It's a great, incisive Q&A that no other site seems keen to directly acknowledge, 'forgetting' to add links and provide an official connection to, and has already sparked a number of headlines.
Nintendo has kindly put the whole transcript online - you can read it here - but the MCV team has also read through the whole thing and here provides highlights from an feature with the man that has led the format-holder, and the entire industry, in a new direction...
Investor Question: I thought that Nintendo operational profit might surpass that of Toyota in about three years, and the financial result you announced yesterday was very good because you already achieved the feat this year. You have just explained about the European and the U.S. markets. I would like to know about the current market situations and your perspective on such countries with large populations as South Korea, China, South-East Asian countries, India, and Russia.
Iwata: Naturally, the ultimate market size can be determined by the total population in the market and, in the mid-term, I think countries with large populations have significant potential.
Around the start of last year, I was hopeful that the company could focus and allocate resources into such markets. However, as it became clear that the markets in Americas and Europe were rapidly expanding, we needed to allocate almost all the Wii hardware consoles we can manufacture to these existing markets. This is how we came to think that the timing of our deployment into the newly-emerging countries should be next fiscal year or thereafter.
It appears that the drastic changes in the economic climate has been affecting the economies of the newly emerging countries more than others. Given this situation, I now think that we need to have a more long-term perspective in estimating how quickly we may be able to enter into these new markets.
In case of South Korea, the market has come to the point where DS can sell more than 1 million units in two consecutive calendar years. On the other hand, as you all know, the yen recently appreciated against the Korean won significantly. Therefore, how we can maintain a profitable business in this market has become more challenging to us.
Having said that, however, countries with large populations from a mid-term prospective have significant market potential for DS, Wii and any future products, so we would like to tackle them as our mid-term issue.
Investor Question: You said that overseas software makers are now taking conservative attitudes in making purchase orders to you. I would like you to explain a little more about the tendency of the third party publishers as the large scale restructuring by overseas software publishers may impact the software sales from now. Nintendo’s gaming population expansion strategy appears to have been accepted by third parties as well, so the impact to the software for Nintendo platforms must be relatively smaller than that for the other hardware manufacturers. Yet, I would like to know if there is a fear that the impact may grow further and affect your software sales in the future.
Iwata: Please understand that I have to refrain from naming individual software manufacturers in order to make that explanation, so that let me talk in generality. As you know, a number of major software manufacturers are reporting that they are experiencing a financially challenging time or that they will be scaling down their operations.
On the other hand, just a few years ago, a year or two before we launched Wii, I doubt that anyone in the industry was able to correctly forecast the current sales situation of Wii. Of course, Nintendo was hopeful that we would make this new system the best selling hardware in the next generation. Even so, if you ask me if we were able to foresee today’s situation, I am not that optimistic so I have to admit that today’s situation is exceeding even our original expectations.
To the third party software manufacturers, the surprise must be bigger. As you know, some are reportedly saying that they bet on the wrong horse or that they need to change course. I recognise that each one of the third parties is trying to develop software that can be appealing on DS and Wii systems which have significantly increased the installed bases, while narrowing the overall number of software to develop.
There are things that show immediate results , and things that need some time to see the results. Overall, we recognise that our relationships with the software manufacturers are shaping up better than before. So, in the mid-term, we believe that more attractive titles will be launched by them for our platforms.
Investor Question: Your downward forecast revision announcement of this time was largely due to external elements, and it is becoming increasingly obvious that your strategy, which is based upon gaming population expansion, was simply the right one. Overseas third parties who had significantly invested in software development for other high high-def machines have now ended up downsizing those efforts, which follows what Nintendo has been saying all along: that market development in that direction will be challenging.
Even so, I think issues are emerging even for Nintendo. I imagine that Nintendo had fairly high expectations for Wii Music but actual domestic sales was a little over 400,000 units, so it is not performing as anticipated in Japan. When I got to try Wii Music hands-on at your conference, I did not immediately feel the 'fun' that I felt with Wii Fit and Wii Sports. I think that today’s mainstream games are something that offers a feeling of fun as soon as you pick it up, so I would like to hear how you are evaluating the result of Wii Music.
