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From IGN. Harris Nesbitt Analysts held a two-day investor conference this week and featured guest speakers, including Nintendo's own vice president of sales and marketing, Reggie Fils-Aime.
would anyone care to counter any of Reggie's comments?
Good morning and thank you. Let's play a game. We're turning back the clock 20 years and naming ourselves the 'Masters of Hollywood.' It's up to us to determine movie production, not only for a single studio, but for the whole industry. The only green lights come from us.
By now, we know what works. We saw Jaws. We saw Star Wars. The day of the big name star and legendary directors is over. Let's put all the money into what works special effects. The audience is eating this stuff up. Everyone loved R2D2 and those light sabers. Everyone lost it when that giant shark bit off the back of Robert Shaw's boat. It's a new age, baby. Let's ride the wave. It's the 80s and our computers are working their magic. They've got ET flying his bicycle across the sky. They make it look like Indiana Jones really is running in front of that giant boulder. And you know what? In the Terminator, they even make Schwarzenegger look real! Computers can do anything.
Now let's jump ahead to the 90s. Look at all of those cities blown up in Independence Day. Can you believe we once thought that Star Wars stuff was cool?
And finally, let's move to this decade. We just did the Lord of the Rings trilogy -- maybe the baddest stuff ever capture on film. Awesome. And when it comes to destruction, are we ever going to top Day After Tomorrow? Just think about it -- once we were happy to have one shark attacking from the water. Now we have all the water on the Earth rising to attack everyone! This stuff just keeps getting better and better. We give the audience what they want and they give us billions.
Of course, there are always going to be doubters. Those faint of hearts who point to Water World. And Battlefield Earth. And Howard the Duck. And the remakes of Godzilla and Rollerball. And yeah, The Adventures of Pluto Nash, which they say is the worst movie ever made. But let's not dwell on a couple of billion lost. After all, we are the masters of the movie universe!
Well, for better or worse, this is just pretend. Sure, all of those special effects movies were made. But all that time, Hollywood remembered it also needed different kinds of movies to appeal to different kinds of people. The Godfather trilogy did pretty well relying on acting and writing and storyline. The real Hollywood made Taxi Driver, and Raging Bull, and Amadeus, and Annie Hall, and Schindler's List, and Napoleon Dynamite, and the Lion King, and even Sideways. But it must be said that big budget, big bang thrillers have remained the bread and butter of Hollywood. Because they're sure things, right? Well, not so much. Last year, theatre revenues worldwide were down four percent and pay per view movie views down 30 percent despite a seven percent increase in DVD sales and rentals. And this year in America, theatre revenues are down another six percent, and total ticket sales down nine percent. The reason? The leading suspects seem to be those big budget, big bang, sure-thing thrillers.
In October, the New York Times cited a steep decline in the numbers of young men going to the movies -- that absolute sweet spot in the market for every action film Schwarzenegger and Bruce Willis and Vin Diesel ever made. The head of Fox Films said Hollywood needed to cater more to audiences beyond young men. He said, "It makes no sense to continue aiming all of your films at the same demographic quadrant. Eventually, they become stale." In other words, the movie industry understands the need to move beyond special effects. But the videogame industry, apparently, does not.
As we stand here, with a new generation of even more powerful game technology about to be unleashed, there are very different strategies in play. Sony and Microsoft are racing toward the sale goal: shiny new versions of the same old games. And we're not suggesting that's wrong. After all, it's worked in the past. There will always be a market for the 'Big Bang.'
But it's not the only way.
Nintendo, as I'll explain, is taking a second path -- the one less traveled, you might say. A path along which we plan to move millions of new players to new kinds of interactive entertainment. And as for current players? For them, brand new ways to play.
