The "leave" vote has destabilized stock markets and financial markets. The decision to leave the EU and the ongoing preparations for doing so will gradually lead to a stabilization in financial markets and exchange rates, but it is clear that the yen is trending strong for now.
The book value of Nintendo's assets denominated in foreign currencies will take a hit compared to last fiscal year-end due to foreign exchange losses if the strong yen continues, and this could have an impact on our earnings. We will need to keep a close eye on the way events unfold.
Another conceivable impact of the Brexit vote is that Nintendo has a base in the UK and sell goods from there. Tax systems, product safety standards and rules, information privacy, and all sorts of other agreements are established by the EU for all of Europe, and at this point in time nobody knows how those agreements would change if the UK were to leave. For now, what we need to do is closely watch developments and prepare appropriate measures.
The former President Mr. Iwata passed away last year on July 11, and Mr. Kimishima was appointed president on September 16. Can you explain why two months were needed to choose the next president?
Next, the Nintendo website has the "Iwata Asks" section, which was a very good opportunity to learn about the difficulties experienced by those in game development. I want to ask you to revive this section.
Lastly, I think many people would like to play Nintendo's action games as smart device applications. But smart devices use touch panels, which may not be suited to action games. Does Nintendo have any plans to launch a physical controller and invest in new titles of quality action games?
To the first question about the two months after the former President passed away, while he was still alive, he gave Mr. Takeda, Mr. Miyamoto, and myself clear instructions to ensure that operations would proceed smoothly. While running the business based on his instructions, we took two months to carefully consider what would be the best organization to put in place, how best to take on new projects, and who would be the right person to be in charge of what.
About the "Iwata Asks" section, I do not have a background in game development, so I would not be able to give very interesting questions. Going forward, we will create opportunities to provide information in a fitting format about the background to our game development and the interesting aspects of it.
Shigeru Miyamoto (Senior Managing Director, Creative Fellow):
The former President Mr. Iwata and I had talked about how the "Iwata Asks" section had fallen into a rut, and we will consider what format will best suit this type of content.
For the last question about smart device applications, Mr. Shinya Takahashi is leading this development and I will let him explain.
Shinya Takahashi (Director, General Manager of Entertainment Planning and Development Division):
Physical controllers for smart device applications are available in the market and it is possible that we may also develop something new by ourselves. On the other hand, I believe Nintendo's way of thinking is to look at whether action games are really not impossible (without a physical controller for smart device applications) to create and how we can make it happen to create such a game. I think we will make applications, and not just action games, in consideration of what best embodies "Nintendo-like" applications, including applications for everyone from children to seniors.
Nintendo's first application developed for smart devices was Miitomo. To the extent that you can, please share what you've learned from providing an application for other companies’ platforms and the response you have received so far.
Miitomo has been downloaded more than 10 million times (by unique users) since it was made available for download this March, and the number of downloads continues to grow. We plan to expand the number of countries where it is available, which should further increase the number of downloads. We are focused on the retention rate, which is how many users continue to play Miitomo. Miitomo represents our first attempt in the field of smart device applications. The communication style of the app is also a new challenge for Nintendo, as this is not just direct one-way communication, but rather communication through Mii characters. There are some points that we need to improve in these areas. Looking at future application development, I mentioned that we are planning to release around five titles (including Miitomo) by the end of next March. Of these, two titles (Fire Emblem and Animal Crossing) have already been announced. In future support for smart devices, if we have a good plan, we will make active use of any of our Nintendo IP without restriction.
In terms of what we have learned, we are still in the process of learning as we have only just started the smart device business a short while ago. We plan to deepen our analysis of the overall smart device business and continue this conversation in some form in the future. Mr. Takahashi is in charge of development and will add his comments.
What stands out most for us in terms of the response we have gotten from releasing an application on non-Nintendo platforms is the opportunity for people around the world who do not have access to Nintendo platforms to experience Nintendo's Mii characters with Miitomo. The different responses of various age groups in each country have also been very interesting to learn about. Releasing applications for non-Nintendo platforms is one challenge for us, and we will try all kinds of things as we continue this challenge.
