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Iwata transcript - Making money on portables, Wii U/3DS digital distribution plans

by rawmeatcowboy
03 August 2011
GN Version 4.0
You have mentioned that the handheld gaming system business is always remunerative, but I think, for example, that there was not much margin when we set the price of the first Nintendo DS at 15,000 yen. It is true that the situation for the Nintendo 3DS (after the markdown) will be more challenging, but it is not true that all our past handheld gaming systems always had large margins. However, the cost-cutting effect of the mass production can be quite large. Manufacturing costs of the Nintendo DS decreased by volume efficiency from a certain point in time and the system rapidly spread around the world. As a result, the hardware itself was able to generate some profit. Therefore, it is not true that the overall handheld gaming business becomes balanced in a circumstance where generating some profit from handheld hardware sales and generating less profit from the software sales in comparison with software sales of home console business. Rather, please think in a way that the profitability becomes larger when a business starts to run well and a number of the hardware units sell. When the platform gains momentum and both hardware and software start to sell well, the manufacturing costs for hardware will be lower. Also, for software, most of the costs come from its development and marketing, so the profitability changes by how many units can write off the costs. When software is launched and sells steadily and for long time, which is often called an unexpected smash hit, the efficiency will improve drastically. Therefore, it is very important from the business perspective, whether we can provide such products or not.

We believe it is our responsibility to achieve stable profits every year and return them to our shareholders, while at the same time propose new things to society, make them hit products at a certain rate and, as a result, gain momentum. But we have been getting a little off track, and I feel that now is the time to get back on track, and we made this bold decision. As a result, it turned out that this fiscal year will face a significant problem with regard to profitability. However, this situation will not last forever, and profitability will improve as mass-production goes on, so I do not think that the profitability of handheld gaming systems will decrease drastically in the future. Rather, the important point is whether the platform will do well or not. I do not think it can happen in our company’s business structure that, to put it in an extreme way, if one platform sold one hundred million units or more throughout the world, the profitability (of the hardware) would still be an issue there.

Talking about whether there are other measures we can take other than the ones we are doing now to improve profitability, it is of course the same thing for the Wii U as for the Nintendo 3DS, but we think there are great new possibilities with what we can do in the digital business or, in other words, the digital distribution business. I am not going to go into detail about the business model today, but we have a strong determination to enlarge our digital business. This area is an area in which we have not been able to implement a good mechanism yet, or in which we have not been able to run our business well. We have made several attempts since we first made Wii Shop Channel for the Wii, but because we could not overcome some preconditions, the business hasn't grown to a satisfactory size yet. However, for the Nintendo 3DS and the Wii U, we are strongly focusing on development of such functions, so I believe we will be able to make new proposals such as "The ratio of packaged titles and digital titles will be like this in the future" or "The business for packaged titles and the business for the digital titles can be combined in this way." I think I will be able to tell more specific stories in the near future, so taking these facts into regard, we would like to make efforts to improve our profitability even more. - Satoru Iwata