Is this really necessary? We believe the answer to that is, absolutely. Let me take a few minutes to explain why. This chart is familiar to most industry observers. It's the trend of the Japanese game industry revenues over the past several years. What use to work, well, isn't as working as well anymore. The chart speaks for itself. Of course, we want to believe that this can't happen here. Surely that 16 percent decline in revenues we saw in September, and the 24 percent drop in game sales, were flukes. Likewise, the last two years of sales declines are predicable approaching the back half of a cycle. And just wants -- business will be back up this year, maybe by double digits. Of course, a brand new hardware console and two new handhelds are necessary to turn the tide.
But before we start looking too far forward, let's look at how the current console generation is winding down. We have currently sold through 52 million home systems in this cycle, beating any previous area. Initially many thought we might reach 60 million, but that doesn't look like it's going to happen. But scratch underneath that number a little bit and a different reality emerges. In fact, you start to wonder if the popularity of dedicated video games is really increasing.
Look at this generation compared to the first one 15 years ago. Research today tell us that among those 52 million machines already sold, a full 24 percent are part of dual-system households, and eight percent reside under roofs with all three consoles. The math shows that our 52 million systems have only reaches a little better than 35 million discreet American households, about 31 percent of all current U.S. homes. Back in the 8-bit days, there was only one console -- the original Nintendo Entertainment System -- which meant there were no dual-households. So 31 million systems equaled 31 million homes. And that represented 33 percent of all American homes at the time. It's unsettling to see that in 15 years, we really haven't increased the percentage of game-playing homes. He population has grown, but our relative popularity really hasn't.
This is particularly perplexing because every year, we imagine millions of 10 or 11-year-olds convincing their parents to buy them their first home systems, while older players carry their game-playing passion further and further into adulthood. In this scenario, the industry should be booming. But instead, we're left asking, "where's the growth?"
Furthermore, it looks like we can't even count on population growth anymore. All through the 20-year lifespan of the dedicated game industry, we've seen a steady increase in the number of young boys entering their pre-teen and teenage years. Historically, these are our 'blue chip recruits.' But now, for the first time, the number of 10-to-14-year-olds has dropped. And it's going to get worse because right now the U.S. population of boys aged five to nine years is a full eight percent smaller than their 10-to-15-year-old brothers. And the pipeline is shrinking. In other words, if we just maintain our relative popularity, revenues are going to fall.
Finally, one more piece of troubling news. There's evidence that our popularity itself is on the decline. In September, Piper Jaffray conducted in-class surveys of high school students across the country. A full 75 percent of all respondents say their interest in gaming is falling. And that number itself has jumped 16 percent in a single year. The same study also highlighted the polarization of the game-playing market. The hardcore is harder than ever. That minority, who say they play games daily, is actually up a little bit. And the hardcore wants harder content. According to the ESRB, the percentage of games sold with a mature rating has grown steadily over the last several years. But at the same time, the casual players may be falling away. More and more respondents who used to enjoy games on a weekly basis now say they're doing so only monthly.
What does this all mean? Clearly, it's easy to imagine a roiling mass of older, techno-maniac, trash-talking, gotta-have-everything, gotta-play-everything aficionados. They are the current reality of the dedicated home videogame business and some will say, as long as these guys keep buying more, who cares? Nintendo does. Because we see in our business the same threat that the exec from Fox Films was talking about: at some point, no matter how big the boom, dazzling become stale.
So what's Nintendo's answer? Well, as a guy who's worked for everyone from Proctor and Gamble to Guinness to MTV, I know my way around the management section of my Barnes and Noble. And there are two recent best-sellers which I think really capture what Nintendo is all about right now. The first is blue ocean strategy. It cites successful companies who've looked beyond the bloody, red waters of ruthless competition. Companies who pushed the accepted definition of their markets and found so-called blue oceans, where they were able to expand business while they competition remained behind. In order to do this, those companies had to shift their focus from "what is" to "what can be." Examples here include how Southwest rethought the airline industry, Dell the PC business, and Cirque De Soleil redefined the very meaning of the circus.