This year's business report was given as a recorded narration. Past presidents have presented it in their own words, which was more impressive. How much can we trust the current President to carry this company called Nintendo? I would have been more pleased if the President himself had presented the report.
In the selection of five directors (Proposal No. 3), the names of the candidates are listed, but it was disappointing to see candidate numbers indicated in front of their names. Since they all have individual names, I do not think the numbers were necessary.
In presenting this year's business report, we decided to use a recorded narration, and that is indeed a change from last year. We gave this much thought. The concern was that my speech may not be clear enough to be easily understood. So I ask for your understanding that this different approach was part of the new things that we are trying out. I do appreciate your valuable input about the importance of presenting the business report in my own words. We will definitely give thought to what we should do in the future.
We will also take into consideration your opinion on the candidate numbers posted on the proposal item on director selection.
I would like to ask about Nintendo's marketing strategy. I see the value in reexamining advertising expenses to bring the operating income back into the black, but with the decrease in the advertising expenses, it looks like information on some software is only reaching committed gamers. I think there is a lot of hidden, interesting software for people who are about to start gaming, such as Tokyo Mirage Sessions #FE. I would really like to see an effort to make these widely known. What do you think about that?
We have been reviewing advertising expenses from the point of view of balancing revenue and expenses, and of whether the spending level is appropriate in proportion to our sales. As a result, we have reined in advertising expenses to a certain degree over the last few years, and this has helped to balance revenue and expenses.
However, the whole point of advertising is to convey information appropriately to consumers, so we cannot simply cut spending. With the progress of technology, advertising media and methods now go beyond television ads to include many different options. Those who come into contact with games for the first time are not that interested to start with, so for those types of people, I agree with you that we need to carefully consider our timing and approach. We intend to come up with detailed plans on what message to convey to what type of consumers with what kind of timing, and push this forward with an eye to cost-effectiveness as well.
On the proposal to change the Articles of Incorporation (Proposal No. 2), I see in Article 2 (Purpose) item 9 the addition of the language: “Development, manufacturing and sale of medical devices and health devices.” Can you elaborate on this?
This is not solely in view of the QOL project. We made changes and additions to the Articles of Incorporation with a view to future diversification of our business. Of course we intend to carry on with the QOL project, and that is what we are doing at present. However, the thinking behind the proposed changes in the Articles was to deploy our assets and expertise to expand our business in many different areas.
Because of the many safety issues and restrictions in game development, I do not imagine VR to immediately become popular in homes, but I would like to see some serious research done on this. This also applies to technology such as AR (Augmented Reality) and MR (Mixed Reality). There needs to be the right development framework in place to make effective use of new technologies in products. Consider, for instance, some Nintendo 3DS software titles that did not look to me like they really implemented 3D appropriately, or when the Wii U with high-definition visual quality came out and there were not enough titles that supported the platform. I am not sure if this is related to that, but there is some report that Mr. Kimishima voiced concern before the release of Wii U, while I think Mr. Miyamoto was promoting Wii U with quite a lot of confidence. Compared to the situation prior to the Wii U launch, what is the feeling around NX at present?
I would first like to clarify my purported comments on Wii U. I do not wish to make excuses, but at the time of the Wii U launch, I was responsible for our sales base in the United States, and I never made any pessimistic comments. In an internal sales representative meeting, someone projected that we would sell close to 100 million Wii U systems worldwide. The thinking was that because Wii sold well, Wii U would follow suit. I said that, since the Wii had already sold so well, we need to clearly explain the attraction of the Wii U if we are to get beyond that and sell the new system, and that this would be no easy task. I was responsible for selling the Wii U, and I knew what was good about it, so I talked with those in charge of sales about the importance of conveying the attractiveness of Wii U to consumers. I am guessing that some of this communication may have come across in a negative tone.
As for VR, I just mentioned that we continue to be interested, and we are continuing our research. Mr. Miyamoto will talk about VR and our level of confidence in Wii U from the software development viewpoint.
