Posted by: seanmalstrom | May 14, 2014

Investor Q/A 74th Fiscal Term Ended March 2014

Iwata held the Q/A with investors. As always, Malstrom was secretly inside.

As to whether our philosophy has changed or not, the basic idea that consumers reluctantly purchase hardware only because they want to play with appealing software remains unchanged. I only mentioned the Wii U software “Mario Kart 8” and “Super Smash Bros. for Wii U” today, but of course, we are going to talk about other Wii U titles at E3 (Electronic Entertainment Expo) in Los Angeles in June. Also, our internal software development teams directed by Shigeru Miyamoto (Senior Managing Director and General Manager of Entertainment Analysis & Development Division) are committed to developing several titles that focus on offering unique experiences only made possible with the Wii U GamePad in order for a large number of people to understand the Wii U GamePad’s significance. The titles we are preparing to show you at E3 vary from being nearly complete to still in the early phases of development but with the core of its appeal noticeable. Therefore, our strategy of focusing on software has not changed.

Why didn’t Shigeru Miyamoto commit to developing several titles focusing on ‘offering unique experiences only made possible with the Wii U’ BEFORE now?  What was Miyamoto’s software team doing during that time if they were not making games that showcased the Gamepad?

Iwata’s answer can also be read as “Miyamoto and his software team WERE NOT making Gamepad specific games for the Wii U.” So what the hell was Miyamoto doing?

I know what he was doing. He was on a crusade to popularize Gamecube-esque games. Pikmin 3. Gamecube sequel. Wind Waker HD. Gamecube Port. Super Mario 3d World. Pushing more 3d Mario down our throats. When you look how Miyamoto treated the sequels to the mega selling Wii games, you find that he butchered them in the name of ‘exploring new business models’. NSMB U was to get us to buy downloadable content. Wii Sports has been shattered to make subscription based gaming. IGN asks, “How does Iwata still have a job?” The right question is “How does Miyamoto still have a job?”

If software drives the hardware, then isn’t Wii U’s poor sales an illustration of incorrect or bad software? And who is in charge of the software strategy? It’s not Iwata. 

I’ve been curiously observing how these ‘Game Gods’ are as they age. What I’m finding is that they are not aging gracefully. They have become arrogant and refuse to calibrate their game ideas to the ever changing reality of the market. A great example is Richard Garriot and his Shroud of the Avatar. Testers (who had to PAY to be a tester) keep writing in suggestions and many of them agree with certain issues. Garriot just flat out ignores them and presses on. From what Shroud players tell me, they are disgusted by the Shroud’s development staff and see the game on the road to become a disaster.

Making video games is very, very, very tough work. You must also keep updating and challenging what you know because young people keep changing every few years. When you get old, you get more set in your ways. You want to draw upon your experience. In many ways, this experience can become a liability.

So what’s the solution? Fucking hang up the Gamecube already. Give up the ‘OMG 3d!’ push that has only ended in disaster for Nintendo at every time it is implemented. Look at what worked before with Nintendo. Make more of that.

I prefer my three legged stool approach for consoles:

One third of the games be sequels to already best selling games (e.g. Mario Kart, NSMB, Smash Brothers, etc.)

One third of the games be games made in the spirit of what worked throughout gaming history (e.g. Wii Sports was the spiritual successor to NES and Atari Era sports games. Nintendogs was the spiritual successor to Tomogotchi pets of the 90s. Animal Crossing was a spiritual successor to Ultima Online’s housing.)

One third of the games be brand new with bold new directions.

However, in terms of when we will be able to regain Nintendo-like profits, I would ask you to give us a bit more time and see how we do in the following two years.

Two years!? What’s going on is Iwata is trying to rebuild Nintendo. Another way of looking at it is that Nintendo has blown up.

The problem is more serious than gamers think . Nintendo’s situation isn’t that where they need a good game to make things right. Iwata is looking at it as if everything has blown up. The ‘two years’ is the reconstruction time. I’m assuming this means QoL but in two years we will have a successor to the 3DS. While the 3DS was released in 2011, it was actually showed off to the public first in E3 2010. E3 2016, where the 3DS successor will probably be shown off, is two years from now.

In two years, Nintendo will be showing off new console hardware which means a new console strategy. Add in QoL, and we will see a very interesting new Nintendo. I’m excited to see what they do. I want another DS/Wii type console, a console that includes people like me in it.

