Nintendo's Iwata: How to Expand in a Recession

Nintendo worldwide president Satoru Iwata addressed shareholders at the end of January, answering questions from the financially-minded audience. The English-language transcript of the event is now available on Nintendo's investor relations site, and there are a lot of very interesting bits of information buried in its three pages of back-and-forth.

Here are some of the more intriguing excerpts.

As you know, a number of major software manufacturers are reporting that they are experiencing a financially challenging time or that they will be scaling down their operations. ... (Some) are reportedly saying that they bet on the wrong horse or that they need to change course. I recognize that each one of the third parties is trying to develop software that can be appealing on DS and Wii systems which have significantly increased the installed bases, while narrowing the overall number of software to develop. ... So, in the mid-term, we believe that more attractive titles will be launched by them for our platforms.

I don't know if you subscribe to the theory that certain publishers' financial woes have been exacerbated by failing to produce compelling content for Wii. I don't know if I subscribe to it. But Iwata definitely seems to.

It is unfortunate that “Wii Music” was not immediately appealing enough to some consumers, but it simply might have not been the right game for them. ... On the other hand, the comment that it is difficult for a software to become popular unless it is easy to be understood is right on target. Something good can spread when a cycle is born where people who have hands-on experience can immediately understand its appeal, easily explain the positive experience they had to those around them, who then spread that information to the others. Nintendo was blessed with certain products that created this positive cycle, which has made Nintendo what it is today. In that sense, I feel like we need to reevaluate why the software (“Wii Music”) has not been able to clear that hurdle.

Wii Music had a lot of significant issues that left it stranded in no-man's land -- the core didn't like it, and casuals who enjoyed Wii Sports were left baffled by what you were supposed to do with it. When you play Wii Sports, you instantly start having fun. When you play Wii Music, it takes a lot of effort and training before you get to the point where you're actually exploiting the strength of the game. And that, ultimately, is where it failed, because Nintendo couldn't find a way to give it that immediately understandable appeal. I'm interested to see if Nintendo tries again.

At the end of last year, Nintendo launched two Wii titles, “Animal
Crossing” and “Wii Music,” in hopes that the Japanese consumers would appreciate them and revitalize the Wii market in Japan. Our efforts have not lived up to our expectation.

This is part of a larger discussion about the state of Wii in Japan, where it is not selling at anywhere near the robust levels of the U.S. and Europe. The Wii is treading water in Japan, which means that the entire home console market is pretty much in the toilet there. Iwata has some thoughts about the Japanese getting busier and spending more time on the go, but that doesn't seem to me to explain entirely just why they seem to have stopped purchasing game consoles. Nintendo hoped its holiday lineup would help; it did not. What's the next step from here?

There are some people, although they may be a minority, who love to create something creative, share that with others, and enjoy seeing other people being entertained or responding positively to their creation. At the same time, great majority of people are rather passive and love to applaud the creative efforts by others and enjoy playing with them. In other words, (user-generated content) has the unique characteristic that, regardless of their game skills, people on both sides can enjoy.

Maybe if Wii Music let people share their user-generated songs without the burden of friend codes, it would have been a better product? Just saying. I think this is one of the most important things Iwata said in this Q&A, because it's a very clear indication that Nintendo will be embracing user-generated content. Considering the kind of iron grip it likes to keep on its content, I'm curious to see how far it allows its users to go.

Overseas subsidiaries are looking forward to the launch of “Girls Mode”
and “Rhythm Heaven” as strategically important products in the next fiscal year.

Okay, looks like Iwata just announced that Nintendo's online fashion game* Girls Mode* is headed outside of Japan this year. Stephen Totilo had the same thought and did a bit of research today to figure out what exactly this game is. You run your own online fashion shop. They'll sell millions of these, won't they? Makes sense, as the girls' game market is rapidly expanding on DS but Nintendo itself has not released many games specifically aimed at them.

For sometime now, I have repeatedly said that the game business is comparatively less susceptible to the changes in the economy but the gap between what sells and what doesn’t sell become obvious (in an economic downturn.) The products that are listed at the top of a consumers’ wish list can sell at the same level in a good economic time as during a bad economy. But those ranked #5 or #10 on the list become the receiving end of the impact of the changing economies.

Iwata provides data to support this point -- the top-selling games of 2008 sold better than the top-selling games of 2007, but as you go down the list, sales start to drop off. This seems like a relatively solid analysis of what happens to games in a recession, and why Nintendo might be one of the only companies that is mostly recession-proof at this point. But it's not going to help them sell third-party software if customers just concentrate on their most-wanted games, because their most-wanted games are Nintendo first-party titles.

As we strive for the expansion of gaming population worldwide, we are also thinking of developing products that cater to the American or European markets. We are actually working on U.S. and Europe-originated Touch Generations products, which may have a smaller demand in Japan than overseas.

Another key reveal from Iwata here. Nintendo hasn't done a whole lot of American and European game development for the past few years, outside of a few hard-core games. That it is now poised to move out of the localization model for Touch Generations -- seeing what games hit it big in Japan, and then bringing them to other countries -- and into actually designing casual products in America is a significant shift in the process.

(In) the Americas, as the total momentum of DS was very weak then, we had to set the price of DS Lite the same as the original. As a result, the demand converged on DS Lite early on. ... This time, considering the current foreign currency exchange rates, there is no possibility of selling DSi overseas with the same price as DS Lite at all. There will have to be a difference in price. With this price difference, I think that the DS Lite and DSi will be sold side by side in the Americas and in Europe(.)

Iwata also mentions that Japanese consumers seem to feel thus far that the DSi's additional features make it worth the price premium over the DS Lite. But the price difference will likely be much more pronounced in the U.S., where DS Lite is much cheaper. I think he's right -- DSi and DS Lite will sit next to each other on shelves for a long time, and DS Lite might even outsell the DSi for a while because of the various factors that he mentions.

(This) spring, we are planning to launch the system update including the storage problem solutions (utilizing SD cards) which I presented at the Nintendo Conference, but a specific date cannot be disclosed today.

I just wanted to point that out -- our fridge-cleaning days might be over in the spring.

Finally, I wanted to note one of the questions that was asked, just to illustrate an amusing cultural gap.

I saw a NPD data of DS sales in the U.S. for December every year. During December 2008 the sales went beyond 3 million, and also beyond 2.5 million in December 2007. Can you explain why sales skyrocket every December?

Iwata then spent some time explaining to the gentleman, in depth, the concept of Christmas.

Image courtesy Nintendo

Investor relations: Third Quarter Briefing [Nintendo]

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