It is true that we are having a hard time with Wii U sales, due to its price and the added fact that tablets are distributed free of charge in the market. I do think Wii U continues to be attractive as a media device that changes life in the living room. A similar challenge continues with NX. As we had announced that the launch will be March of next year, we made no announcements about NX at E3, the world's largest game expo held in Los Angeles. Our exhibit at E3 focused on the Wii U version of The Legend of Zelda: Breath of the Wild game, for which the same experience will also be available on NX. We have a video that was used to introduce our presentation at this year's E3. Please take a look.
The second half of the video is from Day 3 of E3. E3 shows generally have swarms of people and long lines for booths on the first day. This year, even on the third day, people were running in as soon as the venue opened, and lined up in front of our booth to play our game. What happened was the people who played on the first and second days spread the news by word of mouth, and those who heard about it came later, and that is how we ran out of booth access tickets in a very short span of time. I think we were able to introduce The Legend of Zelda: Breath of the Wild to our fans in North America in a way that met their expectations. We are simultaneously creating the NX version of this game, and are working hard to offer the same experience. I hope you all are looking forward to it.
Some of you may not know, but The Legend of Zelda is one of Nintendo's most popular game series, and it is celebrating its 30th anniversary this year. The Legend of Zelda: Ocarina of Time for Nintendo 64 sold nearly eight million copies worldwide. In this latest game, The Legend of Zelda: Breath of the Wild, we took a fresh look at elements that have been taken for granted over the long history of the Zelda series. We created a truly spacious open-air world where the player can move around freely to explore any part of it. The movements of everything in that world are calculated by our physics engine, in a way designed to give the player the feel of actually being there and having an adventure. I sometimes hear comments to the effect that Wii U hardware performance is inferior to the gaming systems of other companies, but at E3 where companies exhibit their latest games, we received very high praise for The Legend of Zelda: Breath of the Wild, including the "Game of the Show" type of award from the gaming media. I hope you are looking forward to the launch, which will be in 2017.
As for VR, we are researching not just VR but AR and many other technologies. We have a range of core technology including 3D, and we are also considering the possibility of implementing these in our own hardware development. For VR in particular, we are continuing our research, and looking into development with a mind to how our current core products are meant to be played for a relatively long period of time. We are looking into the possibilities of providing an experience that gives value when played for a short time, and how to eliminate the concerns of long-duration use. We are also looking into how to make sure that a parent doesn't need to worry when their child puts on a VR device in their living room. At this year's E3, I was on the show floor, and it did not feel like VR was that big of a topic. This could be because VR is not that much to look at for the spectator, even while it might be highly appreciated for the person actually experiencing it. It might also not be clear how the experience can be made into a product.
I have a request regarding the general meeting of shareholders. Your shareholders can be broadly divided into investors and Nintendo fans, and the questions at the general shareholders' meeting follow suit, with questions about financial reports and Nintendo's organization on the one hand, and questions about games on the other. Don't you think it would be better to divide up the Q&A session and use the first part for questions about financial reports, Nintendo's organization and share prices etc., and the second part for questions about games? I am a Nintendo fan, and I would rather ask questions about games, so as an alternative idea you could end the meeting after the first part, but then go into extra innings in a corner where game fans could get together and ask questions.
I appreciate your love of our games and take it you want the general meeting of shareholders to be a place where more information about our games is provided. As I said at the meeting before last, the general meeting of shareholders should be a place where shareholders and board members can communicate on a range of topics. This is very important for the company's future advancement and to respond to the requests of shareholders. Since there are shareholders at these meetings who have questions about corporate management from the perspective of investors, it is a significant opportunity to present that information to them (as well as to shareholders who are game fans). I get that you want us to provide more information about Nintendo products. I can't say right now what we'll do, but we will investigate ways of creating more opportunities to supply that information.