The second book, Innovator's Dilemma, extends this same thinking a bit further. The Harvard authors demonstrate that new markets are frequently created not by listening to the desires of current customers, but catering to what are seen as smaller, even fringe audiences. In reaching them, the technology or performance proposition initially can be seen as a step backwards. Instead, what is offered, and I quote, "typically cheaper, simpler, smaller and more convenient to use."
The primary example here is probably the iPod. It was not the first portable MP3 player, but the first one, coupled with iTunes, that offered a compelling combination of simplicity and ease of use. Looking at the current state of the videogame market, we believe there's a strong argument for expanding the audience beyond the current core players, attracting players by rethinking what a videogame means, and delivering our entertaining in a more convenient and affordable fashion.
Now, let me be clear. Am I suggesting that Mr. Iwata, Nintendo's worldwide president, personally sat down, read these books and then said, "Yep, that's it. That's what we're going to do!"? Of course not. But in fact, Mr. Iwata started saying things similar to what these authors describe, and he's been saying this even before either of those books was published.
Here's a small sample of what I mean.
* "If we cannot expand the market, all we can do is wait for the industry to slowly die."
* "If it our responsibility to make games for all skill levels, including people who are not playing videogames."
* "Technology alone cannot advance videogames, which is why we plan to take Revolution in a dramatic new direction."
The resonance is clear. Expand the market beyond the core. Go where other companies won't. Don't worry about expanding current performance metrics, as long as you over perform on ease, simplicity and cost. In other words, build it right and they will come.
Now, we agree that drawing up a plan is one thing. Executing is quite another. As Jack Welch once said, "In real life, strategy is actually very straightforward. You pick a general direction and implement like hell."
We're beyond planning. We're already implementing like hell.
Over the last 15 years, we've constantly dominated the handheld videogame industry. The latest iteration, our Game Boy Advance Line, has sold more hardware units in America over the last four years as any other game platform of any kind. The logical decision would be line extension -- give owners a better version of what they already love. After all, we've done this before. But instead, we disrupted our own market -- one we already owned. The disruption was the Nintendo DS, a new kind of portable game system, one which undisputedly altered what had come before. We gave it two screens instead of one. Made one of them a touch screen. And added a microphone. Admittedly, when we first described DS, many players called it quirky. It was such a departure that many existing Game Boy owners couldn't understand what these features meant. As is often the case in our industry, it took a singular piece of software -- in this case, Nintendogs -- to make the answer clear. As a legacy to market-moving titles like Tetris and Pokemon, this software has probable "going to the dogs," and in a very good way. To date, worldwide sales are currently approaching two million games, on a host system with an installed base of less than eight million. That kind of penetration rate, over 25 percent, is incredible in such a short period of time.
Nintendogs is also meeting amore important criterion for hit software -- it's helping boost hardware sales. Since Nintendogs' launch in the U.S., along with a $20 price drop, DS hardware sales rates have held firm at more than twice what they were previously. In Japan, the increase was even higher. And in Europe, the arrival of Nintendogs boosted hardware units by a factor of four.
And the opportunity becomes more irresistible this fall when "Special Friends" bundles arrive featuring a Nintendo DS system and a custom combination of breeds. For any guy who loathes trips to the perfume or lingerie departments, I don't know that there's a better holiday gift option for his special girl. That's because this is a different kind of game intended to attract a different kind of gamer. It has no set beginning or end. No way to win. It isn't competitive. But it's distinctly social, not only between owner and pet, but even between owners. Strangers carrying Nintendogs on their DS can quickly become friend when their dogs 'find' each other wirelessly, and begin playing together. What this means is that a so-called 'fringe' market that the industry has long coveted, namely females, is finding a game for themselves with Nintendogs.
Not only is the percentage of female players double with Nintendogs as with other DS games, but the number of new DS purchasers also features twice the previous percentage of women. This is a prime example of the idea of expanding a market to what might be considered 'fringe' players, but whose retail dollars are worth every bit as much as their hardcore counterparts.
