Nintendo or: How I learned to stop worrying and love the internet

Nintendo is a remarkable company for a number of reasons. It is one of the games industry's oldest companies, for example, as well as one of its largest, and certainly one of its most consistent innovators. It is also arguably the only major publisher in the entire industry that openly talks about downloadable "add-on" content as if it's a new idea.

While its competitors are refining their DLC strategies, making it a fluid part of the production pipeline and gaining a clearer understanding of the sort of post-launch content consumers respond to, Satoru Iwata still refers to it the concept like a biologist would some rare exotic bird.

In a recent call with investors, Nintendo's CEO discussed the potential new strategy of, "supplying new stages to Super Mario users who want to play the game more but have completed the game and lost interest in the existing stages."

"This will not only give us new profits but will lengthen the life of a product," he continues, "in that it will never be out of fashion and can keep attracting public attention as long as many people play it."

It is hard to know if this sort of talk will ease the minds of Nintendo's investors, who were keen to know more about the company's short-term strategy following the publication of its financial results for the nine-month period ending December 2011.

After all, a net loss of $623 million on sales of $7.1 billion is hardly cause for celebration, and while the appreciation of the Yen is a significant problem for all Japanese companies with strong international trade, Iwata has an enviable track record of facing up to Nintendo's shortcomings.

"I am not saying that we cannot help going into the red," he explained of the impact of the Yen. "Naturally, we have to find ways to gain profits even with such changes. It is clear that, however, in the next fiscal year, the sales of Nintendo 3DS hardware will not give us much profit even if we will be able to cease selling it below cost."

To the views that Nintendo is cautious, conservative, or even negative about business on a network, we will make a bold attempt when the time is ripe

Satoru Iwata

"It means that we need to make it with the software sales. There are two methods to gain profits from software: one is to sell as many units of a product as possible with fixed development and marketing costs; the other is to get as much money from a product as possible, or to increase the ARPU [Average revenue Per User] you mentioned."

In the first category, Nintendo already seems to be making progress, with Super Mario 3D Land and Mario Kart 7 pushing the much-maligned 3DS to lifetime sales of more than 15 million. The second category is more problematic, and directly relates to what many regard as the company's single biggest weakness: its apparent reluctance to engage with the internet as a venue for business.

When questioned about Nintendo's plans to implement a "unique payment system" to more effectively monetise its online services, Iwata offered the reassurance that, "Nintendo has been making its best efforts to raise the Internet-connection ratio for years." However, despite reinforcing the 3DS's current 60 per cent connection ratio with some pride, the details of its roadmap remain indistinct. Despite redefining the commercial games business with the Wii and DS, Nintendo is now preaching a doctrine of caution. "One of our reflections on why we could not bring our network business up to the level we had anticipated is that each step consumers had to take was not simple enough," Iwata obeserved. "It is said that with each extra step, the number of consumers drops by one-tenth. Our challenge is how to improve such steps one by one."

"To the views that Nintendo is cautious, conservative, or even negative about business on a network, our answer is, in short, that we will make a bold attempt when the time is ripe. Unless the timing is right, we will lose the consumers who do not have an Internet connection."

"We have not gone so far yet because our developers have a belief that our products should be available to as many people as possible. However, now that the network connection ratio for the Nintendo 3DS is much higher than the past handheld systems...we have a strong impression that the foundation for business on a network for us to take on various challenges on it has been steadily put into place today."

The notion that Nintendo would "lose" non-connected consumers outright simply by having a robust online service for those that are is open to question, but Iwata made no bones about one detail: Nintendo already has the infrastructure to distribute digital versions of its packaged games, and on exactly the same scale. "We can start it as soon as we decide to do so." he added.

And the requirements of third parties will not be ignored, either. Iwata was quizzed several times on Nintendo's view of micro-transactions as a viable revenue stream for its platforms, and while first-party enthusiasm is somewhat tempered on the grounds of brand identity, third-party developers will not be prevented from implementing new business models.

"It would be better to present third-party developers with as much freedom as possible... We plan to ensure a relative level of flexibility for the Nintendo 3DS and the Wii U software compatible with the Nintendo Network as long as the developer has built a trusting relationship with consumers, except for the cases that consumers will be too disadvantaged."

"If third-party developers would like to adopt this form of micro-transaction, and if this kind of business relationship between the developers and consumers is commonly accepted in Japan, we have no intention to decline it."