After the recent close of Nintendo's financial year - during which the company detailed record revenues thanks to the DS and Wii - president Satoru Iwata took time to answer investors' questions on the future of the games market. Here, we've picked out the highlights relevant to games developmentâ?¦

Iwata Speaks

[Note: The full original Q&A can be found here. Questions were asked by Nintendo Investors.]

Tell me more about WiiWare. Now that the service has started in Japan, have there been any changes in the reactions from new software publishers? I am anticipating growth in this field, but I would like to know your thoughts on how many software titles will be sold and how much sales will be generated?

As to the number of software developers entering the WiiWare market, I have the impression that it is gradually increasing. As for the initial reactions from software developers who have already started selling their software, some of them have already started working on their second titles because the initial download sales so far in Japan alone where service is available has been relatively good, and global sales can be expected to be several times as much as the Japanese sales. They are thinking that "We definitely want to work on the next title now that we know what to expect with Japan sales alone."

On the other hand, I think it is very difficult to predict how fast WiiWare will be expanded to customers. Should we have to prepare physical inventories in order to deliver the goods to our customers, we would need to make the best guess on the potential sales and make the inventory available. However, as we electronically distribute, we do not need to prepare for physical stocks. Accordingly, we have not made the forecast on the precise business potential, and we are not in a position to answer to that question today.

Having said that, I am expecting it (electronic distribution business like WiiWare) will play important roles in the long run. Will it go pass the tipping point just in one year, or will it take 3 or 5 years? The future of the electronic software distribution business is not very clear today, but it is something that we need to prepare for. On the other hand, I do not believe that today’s packaged software business will simply be replaced by electronic distribution business all together. The packaged software business has its own up side, as does the electronic distribution business. We would like to establish a business model in which both can prosper.

Tell us about the download distribution business status of WiiWare and Virtual Console. Please also briefly explain the business model of download distribution and existing packaged software as they must have different business structures and profitability scales.

The total sales for the fiscal year just ended from Virtual Console and WiiWare, whose service started near the end of the term and were very limited in sales, was 7.8 billion yen. I really cannot tell how this past year sales will evolve in the future. I personally feel that they have the potential to explode sometime in the future, but it is rather difficult to predict when the tipping point will happen. Since there are no inventory risks for WiiWare and Virtual Console, I believe that the business efficiency will get better as soon as the services gain momentum.

For your information, the business relationships between us and software manufacturers for Virtual Console and WiiWare are very different. As for Virtual Console, Nintendo manages the process to make third party software ready for the download sales at Nintendo’s own business risks. This is because when we started the service, the future prospect of download sales on Wii hardware was totally unknown. Since Nintendo is shouldering a large portion of the business risks, we are also receiving proportionally larger margins.

In case of WiiWare, all the development risks are absorbed by our software manufacturers. They shoulder the development risks for themselves, they submit the software to the rating board for the appropriate rating to be determined, and they handle their marketing. Accordingly, the software makers’ margins are bigger. We are not in a position to disclose the margins as part of the contracts, but I just wanted to bring up this clear difference between Virtual Console and WiiWare.

I am personally enjoying WiiWare and Virtual Console but feel Wii’s flash memory size is not enough and annoyed that I need to use a SD memory card. Will this situation be improved?

Statistically speaking, it is true that there are a small number of customers who feel that the flash memory is too small, while many others find that they have plenty of memory. However, because this small number of people are none other than the most avid players, we know we have to review the best possible solution to eliminate their inconvenience.

Will Virtual Console and WiiWare be able to coexist in the future? Or, will WiiWare become the mainstream and is Virtual Console considered as a temporary bridge service until the software download business becomes established?

As for Virtual Console, there is a limit in offering new titles as we only have a limited number of past software titles produced for past systems. So, eventually, the day may come when we cannot offer any more Virtual Console software. Gradually, the ratio of WiiWare business may become bigger.

On the other hand, as more and more Wii hardware are sold, and more customers connect to the Internet and decide to purchase software via download, even games from 25 years ago must feel fresh to these new customers, so these games have room for further sales. While WiiWare business will become proportionally bigger in the future, we are not expecting Virtual Console sales to suddenly fade away. I am of the opinion that Virtual Console will be cherished for a long time.

As a matter of fact, the ordinary packaged software are sold in the launch week or immediately thereafter and quickly lose sales momentum, except for Nintendo’s Touch Generations series, I hear that the sales decrease is slower for Virtual Console software. I am expecting the same trend can be seen on WiiWare sales, but it is too premature to comment on this concretely. I am hopeful that, sometime in the future, when I can speak to you like this today, I will be able to discuss our analysis on our future prospect of the electronic software distribution business.

