We\’re back for part two of the official translation of the Nintendo stockholder meeting held shortly after e3. As before the questions have been rewritten for brevity’s sake, but no detail has been spared from Mr Iwata’s answers to those questions.
Question 9 asks about the progress of development with the Wii Vitality Sensor that was announced a few years ago but has not seen an announcement or update since. Also mentions Nintendo’s company cafeterias are \”not so good\” as relayed by an acquaintance.
The Wii Vitality Sensor is an interesting device, and we did various experiments to see what is possible when it was combined with a video game. But, as a result, we have not been able to launch it as a commercial product because we could not get it to work as we expected and it was of narrower application than we had originally thought. We would like to launch it into the market if technology advancements enable 999 of 1,000 people to use it without any problems, not only 90 out of 100 people. I actually think that it must be 1,000 of 1,000 people, but (since we use the living body signal with individual differences) it is a little bit of a stretch to make it applicable to every single person.
In any case, its launch has been pending because we decided that the Wii Vitality Sensor’s current result is insufficient as a commercial product. You might be anxious that there will be other launch cancellations of products we have already announced. Indeed, it is difficult to decide the time to announce a product. If we announce a new product just before the launch date, we may hear some fans say that they cannot purchase it because the announcement was so sudden. However, if we provide too much information well before the launch date, people will become so used to hearing about it that they may even feel as if they have already played it and experience déjà vu when we finally do launch it. In this way, I believe that the timing of new product announcements is a difficult issue. For example, we discuss, “For this product, we should announce its launch at such time,” or “It is a good time to explain a little far-off future of Wii U” depending on the type of product and the profile of its target consumers. Though we should obviously do our best to fulfill the promises we make, we consider that we should announce a new product when we come to a stage where there will be minimal change to the contents of the announcement in the future. The reason for this is that it would ruin the trust of our consumers if we ignore the quality finish or launch an incomplete product only to adhere to the announced launch date. I hope you can understand that there is a possibility that we will postpone the launch of a new product or put it in a pending state if we determine that it does not meet the quality standards that we require.
As for our company cafeteria, we regularly hear the same opinion when we gather feedback from employees. However, opinions vary considerably by individual and not all the employees agree with this. Still I examine such an opinion as an issue of the company because we receive such feedback constantly. Thank you.
Question 10 points out that Nintendo had higher profits (and no operating losses) in the early 2000’s when sales figures were largely the same; and asks if high costs were an issue that caused the company to post losses for two straight years, whether a restructuring was in order.
Your question was why Nintendo suffered operating losses in its 72nd and 73rd fiscal terms, despite the fact that Nintendo was able to earn enough profits in the past with the same level of sales.
Regarding this question, there is one aspect that is very easy to understand. This table shows changes in sales in foreign currencies. Please look at the top colored row (the fiscal year ended March 31, 2007) and the bottom two rows showing the latest two periods with operating losses (the fiscal years ended March 31, 2012 and 2013). The second column from the left shows U.S. dollar-denominated sales and “2.8B” means 2.8 billion dollars. The figures in the bottom two rows (for the most recent two fiscal years) are 2.9 and 2.6 billion dollars respectively. Then I would like you to compare the exchange rate of the top row with that of the lowest ones. Yen-denominated sales are calculated by multiplying these sales figures such as 2.8 and 2.9 billion dollars by these exchange rates. Therefore, you will understand even if the scale of our businesse in the United States is the same, the yen-denominated sales shrink because of the appreciation of the yen against the dollar. Nintendo mainly carries out development in Japan, so almost all development costs are incurred here. Nintendo purchases component parts in dollars as much as possible in order to enjoy the benefits of a weak dollar. However, appreciation of the yen against the dollar generally negatively affects Nintendo’s financial results. Euro-denominated sales figures on the right are 1.7 billion euros for the fiscal year ended March 31, 2007, 2.0 billion euros for the fiscal year ended March 31, 2012 and 1.5 billion euros for the fiscal year ended March 31, 2013. With respect to the rightmost exchange rates of the euro, the business environment in recent years was totally different from that in the fiscal year ended March 31, 2007 when the exchange rate was 150 yen per euro. I would like you to understand that the influence of exchange rates is the main aspect of this matter. Regarding U.S. dollars, as I mentioned earlier on, the influence can be offset to some degree with dollar-based purchases. Concerning the euro, on the other hand, even though we have attempted to increase the number of partners who receive payments in euros, the number is still very low.
One more difference from that time is Nintendo’s head-count. The manpower required for increasingly complex and advanced product development has totally changed from that of the past. Hence, the number of employees has increased and higher costs have been incurred. In addition, due to development of more elaborate software titles than before, for example, costs associated with localizing titles in English or other languages have risen.
