Last week Nintendo president Satoru Iwata had to handle some tough questions from investors following the firm's decision to slash the price of 3DS by a third.
The transcript of this Q/A can be found on Nintendo's investor site, and has been reprinted here.
Content-based companies like Google and Amazon are interested in developing their own hardware and, on the other hand, companies running SNS like Facebook and Twitter have strong momentum these days. What is the meaning of your cutting the hardware price (of Nintendo 3DS) this time and accelerating the proliferation speed? What is Mr. Iwata’s view on Nintendo’s outlook on video games, which will have high sales promotion fees in the future?
It has been said very often that Nintendo’s business is not as good as people had expected due to the influence of smartphones. We have repeatedly investigated whether social games, as well as smartphones, are actually affecting our business. We got the same results in our latest research that there are no causal correlations. Therefore, we will not touch on the details today as we have explained them several times before.
On the other hand, it is the fact that a great variety of games are available at very low prices for smartphones. Naturally, consumers will choose more affordable ones if the video games we provide do not have much more value than those available for smartphones. However, no causal correlations have been confirmed because we think there are consumers who acknowledge that the value of what we offer does not equal to that of those available for smartphones and that what we offer holds unique value.
The biggest reason of the sluggish sales in this first quarter is that there were no big hit software titles in this period. Regarding the software, we focused on the Nintendo 3DS just after the launch, but the release of some software titles were put off until later dates. In addition, we could not fully exploit the sales potential of each software title owing to the lost momentum in Nintendo 3DS hardware sales, which lead to the poor results on the platform we had put a lot of effort into. Therefore, our decision to focus on Nintendo 3DS and not release our own software for the Wii or the Nintendo DS in this period did not come together. Since there were even no evergreen titles high in the sales charts and without new hit titles for the Nintendo DS or the Wii, in addition to disappointing sales of the Nintendo 3DS, all of our platforms lost momentum and our entire business became depressed. In this sense, it is very important to offer new software for existing platforms even in a time period when a new platform emerges. The lesson from this for our future business is that we need to establish a structure to provide software in a seamless manner.
Please let me explain what Nintendo is thinking of to keep the high value of its own platforms in today’s trend. The greatest merit for the company to own its unique platform is that we can offer to the public software-driven entertainment together with the hardware. We develop both hardware and software, and our hardware development teams are closely collaborating with our software development teams in order to make comprehensively new offers to the public.
Our ability to create unique content has not been constrained by the need to develop software which can be commonly played on a variety of different platforms. The company can create even more unique software which takes maximum advantage of the unique hardware rather than when only the software development teams of the company are independently creating the software. In the past, when games were becoming available with Java technology on cell phones, before smartphones appeared on the scene, we were often told that no one would buy handheld game systems once people could play games on their cell phones. As a result, however, I believe that we have gone above the limits with Game Boy, Game Boy Advance and Nintendo DS by continuing to try new things which games for cell phones can not realize and to offer unique software in connection with hardware. Therefore, we are willing to do the same things in the future – we think that we can keep the high significance of our own platforms' existence by creating and offering software which cannot be realized on the other common platforms and by receiving the consumers’ appreciation of them.
Another trend which has captured people’s great interest today is the power of social networking, or its power to connect different people. The keyword “social” has rapidly become very popular in these last two years and some say that Nintendo may be behind the social age. They might mean that Nintendo, uninterested in so-called social games from a business standpoint, fails to ride on the boom of social games. However, I have a totally opposite view - Nintendo has been a company attaching a high value to human relationships for a long time. We have our roots in the playthings connecting people as the company’s original business was playing cards. Therefore, we have always been aware of the human connections created by each of our products. It is true that on social networking services through the Internet you can make a relationship with those to which you could not connect with before. On the other hand, I think that there has been no best answer yet to the relationship between a real network and a virtual network. What we would like to realize is neither what the current social networking services provide nor what you can enjoy only with those in front of you, which Nintendo has provided before. The big theme for us is to provide new and fascinating human relationships composed of various networks, a real network with those close to you, a virtual network with those distant from you, and networks beyond description created by your experiences of sharing the same place with someone or of visiting certain places and specifically provided by SpotPass and StreetPass.
