Second Quarter Financial Results Briefing for the 74th Fiscal Term Ending March 2014 Q&A

Second Quarter Financial Results Briefing for the 74th Fiscal Term Ending March 2014 - Q & A

Outline | Presentation by the President | Q & A

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4	I would like to ask again about the expansion of new markets. I believe that for now the European and American markets are the priority regions, but can you tell us your thoughts on expansion targeting the middle class in new markets where there is vast market potential? Nintendo 2DS is already available in Europe and the U.S., but I would like you to tell us whether there are plans to roll out Nintendo 2DS in other regions as well.
4	Iwata: Nintendo’s current business is centered on Japan, the U. S., Europe and Australia, but as a company proposing interactive entertainment, the matter of what steps to take in developing markets is an extremely important medium-term issue. On the other hand, the manufacturing cost of hardware tends to increase, and there are cases that smart devices are advancing ahead of game consoles around the world, including in developing nations. Therefore, we have to consider various things in relation to whether we can perform well in new markets simply by continuing with the same approach – namely, the concept of selling products slightly cheaper in developing nations than in developed nations. However, I have not prepared material to discuss this matter today. We are intending to hold a Corporate Management Policy Briefing together with the Financial Results Briefing after the end of Q3, probably at the end of January 2014, and we would like to talk then about our ideas for Nintendo’s medium-term approach to developing markets as well as the immediate future. So please understand that I am not planning to discuss this today.

I would like to ask again about the expansion of new markets. I believe that for now the European and American markets are the priority regions, but can you tell us your thoughts on expansion targeting the middle class in new markets where there is vast market potential? Nintendo 2DS is already available in Europe and the U.S., but I would like you to tell us whether there are plans to roll out Nintendo 2DS in other regions as well.

Iwata:

Nintendo’s current business is centered on Japan, the U. S., Europe and Australia, but as a company proposing interactive entertainment, the matter of what steps to take in developing markets is an extremely important medium-term issue. On the other hand, the manufacturing cost of hardware tends to increase, and there are cases that smart devices are advancing ahead of game consoles around the world, including in developing nations. Therefore, we have to consider various things in relation to whether we can perform well in new markets simply by continuing with the same approach – namely, the concept of selling products slightly cheaper in developing nations than in developed nations. However, I have not prepared material to discuss this matter today. We are intending to hold a Corporate Management Policy Briefing together with the Financial Results Briefing after the end of Q3, probably at the end of January 2014, and we would like to talk then about our ideas for Nintendo’s medium-term approach to developing markets as well as the immediate future. So please understand that I am not planning to discuss this today.

5	I would like Mr. Iwata to talk about the term “commitment.” I find it difficult to understand how the commitment is benefiting Nintendo in any way, as it has simply fallen prey to media and investors. Could Mr. Iwata explain what he means by “commitment”? Also, on the topic of third-party support, if you look at some third-party titles in the U.S. and Europe, you often find that every platform apart from Wii U has DLC (downloadable content) and you also find instances where Wii U fails to attract titles from publishers. Another company mentioned that they would invest tens of billions of yen into third-party support, and I would like to know whether Nintendo plans to support third parties financially, too.
5	Iwata: First of all, I used the word “commitment” to show our firm determination to do our best to reach our target. However, it was perhaps not an appropriate term to use as it has, as a result, led to some reports that speculated about my resignation. I believe that my ultimate responsibility is to maximize the long-term corporate value of Nintendo. That is how I view my role, but on the other hand, I am not saying that the current financial forecast has become unattainable. As I remarked just a while ago, the annual financial performance of a video game company rests heavily upon its success in the year-end sales season. There would of course be a significant difference between the most optimistic and the most pessimistic scenarios. This is the inevitable fate of any video game company, and even if one may hope it to be more foreseeable, we operate in an environment where it is impossible to know the outcome of a product we have produced until consumers have tried it for themselves. What is more, how players influence the value of our products and turn them into hit titles through interacting with each other, and thereby creating buzz in society, is simply beyond our reach. All we can do is offer the best entertainment that we can and do our best to motivate our consumers to talk about our products, but there is inevitably a fair degree of uncertainty in our performance. Therefore, I do not think that it is the right time to change our financial forecast. In terms of how we view our relationship with third-party publishers, I think it is natural that there is a difference between publishers who have the software development resources like Nintendo’s to build a software lineup of their own and publishers who do not. Since former President Yamauchi passed away, I have been considering what he taught us in the end, and his words that the worst thing we can do in entertainment is to follow what others are doing spoke directly to my heart. Following and imitating others is the kind of reasoning that Nintendo tries to avoid the most, and while we certainly do not have a negative attitude toward strengthening our ties with third-party publishers, employing the same methodology as the other manufacturers would only lead to the most simplistic competitive approaches, such as price wars or money-giving that would never end. We would like to take a unique approach of our own and build sustainable relationships with our third-party publishers.

I would like Mr. Iwata to talk about the term “commitment.” I find it difficult to understand how the commitment is benefiting Nintendo in any way, as it has simply fallen prey to media and investors. Could Mr. Iwata explain what he means by “commitment”? Also, on the topic of third-party support, if you look at some third-party titles in the U.S. and Europe, you often find that every platform apart from Wii U has DLC (downloadable content) and you also find instances where Wii U fails to attract titles from publishers. Another company mentioned that they would invest tens of billions of yen into third-party support, and I would like to know whether Nintendo plans to support third parties financially, too.