Regarding why we have not reduced the number of the personnel, it is true that our business has its ups and downs every few years, and of course, our ideal situation is to make a profit even in the low periods, return these profits to investors and maintain a high share price. I believe we should continue working toward this ideal. If we reduce the number of employees for better short-term financial results, however, employee morale will decrease, and I sincerely doubt employees who fear that they may be laid off will be able to develop software titles that could impress people around the world. I believe we can become profitable with the current business structure in consideration of exchange rate trends and popularization of our platforms in the future. We should of course cut unnecessary costs and pursue efficient business operations. I also know that some employers publicize their restructuring plan to improve their financial performance by letting a number of their employees go, but at Nintendo, employees make valuable contributions in their respective fields, so I believe that laying off a group of employees will not help to strengthen Nintendo’s business in the long run. Our current policy is to achieve favorable results by continuously cutting unnecessary expenses and increasing business efficiency. Thank you for listening.
Question 11 asks for an overall strategy with Nintendo Web Framework
I have just described “Nintendo Web Framework,” but I guess my explanation might have been a little too simple. We have publicly set forth the goal of “gaming population expansion” or “user population expansion,” but when it comes to the Nintendo Web Framework project, we are calling it internally at Nintendo “developer population expansion.” Development of games for dedicated game systems has gradually become possible only for large-scale development teams. The best situation for a game platform is one where even a game developed over a short period by a small team could become very popular around the world. Many developers dream about competing to make a game for such a platform. However, recent video game machines are, in a sense, becoming rather unique systems because they require the software creators to use development methods specific to each game system, employ a large development staff and spend a considerable amount of time in order to develop a packaged software title for which consumers are willing to spend several thousand yen.
This is a conceptual diagram of developer communities. The vertical axis shows the scale of a community. On the horizontal axis, “Embedded System” on the left is a system required for a dedicated development approach and “Open System” on the right is a system widely used in the world. When you access an active website, a special program to control actions has been automatically downloaded from a server and executed. This is an example of the technologies called “Web Platform.” This diagram also has information on the population of developers for each system. Currently, the top-left “Dedicated Game System” has a relatively small number of large-scale development teams left. As dedicated game systems require a unique software development method, developers have to learn a lot to understand such a method and then make considerable efforts to create game programs for such systems. The entry levels are going up because developers need to know a lot of things before starting developing games for Nintendo 3DS or Wii U for the first time. The bottom-left “Unity” is a video game engine with a vast number of developers around the world, which can easily be used to develop games for various platforms. We have started working to expand the developing population by organizing a partnership with Unity and making this engine available to Wii U developers. “Nintendo Web Framework” that you asked about is a system we have prepared so that the more than ten million developers of the right-sided “Web Platform” can relatively easily develop games for Wii U. However, since we are currently not capable of dealing with a vast number of individual developers, we cannot go so far as to widely open development opportunities to them tomorrow. However, we are accepting ideas from any corporations which are interested in it regardless of their scale or development experience and are considering the possibility of accepting individual developers in the future. This is the first step to increase the number of developers for dedicated game systems, which we started more than two years ago and announced this March. We hope that this will expand the potential of video games. Thank you for your understanding of our strategy.
Question 12 Asks about Nintendo’s network policy. Specifically why some games have network capabilities included while others, like New Super Mario Bros U, do not. Also asks for explanation as to why game labels do not offer a clearer indication of what types of \”network play\” are available before spending money on them.
Please let me give you a broad overview of the network policy for Nintendo games. There are several ways to make games more interesting by using a network structure. The first and most widely known way is to play video games with people in a distant place. For instance, I can play Mario Kart together with Mr. Miyamoto when he is in a different location. Still, even though you do not need to be in the same place, it does not eliminate the fact that you must play the game at the same time. We have laid emphasis on a service called “Miiverse” since the release of Wii U. Basically, users can pause most games, visit Miiverse and share their impressions or precious scenes from the game in addition to learning how others play the game. Miiverse is also helpful to learn about games before making purchases, and it appears that quite a few people appreciate that other players understand and empathize with their impressions. If the structure of Miiverse is developed more, users will also be able to exchange their play data with others, making it possible to play a game with another person without doing it at the same time. I think that the best way to use network play differs depending on the game. For “New Super Mario Bros. U,” which a maximum of five people can play together in front of the TV, we focused most of our effort on enabling those five people to enjoy the game all together so we did not focus on online play. On the other hand, through Miiverse we provide information such as play tactics and strategies, and we have received a lot of positive feedback. We are developing Mario Kart and Super Smash Bros. for Wii U, and in these two games, we would like to meet the expectations of consumers that they want to play together with people in different locations. In addition to that, if we can create an environment in Miiverse where users can play a game with others without sharing the same time and inspire one another through exchanging their game experiences, then I believe that some very interesting things will happen. I would say that our policy at Nintendo is to consider each game’s features and then offer network functionality that takes advantage of these features. We will do our best to achieve this since we believe that there is a consensus that you have more fun when you play with others than when you play alone, and that you feel happy when others understand the impressions and fun you had while playing a game. What you have pointed out about the lack of network play information is very helpful. We will consider this point for future improvements to our product packaging and website. Thank you very much.