 I of course believe that launching new hardware will not produce good results unless we first make sure that those who have already purchased our platforms are satisfied. We will continue to work hard to ensure that consumers who already own our platforms are satisfied, and make sure that people will continue to see great value in our software, but I would like to say that we are preparing for our next hardware system, and in fact, we already have a clear idea to some extent about the direction our next hardware is going to take.

This is very encouraging to hear. It is critically important Nintendo satisfy current 3DS and Wii U owners. People who haven’t bought those systems, such as myself, are quietly observing from the sidelines. The PS4 is doing so well because Sony satisfied PS3 owners. People on the sidelines said, “I feel safe to buy a PS4 at launch because of Sony’s track record.”

In other words, Nintendo has been known as a video game company only for one-quarter of our history, but people around the world, even including many at Nintendo, tend to believe that Nintendo is a video game company and even think that Nintendo should not or must not do anything other than making video games. This, I believe shows that over the past 30 years or so, the video game business has been running smoothly. 

The question Iwata was answering was asking Iwata about the macroeconomic future of video games. This is a very interesting answer from Iwata. Most people playing games are younger than 40 so they cannot imagine entertainment in non-video games such as the Rubik’s Cube or other things.

Iwata continues with the answer:

In video games, players interact with a computer and receive output as the result of their input. If players realize that they will be able to receive greater rewards in the form of computer output than the amount of effort they put in, they will be tempted to repeat that process. Because that process makes players feel comfortable, there is a great sense of excitement and achievement. I think that this is the kind of know-how you need to make video games, but it can be applied to much wider fields than you might imagine today. When I said that health is going to be a theme of our QOL initiative, I referred to it as an example of one of these fields. 

The answer fascinates me. Iwata is talking digital entertainment in a non-computer based way. He is implying that the computer revolution has really gone everywhere and isn’t just stuck to a ‘computer box’.

The current thinking is that video games will always be around. But I think, and Iwata thinks, that video games may go away or be very niche when digital computers permeate everything in society. You may think we are there now, but we are not. Back in the Atari/NES 1980s, video games were a magical mystery because computers were extremely scarce. As computers became more common, the mystery of video games also diminished. Today, we have very powerful computers in our phones and other devices. Traditional video games just aren’t special like they used to be.

Nintendo’s solution was to do ‘integrated hardware and software’ in order to make video games interesting. The problem here is that this is a band-aid to the traditional video game market.

The real revolution, one bigger than the Wii and DS, is embracing non-traditional video games in ways we never imagined them to be. It is not a ‘new way to play’ games in a traditional gaming market but outside that traditional market. People forget that arcade games, PC games, and console games were once ‘new’ and ‘non-traditional’. We could be on the cusp of a revolution bigger than video games. Should it occur, it will have the awe and mystery that video games once commanded in the 1980s.

Not to change the subject, but many years ago, people used to connect with video games only when they were sitting in front of a TV set. Other than that, people did not have any relationship with video games back in those days. Then, handheld video game systems were introduced, and people started to carry around their video game experiences outside the home. And today, many people carry around smart devices and use them in their free time.

All you crappy analysts out there are thinking in terms of regions (console market, handheld market, etc.) while Iwata is thinking in terms of continents. This is why Iwata is the Nintendo president and you, my esteemed analysts, are not.

 In other words, we will try to ensure that there is more than one device, more than one location or more than one environment where users can access our products and make sure those users can interact with our products in various environments.

This is a prologue of the Generation Nine Nintendo strategy. In the future, when you buy a Nintendo game you will be able to interact with it through home console, through handheld, through smartphone, through PC, and so on. The actual playing of it may only be done on the Nintendo hardware, but there are other things you can do.

This is EXACTLY why I love PC gaming such as the Blizzard games. In World of Warcraft, you can play the game normally on your PC. But you can use a smartphone app to play the auction house and chat in game. Then, of course, there is the large community of websites and forums and databases for the game. When you aren’t playing WoW, you are still playing WoW by researching an item, an area, a quest and planning your next move.

Back in the 1980s, we didn’t stop playing the games when we moved away from the consoles. We kept playing the games in our heads when we read our Nintendo Power or talk to our friends. Even though the games were much shorter back then, they still occupied our minds the same. Today, games hog too much attention with active playing (usually doing some BS RPG leveling stuff in non-RPG games).

I also mentioned in January (at the Corporate Management Policy Briefing) that we would change the definition of our platforms from being device-based to NNID-account-based. When our platforms are account-based, we can expand the number of applicable devices. In order to have rich and high-quality game experiences, we always want our users to play with our dedicated game systems that are specifically designed to provide such unique experiences, while at the same time, we may be able to select some portions of these games and make them available on other devices. 