Could you tell us Wii’s internet connection rate in each territory? Also, about WiiWare, I had the impression from today’s presentation that you would like to use it as a platform to discover new software and new developers as well. Who are the main WiiWare user targets in your opinion?

The Internet connection rate is high at the early stage of the product’s availability in the market because the most avid customers are willing to purchase the machine first. If we did not make any efforts to increase the net connection ratio, the rate will decrease gradually. We have been making various efforts, such as our collaboration with NTT in order to increase the rate. What our efforts have realized is the situation where we can just maintain or increase the net rate by a small margin which could have been decreased if we had done nothing. If we do not take any measures, the ratio of people who are willing to connect their Wii to the Internet will decrease as the total number of Wii shipment increases.

For this reason, when we look at the overall internet connection rate on a global scale, it has not changed drastically since the last time I disclosed these figures. In general, the internet connection rate is comparatively high in the U.S., and comparatively low in Japan. The types of Wii user might be a small factor for this. In other words, the ratio of avid gamers is high among the total Wii purchasers in the U.S. and the types of software which are selling in the U.S. are also different. European internet connection rate is between the U.S.’s and the Japan’s, but I have not brought with me any concrete figures to share today.

As for WiiWare, just as you pointed out, one of the missions is to discover new developers and new software. We would like WiiWare to become the platform that can provide a unique opportunity to developers to create games that they cannot otherwise on other platforms. From the game players’ perspective, we would like to increase the possibility for them to experience unique new games.

So, when it comes to WiiWare, rather than outlining who our primary target customers will be, we may want to consider unique software and services that can only be provided only on WiiWare. It is possible that companies from completely different industry may start an unprecedented service on WiiWare. As this should be something our partner corporations should announce, I cannot identify their names today, but in Japan for example, we have already received a proposal from a company which has nothing to do with the video game industry for WiiWare software that looks exactly like a Wii Channel. I think there will possibly be WiiWare software that people cannot think as video games at all when they are publicly announced. It is one of the unique characteristics of WiiWare that such software services can be started with a small risk and with a small start.

Japan had suffered a serious gamers’ drift situation during the preceding hardware generation because the business back then was placing too much emphasis on hardware specifications. With the efforts of Nintendo, the market situation has finally been recovered. On the other hand, the growth ratio is slowing down a bit. If the current situation continues, I am afraid that the Japanese market share will be weakened to be less than 10% of worldwide market. So far, video game market has been introduced overseas as a sort of culture with Japanese origins, but I am concerned that this may not be the case in the future. I would like to know what you, Mr. Iwata, think about this situation. If you share my concerns, do you have any plans to alter the situation? In Japan, I understand that the market has not reached a point where many small-scale developers are starting to work on WiiWare software. What is your observation on this?

As for WiiWare, at this point in time, there seems to be a higher number of major publishers in Japan, while there are more small-scale developers overseas working on WiiWare software. I am hopeful that a small developer will succeed in their WiiWare software and the news will be introduced as a success story of WiiWare so that more small developers will be willing to create unique WiiWare applications. I am really hopeful that there will be one such a good example to trigger this good cycle in the future. Nintendo would like to consider what Nintendo can do to most effectively make that happen.

Nintendo has had a long-standing relationship with Japanese publishers and major developers, and overseas expansion is a major topic when we get together. A unique example that I am proud of is the Mario & Sonic Olympic Game that we collaborated with Sega. Sega had obtained the Beijing Olympic license to make exclusive video games and offered to cooperate on a game in which Mario and Sonic appear together, which was the starting point of this project.

In Japan, Nintendo is selling this Mario & Sonic game, In the U.S. and in Europe, however, it is Sega who is selling the same game. Sega has recently announced that the cumulative sales of Wii and DS Mario & Sonic games have reached 5 million units. It has been a while since a Japanese publisher had produced this kind of smash hit in the overseas markets, so I felt that this set a great example. Of course, I am not suggesting that merely licensing Mario will generate good results. However, if there is a good idea, and if we can understand the advantages of each company that can be leveraged in the project, we would like to cooperate in such a project that can help heighten Japanese software manufacturers’ presence in the global market.

Some say that both DS and Wii can be played intuitively but that they do not have deeper elements for players to explore so that it can get boring. So, isn’t there any concern that both DS and Wii might lose the current popularity in Europe in the future?

As to the "depth" issue of games, the game elements which encourage players to play again and again are not determined by hardware characteristics. It is the matter of how many game replay incentives the game developers include into one software and of how to balance between very easy-to-be-understood aspect for anyone and the additional excitements only those who have played hard can experience. For example, while a number of DS software currently available in Japan are highlighting their intuitive game plays, many others are including the elements that must be explored by intensive plays. The balance between the two will change as time goes by. Such notions as all the Wii and DS software can be intuitively played but shallow in the contents are superficial observations.

