As we wrap up looking at Nintendo’s financial results briefing, we take a look at the last and most important details that Iwata covers in the financial results briefing. Those details are Nintendo’s expanding their business into digital distribution of retail titles.

As most of us know, Nintendo has been really hesitant about digital distribution of major retail titles. They did have some success with the eShop and WiiWare, but they have finally realized that it may not be enough. Iwata points out that 70% of the handhelds that have been sold in the US and Japan markets are connected to the internet, the highest among all the handheld systems Nintendo has launched. As for the European and Australian markets only about 50% of the handhelds are connected to the internet, a number which Nintendo wants to improve on. These numbers are not one time visits however. The number of repeat visitors to the eShop has largely grown when in comparison to the previous platforms like the Wii and the DSi. The reason for repeat visits may differ from person to person, but I believe it might have to do with Nintendo putting its backlog of its classic games and games from other systems on the eShop. Another reason might be the various quality indie titles that are showing up on the eShop and have customers satisfied.  With this foundation, Nintendo believes it is ready to deploy the next step of its digital businesses.

The first title that will spearhead their initiative is New Super Mario Bros. 2 in August. When the game is released consumers will have a choice in if they want to buy the game in digital form or if they want to buy a retail box copy. If consumers choose to buy a digital copy, the game will be stored in their SD memory card and will only be playable on the 3DS it was downloaded on. This is somewhat like the method that Sony is using with the PS Vita, with the only difference is that the game is connected with the PSN account it was downloaded from.  Like the Vita, the downside of having a digital copy is that consumers will not be able to share the software with friends and family. On the other hand, the consumer will not have to worry about the physical copy of the game being out of stock, going to a retail store to buy a game or having to carry multiple games. They only have worry about having enough room in the SD card to hold the game.

Nintendo does realize however that digital distribution can be a double edged sword, in the sense that by eliminating the need to visit retailers (both brick & mortar and online) will force consumers to buy only from Nintendo, like how most digital models are. They see that it is the consumer in the end has to choose how they pay and download the game. With that Nintendo will allow consumers the ability to buy digital copies of the game at retail stores (brick & mortar and online).

The reason for this is to tear down the big hurdles that their expansion of their digital business and to expose digital products to potential customers.  As mentioned before, Iwata states that the connection ration of 3DS connected to the internet is higher than previous Nintendo handhelds and that the ratio of 3DS owners visiting the eShop frequently has also increased compared to the Wii and the DSi. But for these numbers is that these customers were proactive in going on eShop when games release and are aware of digital releases. So by allowing potential 3DS customers to buy digital versions of the games in store or online, this will increase awareness of digital versions of titles. But how will retailers benefit from selling digital versions of the game as well as its physical box copy? Iwata explains it as thus:

The lifespan of software is starting to become shorter. If retail outlets even have a small excess of inventory, this will cause a price breaks shortly after launch and will affect how retailers make purchase orders. If this somehow doesn’t make sense, let me put this in another way. I used to work at a Game Crazy and one of our requirements was to get as many confirmed pre-orders as we can. What I mean by confirmed pre-orders is that the customer not only makes a pre-order, but actually comes by the store and buys the game. Pre-orders dictate how many copies of a game that the game buyer of has to allocate to our store. The more pre-orders we get, the more copies of the game we will receive. But if we have a leftover amount of games that were not picked up, the game buyer and the regional manager will take that into consideration when allocating new product to the store. This meant that until we sold our allotted stock, we will either miss out on the next potential big seller or get a smaller amount of games. This can hurt stores’ bottom line and will cause a limited amount of product offered. By having retailers participate in this form of distribution proposed by Nintendo, this will prevent losses due to excess inventory and lost sales due to being out of stock.

This also helps retailers who use POSA (Point Of Sales Activation) technology.  Similar to pre-paid cards, retailers can have software exchange codes with no value and when a consumer buys the game, it can be activated at the register. Retailers won’t have to purchase the software until the actual sale has occurred, thus saving floor space for other products and they won’t have to worry about being sold out of product.

Now to talk about pricing of the digital products. This will be the first time that the Nintendo eShop will be offered in other sales channels. Before this, it was never offered so all the price points were virtually fixed on all of the software. Now that retailers will be also dealing with selling digital software, Nintendo is going to ask them to decide the price points, just like they do with their physical games. Now depending on the retailer this could potentially have stores start pricing wars with each other, thus making it a win-win situation for both consumers and retailers. A win for consumers in that they now have a wide range of retailers to choose from to save money, and a win for retailers for the influx of consumers that will be going to them since they have a low price compared to their competitors.

To give a visual representation what Nintendo has planned for the following chart is the common digital product distribution that is the standard business model when selling digital software:

And in this graphic, this is what Nintendo is proposing to retailers:

 

This new distribution method will also be applied to Wii U software in addition to 3DS software, and both digital versions of Wii U and 3DS games will be available on the same day that physical copies are released.

In closing Iwata makes it clear that there is a big difference between digital software and digital add on content and when it comes to making retail software available digitally, they intend to make sure that they does not offer any products that consumers deem incomplete (this obviously a shot to Capcom and possibly EA). He also states that they sell add on content so that consumers can play a game “on a deeper level and when we sell this add on content that we are making a proposal to consumers to pay for the content that our developers have additionally created”. In other words Nintendo will not adapt a gotcha-type charging business (capsule toy) model. This model asks for customers to pay for content without knowing what they will be getting once they pay.

In my opinion, the new digital distribution model Nintendo is proposing, if done the way that they planned, will be a game changer when it comes to pricing digitally distributed software. For the first time, digital copies of games will be available the same day physical copies hit stores. This will for sure increase software sales of the 3DS and the Wii U when it finally comes to market. By also having retailers selling the download codes to consumers in addition to physical copies, this will help retailers avoid problems such as overstocking and running out of stock. In addition consumers will have greater options when it comes to buying their games, be it physical or digital. If Nintendo can enact all of what they laid out in the financial briefing, not only will they be back in the black, but they will have possibly influenced how digital distribution of retail software will be done in the years to come. As E3 is a month away, it will be interesting to see how developers will react to Nintendo’s plans to revolutionize digital pricing.

Source: Nintendo April 27 2012