Nintendo : Corporate Management Policy Briefing/Third Quarter Financial Results Briefing for the 72nd Fiscal Term Ending March 2012 - Q & A

 It is an extraordinary situation that a company with sales of no less than 660 billion yen posts an operating loss, although it might not be fair to evaluate a global company like Nintendo in the yen's value. You mentioned your network strategy. It is difficult to raise the price of the hardware once it has been marked down. Naturally, therefore, you need to obtain as many added benefits from software as possible. Please tell me how to get such benefits when you can charge users online. Nintendo has been in the business of one-time sales of packaged software, and would you comment on the discussion that you should get paid more from each user, or increase the ARPU (Average Revenue Per User)?

Iwata:

When I was appointed as the president of Nintendo about ten years ago, its sales were approximately 500 billion yen with the operating income of approximately 100 billion yen. I therefore understand the point you made that it is extraordinary that Nintendo will post an operating loss even with sales of no less than 660 billion yen. The result will mainly derive from the decision to mark down the price of the Nintendo 3DS and sell it below cost, sacrificing our profitability for this fiscal year, so that we can get it back on track to its originally-anticipated sales pace so as not to shrink our future business (of the Nintendo 3DS). In addition, I want you to know about some big changes in our business conditions.

This slide shows the sales in foreign currencies and foreign exchange rates against the Japanese yen for the past five fiscal years. Please pay attention to the difference in the foreign exchange rates between the time of the launch of the Wii and the present. Our overseas sales represent about 80% of the total sales. However, we cannot easily raise the prices of our video game systems even if the yen appreciates. If we manufactured commercial-use products without any alternatives in the world, we might have gone to the extreme to increase their prices to respond the stronger yen. But our products are not of that kind. 199 dollars remains the same value for the U.S. consumers both in the past and in the present, and how much our products are worth in yen is of no concern to these consumers. This is also true of the consumers in Europe. I hope you first understand the considerable impact of the yen's appreciation on our profits. Also, the existence of new devices like smartphones might be considered another change in our business conditions. Having said that, I am not saying that we cannot help going into the red. Naturally, we have to find ways to gain profits even with such changes. It is clear that, however, in the next fiscal year, the sales of Nintendo 3DS hardware will not give us much profit even if we will be able to cease selling it below cost. It means that we need to make it with the software sales. There are two methods to gain profits from software: one is to sell as many units of a product as possible with fixed development and marketing costs; the other is to get as much money from a product as possible, or to increase the ARPU you mentioned.

Which has the priority depends on the types of games and users. However, if we put too much emphasis on increasing the ARPU, we cannot leverage our strengths. Our basic strategy is to increase the number of users, which leads to brisk sales of one product for a long time and will eventually create high profitability. In this fiscal year, we are in the transitional phase of platforms when a new platform has not penetrated well and even the software with the most potential for the platform can only sell as much as the number of hardware systems sold so far. In other words, however, such software could sell for a long time to come. For instance, we anticipate that "Super Mario 3D Land" and "Mario Kart 7" will bring in a substantial profit in the next fiscal year and the year after that. On the other hand, we will be able to do various things in the field of digital business. Up until now, once consumers who had bought a game got tired of it, they would never play it and it would never draw public attention again. Even if the game had the sales potential to other new consumers, they rarely actually bought it because the consumers who already had bought it would never talk about it again and the game would be considered an old one. Having said that, what if we could provide add-on content through the network? As I referred to before, for example, this is the idea of supplying new stages to Super Mario users who want to play the game more but have completed the game and lost interest in the existing stages. This will not only give us new profits but will lengthen the life of a product, in that it will never be out of fashion and can keep attracting public attention as long as many people play it. We should not aim to just increase the ARPU, but at the same time, to give our products a longer lifespan and a larger number of total sales. "Wii Fit Plus," which we released as packaged software as the upgraded version of "Wii Fit," could be another example. Under the current network environment, we might be able to provide such upgrades to consumers through the network as opposed to just providing the content in a disc form. We can recommend that "Wii Fit" users try new trainings and games, and continue to play the software with a fresh mind, which will give the software a longer life and bring us slightly more revenue.

After all, our basic policy is that we create products which appeal to a wide variety of consumers and sell for a long time. We should take advantage of add-on content for this purpose, which could give us a higher ARPU as a consequence. If we focus on the increase of the ARPU only, we could possibly narrow the range of our consumers and fail to succeed in the long run.