This is exactly what I want to hear. Account based systems are a must for Nintendo. All the smartphone owners are used to an account system. Nintendo not having one seems pre-historic. I want an account based system that makes me feel comfortable buying digital games on the Nintendo platform. This will be huge for indie games on Nintendo’s system as well.

 For one thing, as previously announced, we have integrated our hardware development divisions and established the “Integrated Research & Development Division.” Until this change took place, we used to develop our handheld video game devices and home video game consoles in separate divisions. Of course, we did not simply merge two divisions into one. We know that we need to change how we manage this new division as well as how we create and manage new projects, and we are currently making progress on this. 

Why would they be merged? Rather, why were they separate in the first place? It is because home consoles and handheld consoles had different jobs. The handheld was not to do the job of the home console and vice versa. The hardware was designed to do the specific job.

The merger is not telling me that Nintendo won’t do a separate home and handheld consoles but that the JOBS won’t be separate any longer.

In addition to these changes to the R&D divisions, in March we established a new department called the “Business Development Department.” Since the company released Family Computer System (Nintendo Entertainment System) in Japan and put it on the right track for sales growth, Nintendo has not needed to implement significant changes to its principle business structure. In other words, in comparison to many other companies, Nintendo used to have a smaller need for business development because, by maintaining a similar business structure, it was able to conduct its business and grow rather steadily. 

Well! Well! Well!

However, because the environment has greatly changed and Nintendo must create a new business structure and execute a variety of new endeavors that I have been addressing recently, we have established this new department that reports directly to me.

Directly to me. I love how Iwata says that. It’s like he is some Lex Luther mega-boss who snarls, “and they report DIRECTLY to me!”

Is this department one where Christensen talks about that businesses should do in order to disrupt their own business? It might be. Nintendo seems willing to cannibalize their traditional video game business at this point. I haven’t seen this willingness before. Note how Iwata talks about Nintendo’s long history of doing things other than video games and that the video game market was only there for about 30 years. Emotionally, Nintendo has separated itself from traditional video games. Now it is looking for a financial way to do so.

This isn’t saying Nintendo will stop making traditional video games. Nintendo still makes Hanafuda cards after all. Generation Thirteen Nintendo games may very well be like Hanafuda cards. They make them. People still buy them. But they aren’t the meat and potatoes of Nintendo’s business any longer.

Just as it was difficult to forecast the performance of Nintendo DS or Wii before their respective launches, which both proved to greatly exceed our expectations, at other times, our products do not meet our expectations, as is the case with Wii U. This is inevitable in the entertainment business.

Indeed.

Currently, Nintendo has both the home console and handheld platforms, and we would see great results if both of these platforms performed very well; however, our business would become mediocre if one of them faltered, and if both of them were to falter, it would very negatively affect our business. 

The key word in this sentence is ‘currently’.

We have decided to establish new business platforms not for being pessimistic about the future of the video game business, but to prepare for a challenging situation. 

A challenging situation? You mean like bad macro-economics? Japan’s situation is extremely dire. Any observer of the Japanese game market (or Japanese anything market) will admit this. The recent sales tax has only hurt purchases more.

However, Japan is leading the charge. The United States economic future will be like Japan. Japan is like maybe 5-10 years ahead of the US perhaps. European countries also have their challenges as well. This is not like a rosy economic time of the 1980s or 1990s. Heaven forbid the outbreak of a World War 3 which would really crush the markets.

People reading Iwata’s words are thinking, “Wow! This is crazy bold what Iwata is doing!” But in Iwata’s mind, he is thinking, “We should have done this a DECADE ago! We cannot move fast enough!”

We believe that we may be able to establish some sort of new core business if we consider our role as an entertainment company in a broader sense. 

And there you have it.

The fate of a video game system is often influenced greatly by the introduction of a single title. As many of you probably remember, before the release of the Pokémon game, Game Boy had been showing slow growth, and many people wondered whether it was the end of Game Boy. But the Pokémon game singlehandedly changed the landscape of the system, which then started to show the strongest sales in the lifecycle of the system.

But Pokemon didn’t cost that much to make. Today’s home console AND handheld games cost a buttload to make and a ton of time to do so.

Nintendo needs to create many new low cost games. Minecraft was only made by one guy and look how well it did. Such games can be made today. Nintendo isn’t going to make a new Pokemon game by focusing on ‘omg 3d’ or ‘look how awesome our HD graphics are’ mentalities.


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