Two more quick notes on the intersection of Nintendo DS and the blue ocean. As a lever to expand market, Nintendogs is not, you might say, a "one-trick pony." Electroplankton is software that was demonstrated at E3. Not a game, but a creativity tool, designed specifically to allow users to compose music. In Japan, we've seen great success with two other software titles, Brain Training and Brain Flex, whose promise is to sharpen thinking, especially among older users.
The programming is exceptionally easy. A team of less than 10 developers completed Brain Training in less than four months. But the impact has been dynamic. Sales of the two Brain games now stand at over one and a quarter million in Japan, and the positive impact on DS hardware sales has nearly matched that of Nintendogs. And that's why, as some of you may not be aware, Nintendo DS is right now the best-selling game station in Japan, outselling even the runner-up PlayStation 2 by a margin of 20 percent so far this year, and nearly a two-to-one margin after Nintendogs arrived there.
However, we believe the most significant advance offered by Nintendo DS may just be arriving. Next week the Nintendo Wi-Fi Connection rolls out across America, and soon after, the world. Certainly it's not novel for game players either on a PC or on dedicated console, to square off against each other over distance. Those players are tied to their machine and beyond the real of basic card or puzzle games, they pay for the privilege. The two online communities differ dramatically, however, in tone. Console online play is the domain of the dominant. It is ruled by hardcore alphas. PC online typically is the opposite. Middle-aged women playing online frequently won't call out a bingo until every other player in the game has also won. It is purely social.
Is there a methodology that bridges that divide? Yes. It's the Nintendo Wi-Fi Connection. First, connection to an online Wi-Fi community has never been easier. You may do so at home, connecting your DS to your high-speed wireless network, or to your desktop or laptop with a proprietary USB adapter. That laptop connection can also work in any remote hotspot, but as importantly, Wayport will provide dedicated access to the exclusive Nintendo DS community at more than six thousand McDonald's locations in North America. Affordability is guaranteed. There will be no additional charge for access, or for Wi-Fi play on any first-party Nintendo game. At launch, two titles will immediately demonstrate the diversity of this gaming community.
An exclusive version of Activision's Tony Hawk franchise will be open to all comers, whether the goal is pure competition or creating your own custom designs and tags. While Mario Kart DS, itself a familiar name to millions of gamers around the world, will allow players to select their own comfort level. That's because you can choose to compete only among your friend or among players of similar skill levels, or among any available players. In this way, Mario Kart can provide either an environment free of excessive competition or one filled with it.
In the coming weeks, the release of Animal Crossing DS will let you interact safely within the walls of your village, only with your friends. And then, after the first of the year, the high-intensity action of Metroid Prime Hunters will connect the 'best of the blasters' around the world. Nintendo Wi-Fi meets the requirements for blue ocean market expansion. Make it appeal to new customers. Make it easy. And make it affordable. We think free is going to prove very affordable.
I want to move on today by talking about our upcoming home console, codenamed Nintendo Revolution, in ways that also make it clear how it serves as a potential case study for blue ocean strategy or the Innovator's Dilemma.
Clayton Christensen points out that so-called sustaining, or existing market technologies, are inherently geared to deliver incremental increases in performance to customers who value what's already being delivered. A better description of the linear advances represented by both the new Sony and Microsoft consoles could not be written.
Christensen also observes that this kind of strategy frequently result in, "overshooting the market, giving customers more than they need -- or are willing to pay for."
Will the new competing consoles also match this description? Well, I'm sure everyone is anxious to find out.
Nintendo Revolution is decidedly not running in this race. Not because we can't afford the entry fee. But because we don't want the prize. There is no guarantee that even the winner among these two will be rewarded with profits. It's clear that the billions invested can only be rationalized by considering a larger corporate goal. It takes a long time to escape the red ink when billions are spent before the first machine is sold, and more money is lost every time the cash register rings.