I heard that the initial sales of Mario Kart Wii that you just launched have been good, which reminds me of the arcade version of Mario Kart that was also a hit just sometime ago. On the other hand, someone attribute the recent slump of arcade business in general to the success of Wii. What are Nintendo’s position and thoughts on arcade business? Does it have potential to become another new business model for Nintendo?

Nintendo licensed the arcade version of Mario Kart to Namco Bandai, who rolled out the game and with whom Nintendo has collaborated on many other fronts. For example, the Flash Focus software to which I was referring in my earlier presentation, was originally developed by Namco Bandai. Nintendo saw the potential for it to develop into an excellent software if it finished up well and, accordingly, we proposed to Bandai Namco to jointly develop it. As a result, more than 2.5 million units of Flash Focus software were sold on a global basis, and I imagine that they are as happy as we are. So, we are working together on many other projects, and the Mario Kart arcade project was one of the many collaborations with them, which cannot be compared to any other Mario Kart developments for the Wii or DS.

When any arcade software is developed, the application must provide players with unique, fun experiences that can be realized only by the medium of the arcade. As for Nintendo, it has been a while since we withdrew from the arcade business when Mr. Yamauchi was the company president. I myself have been concentrating upon how we can make DS and Wii appreciated by customers all around the world, so I have not had a time to think about arcades nor do I have any idea about arcade business at present.

In the entertainment business, however, it is my fundamental belief that we cannot think that a form of entertainment cannibalizes another. People are attracted to a form of entertainment because it offers something that no other form of entertainment can offer. I think we should think in this way. In general, if I were to think about entering the arcade business, I would disregard Wii’s influence and first think about what it can offer that could never be experienced at home.

I imagine there are many non-traditional gamers who are purchasing Nintendo’s games. Isn’t there any impact of the economy even among these new customers?

I am feeling that there have not been direct influences. Of course, we have to be very sensible to any changes in the market and have been carefully monitoring the sales of software that have contribute to expanding the gaming population every week, but we have not found anything. Probably, as long as Nintendo’s projects are concerned, they are less susceptible to the changes in the economy.

I think it was last year when you said that you wanted to challenge the old convention that increased hardware install base will result in lower hardware-software tie ratio, by expanding the dynamic range of software both in terms of play volume and price, but I feel that your efforts seem slow to progress. I do not know if this has something to do with it directly or indirectly, but you reportedly spent 37 billion yen for R&D in the fiscal year that just ended although you had originally planned to spend 45 million, and the actual result was similar to the result of a year ago. I heard that the reasons behind this are focus upon select titles and delays of some software launch timings. However I have another hypothesis here, and that is the lack of man power. On a consolidated basis, you increased your employees by around 400 people during the fiscal year just ended but most of them were people from Monolith Software, newly grads and people employed by your foreign subsidiaries.

My question is, can you further increase productivity per capita? You are not engaged in physical labor, so you do not have a limit for that, but I also understand that only increasing the number of people will not do any good. I just want to know if there is room for improvement in individual productivity.

I think there are few past examples of a company our size with a unique business style that has tripled its sales in two years. Without much reference I am thinking how to move forward day by day. When one business rapidly expands, there is always the issue of labor shortage.

On the other hand, we also have to consider whether increasing the number of people where we feel are short-staffed will really solve the issue. If we could split one person into two in order to double the number of employees, it should probably work out. However, merely recruiting a large number of external people who is not familiar with what Nintendo is about nor with the unique characteristics of the video game business would pose a danger to us because we would see a sudden increase of people at Nintendo who could not comprehend the unique Nintendo way or DNA which is sometimes regarded by the public as offbeat. So, I have been trying to reinforce Nintendo’s workforce by identifying the fine line between increasing head count and keeping the Nintendo culture intact.

Having said that however, I do not think that we have done everything possible to maximize individual productivity yet, even though we believe Nintendo is one of the more efficiently-operated companies. Although there is less now, there is still wasted energy in Nintendo. Also, I think we can do better in identifying what tasks Nintendo should take care of internally and what we’d like to share with our partners. Also, as being explained in the Theory of Constraints, the phenomenon that one bottleneck situation can determine the overall performance and through-put is found in a variety of businesses including ours. So, we have to always think, "What is the bottleneck?" and "How we can strengthen that area?"

It is true that our business has expanded rapidly in a short time period, so our workload has increased along with our potentials. There are things that we may want to do but have to refrain from doing so because we know that if we attempt to do everything that we want to, many of them would end up being just halfway done, so the final outcome will be worse. So, there are things that we could have done but have refrained from doing so. From an external point of view, Nintendo may be criticized as slow in development, but Nintendo would like to carefully identify our limit as to how far we can expand without losing our Nintendo style. However, please understand that we are aware of opinion like yours, and we have been making efforts and trying to implement our own unique tweaks in order to strengthen our productivity. I think I can also be proud of the fact that the total number of Nintendo’s productivity today is significantly higher than that of a few years ago.

