Q&A: Nintendo of America chief on game industry competition

Reggie Fils-Aime is sitting pretty. The president of Nintendo of America has the two hottest-selling game systems: the Nintendo Wii and the Nintendo DS. Today, he introduced the new DSi model, which has two digital cameras, music playback and flash memory storage. That model will likely widen Nintendo’s lead over second-place Sony in game portables. You can’t get a stronger hand than this as the crucial fall selling season approaches. Not so long ago, before the “Regginator” joined Nintendo in 2003, Nintendo was the underdog in the console war.

VB: How important is digital downloading to the new Nintendo DSi handheld?

RF-A: It’s a nice added business model but it’s not something that’s going to take over retail game sales. We’ll be able to see the sales growth and plan for it. But I guess similar to home consoles, the consumer will want an experience that’s best delivered through physical goods, simply because of the memory size required. There will always be those opportunities for big, in-depth games on retail products.

VB: You didn’t disclose the amount of flash memory that will be in the DSi model.

RF-A: And I won’t in this conversation. (Laughs).

VB: I suppose you wait for the best price you can get on the largest amount of memory and then drop it into the design at the last second.

RF-A: Exactly.

VB: Is that one of the harder decisions for a new model?

RF-A: On memory size? It is. It’s based on cost, performance, reliability. Those are a number of things that you touched on in your Xbox 360 article, in terms of how you create a hardware platform that really delivers against the consumer’s expectations of quality.

VB: You brought up our article on the Xbox 360 defects. How has Nintendo managed to escape the defect problem that Microsoft ran into?

RF-A: Simply put, we take product quality extremely seriously. We test our hardware and software extensively before putting it in the market. We have a very low tolerance for issues. When we do have them, our customer service personnel are extremely good at managing the consumer reactions. In the end, we don’t believe in launching any type of product if it isn’t perfect in our eyes.

VB: And that has turned out to be an advantage in this generation of consoles?

RF-A: It has turned out to be an advantage in this generation and past ones. The consumer perception of our product quality is high. We will only launch our products when they are perfect or nearly perfect.

VB: If that’s where you’re careful, where do you see Nintendo taking the most risks?

RF-A: We as a company take the most risks in pushing the boundaries on consumer expectations. [Think of] when Mr. (Satoru) Iwata (chief executive of Nintendo) held up the Wii remote and said this is the game controller of the future. Think of the day when we said the next handheld will have two screens, including a touch screen; it will have voice activation and all new types of games. Now we’ve said our handheld’s next iteration will have two cameras and sound that you can manipulate. That’s how we take our risks and push the boundaries of what defines a gaming experience.

VB: There’s always risk in how much inventory you decide to create. It looks, by the way you’ve set up the schedule for launching the Nintendo DSi in different territories, that you’re being careful to make sure Japan has enough units before you move to the U.S.

RF-A: In this case, that’s part of the reason. The other part is there’s an extremely high level of demand for the current Nintendo DS Lite. Here in the Americas, we need to satisfy that demand before moving on to the next iteration. That’s especially true going into the holiday selling period when 40 to 50 percent of the annual sales will happen.

VB: That means Japan is more saturated with the DS Lite than the U.S.?

RF-A: That’s correct. A side benefit is that there’ll be more software optimized for the new device when it launches in the U.S.

VB: On the Wii, the Wii MotionPlus technology will make aiming more accurate when it debuts next year. There are a lot of startups out there with technologies that promise to go much further. 3DV Systems has a depth camera where you wave your arms around and you don’t need a controller at all to control a game. Why didn’t Nintendo go further than it did?

RF-A: Wii MotionPlus is a great example of our approach to new technology. We were aware of that technology (the gryoscopic chips made by Invensense) at the time we designed the original Wii. But the cost would have been too high for the business model. It would have been unacceptable. By waiting about three years, the costs come down substantially and it becomes a viable product. So, for a number of the startups that you describe, there is very advanced technology. But it’s not at a point where there’s a consumer proposition.

VB: The risk is someone takes the technology and tries to one-up Nintendo on the user-interface for gaming?

RF-A: It all depends on the execution.

VB: Do you think your upcoming hardcore games will answer complaints people had a few months ago at E3 about Nintendo ignoring hardcore gamers?

RF-A: The gaming enthusiast that buys a tremendous amount of games is truly insatiable. As an example, in March, we launched “Super Smash Bros. Brawl.” In April, we launched “Mario Kart.” In later April, we launched “Wii Fit.” Then, in July, at E3, they say, “where are the games?” They say they want the next Mario game. “Super Mario Galaxy” isn’t even a year old yet. We believe today that we have shown a plethora of games and genres that can satisfy the most casual to the most core. Even that doesn’t seem like it’s enough.

VB: The shooting games are starting to appear. That looks like one of the things that’s been held up by the lack of accuracy of the Wii remote.