Also, the home console market is shrinking only in Japan. As the first party software manufacturer, Nintendo has the responsibility to grow the market, and I would like to know of your strategy.
Iwata: I agree that Wii Music, as of now, has not achieved its true potential. On the other hand, I feel that Wii Music is a software that elicits largely two extremely different reaction from consumers. There are people who highly appreciate it and those who do not appreciate it at all. Usually for other software, if there is a fair amount of people who evaluate the software positively, the appreciation level of that software becomes slightly skewed toward a positive note, but on the other hand, if a number of people evaluate it poorly, the overall reaction to the software is bad. For Wii Music, the impression seems to completely depend on each individual player. It is unfortunate that Wii Music was not immediately appealing enough to some consumers, but it simply might have not been the right game for them.
However, I would like you to recall the case of Brain Training software. Nintendo launched the first Brain Training software in May in Japan, and it was only around the time Nintendo launched More Brain Training at the end of the year, when the original Brain Training started to show explosive sales.
Currently, I think that the appeal of Wii Music has not yet been fully conveyed and accepted by those who could be interested. We do not like to think that we failed with Wii Music nor that we should abandon sales support. If we had approached Brain Training with that mentality, the software would have not achieved the current sales situation. The first week unit sales of the original Brain Training in Japan was just around 45,000. We should not have the attitude that a game does not have sales potential because the first week or first month sales were small.
On the other hand, the comment that it is difficult for a software to become popular unless it is easy to be understood is right on target. Something good can spread when a cycle is born where people who have hands-on experience can immediately understand its appeal, easily explain the positive experience they had to those around them, who then spread that information to the others. Nintendo was blessed with certain products that created this positive cycle, which has made Nintendo what it is today. In that sense, I feel like we need to reevaluate why the software (Wii Music) has not been able to clear that hurdle.
Another thing I would like to explain is the home console market. Perhaps, the Japanese market is the least robust market in the world today with regard to home console systems. In the U.S., the home console market is very robust. If the U.S. sold two or three times as much as Japan, it would be tolerable. Yet, I feel that something is wrong when the U.S. is selling ten times as much as Japan on a weekly basis. So, I do not believe Nintendo should be content with the current situation in the Japanese market and believe that we have other methods to confront this.
One thing I can tell you about this is that, compared to the past when home consoles were selling better in Japan, all the Japanese are getting busier for a number of reasons, so we are seeing an overall lifestyle shift where many forms of entertainment are enjoyed while on the go or during spare time. In these times, we need to provide the Japanese market with entertainment that only a home console can realise.
At the end of last year, Nintendo launched two Wii titles, Animal Crossing and Wii Music, in hopes that the Japanese consumers would appreciate them and revitalise the Wii market in Japan. Our efforts have not lived up to our expectation. While Wii had very strong momentum in the overseas markets, the Wii market in Japan (during the year-end sales season) showed a slow start, did not show sharp trajectory in sales, and ended up moving back to the sales level of non-sales-season level quickly.
Nintendo has always tried many unprecedented things. As we offer new proposals one after another, sometimes they are accepted just as we had expected, sometimes it falls below our expectations, and sometimes it explodes far beyond our expectations. After all, in the video game market, I believe that a company which successfully creates just one product with astonishing sales.
I shudder at the thought of what if Nintendo DS had not had Brain Training or Nintendogs, and if Wii had not had Wii Sports and Wii Fit. For each of these products, we create them hoping for a winner, but it is impossible to hit a bulls eye every time.
So, what happened at the end of last year in Japan was simply that it did not go as we had planned. To generate strong sales, we need to effectively communicate Nintendo’s messages to our consumers. Of course, the level of sales of Wii Music and Animal Crossing are nowhere near that of failing software. However, because there is a software that clicks with everyone, you get one consumer after another who want to play with it by purchasing the hardware. As these people invite those around them to have the same positive experience, a product spreads. We have observed what they call DS phenomenon and Wii phenomenon precisely because such a cycle was in place, and we need to make an effort to create yet another one.