You said that platform cycle may change. What are the things you can identify as the factors to generate the new platform cycle today?

I personally feel that, when software creators have done everything possible with one hardware platform to offer ideas and tricks to generate pleasant surprises to the customers, it is the end of the hardware lifecycle. As Nintendo has its own hardware development team, they are always researching into new hardware. Also, while they are working on new video game hardware, they are also working on hardware accessory to the video game hardware, such as Wii Balance Board, which can add extra functions to the original hardware in order to add an element of surprise for people. Such developments by the hardware team can be considered as a way to expand the hardware platform’s lifespan. Most recently, the wheel accessory for Mario Kart Wii falls in that same category.

On the other hand, any technology has a breakthrough point. Even today, there are many things that we want to materialize, but that is limited by the currently available technologies or that can be done today but would be costly to be sold as a game console. But when a breakthrough takes place in the future, that technology can be incorporated into a hardware that can be reasonably priced for our customers. At that time, if the software developers believe they have done everything possible on the current platform to surprise the customers but cannot do anything further, that is when a new hardware platform is needed.

As semiconductor technology makes progress and the width of the process rule has become thinner, we can put more transistors and the total functionality will increase. However, that alone will hardly surprise the customers any more. So, we have to think in terms of other elements as well.

Do you mean that the factor which will trigger the new platform to emerge into the market will be from within the company and not initiated from outside?

We are always trying to be the first to offer fun proposals to our customers, and many companies in this industry are eager to do the same and putting in the utmost efforts in order to find the concept that can give pleasant surprises. From that perspective, when another company comes up with an idea that can totally surprise customers, our way of thinking on what we should do might be altered. So, as principle, we would like to generate such (factors to initiate the new product cycle) from among ourselves, but we cannot say for sure that the trigger won’t result from action of other companies.

I am concerned of two risks. One is about the rumor that Microsoft will launch a controller which will resemble a Wii Remote by the end of this year. What are your thoughts on this? The second is, even though this may be the matter of next year or thereafter, they often refer to Apple and others as potential companies to enter into home console and handheld game businesses. What is Mr. Iwata’s opinion to this kind of move?

I am also aware of the rumor and have seen a fake image made by a fan on the web which looks like a Wii Remote with the rumor that such a controller may be launched, However there is no way for us to comment on such speculations. All I can say today is, it is not that easy to develop software which leverages the characteristics of Wii Remote. We are not concerned about what other companies may do but rather more concerned with presenting them with new ideas to our customers based on the prospect that our existing customers will surely get tired of the plays enabled by Wii Remote if we do not try to improve the experience. In other words, what matters to us is whether or not we can continue to constantly create and offer new surprises one after another. If we can, then (other company’s attempt to launch Wii Remote-like controller) should not be a big threat. The efforts in this field to try to appeal to a wide variety of customers are something in which we saw potential early on and that we have been working on the longest, so there appears to be no reason whatsoever why we need to be concerned.

About your next question about what we will do if other companies enter into the market, as I said earlier, the game business comes with huge business risks and it is becoming increasingly more difficult for new entrants. You mentioned the name of Apple, but until any one of them can actually demonstrate what they are willing to do in this game market, I cannot make any comment.

Just like I said now, what matters to us is not who may be entering into the video game market with what kind of risks but how we can keep the interests of our customers because these customers, even though they are appreciating our offers today, will get tired of them if we cannot provide them with new proposals before they get tired of them. If we can provide them with new surprises, they will continue to support Nintendo for longer, and if not, they will say in the near future, "That was Nintendo’s peak." So, we want to make sure we will do our job right.

Could you tell us what kind of criterion do you have regarding the licensing of Mii? For example, I imagine that there is a possibility of difference in sales between sports titles where Mii appears or not. Have you already planned and disclosed such conditions from the outset?

To Nintendo, licensing Mii is identical to licensing Mario. If you read Iwata Asks interview series in website, you can understand how Mii was created in detail, so I hope you can read them if you have time. Mii is actually the result of more than 10 years of efforts.

Mr. Miyamoto, the inventor of Mii, himself has been saying that, "In a sense, licensing Mii is same as licensing Mario – Nintendo should grant the license when we can conclude that the proposed project is worthwhile. Should we allow any and all the licensees to use Mii license for whichever projects, Mii’s brand image will be hurt. Because we are not granting Mario license to any and all, we should not do so with Mii either."

This is the current policy of Nintendo. So, at the software development stage, we are consulting with the developers as to how they would like to make use of Mii, and our Licensing Department handles on a case-by-case basis.

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