During its latest financial results briefing for fiscal year ending March 2016 Nintendo held its standard question and answer session. Investors are able to ask questions directly to Nintendo and sometimes the answers can be very revealing. The official English translations have been posted below:
Question 1: For the fiscal year ending March 2017, projected sales of Wii U hardware is set quite low, due in part to the timing of the launch of NX (development code name for the new-concept dedicated video game system currently under development). During this planning stage, what was the thinking about the effect on the Nintendo 3DS system?
Tatsumi Kimishima (President): By setting the projected sales of Wii U hardware for the fiscal year to 800,000 units, we do not see that there would be any negative effect on the Nintendo 3DS business. We have major titles for Nintendo 3DS for the fiscal year ending March 2017, as I mentioned in the presentation, and there is a solid lineup of titles. That should greatly contribute to the sale of both the hardware and the software. The positive aspect of lowering the projected sales of Wii U hardware to 800,000 units is that it allows us to focus on the Nintendo 3DS system.
Question 2: I would like to ask about game design for smart device applications. Is Animal Crossing a title that places emphasis on the synergy with dedicated video game systems? Is the game design of Fire Emblem going to be aimed at contributing to earnings? I would like you to explain the objectives of the two titles recently introduced. I would also like you to tell us, to the extent possible, what aspects you would like to reinforce with the remaining two titles to be released before March 2017.
Kimishima: We chose Animal Crossing and Fire Emblem as titles to follow Miitomo from the viewpoint of increasing the diverse types of consumers interested in Nintendo, and widening opportunities for game play. The Animal Crossing series has been played by a wide range of consumers including children and women. I think there is a good chance that those consumers would enjoy this. As for Fire Emblem, it is not so much the width of the audience as the existence of die-hard fans who have stuck to the series for a long time. We selected two titles of different categories and IP to reach as many consumers as possible. We are not limiting the IP for the titles that will follow these two. We will continue to prepare titles using IP that many consumers are familiar with.
Question 3: I heard that there are over 10 million Miitomo users worldwide. I would like to know the attributes of those users, the number of DAUs (daily active users), as well as how much Miitomo is contributing to earnings. Have there already been positive effects on existing business from its connection with the Nintendo Account system? For applications to be released in the future, are you going to increase the game element and seek to increase revenue from in-app purchases?
Kimishima: The over 10 million users are very balanced in terms of gender. There was a slightly higher ratio of women at the beginning. We will not be releasing statistical data such as DAU numbers. As you are well aware, all kinds of ranking information exists for smart device applications, so I will refer you to those. If you look at them and estimate the in-app purchase revenue, I think it will not be too far off from reality.
The revenue impact of Miitomo is negligible for the fiscal year ended 2016, as we have only just started. The Miitomo download numbers are growing right now, so I think the in-app purchase revenue is also growing more or less as expected.
As for in-app purchases in future titles, we will be releasing titles with strong game elements, as I just explained. The game application content and the type of player vary widely depending on the IP used. Some titles have many fans who may purchase paid content to enhance their play.
As for the Nintendo Account, it is not necessary to register (for a Nintendo Account) in order to play Miitomo. Registration on the Nintendo Account grants membership to “My Nintendo”, a membership service. We will be providing a wide array of services for these members in the future. Consumers playing Miitomo are gradually creating their own Nintendo Accounts. In the graph just presented, there were no numbers, but you could see the increase in the number of My Nintendo members. Henceforth, we would think about ways for consumers with no Nintendo Account to register at the time a new application is released. We hope to increase the number of My Nintendo members in this way.
Question 4: I would like to reconfirm how serious your company is about your initiative on games for smart devices. How much management resources are you intending to shift over to this business in the future? The company has extremely able, world-class creators, and I think they could create hits in games for smart devices. In that sense, I think the best scenario would be to have the legendary Mr. Miyamoto take up the challenge of games for smart devices, and have him create something that would make people think, “This is truly Nintendo’s smart device game.” Mr. Kimishima, what do you think about that?
Kimishima: If people are “not sure about how serious we are” about smart devices, it means that information issued from our company is not accurately conveyed, and I have to reflect on that. As we have reiterated, we want to grow smart device gaming as one of the pillars of Nintendo’s revenue stream. As for shifting managerial resources in that direction, we have very capable developers who are working on development of games for smart devices, as you already know. Of course, Mr. Miyamoto, our Creative Fellow, is also supporting the business for smart devices from a company-wide perspective. To explain the level of engagement of Mr. Miyamoto, he is having specific talks with developers of games for smart devices on what would be desirable overall. In that sense, what you see from the outside may be markedly different from what we see on the inside. As I have said, we want this to be one of the pillars of our business. Our level of engagement has not lessened, so I hope you will understand that.
Question 5: I understand that details of NX will not be announced today. However, I would like to ask about the effect of NX in terms of performance in the fiscal year ending in March 2017. There were times in the past when sale of hardware at launch suffered due to the lack of a sufficient number of titles. Can you promise that the launch of NX will be accompanied by a solid lineup of games? We also have the case of Wii U hardware, which was sold at a loss at launch. I would like to know what you are thinking about the cost of NX in terms of analyzing performance for the fiscal year in which NX is launched.
Kimishima: We will introduce NX concepts and details at another time, so I will restrict my answer to the question asked. You are correct about needing a solid lineup of software. One of the reasons for choosing the launch timing that we did is so that the software lineup will be ready in time for the hardware launch. Not only at launch, but we also need to be able to continuously release titles after launch. We are planning for this to be a platform that consumers can enjoy for a long time.
Next, about how we are looking at cost, we are not thinking of launching the hardware at a loss. When Wii U was launched, the yen was very strong. I am assuming that situation will not repeat itself. Selling at a loss at launch would not support the business, so we are keeping that mind in developing NX.