This is not a structural issue which can happen on home console alone. Rather, what matters here is whether or not we can periodically deliver such a product and/or service. Of course, we will offer new proposals and try to live up to people’s expectations this year again.
Investor Question: I’d like to ask about the financial forecast of the current fiscal year and your prospect on the next fiscal years and afterward. As for this fiscal year, you said that Wii and DS hardware are increasing its sales even after the turn of the year. However, when I subtract the shipment numbers of the past 9-months from your annual shipment forecasts, both DS and Wii show slowing ratio of growth. You are also expecting approximately a 20% decrease in software for both platforms in comparison with the corresponding quarter a year ago. Tell me about the reason of this discrepancy, and how have the software sales been going since the start of this new calendar year?
In addition, you mentioned that this year will not be the peak year of the sales. While the official announcement for the forecast must wait, what is you current feeling about how many hardware you would like to sell in the next fiscal year?
Iwata: First, about your question on how we see the growth of Wii and DS, the reason why our January sales are better in comparison to that of last year’s is because, for one thing, the hardware stocks were depleted during a rather early part of December a year ago and stock shortage continued for a fairly long time into the following January. Due to such a background, even when our January 2009 sales are twice as much that of a year ago, we cannot say that twice the amount of February and March 2008 sales can be made in the next two months.
More realistically, in order to come up with the forecasts for the unit shipment numbers, we have to think in terms of our past sales each week by taking into considerations the seasonality in the past, when Nintendo was able to achieve a fairly big number of yearly shipments, and also by considering the current Japanese market situation. As a result, we announced the forecasts as rather realistic figures.
There would be no end if we started to explain about the situation of each software. However, as long as Nintendo’s first party titles are concerned, a number of different types of software are selling constantly in the U.S. One thing I would like to note, however, is that the software unit sales numbers Nintendo is disclosing are the number of shipments Nintendo has made to the companies outside Nintendo. In case of Nintendo’s first party titles, Nintendo ships the software to the distributors and retailers who then sell the products to the consumers.
In case of third parties software, Nintendo receives orders from them of discs and ROM cards and, when Nintendo delivers them to the third parties, Nintendo counts them as our own sales. The software, however, needs to be shipped to the third parties’ distributors before the consumers can purchase the software from the retailers.
Accordingly, if the unit shipment numbers as of the end of December we announced had actually been purchased by the end-consumers, the forecast we made could appear to be rather conservative. In reality, though, the distributors and even software publishers might have inventories. Especially when it comes to these numbers relating to the third parties software, Nintendo does not know for certain.
For sometime now, I have repeatedly said that the game business is comparatively less susceptible to the changes in the economy but the gap between what sells and what doesn’t sell become obvious (in an economic downturn.) The products that are listed at the top of a consumers’ wish list can sell at the same level in a good economic time as during a bad economy. But those ranked #5 or #10 on the list become the receiving end of the impact of the changing economies. As a result, I am pretty certain that there must be software that our third parties have prepared to sell, which did not live up to their original expectations. The rather conservative impression Nintendo received during our preliminary meetings with software publishers must have reflected such background (as software publishers are making a purchase order plan based upon the intentions of their distributors and retailers as well as by taking into considerations the situations surrounding the distributors.)
When we analyze the Japanese market, for example, and look at the top 100 best selling software in 2008, last year’s sales of the top 5 software were even more than that of a year ago, but other software around the middle of the list showed significant sales decreases on a year-on-year basis, which attests to our point that the gap between what sells and what doesn’t is widening. So, when the distributors hold significant inventories, that can affect many aspects in this industry.
We announced the new financial forecast as the result of reviewing many aspects comprehensively, including what I just mentioned. So, the current situation includes an aspect that it is experiencing a momentary repercussion of the large shipments the software publishers made at the end of 2008 by looking forward to large sales volume. I do not think that the industry has entered into a structural spiral where software cannot sell. In fact, in the U.S., (even in this bad economy,) they realised approximately 20% growth over 2007. So, I believe there is nothing for us to be pessimistic about.