What can you tell us about your NX production plans? I've heard that labor costs in China for assembly workers have risen considerably lately. And there was news at the end of May that the Taiwanese contract manufacturing company Hon Hai was restructuring by replacing 50,000 workers with robots. Game systems have a life cycle of around five years, and the products designed five years ago both by your company and by other companies do not look like they could be easily made by robots. NX will probably come out next year, so its five-year life cycle takes us to around 2020. Production will likely be largely automated by then. Assuming that Nintendo will continue to be a fabless company that outsources production, what can you say about production trends and how will Nintendo address issues like cost and ease of manufacture?
Hirokazu Shinshi (Director, General Manager of Manufacturing Division):
Labor costs in China have certainly risen steeply over the last ten years or so. You see some uptrend in labor costs in other ASEAN nations too, so it is not as if this is happening in only China. That said, the jump in China stands out.
There is some talk that the rising labor costs in China are leading to more automation. The word "automation" brings robots to mind, but we should see the trend for automation in China in the same context as Japan's past efforts to automate its manufacturing sector. You bring up the matter of Hon Hai, but that is not about the factories that make Nintendo products. So, although I can't really comment, Hon Hai is working hard to cut its costs, and one way is to progress with automation using robots. I see this as a cycle that puts workers to use in more productive ways, rather than something leading directly to layoffs. The circumstances in China support automation in factories to boost productivity and counter rising labor costs.
But regarding the manufacture of our products in this setting, let me just note that devices like ours, which are complicated and made in amounts that vary widely from month to month, do not lend themselves to the kind of automation that is easy to introduce for devices with simple structures, that are made in constant amounts. Are there more efficient ways of determining which processes to automate and how? Can automation deal better with changes? These are the kinds of questions we continue to address. We are in close communication with our partners who manufacture our products. We are now preparing to manufacture NX and hashing out details like the extent of automation. We hope to create the optimal production environment.
Nintendo has begun making greater use of its IP, and there are even reports about your plans on producing movies. Putting aside the question of money, how do you plan to get the people for this? What is your take on human resources for engaging in new projects like NX and the use of your IP?
First let's talk about the video business. It's less a venture into the movie business, and more a question of how we can utilize the Nintendo IP in video content as part of the broader effort to put our IP to practical use. If anyone wants to partner with us, we'll hold discussions. The fact that there are many interested parties is something we've already mentioned. People are our most valuable management resource, and it is important to give employees opportunities to develop their skills and achieve personal growth. But when it comes to business in a completely new field, it is essential that we build relations with external partners. To talk about the commercialization and expanded use of our IP, let me hand the discussion over to Senior Managing Director Mr. Miyamoto, who is involved in both planning and production.
Video content is a really interesting area for us. Going forward, it is extremely important for Nintendo to move beyond the limits of game systems and make good use of its character resources in order for Nintendo not to be forgotten. Nintendo has a variety of characters. That one company has all the rights to so many characters is something that is recognized as unprecedented. To avoid any misunderstandings, we have never said that we will produce a movie. We have talked about our expansion into video and other areas, but we are not saying anything official about the details. What I can say is that video is one of the business areas where Nintendo is making good use of its IP. Three years ago I created an about 20-minute video content of Pikmin’s short movie, and just recently I made a 15-minute PR movie for Star Fox Zero. These were made in association with video production companies. We can make video content by mostly leveraging the knowledge and capabilities of outside companies. For the production of those two short films, I was basically the only person from Nintendo involved. Nintendo needs to make a lot more products, but when a company gets too big, it faces continual problems nurturing its employees. Besides video content, we have begun to provide Nintendo characters for theme park attractions through a basic agreement with Universal Parks & Resorts. By working on development with others outside of Nintendo, I am working actively to expand the number of Nintendo products. These projects will take time to bear fruit, but they are something to look forward to.
Let me add something about the resources that Director Miyamoto talked about. We have a business tie-up with DeNA Co., Ltd. (hereinafter “DeNA”) for smart devices, and that involves leveraging DeNA's know-how for our own business. We will launch various projects in the future. Advancing projects like these will require the involvement and support of our partners and not just our own human resources.
