Iwata on the benefits of integrated hardware-software business model for Nintendo
The final topic tackled by Satoru Iwata during Nintendo’s investor briefing Q&A concerned its focus on producing both hardware and software.
At the end of the day, “pursuing an integrated hardware-software model in which we offer hardware as well as software provides us with more options in the video game industry in terms of surprising consumers.” Iwata reconfirmed that Nintendo will soon house a new building at its headquarters to allow for its hardware and software developers to work more closely developer, and Iwata hopes he will be able to “demonstrate more clearly the synergy effect that comes from developing both hardware and software.”
Read Iwata’s full comments below.
In talking about the benefits of pursuing an integrated hardware-software business model, the most important element of any entertainment offering is its ability to surprise and convince consumers that they have never experienced such a new, unique and entertaining proposition, and when we do succeed in making such offers, they achieve market penetration on an explosive scale. The key point is that pursuing an integrated hardware-software model in which we offer hardware as well as software provides us with more options in the video game industry in terms of surprising consumers. As the number of developers has increased beyond the capacity of our corporate headquarters, it has become a bit difficult for our hardware and software developers to work closely with each other for some recent years. However, we will soon have a new dedicated building at our headquarters for development which will enable our hardware and software development teams to work very closely in one building, through which I hope to demonstrate more clearly the synergy effect that comes from developing both hardware and software. As I explained earlier, we will make an effort to take advantage of smart devices and create an application that draws consumer attention, but since we will have no hardware in our arsenal to surprise consumers, we will use our strengths and imagination, and try something completely new. So, I am not claiming that Nintendo is unable to do anything without making its own hardware. However, as Mr. Takeda said earlier, I believe that combining software and hardware will “amplify” our strengths, and this becomes an advantage in the entertainment industry. The type of competition that exists in most industries requires one to respond to known needs of the consumers that consumers themselves are aware of, which, however is not the case in the entertainment industry. Entertainment flourishes when consumers are faced with something that they did not know that they wanted, so it is my view that the entertainment industry is slightly different from others in the sense that the more resources we have in order to surprise people, the more competitive we are.
Given that the company is not currently running at a profit, I find it unpersuasive to define our targeted business size by, for example, giving a concrete figure for the operating profit, so I will not give a number to what I perceive to be the right business size for Nintendo. Our software business alone could achieve that business size in, say, one or two years if we are fortunate enough to have some hit titles. However, it has been 30 years since Nintendo started its business of dedicated video game systems, and if I want to maintain that size for the next 10, 20 or 30 years, leading a software-only business would only put us at a big disadvantage, which is another reason why we insist on our integrated hardware-software model. On the other hand, the integrated hardware-software model has a significant handicap today, as the traditional way of explicitly telling consumers the investment they need to put in to buy hardware and software now comes across as being relatively more expensive due to changes in our environment. Although people may actually be spending more money (to play games on other devices not dedicated to video games), it is less visible, so the hurdle we have to clear in order to encourage them to purchase dedicated game systems has comparatively become higher. As with games that are free-to-play, or “free-to-start” as we like to call it, there is a tendency within the entertainment industry to make gaming as easy as possible to start playing. Because our hardware and software are integrated, we first need consumers to purchase our hardware to get our business off the ground, a challenge I outlined when I talked about changing the way we sell our products. Our mid-term goal would be to give an answer to this question in a way that had never been seen before.
I do not think that hardware-software integration is equivalent to making people smile, and I do not intend to say that making games on smart devices will not lead to putting smiles on people’s faces. There are games on smart devices that are indeed making consumers smile, I think.
However, only two years ago, many people urged Nintendo to follow other companies into what was then a very lucrative area, but no one says so any longer. In a similar vein, those who now claim that we should make games for smart devices might or might not be saying so in three years. It is our determination for our mid-term future to make efforts to devise our own solutions different from others.