Question 6: I’m sure that there were many things with Miitomo that Nintendo expected, as well as many that were unexpected, that provided learning experiences. I would like to hear as much as possible about what was learned from the experience. Nintendo’s value comes from its strong IP, and using that IP comes with the risk that if the IP is not successful, its value will decrease. In that sense, Miitomo and future titles need to get results in the smart device application market. It may still be too early to generalize, but I would like to know how the response to Miitomo has been in comparison with your expectations.
Kimishima: I believe that Miitomo reaching 10 million unique users in the short time since its release shows that it has achieved the level we had planned. At the same time, this system lets us hear the consumers’ opinions. I believe this business requires us to continue to update to respond to these opinions in various ways, so we knew from the beginning that we would not be able to satisfy everyone right away. We believe that it is important to continue to revitalize the applications by quickly implementing feedback from consumers. Only one month has passed since distribution began. Our goals are to act on the feedback we received during this period quickly and increase the amount of consumers who are playing daily.
Question 7: About the company’s KPI (Key Performance Indicator). Am I correct in understanding that in the company’s smart device business, the number of daily active users, or DAU, is the most important indicator?
Kimishima: I think that there are lots of ways to evaluate it, but when a user plays continuously it supports the fact that the application has a lot of appeal. This is connected to DAU, so it is important to see how much we can raise the absolute value of DAU, but the rate of continued use is important as well. If the rate of continued use increases, naturally, the DAU will increase as well, so we are keeping a close eye on that. We believe that as this increases, though it will vary by application, revenue from in-app purchases will change as well.
Question 7-2: What indicators will be important when developing the same IP for both smart devices and dedicated video game systems?
Kimishima: I think that for dedicated video game systems, the number of units purchased is definitely the most important. Other than the number purchased, the other important thing is how the game is being played after it has been purchased. I do not mean this in the sense of how the game is rated, but rather that how the game is played connects to the future of the IP. Therefore, we believe that in addition to the number of units purchased, the activity numbers including hardware activity, and how much the game continues to be played are both important factors as well. I think that this is the same for both dedicated video game systems and smart devices.
Question 8: Though enriching software has been given as a reason for launching NX in March, 2017, when thinking about how long it takes to develop software, there would not be any real objections to missing the year-end sales. I recall that at a past Corporate Management Policy Briefing, when the Nintendo GameCube launch was set for September, former President Yamauchi said that it is extremely important not to miss the year-end sales, and I think that former President Iwata also said that it was a big problem when the Nintendo 3DS launched in February and missed the Christmas sales. Since you took over, Mr. Kimishima, both Miitomo and now NX will miss the year-end, which gives the impression that Nintendo’s way of thinking about the future has changed quite a bit. So why will NX launch in March? Has Nintendo’s approach changed?
Kimishima: There has been no change in our way of thinking about launch times. We believe that when launching hardware, the amount of quality software for consumers to play that is available at launch is important, and that we ought to determine our launch dates based on this. The fact that consumers spend more money in the holiday season may be a big factor in why launching then is a good way to start. However, our hardware and software business structure does not end in that year. We want consumers to continue to play this game system for many years, so we believe that in the beginning it is most important to make sure that everything is in order at launch. In that sense, our approach is that we should wait until we can provide a fully realized experience rather than rushing to launch in the holiday season, and this approach has not changed.
Question 9: Please tell us about your approach to on-hand cash management. I recall that before the Wii U launch, former President Iwata could not exactly indicate how much of funds is considered as surplus funds for Nintendo. After that, a lot of new business strategies were disclosed, and I would like to know how the need to have funds on-hand is being considered as the future of the company is becoming more visible in a lot of areas, including NX.
Kimishima: Concerning our thoughts about the need for funds, as we get the business running smoothly and increase cash inflows, I think that we need to think very seriously about whether we are building on that progress.
That is our approach to money balance. Right now we are proceeding with many projects that make use of our IP, and in those plans there are several projects that will require funds, so we want to use funds for those purposes first. The launch of NX is not the only project which requires funds, and we want to prioritize using it on projects that make use of our IP.
Question 10: Roughly how much will smart device projects contribute of the company’s overall revenue and profit in the fiscal year ending March 2017? Also, from a long-term perspective, how long can we assume it will take before this becomes hundreds of billions of yen business instead of a tens of billions of yen business?
Kimishima: We plan to have released about five titles (including Miitomo) by March 2017, but the next applications will release in the fall, so the latter half of the year will influence our results. In that sense, it is included in the 45 billion yen operating income and the expected 500 billion yen sales results predicted for the fiscal year ending March 2017, but its impact will not be on the level of the majority. However, (as of the second application) we will be putting out applications that use IP from actual games, so it will be a decent value for the fiscal year ending March 2017. In the mid-to-long term, of course we want to make the smart device business a pillar of profit, so hypothetically, if sales of around 500 billion yen continue in the future, the sales would not grow to the scale of hundreds of billions of yen as you just mentioned, but we believe that it will become a big volume in the future. It is still a little early to get into specific numbers at this point in time, so that is all I can say for now.
Question 11: While Wii U sales in the fiscal year ending March 2017 are predicted to be very weak, with NX sales and profit contributions included, looking at these predictions, the numbers look as if you are fairly confident in the NX and ready to take off running. Do you think you can cover the decline of the Wii U with the new NX?
Kimishima: We are predicting about 800,000 Wii U hardware sales in the fiscal year ending March 2017, which is a decrease of about 2.4 million units compared to the previous year. NX and smart device business will be essential to cover this gap, but we also expect download content business to play a role. However, we are planning with the expectation that NX sales will compensate for much of the impact on sales from reduced Wii U hardware sales.