My outlook on video games is a future where more people are connected in a good sense by video games and give positive feedback to one another, and when something very exciting emerges, the content which appeals to one consumer can actually be offered to that consumer in a more efficient and speedy manner. We would like to spread the Nintendo 3DS and the Wii U, and to spend a substantial amount of money on sales promotion to make such a future a reality.
You referred to some big titles like Mario Kart 7 On the other hand, nearly 300 Miis are stored like captives in StreetPass Mii Plaza on my Nintendo 3DS system and they are not doing anything at all. Do you plan to release software in which I can realise human relationships in the near future?
As we hear that a fairly good number of people have already done everything we offered with StreetPass Mii Plaza, we are preparing for something new that you can enjoy there in the near future. We are planning to make it available by the end of this calendar year.
In addition, now that a number of Miis are there in StreetPass Mii Plaza, including those in your immediate circle and those who happened to pass you by, we are developing several software titles to take advantage of them. We will not be able to offer you the full or all the specific possibilities of the Miis stored in StreetPass Mii Plaza within this fiscal year, but we can say that you will never let your 300 Miis stored in your Nintendo 3DS go to waste, as we are preparing for a number of software titles, which will feature such as a theme, to be launched in this and the next fiscal years. Nintendo 3DS is hardware designed so that a number of your surrounding people’s Miis in your StreetPass Mii Plaza will generate a synergistic effect on the software to be offered in the future.
I believe that the success of a game system can only be achieved when it can satisfy the three parties, namely, users, software publishers and retailers. This time, Nintendo announced a drastic markdown for the Nintendo 3DS. This will make it easier for users to purchase it, but how will this measure affect retailers and software publishers? Regarding the retailers, a price-cut will have some effect, such as the decrease of the profit margin per sale, but has Nintendo offered them some kind of measure or plan to tackle this situation? Regarding the software publishers, Nintendo 3DS software titles are often seen as more expensive than Nintendo DS software. Is Nintendo giving consideration to ways that third-party software publishers can publish software with a reasonable price, by, for example, reducing the manufacturing fees billed to the publishers?
After announcing the markdown of the Nintendo 3DS, the news spread throughout Japan and all over the world and, of course, this news also spread to our business partners such as software publishers and retailers. First, I want to mention that the news was well accepted by software publishers and retailers, which became clear when our sales department here in Japan and our overseas subsidiaries communicated with them after the announcement.
Some of the software publishers were feeling that because of the price of the hardware, "Even if consumers become interested in our software title, they do not purchase it easily," and others were saying, "I had strongly believed that this game system would be widely accepted in society, but I am starting to become anxious." These people responded to our announcement by saying, "I am greatly relieved," or "This will change the situation for sure." On the other hand, concerning the price of software, I cannot (directly) comment on it because the price is decided by the software publishers, but I think that there is a possibility that it will be even more necessary to discuss this subject with them so that the price of software will become more affordable for the users to purchase it. However, it is not my understanding that the manufacturing fees billed to publishers for the Nintendo 3DS are extremely high compared to those of the Nintendo DS. But to mention one aspect (in fact, the manufacturing fees billed to publishers for the Nintendo 3DS are lower than those of the Nintendo DS if the ROM sizes are the same), because the average ROM size is larger for Nintendo 3DS software, manufacturing costs might be one reason, especially for the titles with very big memory sizes.
Concerning the retailers, one thing which affected Nintendo's financial results this time was the price protection. Price protection means that we have to compensate retailers for the difference which arises from the markdown of their inventories we have already sold to them at the former price. Because of this, I think that retailers feel that Nintendo is appropriately considering them. On the other hand, I cannot say that retailers are not feeling at all, "If the price is lowered, the profit margin will become smaller. I want Nintendo to take some measures on that point," but the markdown was a big decision for us. It is difficult for us to give special consideration to the margin. Therefore, we want the retailers to feel the merit as the result of our efforts to enlarge the whole Nintendo 3DS platform business. For your information, I cannot mention the actual name, but when a big U.S. retailer heard our news, they commented, "The holiday season just came early!" So I think we can say that even without any special consideration, our markdown has been very well received by the retailers.