Iwata Q&A: ‘Non-gamers’ and production

Nintendo has published Satoru Iwata’s QA session with journalists at a recent investor briefing. MCV has split the press conference into three digestable sections, focused on the following topics:

Part 1: Sales and projections
Part 2: New hardware, new peripherals
Part 3:Non-gamers and production


Isn’t it becoming harder to get "the active users who do not play with Wii nor DS" and "those who think that they may play video games in the future" to respond to your marketing approach as easily as before? Haven’t they become a highly challenging group for you to reach?

The 2nd question is, aren’t "those who are already playing with Wii or DS" will not necessarily be playing with them in the future? You talked about "Everyone’s game" at E3, however, are you going to grab them all in one swoop with such games? There must be many angles to invigorate "active users who are playing with Wii or DS," such as game software, peripherals and online services, and the questions is how.

Also, when will we be able to see the result of when the company has stepped up the efforts to attract "active users who are not playing with Wii nor DS," "those who say who may play in the future," and "those who showed no interests in gaming?" What kind of new things are you tackling with now in order to make that happen? At the outset of today’s meeting, you said that the company had made two mistakes. With the mistakes in mind, what are you going to change?
It is true that a fairly large number of people say that they have no interests in video games at all. The number of such people rapidly increases as the age bracket becomes older. Some in their 60s and 70s have a very strong sense of refusal and say that they will never play games. Since Nintendo started its challenge to expand the gaming population, the sheer size of gaming population has actually increased. In Japan, people who used to play but quit have returned to gaming, and simultaneously, brand new games such as Brain Age and Wii Fit have invited those who used to have no interests in video games to the world of gaming. Actually, the ratio of people who used to play but quit is not very high in the U.S. and in Europe. In other words, more new players have entered gaming.

You are right in saying that the difficulty level for the company has increased. To some extent, those who would have responded to our approach have already done so. So, the difficulty level for us is surely increasing. On the other hand, the 149.5 million people who I mentioned are not playing games today but may do so in the future were not originally this large of a group in the past. In fact, the number of people who have started to think that they may want to play in the future have significantly increased as a result of our efforts to approach to them. To be more precise, before the actual gaming population increases, there is an increase in those who do not play today but may do so in the future, in other words the group of people whom we call potential users. That is to say when we make an effort (to expand the gaming population), it does not have the immediate effect to increase the active game players but it first increases the potential users who think, "I thought gaming was not for me at all, but I may want to try in the future as it sounds a bit fun." They first become potential game players and then become active players. When potential users become active users, the number of potential users decreases. In a good cycle, just as the new active user base increases, those who used to say they would never play start to become potential users. This is how the gaming population has expanded so far. They become potential users by listening to our proposals. Our challenge is how to encourage them to take that one last step forward. While we recognize the increase in difficulty level, I do not think that we have to completely change our game plan to reach out to them. The fact that those who used to say they will never play are starting to consider playing games shows that our approach have been effective.

Having said that, I think you can all relate to this that we human beings often do not end up purchasing a product even when we think we want to buy it. I myself can think of many products that I have not purchased even though I want to buy them. Because we human beings behave like this, even when we are able to convert many people to our potential users, there is no guarantee they will buy our products in the future if we do not take action. To make that happen, we must challenge ourselves with tasks at an even higher difficulty level.

Another important challenge is maintaining the current active customers. As you pointed out, this is a very important point. Nintendo is not nave to think that those who have become active players will continue to be active players without us doing anything. If the situation were that simple, we would never see the increase in sleep users. The fact is, people can easily quit playing games. What I have been thinking as a very important challenge lately is, how we can confidently recommend to such customers the next game. When they visit video game sections of retail stores and notice, for example, that there are actually 500 Nintendo DS titles, the issue for them is to know which software they should pick up. When they ask the shop clerk for "English training software" or "Kanji training software", the clerks would show 5 to 10 different software that fall into that category and they cannot tell which one is the best for them. I have heard of a research that people cannot decide if there are too many choices. We believe it is very important that our customers can pick up the one title that we recommend with which the customers will be satisfied. If Nintendo picks a few software titles and make recommendations to the customers, third party software publishers would feel that we are arrogant and that we have no right to do such a thing. So, we will need to come up with a different method.