Iwata:

First of all, I used the word “commitment” to show our firm determination to do our best to reach our target. However, it was perhaps not an appropriate term to use as it has, as a result, led to some reports that speculated about my resignation.

I believe that my ultimate responsibility is to maximize the long-term corporate value of Nintendo. That is how I view my role, but on the other hand, I am not saying that the current financial forecast has become unattainable. As I remarked just a while ago, the annual financial performance of a video game company rests heavily upon its success in the year-end sales season. There would of course be a significant difference between the most optimistic and the most pessimistic scenarios. This is the inevitable fate of any video game company, and even if one may hope it to be more foreseeable, we operate in an environment where it is impossible to know the outcome of a product we have produced until consumers have tried it for themselves. What is more, how players influence the value of our products and turn them into hit titles through interacting with each other, and thereby creating buzz in society, is simply beyond our reach. All we can do is offer the best entertainment that we can and do our best to motivate our consumers to talk about our products, but there is inevitably a fair degree of uncertainty in our performance. Therefore, I do not think that it is the right time to change our financial forecast.

In terms of how we view our relationship with third-party publishers, I think it is natural that there is a difference between publishers who have the software development resources like Nintendo’s to build a software lineup of their own and publishers who do not. Since former President Yamauchi passed away, I have been considering what he taught us in the end, and his words that the worst thing we can do in entertainment is to follow what others are doing spoke directly to my heart. Following and imitating others is the kind of reasoning that Nintendo tries to avoid the most, and while we certainly do not have a negative attitude toward strengthening our ties with third-party publishers, employing the same methodology as the other manufacturers would only lead to the most simplistic competitive approaches, such as price wars or money-giving that would never end. We would like to take a unique approach of our own and build sustainable relationships with our third-party publishers.

6	I would like Mr. Iwata to elaborate a bit more on the company’s digital business. I was surprised to see how digital sales have grown, but I also feel that most of them still come from digital distribution of packaged software. Could Mr. Iwata share his thoughts on how the breakdown in digital sales will change in and after the next fiscal year? Also, as Nintendo has released numerous hit titles before, I would like to know how the company will use these assets. For example, Square Enix has recently announced that they plan to release previous Dragon Quest titles on smart devices. What is Mr. Iwata’s view on that?
6	Iwata: As I remarked in the presentation, digital sales in the first six months of the fiscal year have reached 11.4 billion yen, and about half of them come from digital distribution of packaged software. The other half of this figure is derived from, for example, digital-only software and downloadable content. To put it a different way, I think that our digital sales grew because both of these components grew. On the other hand, I feel that digital content that is offered through brand-new sales methods has greater potential to turn into massive hits than digitally offered packaged software. Whenever we offer a new proposition, we do so wishing that it will turn into a hit, but since we can never know when our endeavors will come to fruition, it is difficult to give a concrete figure on the breakdown of our future digital sales today. In terms of taking greater advantage of our previous assets, I feel that there are two points to consider. As we first began to do on Wii, one method would be to release games for our previous consoles, such as Nintendo Entertainment System or Super Nintendo Entertainment System, on other Nintendo consoles as Virtual Console games. While Wii U and Nintendo 3DS already offer Virtual Console software, I feel that we have not been able to take full advantage of our assets yet, so we would like to enrich our Virtual Console lineup. As the ability to digitally offer our products has given us greater flexibility in offering new propositions to our consumers, we should naturally consider these possibilities in the future. The other point is, as you mentioned, whether we should release our games on smart devices. At the moment, however, we believe a more balanced approach would be to use our content to increase the value of our hardware as opposed to distributing it on smart devices, and therefore, we have no plans to release Nintendo content on smart devices.

I would like Mr. Iwata to elaborate a bit more on the company’s digital business. I was surprised to see how digital sales have grown, but I also feel that most of them still come from digital distribution of packaged software. Could Mr. Iwata share his thoughts on how the breakdown in digital sales will change in and after the next fiscal year? Also, as Nintendo has released numerous hit titles before, I would like to know how the company will use these assets. For example, Square Enix has recently announced that they plan to release previous Dragon Quest titles on smart devices. What is Mr. Iwata’s view on that?

Iwata:

As I remarked in the presentation, digital sales in the first six months of the fiscal year have reached 11.4 billion yen, and about half of them come from digital distribution of packaged software. The other half of this figure is derived from, for example, digital-only software and downloadable content. To put it a different way, I think that our digital sales grew because both of these components grew. On the other hand, I feel that digital content that is offered through brand-new sales methods has greater potential to turn into massive hits than digitally offered packaged software. Whenever we offer a new proposition, we do so wishing that it will turn into a hit, but since we can never know when our endeavors will come to fruition, it is difficult to give a concrete figure on the breakdown of our future digital sales today.

In terms of taking greater advantage of our previous assets, I feel that there are two points to consider. As we first began to do on Wii, one method would be to release games for our previous consoles, such as Nintendo Entertainment System or Super Nintendo Entertainment System, on other Nintendo consoles as Virtual Console games. While Wii U and Nintendo 3DS already offer Virtual Console software, I feel that we have not been able to take full advantage of our assets yet, so we would like to enrich our Virtual Console lineup. As the ability to digitally offer our products has given us greater flexibility in offering new propositions to our consumers, we should naturally consider these possibilities in the future. The other point is, as you mentioned, whether we should release our games on smart devices. At the moment, however, we believe a more balanced approach would be to use our content to increase the value of our hardware as opposed to distributing it on smart devices, and therefore, we have no plans to release Nintendo content on smart devices.

Outline | Presentation by the President | Q & A

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