We intend for Revolution, just like every other Nintendo system, to actually make money.
As I've said, the strategy for maximizing our return is twofold: attract new players and attract current players with new forms of play. Revolution's first announced appeal serves both groups: our virtual console concept. It not only offers direct backward compatibility to all GameCube software, but via downloading, to a library of games that spans the entire 20 years of Nintendo's console history. For the higher age group, this is a nostalgia trip -- and an emotionally-charged one, at that. How many devices allow you to relive part of your youth? At the same time, most of those games are in fact brand new titles even to those approaching their 20s. To borrow another movie analogy, The Wizard of Oz is a revelation the first time you see it no matter how many years after it was filmed. In our industry, Nintendo owns the equivalent of the back libraries of MGM, United Artists and Paramount put together. Virtual console is a direct pipeline to new, simplicity-seeking, blue ocean customers. And these are proven, high-quality game experiences that we an, of course, make available at a far more affordable price than current hits.
The nostalgia card alone doesn't make a winning hand. For that, we've also got to offer the base players something they'll find irresistible. And despite its modest appearance, this is it. The freehand controller design for Nintendo Revolution once again builds on our unparalleled heritage of improving how a game feels -- beyond just how it looks.
Many of you are aware that the standard controller D-Pad, the analog joystick, and the Rumble Pak, were all features first introduced by Nintendo. But the freehand system may prove to be our most lasting contribution to the player interface. That's because this controller itself becomes part of the game. The base unit resembles a small TV remote control in almost every respect, except performance. The controller itself becomes part of the game. Thrust it, tilt it, twist it, chop, swoop and swirl, and the corresponding action occurs on screen. Any videogame character, any game genre, is transformed, as we expand the interface triggers beyond the fingertip to the hand, the wrist and the arm. You become the maestro of your own game symphony. This single device alone can command many games. But it's only half the story.
A docking slot at its bottom can attach an almost infinite range of expansion controllers operated by your other hand. The most obvious one, a joystick, is shown here, but virtually any element for assisting game control could be added.
What this means for the development community is the widest range of flexibility ad creative muscle ever built into a videogame system. Consider any classic game element -- swinging a sword, sliding into a tight turn, delivering a big blow on a tailback -- and Nintendo Revolution can make that moment better.
We deliberately delayed giving the full third party development community details on the freehand system because we knew we needed to show as well as tell. But now that they've seen it, the response from development groups is off the charts. For them, this is not just different -- it's liberating. Not just because it promises the ability to do more than ever before. But also do less. Revolution's freehand control brings back into the equation the ability to do simpler yet groundbreaking games requiring fewer team members, fewer dollars and fewer hours.
We know freehand control also raises a logical question: won't an advance this dramatic cause difficulty for the porting of games between systems? The answer is little difficulty at all. If you want to retain your original control scheme, we make that easy by supplementing our new control system with a traditional controller expansion, if you will. It's a classic looking device that will hold the basic Revolution controller and allow game manipulation in traditional ways -- if that's what the developer chooses. In short, you can have it both ways. Familiar or revolutionary. One hand or two. Today's games or tomorrow's.
I'll close today with one more thought from Jack Welch. He said: "Change -- before you have to." For our industry, we believe it's time to change. The entire bet on this upcoming generation of home systems for manufacturers and publishers boils down to change. Do we only give them more of what they've always wanted no matter what the cost? Or dare to give them something new? Do we change? Do we make games that play just like the old ones? Or expand the very definition of a game? Do we change? Are we satisfied just serving current players? Or do we offer a turn to the millions still standing on the sidelines? Do we have to courage to change?
For Nintendo, we're not leaving the old market behind. We're just out to expand it. To show the world what a bigger, more robust more profitable market looks like. Blue ocean, her we come.
Thank you for your attention today.
would anyone care to counter any of Reggie's comments?