Although this is not 100% a sufficient answer, Nintendo updated Everyone’s Nintendo Channel for Wii this month (July) in Japan. One of the most important aspects of this channel is that the customers can evaluate the game that they have actually played and submit those evaluations just once. We had been gathering these votes, and we have now started to share the feedback of highly-rated games to Wii owners in a visible way. In essence, Wii owners can clearly see the titles which have been highly evaluated by Wii game players in general. We are discussing the possibility to make such information available at retail outlets in the future. The point here is, we are trying to create a situation where our customers can easily see what products are highly satisfactory to our customers and minimize the chances of our customers purchasing software which are not satisfactory and do not live up to their expectation.

I’d like to talk about "Everyone’s game." General marketing wisdom says that customers need to be segmented. For product planning, the target audience needs to be identified and narrowed down. For marketing, segmentation is critical and necessary for media buying. Anything that has been segmented is always perceived as good. If Nintendo had 500 different development teams inside the company, that approach might work as each team might be able to cater to a different niche. The fact of the matter is, Miyamoto is the head of one R&D division, which can only launch a few titles each year. To maximize the result, we have decided to counter the common marketing wisdom and go anti-segmentation if everyone else is segmenting everything.

This is easier said than done. It is a huge challenge to make a game that will please and be fun for both veteran gamers with the expected depth and novice gamers who say "I don’t get it" but provide them with particular depth that can lead them to deeper points just as they become eager to play longer. Nintendo would like to tackle this enormous challenge. This is one of the reasons why we spent time fine-tuning Wii Sports Resort and this is also the challenge with New Super Brothers Wii. When we can finally demonstrate to the world that these products can satisfy different types of people at the same time, you will probably understand what Nintendo was talking about. For your information, when I talked about this "Everyone’s game" concept at this year’s E3 media briefing, I really did not get any response from the audience. Maybe it was a sign that people do not believe it would be possible.

How do you access the 183.4 billion yen of "Finished Goods?" Have you inadvertently increased it to this level, or did you do so intentionally in terms of the arrival of big titles? When I looked at the April-June financial results, I had the impression that there were some inventory adjustments taking place. Had you already gotten rid of inventory issue as early as July, and if so, I would like to know by the products and by hardware and software. Another thing is, if the company is confident about its operations and its financial forecasts toward the latter half of this fiscal year, I personally believe this might be very good timing to do stock buybacks and others. What is your opinion?
First about the inventories, it is true that it increased a bit more than we originally anticipated just as I explained to you earlier today that the 1st quarter results were within the range of our estimate but near the lower end of it. In addition to the lack of strong Wii titles which caused the weak sales, it was also affected by the conservative attitudes of our customers in channels. As a principle, we do not want to blame the economy for our performance. Video games have been relatively inexpensive commodities and the business has been less susceptible to the changes in the economy. Blaming it on a once-in-a-hundred-year depression sounds to me too easy of an excuse. Although I do not want to attribute it to the bad economy, if there was any economic influence, I should point out the fact that the retailers are taking a very deliberate attitude towards holding their inventories. When weekly Wii sales declined in comparison with that of last year, they naturally tend to judge that what used to be the appropriate level of inventory is no longer appropriate. They then become very deliberate in making additional purchase orders. They should have ordered more, but they didn’t. When you looked at the sell-through data, you might have expected more shipments from us. I think the attitude of the retailers had something to do with that. As for purchase orders for software, the global tendency was that retailers contracted them for titles with no known franchise and that they could expect small-scale sales. Such tendencies were there, but as I see it, that kind of adjustment has already made progress to a certain point. I don’t think the tendency will continue for a long time in the future. I don’t expect in the future that Nintendo’s shipment numbers will not match well with the sell-through data publicized by independent research firms around the world.

As for share buyback, there are a variety of different thoughts. Of course, we are always considering when or at what timing we should buy back the stocks if we ever do so. However, this is not something I can share any concrete schedule here today. While we are always considering it as an option, unfortunately, I have nothing to say on this today.

Tell us about the most recent monthly production of Nintendo DS Lite, Nintendo DSi and Wii as well as the change in production trend lately. Also, please tell us about the profitability of each product.
I do not think we have ever talked about the monthly production number for Nintendo DSi, while we have shared monthly production capacities of Nintendo DS Lite and Wii. When we confirm the monthly production capacity, some predicted how many we could sell in a year simply by multiplying that number by 12. As a result, we discussed among ourselves that there is a larger demerit (in disclosing monthly production capacity). Therefore, we will not proactively announce the monthly production capacity unless there is some compelling need for us to do so. On the other hand, if you simply multiply the monthly production capacity that we previously mentioned and compare the unit shipment number for the subject 1st quarter, they do not show the good match. This means that the inventory will increase, so we are decreasing the production a bit in June and July. After August, however, because we have declared that we will prepare for the year-end sales season and aim to achieve specific business results, the production is planned to increase. Please understand that this is all I can tell you now.