Question 13 asks if Nintendo plans to expand their business beyond video games and playing cards in the future, and whether there will be a special benefit plan for shareholders.
Physically, even a small amount of power can have a great effect when concentrated on a certain area. I think Nintendo has carved out a new future in this manner. In other words, we should not spread ourselves thin by diversifying our business because, by doing so, we might lose a strong presence which we currently have in the area of entertainment. We therefore have no intention to advance into other markets. Nintendo is an entertainment company.
On the other hand, we believe that entertainment can be defined very broadly. We have released products which have centered on entertainment but pushed the boundaries of traditional video games, including “nintendogs” in which you can take care of a dog on your Nintendo DS, “Brain Age” in which you can train your brain, “English Training” in which you can learn English and “Wii Fit” in which you can do exercise every day with Wii. So when we find a possibility of further broadening the definition of entertainment and capitalizing on our strength, we might release something unexpected as a Nintendo product. However, our core business will continue to be to create entertainment products and services which surprise consumers, and make them happy and smile.
I have received requests for a shareholders’ special benefit plan in previous shareholders’ meetings, but please let me answer it again. We have a lot of institutional shareholders as well as individual shareholders. Since institutional shareholders see a special benefit plan for shareholders as something they cannot take advantage of, paying for such a plan will not necessarily meet with the approval of all the shareholders. As I answered in the past shareholders meetings, we have not introduced any shareholder benefit plans for such reasons. Thank you for your understanding.
Question 14 Notes that Nintendo Direct broadcasts enable Nintendo to communicate what it wants, when it wants. Also points out that many video gaming news sites report things that are factually untrue about Nintendo, even to a point where Nintendo must publicly deny the claims. Asks about bias against Nintendo in general in the gaming media.
Let me first say that I would like to refrain from commenting on individual cases. On the other hand, it is true that there are some Internet sites and certain media who have written stories about Nintendo as if they were official when, in reality, they did not come from any official sources such as interviews or announcements, nor were they confirmed by the company. My words are sometimes taken out of context, rephrased in a way that sounds offensive, and then reported as if those were my exact words. We look at the influence and the content of any article and media, and when we feel that it could potentially spread misleading information (on a wide scale), then, as other companies do, we sometimes decide to communicate on our official website and Twitter account that what the article in question claims is nothing that the company has officially announced. In this sense, we are proactive with regard to information that, if left unattended, could affect us in an extremely negative way.
On the other hand, what people say on the Internet is simply beyond our control. There have certainly been instances where we felt very sad or frustrated, but reacting to every single piece of information could in fact contribute to spreading it further. We take action when we feel that a certain piece of information could affect us or our shareholders in a negative way.
We have Nintendo Direct, our official Twitter account and our official website to communicate our messages to our consumers directly. An increasing number of people are watching videos on the Nintendo eShop, which is a virtual shop where people can purchase new games and find new information. In fact, the most popular way to watch Nintendo Direct is through the Nintendo eShop as opposed to watching it live on computers. As you can see, we now have more ways to directly reach out to consumers, and by communicating our messages in a genuine manner, I think that we can make sure that inaccurate and ill-intentioned reports will not become too serious an issue.
Question 15 Notes that the 3D effect available in Nintendo published 3DS titles is more polished and better implemented than for third party titles. Asks how Nintendo is supporting 3rd party developers to correct the issues.