Next, about the next fiscal year, now that the situation surrounding us is rapidly changing, I do not want to make any irresponsible forecast today. So, I do not intend to offer any concrete figures, but one thing I can say is, if Nintendo does not act, we will be in a more difficult situation regarding our sales in the next fiscal year because we are expecting a high appreciation of yen from the start. In case of the current fiscal year, yen was comparatively weak at the start of the term and suddenly started to significantly appreciate during the term, which gradually increased the average yen appreciation for the fiscal year. If the yen appreciates at the current level for the next fiscal year, although we wish it will not be that way, it will have the effect of decreasing our sales figure (when converted into Japanese yen for financial reporting purpose.)
On the other hand, the number of hardware we can produce this year is larger from the start when compared with last year’s production level. Some analysts have reportedly mentioned that Nintendo could have sold 3 or even 4 million units of Wii hardware in December in the U.S. if it had enough inventories. But we could not make that happen because we were not able to ship that much to the U.S.
It is too premature to tell how much momentum Wii will have at the end of this calendar year. My job is to consider how we can prevent sales from sliding even with today’s appreciation of the yen and even consider how we can increase sales. I will not provide you with any concrete figures today because this is not our financial forecast announcement conference for the next fiscal year. I am, however, enthused to come up with plans in order to realise our ideal sales in the next fiscal year and, to do so, to identify and start executing the necessary plans from the start of this year.
Investor Question: I would like to ask about your views on corporate social responsibility [CSR, i.e. the impact of its work on employeers, the cultural impact of its products and environmental issues]. Recently, many companies are appointing CSR officers, and you have also taken some forward-looking steps by, for example, producing CSR reports. Because you are one of so-called fables companies and you are purchasing all the components of your products from the other companies, I imagine you have your own strict guidelines to check them. As environmental regulations get more strict, especially in Europe, how much financial and human resource do you think it will require to ensure these checks and guidelines are in place? How do you assess the current situation?
Iwata: Firstly, I would like to share with you what we think is Nintendo’s CSR. In our CSR report, I wrote that the CSR mission Nintendo is striving for is 'To put smiles on the faces of everyone involved in Nintendo'.
'Everyone involved in Nintendo' can be displaced as stakeholders. So our aim is to put smiles on everyone – from, of course, our customers to our stock holders, business partners, employees, to the local community. I continue to tell our employees that if it makes everyone involved in Nintendo smile, then that is something that we should do. If it doesn’t make them smile, then it’s not something Nintendo should do.
This is my solution to express the substance of CSR as simply as possible. As our products are meant to be actually putting smiles on our consumers’ faces and it is apparently easy to understand, this explanation is widely favored and I also find it good. And of course, care for the natural environment must be considered there.
As Nintendo conducts business globally, Europe seems to have the most strict environmental regulations, so if we meet those standards, we would also be meeting most countries’ standards. To this end, our special team is working internally on so-called Green Procurement.
A single product consists of more than 1,000 parts and components, and we are supplied with them by various companies. Parts and components get revised so many times, and supplier companies claim that the iteration is the same in quality as the last one, but upon our inspection we have found that they contain different ingredients, even after the supplier’s checking process. So we have proactively created our own inspection process.
Even though we do not directly manufacture our products, we are committing pretty large human resources for the evaluation of products or analysis on Green Supply by the Product Evaluation and Engineering Department in Uji Plant (Manufacturing Division). If you say that the fabless Nintendo is outsourcing everything in the manufacturing process and not doing anything, it is a complete misunderstanding.
For your information, we have also implemented an Iwata Asks feature story project for recruitment. From an external point of view, there are some positions at Nintendo that are more easily understood than others. For example, product development is relatively easy to understand, but we also have officers working for debugs, packages designer, or Green Procurement as I mentioned. In order to present these harder-to-understand positions, we have a page called 'Iwata Asks; What does it mean to work for Nintendo?' on our recruitment page, and one edition features officers from Product Evaluation and Engineering Department, who talk about green procurement. Please check it out if you are interested.
