo 3DS was sold in the form of a POSA card, which is activated only when it goes through POS registers at retailers and therefore the retailers do not have to shoulder the physical inventory risk. The growing sales of the POSA version of this game must have helped retailers see the business opportunity for video games with such a business structure. We therefore expect that our publishers may be interested in selling POSA cards for some titles they are publishing as download-only titles and that they will want to make more games available in POSA card format. Although convenience stores have limited shelf space to spare for a number of video game POSA cards, retailers with more shelf space might expand the areas designated to the video game POSA cards. They might even educate their customers who are not familiar with digital download software. We can expect to see a number of new possibilities. We expect our digital distribution to increase in importance and become an important revenue source.

Regarding China, we certainly saw some articles the other day. On the other hand, we do not think that the situation has actually changed drastically. Of course, if a drastic change is made, there will be some opportunities for us. We have been preparing for that, but we have not obtained any confirmation of the recent media reports. In the future, if we receive any official confirmation in this regard, the company will make an announcement from inside China. At this point in time, please just understand that there will be some options we may be able to take if the situation has actually changed.

6	I'd like to ask you about the NFC functionality of Wii U. I recall Mr. Iwata talked about NFC as one of the interesting features of Wii U. I believe NFC holds great potential not only in its application in video games but also in non-gaming areas. I would like you to tell us about your prospects for NFC.
6	Iwata: First of all, there are two main directions when it comes to the use of NFC. One is to use it for video games. For example, we can create cards and figurines with NFC and design our video games to work in conjunction with them. Also, an increasing number of arcade games are utilizing IC cards which can read and write data in order to record users' scores and it is possible for Wii U games to connect with them. We are in talks with several software developers regarding such possibilities. We are making preparations and, by the end of this year, we will probably be able to show you some output, tell you about some more concrete examples of the possibilities or even let you try out some tangible examples. The other direction is e-money. In Japan e-money called FeliCa is widely used, and FeliCa is included in NFC. Technically, it is possible to settle an account by waving an e-money card over the Wii U GamePad. We are conducting research into this right now as one of this technology's future possibilities. We will make an announcement when we are ready to discuss a more detailed plan. Since we have made a certain investment in order to install NFC, we will make efforts to at least receive a return on our investment.

I'd like to ask you about the NFC functionality of Wii U. I recall Mr. Iwata talked about NFC as one of the interesting features of Wii U. I believe NFC holds great potential not only in its application in video games but also in non-gaming areas. I would like you to tell us about your prospects for NFC.

Iwata:

First of all, there are two main directions when it comes to the use of NFC. One is to use it for video games. For example, we can create cards and figurines with NFC and design our video games to work in conjunction with them. Also, an increasing number of arcade games are utilizing IC cards which can read and write data in order to record users' scores and it is possible for Wii U games to connect with them. We are in talks with several software developers regarding such possibilities. We are making preparations and, by the end of this year, we will probably be able to show you some output, tell you about some more concrete examples of the possibilities or even let you try out some tangible examples. The other direction is e-money. In Japan e-money called FeliCa is widely used, and FeliCa is included in NFC. Technically, it is possible to settle an account by waving an e-money card over the Wii U GamePad. We are conducting research into this right now as one of this technology's future possibilities. We will make an announcement when we are ready to discuss a more detailed plan. Since we have made a certain investment in order to install NFC, we will make efforts to at least receive a return on our investment.

Outline | Presentation by the President | Q & A

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