Nintendo's Satoru Iwata

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.

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.

We should not conclude that the Japanese sales of DS have peaked. In our business, one single software can change the entire picture completely. For example, there was a time when people thought the Game Boy platform was virtually over. However, a software called Pokémon single handedly changed the situation and expanded the platform’s lifespan by several years. Just as we were able to do so with Nintendogs and Brain Training, if we are able to provide customers with an unexpected product, the situation can drastically change.

I said earlier today that the (past) product cycle cannot be applied today, but I did not mean that the notion of product cycle will disappear. What I was trying to say was that, thinking such as "since the past generation’s product cycle was 4 years or 5 years, this generation’s cycle must be 4 years or 5 years too" or "as the past generation hardware followed this path so will the current generation" will not hold as cycle length and patterns will differ with different environment and customers. Simply because the same patterns have taken place for many years in the past, many tend to think that the same pattern should be repeated next. However, when I hear that kind of traditional platform cycle theory, it reminds me of how people opposed our ideas of products for 5 to 95 years old, regardless of age, gender and their past gaming experiences. So, what I really wanted to say today was, isn’t it time for us to rethink of product life cycle in a less static manner.

First of all, our traditional customers are mainly those who proactively seek game-related information for themselves, and we could quickly deliver the information they needed. This is because they are acting to obtain the information from their side. On the other hand, what we are attempting today is to ask those who openly states that they have no interests in video games to give Nintendo’s products a chance and enjoy our games, which takes time. From this perspective, I have to wonder if it is all right to think that this current generation of hardware will have a 4-year lifespan just because the past generation’s lifespan was 4 years. I believe a different time cycle must be considered.

Now that they have kindly purchased hardware, it is desirable for us if they can enjoy the machine as long as possible. We are selling the hardware just because we want our customers to enjoy software. This is something that Mr. Yamauchi (the former president of Nintendo) was saying and not something I myself started. But Nintendo thinks that our customers reluctantly buy our hardware (in order to play software). Accordingly, we would like to offer new proposals one after another as long as that hardware can still provide fresh and pleasant surprises. If such efforts can be resulted in the prolonged lifespan of a hardware, that is good to us.

So, we are trying to offer new proposals one after another and trying to maintain a high activity ratio of the hardware. At the same time, there are still many people in the world who have not played video games, so if we can reach out to them, the total life cycle will change. The main point of my address today is that, we have reached a stage where an analysis of past businesses that targeted traditional gamers in Japan, the US, and the European markets alone cannot be an appropriate indicator for the future.

As of the time when financial forecasts are made, we only know what we are currently making at Nintendo and the plans of third party software launches shared by software manufacturers. For example, Nintendo launched the Brain Training software in 2005, but at that time, even if we had said that this software could sell tens of millions of units, nobody would have believed it. As a result, the internal expected shipment unit of the title was very conservative in terms of the actual result.

Among all the software that we are planning to launch from now, if any one of them is going to be an unexpected smash hit all around the world, there is always room for upward revisions. However, we cannot base such unknown factors when we announce our financial forecasts. As the result, we always have to base our forecasts on past trends. If any of them become an unexpected hit, that can contribute to market expansion. Again, we cannot tell which one of the proposals we are going to make may likely become the next smash hit, or how much they can sell beyond our expectations. It is one of my jobs to increase the possibility of making that happen, but I am not in a position to make our financial forecasts based upon such hypothesis, which may result in downward forecast revisions later on. This is the background for our financial forecasts.

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.

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.

Many people point out what we will do with increased money or that we own too much money. First of all, please understand that Nintendo’s business shoulders huge business risks. For example, when we were still developing Wii or DS, no one could tell these products would be successful. Of course, Nintendo was doing its best to make them successful, but as of the time of developments, the reactions from the industry were rather sceptical. It was even said around that time that Nintendo was running counter to the common sense in the world.

What if Nintendo did not have enough money at that time? Our partner corporations that have been providing us with many different technologies and components and our partner subcontractors to manufacture our products must have held grave concerns. If they had been concerned and feared that Nintendo might not succeed and that Nintendo might not be able to pay as promised, they would not have maximized their cooperation with us when we really needed their efforts.

Also, if we had to disclose all of our plans on the new unique hardware a year and half or two years before its completion in order to solicit for necessary money from the stock market or banks, what would otherwise have been a unexpected surprise would not have generated the positive effects on the potential customers when we would have finally demonstrated the tangible product. In terms of the traditional efficiency of funds operations, especially for those who are reading our financial statements from the outside of the industry, our situation may appear inefficient. However, it is the unique characteristic of our business operations that you cannot dare to challenge some bold tactics unless you have a strong enough financial backing.

To this end, we need our own capital adequacy. Also, the business risks in our business are increasing year after year. If we can come to the stage where no more risk increase can be forecasted, we may be able to tell our shareholders that we will return everything to them because we do not need them any more. But the fact is, we are not expecting such a day can come for sure. For now, therefore, our position is that, because Nintendo has been announcing one of the most aggressive policies as a listed Japanese companies to return our profits to our stockholders by making the higher amount of 50% of consolidated net profit or 33% of consolidated operational profit as the source of dividend, we are asking you to allow Nintendo to keep holding a large amount of cash reserves and to continue investing in us.

Sometimes, some people say that Nintendo’s position will become even more solid if it purchased software companies by M&A, but I have no such intention because buying such companies will not contribute to strengthening Nintendo in the true sense. I believe that it is not the company but the skills of the employees that matters most, and therefore regard M&A as meaningless.

There are the cases where M&A is effective. For example, if a company holds a very important patent that Nintendo wants to obtain that will help fight future battles in the video games business with a huge advantage, that would be a time when Nintendo would consider the possibility of M&A. When we determine we should, we should not hesitate to work on the M&A at that time.

Once again, however, it shall be confined to the situation where owning a specific expertise or intellectual property right which belongs to the company will be critical. I do not think that rapidly increasing the number of people who cannot share Nintendo’s unique way of thinking or Nintendo DNA will do us any good. I have never thought that we should do an M&A just because, for example, we have recently not been able to make the significant sales growth. Neither do I have such intention in the future. Of course, there are technologies and rights that we are paying special attention to, but we cannot disclose them.