Investor Question: I would like to ask you about the DSi business. It seems to have gotten off to a very good start from the beginning in Japan. I wonder what kind of people are the main customers, if new users are buying them or not, and how they evaluate DSi. Also, can you share the current capacity and future plans of DSi production. As for that, how do you think of the oversea launch period of DSi, transition from existing DS Lite, and the change on ratio of your production of DS Lite and DSi?
Iwata: Firstly, I would like to answer about the composition of DSi owners. Those who understood DSi earlier are, of course, those who actively gather information about video game industry. As these kind of people who already own DS start to try it first, they mainly account for the new owners of DSi at the early period.
You might feel that the gaming population is not expanding at all if the same consumers are buying. But they may have a family whose members can be a recipient of their very own DS. So my understanding is that we must not stick to see just what kind of people have actually purchased DSi, but to measure how DS users would expand and how and what kind of people will be the owners of his or her own DS in the end.
What I have talked about so far happened during nearly one month since the launch. In the second month, I mean December, more (various kinds of) people bought DSi. I have heard some reports like, 'As expected, those who seem to know much and well about videogames came in to buy' in November and 'much more various kinds of people are coming in to the store' in December, and those in the latter report are thought to be inactive to gather information of videogames; they did not see our websites beforehand, read the brochures in detail nor usually buy or read videogame magazines. These kinds of people came in and asked about the difference (between DSi & DS Lite) at retailers. After they learned the features of DSi, they were often grateful for the information, and gravitated towards the new DSi despite its higher costs and bought the DSi. And reports say those kinds of people are increasing.
DS Lite is still maintaining a consistent amount of sales even after the launch of DSi. There are two reasons; one is because of DS Lite’s GameBoy Advance software functionality, and another is because DS Lite has more variation of colors. Others are buying DSi in high percentages. We also have reports of purchase by those who have never touched a DS.
I will refrain from commenting on production capacity now, as the current number might get miscalculated by multiplying it by 12 as the annual amount. I would like to comment on it after it launches overseas and establishes momentum.
I am imagining that launches of DSi overseas will be in the first half of the next fiscal year. As for change on production ratio of DS Lite and DSi, I would like to cite a historical fact that in Japan, DS Lite was more expensive than the original DS but the total demand converged on DS Lite very quickly. But in Europe, it did not happen so fast and these two had been sold together side by side for a long time. And in the Americas, as the total momentum of DS was very weak then, we had to set the price of DS Lite the same as the original. As a result, the demand converged on DS Lite early on.
This time, considering the current foreign currency exchange rates, there is no possibility of selling DSi overseas with the same price as DS Lite at all. There will have to be a difference in price. With this price difference, I think that the DS Lite and DSi will be sold side by side in the Americas and in Europe, but I will not be able to comment on their ratio today as we have not announced the prices and we will have to see how people react to the announcement.
Investor Question: Does your downward-modification on Wii hardware sales from 27.5 million to 26.5 mean that you have one million Wii consoles in stock?
Iwata: No. This is an estimate made at this moment of Wii consoles to be shipped out of Nintendo by the period ending in March, according to our adjustment on production amount within the monthly limitation. In retrospect, we could have sold more units if we had adjusted to send over more Wii consoles allocated for Japan to other markets.
Investor Question: So do you mean that the ultimate demand for Wii is decreasing?
Iwata: The domestic demand for the period ending in March lowered from our estimate made on October 2008. On the other hand, overseas markets performed just as we expected. At the end of October 2008, we made a fairly bullish estimate for overseas markets, and it is moving along according to our estimates.
Investor Question: I saw a NPD data of DS sales in the U.S. for December every year. During December 2008 the sales went beyond 3 million, and also beyond 2.5 million in December 2007. Can you explain why sales skyrocket every December.
Iwata: As I am not from the U.S., all I can tell you is based on my understanding. If Reggie Fils-Aime (President of Nintendo of America) were to be here, he would be able to tell you better.
The largest reason is Christmas. Americans buy a lot of presents during the Christmas holidays. Christmas gift guides, which I prefer not to call flyers but rather catalogs, usually circulate at the end of the year, and products advertised favorably there usually sell extremely well.