I’d like to ask about management operational timeline. When we see things on a one-year basis, there is the year-end season. You just told us that you would like to offer to the market something unprecedented once every two years. Some have talked about the 5-year hardware lifecycle. So, there are different timelines. We are looking at the company from a capital market, and I believe President Iwata has been creating value on a daily, mid-term and long-term basis, however, I think the timeline we use for our evaluations do not always match with the timeline you conceive in your operations. Can you advise me of any timeline that you are conscious of when you operate the company?
First of all, about your comment on the 5-year hardware cycle, I’d like to emphasize at the outset that I do not share the idea that new hardware must be launched every 5 years. I would be lying if I said that I had no grievance at all about having to announce the 1st quarter financial results because it is the duty of a listed company. When asked how much importance there is in needing to argue about what percentage is up or down in the April-June quarter in comparison with the corresponding quarter a year ago, it is true that I feel something a bit incompatible with my sense of value.

Since I am operating a publicly traded company, I do think as a matter of fact that the unit of annual sales results is important. On the other hand, a year is actually less than the average product development cycle. For example, it is rare that the products that we can launch this year started in development last year. Rather development for most of them started two or three years ago. An extreme example is the Tomodachi Collection to which I was referring earlier. We had started the development almost 4 years ago. When we started development then and the product was shaping up to some extent, we found that the function (to create caricatures) was interesting that we chose to integrate that feature in Wii, which ended up becoming Mii and Mii Channel. This software with such back stories deviated from the usual route, and was not initially highly anticipated by (from the trade and game fans) but eventually launched to a good response in the market. So, some software even have a timeline of 3 to 4 years because what we start making today needs 3 to 4 years before they can exhibit their real worth.

Similar example can be cited with Wii Vitality Sensor. For one year after the completion of Brain Age software, while we were continuously planning a variety of different products across departments, we came up with the idea of a "Face Training" software with the brand new concept to train your facial muscles of expression. The concept of Wii Vitality Sensor also came out around the same time. Since this concept involves (the development of) new hardware, we spent more time. As makers of entertainment devices, we do not make medical equipment, so we are developing this in collaboration with university professors and others by discussing with them the most appropriate parameters for entertainment.

Some software can be developed within a fairly short time period, like half a year. However, it usually takes a year to a year and half to develop and it can be stretched to two to three years, even 4 years depending on the circumstance. With hardware, the cycle is 5 years or longer.

People in general probably have some notion toward what a certain product should be. However, the products that can surprise consumers exist behind the wall of that perceived notion. Nintendo is valued by customers because we were able to take that extra step forward where no one dared to go: make a brain training game, create a cooking game, play a game by waving a wand-like remote controller, and market a bathroom scale. For that matter, when Nintendo first introduced its Nintendo DS and mentioned that that the next portable machine has two screens, I felt that a great majority in the industry thought Nintendo had lost it. Recently, however, (when we make some new announcement and) if there is no (positive) initial reaction from the market, I try to think of it as a good sign because that can be interpreted as people reacting to something groundbreaking. If the employees were always minding themselves to do whatever the market is requiring at any moment, and if they were always focusing on something we can sell right now for the short-term, it would be very limiting. We are trying to think outside of the box.

So, as a manager of a listed company, I personally have to consider and act so that the company produces a certain level of outputs to increase the sales and profits as a publicly traded company. On the other hand, most of the company’s individual projects cannot be considered and executed within such timeline as half year or a year, let alone on quarterly basis. In addition, we are always trying to create something really interesting and groundbreaking that will surprise customers in an unprecedented way. Such thinking has taken roots as our corporate culture at a number of internal development teams, and Miyamoto and I have to be the judge who can sort out development projects with bright future prospects from others. We then pour sufficient time and resources for projects with good prospects. We never give up until the project is completed and highly satisfactory, at which point we can launch the product. (In this way, it is not possible for us to accurately guess how long the development takes.) We still have to make sure that certain outputs are being made every year. I am always struggling with this, and try to be very conscious about not thinking with too short of a timeline in assessing things.