Iwata on that 3DS price crash

Christopher Dring
Iwata on that 3DS price crash
 

I would like to ask about the profitability of handheld gaming systems. My understanding is that you are able to secure a decent profit from the sales of handheld hardware, but the margins of the software are lower than those for home console software. In such situation, if a loss should arise from the sales of handheld hardware, won't the overall profitability fall? Is there a possibility of introducing new methodology, such as paid add-on content, a charging service using AR cards or new Nintendo-original methods, in order to cover the falling profitability?

You have mentioned that the handheld gaming system business is always remunerative, but I think, for example, that there was not much margin when we set the price of the first Nintendo DS at 15,000 yen. It is true that the situation for the Nintendo 3DS (after the markdown) will be more challenging, but it is not true that all our past handheld gaming systems always had large margins.

However, the cost-cutting effect of the mass production can be quite large. Manufacturing costs of the Nintendo DS decreased by volume efficiency from a certain point in time and the system rapidly spread around the world. As a result, the hardware itself was able to generate some profit. Therefore, it is not true that the overall handheld gaming business becomes balanced in a circumstance where generating some profit from handheld hardware sales and generating less profit from the software sales in comparison with software sales of home console business. Rather, please think in a way that the profitability becomes larger when a business starts to run well and a number of the hardware units sell. When the platform gains momentum and both hardware and software start to sell well, the manufacturing costs for hardware will be lower. Also, for software, most of the costs come from its development and marketing, so the profitability changes by how many units can write off the costs. When software is launched and sells steadily and for long time, which is often called an unexpected smash hit, the efficiency will improve drastically. Therefore, it is very important from the business perspective, whether we can provide such products or not.

We believe it is our responsibility to achieve stable profits every year and return them to our shareholders, while at the same time propose new things to society, make them hit products at a certain rate and, as a result, gain momentum. But we have been getting a little off track, and I feel that now is the time to get back on track, and we made this bold decision. As a result, it turned out that this fiscal year will face a significant problem with regard to profitability. However, this situation will not last forever, and profitability will improve as mass-production goes on, so I do not think that the profitability of handheld gaming systems will decrease drastically in the future. Rather, the important point is whether the platform will do well or not. I do not think it can happen in our company’s business structure that, to put it in an extreme way, if one platform sold one hundred million units or more throughout the world, the profitability (of the hardware) would still be an issue there.

Talking about whether there are other measures we can take other than the ones we are doing now to improve profitability, it is of course the same thing for the Wii U as for the Nintendo 3DS, but we think there are great new possibilities with what we can do in the digital business or, in other words, the digital distribution business. I am not going to go into detail about the business model today, but we have a strong determination to enlarge our digital business. This area is an area in which we have not been able to implement a good mechanism yet, or in which we have not been able to run our business well. We have made several attempts since we first made Wii Shop Channel for the Wii, but because we could not overcome some preconditions, the business hasn't grown to a satisfactory size yet. However, for the Nintendo 3DS and the Wii U, we are strongly focusing on development of such functions, so I believe we will be able to make new proposals such as "The ratio of packaged titles and digital titles will be like this in the future" or "The business for packaged titles and the business for the digital titles can be combined in this way." I think I will be able to tell more specific stories in the near future, so taking these facts into regard, we would like to make efforts to improve our profitability even more. 

 

You said, "in the near future," but can I understand that there will be a specific move during this fiscal year, which ends in March 2012?

There will be some developments in this fiscal year, and I think they will grow in thickness in the next fiscal year. 

 

I would  like to know what age group is purchasing the device. I am also interested in knowing your take on what is the bottleneck of its spread into other demographics, and in that regard, what is the situation over the concern that the possible effect upon the eyes of children aged six and under might be preventing their parents from purchasing the Nintendo 3DS. Also, what is the likelihood of the just-announced price cut being able to eliminate these bottlenecks?

The release of the Nintendo 3DS was not in the year-end sales season, and the software lineup at its launch was mainly appealing to those who avidly play games, except for nintendogs + cats from Nintendo and"Professor Layton and the Mask of Wonder from Level 5, which was only released for the Japanese market. Therefore, the main purchasers of the Nintendo 3DS are young men, and the ratio of women is relatively low for a Nintendo platform. On the other hand, the situation of gaming systems is not that simple. Who purchases a gaming system and who uses it are actually different. When the Nintendo 3DS comes to one's house, it will be shared among the family, so the actual female ratio of users will be higher than that of the actual purchasers. But one thing I can say is that young male enthusiastic game fans have constituted the biggest demographic group among all the initial purchasers of the Nintendo 3DS. Of course, children also purchased it, as well as girls who wanted to play nintendogs + cats, but if we talk about what type of consumers have purchased the Nintendo 3DS the most, it is young men. Due to the difference in campaigns in each territory, this tendency is more prominent in the overseas markets than in Japan.

Also, for children aged six and under, Nintendo seriously thought about this subject and made a preliminary announcement. But, we were not saying that children aged six and under should not touch the device. Rather, we tried to explain that, when children aged six and under use the Nintendo 3DS, it has a feature called Parental Controls and that the system can be enjoyed even more safely by utilising this function. But we feel sorry that our message was not delivered appropriately or that it is taking time to be widely comprehended. In Japan, our research shows that this misunderstanding is starting to be corrected, but I think that it will take some more time. We would like to ensure that our message is clearly understood by the end of this calendar year, and we hope that it will comfort consumers.

The message is not only about 3D viewing and children, but also about how adjusting the 3D Depth Slider of the Nintendo 3DS can make improvements for those who feel “(viewing 3D images) tires my eyes,” for example. Having said that, however, a more influential fact than these matters which is attributable to the slower penetration speed of the Nintendo 3DS to children than that of other Nintendo platforms is that it has yet to experience its first year-end sales season, and because if a child has siblings, the family would have to buy two or more devices because it is a handheld device, and until now the price was the barrier. The price of a product is decided based on preliminary research, such as, "How much value do you think this hardware has to be purchased?" and also taking the costs and other factors into consideration. But in reality, for a family with two or more children which tend to think of purchasing some Nintendo 3DS systems, it is clearly shown in our research after the launch that the price was one barrier for them. Therefore, by changing the price, we would like to change the age range and gender ratio by the end of this year, and I think that the situation will be very different four months later.

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Tags: Nintendo , 3ds , satoru iwata

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