These 'rotos,' the ads with visuals that are distributed with papers, dictate the sales volume of products. American consumers go to retailers after deciding what to buy according to these rotos. As retailers also emphasise what rotos featured, these products also receive great visibility at retailers. This is my understanding of the retail business model in the U.S., according to what I have heard, seen and felt as one consumer, during my ten-times-a-year-visits for years.
In December, videogames receive larger visibility. And every retailer offers its own campaign like bundling Wii console and software for a discount as if to tell consumers that it’s high time to buy. And consumers who have been thinking about buying a product and who find it in rotos or at retailers come to think that right now is the time to buy it. Most likely, this is why we see concentrated sales around this time.
In Japan, seasonality of sales of videogames is getting less relevant as the gaming population has been expanding. But in the U.S., seasonality remains relevant even though the gaming population is actually expanding. On the other hand, as our business during the months when it was relatively small has increased sales, we have a strong feeling that the videogame market has been expanding.
Investor Question: You have launched a policy to gradually raise the ratio of payment in U.S. dollars among gross amount of purchase. At this moment, total payment in foreign currency among the gross purchase accounts for 2.7 billion dollars. How high do you think you can raise the ratio of U.S. dollars?
I imagine your payment is varying by major parts like, for example, LCD panels and CPU chips for Wii might be in U.S. dollars, and so on. Are there any components, the payments of which cannot be made in the U.S. dollar? I would like you to explain it, as higher ratio of payment in U.S. dollars will gradually make natural hedge more effective.
One more thing might be relating to ads and rotos you just mentioned. I have heard that your subsidiary in the U.S. is the largest one in the world for you, which holds nearly 800 or some hundreds of employees including the ones to publish their own magazine Nintendo Power. Can you update us on the situation after the move from Seattle?
Iwata: Actually, the ratio of the U.S. dollar payments among our gross payment is increasing. On the other hand, as many of our suppliers are Japanese firms, many of them request payment in Japanese yen. We actively pay in U.S. dollars for firms such as foreign ones where apparently payment in U.S. dollar is more useful. Even for some Japanese ones, we are asking for the payment in dollars. I do not think it necessary nor have any plan to publicise specifically what is paid in dollars and what is in Japanese yen.
Today we have a much larger ratio of payment in euro than that of the time when we started to think that payment in dollars was necessary. At that time, as sales made in U.S. dollars was really huge, so if we paid in dollars, it was a good natural hedge to offset the sales and we were actively working on that. I think we have made some progress so far. Actually we can see a certain level of hedge on the document we distribute today, where sales in dollars and amount we paid in dollars are written.
However, payment in euro does not virtually exist (at this moment.) And to realise that is not easy at all; I think it is harder than increasing our payments in U.S. dollars. If we increase good businesses with firms which belong to the Euro territory and payment in Euro can be made, it will be a good natural hedge for us. In the long term, as American and European videogame markets are expanding more than the Japanese market, my understanding is that we have to find the way for currency hedge against Euro just like we did for U.S. dollar.
As for Nintendo Power, Nintendo of America has long been headquartered in Redmond, which is close to Seattle and where Microsoft’s headquarters are located, and most of Nintendo’s function is based there.
On the other hand, in order to develop business in the U.S., we internally discussed if it was really good to settle all the function in the U.S. in Redmond/Seattle. As a result, we built a branch for the sales and marketing department in Redwood City in Silicone Valley, in order to be near where America’s fastest technology innovation takes place. Along with that, we moved another department to New York City, the center of media, where we can enhance our public relations or media policy than in Seattle.
As for Nintendo Power magazine, it has contributed greatly so far in selling NES and SNES, which Nintendo had to start from scratch in the U.S.
Back then, publishing and distributing a monthly magazine was the most practical way to connect consumers and manufacturers. Now we have a much higher frequency of connecting with consumers online than traditional print publications. Online also has an advantage with lower cost and speed. As so many media are shifting from print to online, we also wanted to shift how we primarily connect with our consumers, and going from our paper publication, Nintendo Power, to online as the center of our message delivery efforts to our consumers. Part of the team that moved to New York included Nintendo’s web content team, and they are working with an increased number of staff.