We have of course conducted research to find out the level of perspective difference between left and right images that was low enough to reduce the burden on the eyes but was high enough to achieve a significant 3D effect, and we feel that we have certainly amassed knowledge and know-how since our first prototype using a 3D screen. In this sense, we share information internally in the company on what successful software has done to achieve such a high level of stereoscopic effect, and we share that with our external partners if we receive questions from them. On the other hand, it would be nonsense to claim that the quality of the 3D images of a particular game only depended on whether it was created at Nintendo or outside Nintendo. I believe that it depends on the individual title. The quality of 3D images cannot be quantified and it cannot be measured against a certain experiment to set a threshold either. It is up to the individual player to decide for himself or herself. You might get a totally different impression by simply looking at a different location on the screen, and what one person might describe as too strong could in fact produce images that another person might describe as compelling and immersive. Players have the ability to adjust what is called the 3D Depth Slider (to adjust the level of perspective difference between the left and right images on Nintendo 3DS) but in some cases, it is not adequate. From your question, I take it that you probably had the chance to watch video footage for certain games that were distributed before they officially released, but as a matter of fact, the level of parallax effect is fixed with videos, meaning that it is impossible to adjust it (using the 3D Depth Slider). In this sense, I believe that we have not been able to fully satisfy our consumers in every aspect. Of course, it is up to individual publishers to make judgments about the quality of their software in the end, but we would like to support them when necessary to find a good balance between comfortable and impressive 3D images. Thank you for your question.
Question 16 asks about improving shareholder satisfaction, whether Nintendo will split the stock to allow stockholders to use the benefits of the upcoming NISA (Nippon Individual Savings Accounts) which give investors tax breaks for accounts up to 1M Yen per year.
I have often been asked about a share split in shareholders’ meetings. Before the digitalization of share certificates, I mentioned that it would require a lot of clerical costs to split a share when only real share certificates existed and that we would start considering one after the digitalization. Now we don’t have to care about such clerical costs because the digitalization has already happened. Naturally, we are internally studying the methods, and pros and cons of a share split, but we cannot talk about it in detail today. I would like you to at least understand that a share split has two aspects. When a company splits its shares, its investor base is broadened by increasing the number of individual shareholders and, as is widely alleged, the liquidity of the shares will improve. Also, as you mentioned, NISA, which is a tax exemption on small investments by individuals, will begin in January 2014 and give many people a chance to start investing in equities. We would like to think of a way to attract more people to our shares. On the other hand, as a shareholder commented in a shareholders’ meeting some years ago, some people are against a share split because it would reduce the premium nature of Nintendo shares. This is not a rare opinion as we have received this sort of opinion through various channels before. We are not disregarding the importance of our shareholders, but my explanations today have been more focused on how to satisfy our consumers to improve our business performance because doing so can increase the corporate value of Nintendo, its share price and the dividends to you all. We hope to decide if and when to split our shares, taking into account the pros and cons I stated just before.
Please let me take this opportunity to tell you something to address criticisms that Nintendo may be making little of its shareholders. As we have not bought back our shares despite our share price being in a downswing phase for some time, we have received some comments that Nintendo may have no intention to support its share price or even may not care about its share price. Of course, we care about our share price and we think a share buyback is a good option if we can determine it will work effectively. Under the current circumstances, however, we think that a buyback alone cannot change a large trend without also improving corporate performance and proving that our current business structure will work well in the future.
On the other hand, there is an indicator called “total return ratio,” which shows how a company returns its income to its shareholders. It generally means the ratio of the dividends and share buybacks in total to the net income for a fiscal year. For Nintendo, the ratio is 67.9 percent in total for the recent six fiscal years. The net income was 806,582 million yen and we returned 547,344 million yen to shareholders in dividends over those six years. Please let me compare this number with other Japanese companies. As there are few companies whose business and scale are similar to us, we have picked out some large-scale companies with a big market capitalization which are known as “cash rich” or have positively bought back their shares. It goes without saying that we are very sorry we could not pay many dividends due to the downturn in business for the 72nd and 73rd fiscal years, and we are making our best efforts to improve our performance so that you will be smiling here at the 74th annual shareholders’ meeting next year. However, this comparison chart shows that Nintendo belongs to the group of companies which have been most actively returning income to shareholders in the form of dividends and, even when it comes to the total return ratio which includes share buybacks, Nintendo is the highest, except for a prominent one, Canon. (Note: 56.6 percent is the six-year total return ratio of the 20 Japanese companies with the biggest market capitalizations including the companies on the slide (excluding three financial institutions) as of June 27, 2013.) Our basic dividend policy is a 50 percent consolidated payout ratio. However, we have the other policy which is to consider 33 percent of consolidated operating income as a dividend resource in consideration of the investor opinion that they would like to avoid the risk of reduced dividends in case of a strong yen causing foreign exchange losses and reducing net income, and we have adopted the higher of the two policies for years. The accumulation of dividend payments has contributed to the high total return ratio of 67.9 percent. In this sense, we would appreciate it if you could understand that we are seriously working for profit returns to our shareholders.
There you have it. All of the questions and answers provided by Mr Iwata. Now we can rest assured that Nintendo is trying to improve the condition of their cafeteria as well as maintaining their focus on video games rather than expanding into other markets.
What are your thoughts on the answers provided? Let us know in the comments!