Nintendo: Free-to-play is hurting our hardware business

President Satoru Iwata says it's now more difficult to convince gamers to buy hardware.

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The free-to-play genre is growing and growing, with shining examples like League of Legends and DOTA 2, but the business model is not adored by all. Nintendo president Satoru Iwata recently commented that free-to-play is actually hurting the company's hardware business because it means the Japanese game giant must work even harder to convince gamers to buy a 3DS or Wii U.

"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," Iwata said during last week's Q&A with investors. The English translation of the briefing was published today.

Iwata further explained that Nintendo's longstanding hardware-software model is suffering through a "significant handicap" today because it is increasingly difficult to communicate the value of its hardware when free-to-play offerings have become so commonplace.

"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," Iwata said.

"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," he added. "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."

Overall, Iwata said Nintendo is not interested in trying to replicate a business strategy employed by other companies.

"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," Iwata said. "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."

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Nintendo might be in the minority by thinking this way, but blazing its own trail has proven fruitful for the company before. You need only look at the industry-shaking original Wii for evidence of that. The console introduced motion controls and had sold over 100 million units to date, millions more than the Xbox 360 or PlayStation 3.

Also during the investor Q&A, Iwata and other senior management addressed the shortcomings of the Wii U so far. Iwata said it is "not realistic" to hope that the Wii U will sell 100 million units during the same product cycle as the Wii. However, he also said it is "never too late" to achieve a "certain level of sales volume" with the platform if it can execute its strategy to turn things around.

Shigeru Miyamoto, creator of Mario and Zelda and senior managing director at Nintendo, did not hold back when discussing the Wii U's poor sales performance so far.

"Our biggest downfall last year was that we failed to communicate the true value of Wii U, failed to make children persuade their parents to buy our products for them, and failed to offer products that parents could not resist," he said.

Miyamoto said Nintendo can right the ship by making more games that better utilize the Wii U GamePad and by improving the user experience overall by speeding up the amount of time it takes to load a game. Nintendo is currently working on a patch that will do this, he said.

Finally, Miyamoto suggested that more remakes of older games might be on the way for Wii U. He also said that speeding up and streamlining the development process across the board will help Nintendo avoid the "huge bottleneck" it's been facing of late.

"Although we have recreated some of our past games for Wii U, we are actually trying to use many outside developers to help us do so, while we focus our internal resources on making new games," Miyamoto said. "I feel confident that we have made a significant improvement in this regard. Moreover, we are trying to cut down the time it takes to create a suitable development environment as it has proven to be a huge bottleneck, and we are continuing to make improvements in this area across the whole company, too. I think that we will be able to smoothly carry out the process of upgrading Nintendo franchises and offering them to our consumers in a stable fashion on future systems."

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