I was a fan of the late President Hiroshi Yamauchi, who forcefully spoke of being genuine or fake as the most important thing in making things and products. So from this, I think Nintendo values uniqueness and making things that are different from other companies. I remember Mr. Yamauchi talking about how Nintendo did not depend on the strengths of others, but did things using its own strengths. Will there not be side effects from the partnership with DeNA?
First, please understand that the need to continue making unique products that are different from other companies' is firmly embedded in our management approach, and this will continue to be of utmost importance. In addition, I would like to extend my appreciation to you for remembering the words of Mr. Yamauchi.
Regardless of our partnership with DeNA, there is no question that we must undertake the important task of creating new things. Meanwhile, DeNA does have very good technology and experience when it comes to analyzing how to get things to consumers and how to understand consumer reactions after delivery. We believe that we can make products that are even more unique based on consumer feedback. As such, I'd like to be clear that we are confident that our current business partnership with DeNA will move us in a positive direction, not a negative one, in terms of making unique products.
I have a question about your earnings forecast for this fiscal year. With the Wii U effectively withdrawing from the market, Wii U hardware sales are projected at 800,000 units, and with the 3DS also having peaked, there is a slight decline in projected sales volume. This makes the operating income target of 50% year-on-year growth to ¥45 billion look less than fully credible. There is also a sense that the company's projections could be revised downward substantially around the end of the calendar year or the beginning of the new calendar year, and that the NX launch date could be postponed. As such, I would appreciate hearing what you can tell us about the basis for the ¥45 billion operating income target, and any detailed breakdown of this figure.
The Nintendo 3DS business has already surpassed cumulative global hardware sales of 58 million units. We believe that the Nintendo 3DS business will generate sufficient profit as long as we can deliver the software titles that are planned for release. The Pokémon series is marking its 20th year since the first title was released, and the series has topped total sales of 200 million games worldwide. Pokémon Sun and Pokémon Moon are the latest series titles, scheduled for release in November 2016, and we expect these to make a substantial profit contribution.
While we announced our shipment forecast of 800,000 Wii U hardware, we are forecasting total sales of ¥500 billion for this fiscal year, about the same as last year. I am not currently able to talk about concrete figures for unit sales, but we are planning for NX to make up for falling Wii U sales. Software for NX will also contribute to sales and profit.
We are preparing to release around five smart device applications (including Miitomo) by next March, and predict that the smart device business will also contribute to profit.
One factor that merits caution, however, is the UK's decision to leave the EU. While we still do not have a clear picture of how this will affect exchange rates, a continued strong yen may impact our sales and profit, as overseas sales account for more than 70% of our total sales.
Nintendo's core business is in the game industry, and the biggest problem there is the rising cost in terms of time and money needed to develop one game. How are you addressing this problem?
The cost of developing game software has certainly grown over the last ten years. This is a big challenge, as there is no simple formula to calculate the size of how popular a game is going to be with consumers. That said, I think that developing with this in mind will be increasingly important.
Genyo Takeda (Senior Managing Director, Technology Fellow):
The thinking for a long time was that computer performance for a game should be dedicated entirely to the consumer’s enjoyment, but now times have changed and the common sense is that computer performance should also be used to improve productivity in making the game software itself. But what is most important is how we achieve balance. I am going to let Mr. Miyamoto speak, as he has spent a lot of time and energy on raising the productivity of software development while doing this balancing act.
In striking that balance, while it's important that we do not overextend by putting an excessive amount of content in our games, the only solution is how to make software that sells well. There will be big hits somewhere in our business, and they support the games that fail and allow us to take on other challenges. So our basic premise is to create software that will sell in the range of at least two million units. We simply couldn't recoup our costs if we only released games in Japan that had sales of around 300,000 units, so the global market is our standard.
I also think the key word here is balance. This has a lot of aspects, such as knowing when we need to dedicate a lot of time and people to something and when we do not. Or ways to leverage game engines that are used for general purposes, and how to create our own game engines that lots of others can also make easy use of. For NX, we are thinking about many different development techniques based on these considerations.