RF-A: The shooting function is highly accurate. I would say that the lack of titles to date has been a lack of development focus on that genre. Look at “Metroid Prime 3″ and that was certainly responsive.

VB: Some people have said you’re going after Apple with these new Nintendo DSi features. Is that true?

RF-A: We always viewed ourselves as competing in a larger entertainment space. It’s not just video games but music, movies, and TV. You, as a consumer, have 1,440 minutes in a day. You work, eat, sleep or go to school. All of the time that’s left is what we compete for. That’s always the way we looked at it.

VB: If you were going after Apple, I would have expected you to add MP3 music playback to the DSi (which only uses the AAC music format).

RF-A: We’re going for a sound experience where you can control the speed of the playback. That’s why we used that.

VB: If I look at all the startups in the game industry, there’s a lot of innovation on the fringes. There are the free-to-play games in Korea coming to the U.S. Being in the core console business, what do you think of these innovations?

RF-A: We love experimentation. That’s where the gold nuggets come from. Last year, (Shigeru) Miyamoto (Nintendo’s game design chief) said he’d been playing around with the Miis (Nintendo’s cartoon avatar characters) for years. Finally, he brought it to life in a way that was provocative for gamers with the Wii. Experimentation leads to the mother lode of great ideas.

VB: Some of these games like “Wii Music” look so simple. Why do they take so long to make?

RF-A: What’s powerful in Wii Music is this juxtaposition of something that looks so simple but is wonderfully difficult to master. We may have done that title an injustice at E3 by showing something that looked so easy. We made it appear too simple. Now we’re showing the tremendous variety of instruments and tones and how challenging it is to make music that sounds good. We don’t publicly talk about sales targets but our expectation is it will be one of our top sellers.

VB: How did you view Microsoft’s price cut for the Xbox 360?

RF-A: They’re trying to get their consumer value proposition in line. Today, I have no need to adjust my prices. Consumers are voting with their wallets and pocketbooks. The Wii and DS are tremendous values.

VB: With the introduction of the DSi, it looks like you’re not really waiting for things to slow down before you move on. If DS sales slowed, it would make sense to introduce a new model. That slowdown hasn’t happened, though, so why introduce a new model?

RF-A: Nintendo has a legacy of constantly updating the system. If you look at handhelds, we had the original GameBoy, the GameBoy Color, the GameBoy Micro, the GameBoy SP, and the DS. That’s a way to keep consumers happy and to drive ongoing creativity. It’s also a great way to increase competitive pressure.

VB: So by that logic, some people are guessing that the next Wii will show up in 2011. You’re in the lead. You have no reason to introduce a new machine. But maybe you’ll keep up the competitive pressure?

RF-A: It’s pure rumor and speculation. I find it disappointing that it’s being reported as fact by a number of online outlets.

VB: They’re saying you’ve shown a prototype to the industry and asked them what they think of it. Is that the way people would find out about your plans?

RF-A: It’s not the way they would find out.

VB: If you look back on how much progress you’ve made since the last generation, what comes to mind? You’ve had an astonishing turnaround.

RF-A: I wasn’t part of the company more than five years ago. Those experiences during the N64 generation — I saw those as a consumer looking in versus an executive looking out. What I do see is that Nintendo as a company has always tried to deliver on bringing gaming back to the masses. In this generation, we did a better job of having the software, interface, and price point to bring it all to life. What’s great was the Nintendo DS gave us some of the insight and confidence to execute the Wii the way we did. Now our challenge is how do we continue our mantra of bringing gaming to the masses.

VB: What is the latest evidence that shows that’s happening?

RF-A: We have consumer data that validates that we’ve expanded the market, that we’re getting consumers to play with our systems. These are people that never considered video games before. For me, when someone sees the Nintendo tag on my bag, they react with enthusiasm. I never played video games for a long time. But I love the Wii. I love Wii Fit. I love Mario Kart. I love Wii Sports. I love Guitar Hero on the Wii. To me, that’s the personal side of how we have expanded the market.

VB: What’s the next frontier to cross?

RF-A: For us, it’s always about doing more. In the Americas, we’ve been fortunate to have very strong momentum on our Wii and our DS business. And yet, I can look to Japan and see they have frankly done a much better job on the DS than we have. Our internal challenge is to match the progress in Japan. I look at what we’ve done with the Wii in Canada. If we could do that here, it would be dramatically higher than where we are today. How do I make that happen? We’re always looking for the best in class and to apply that to our business. We are in uncharted territories overall in terms of popularity.

VB: Will the weak economy hurt you?

RF-A: This is a challenging macro-economic problem. If you look at history, the video game market hasn’t suffered terribly during recessions. It’s because consumers view our products as strong values. A $50 piece of software that you can play forever is inexpensive compared to taking a family of four out to a movie. Having said that, if the market continues its turmoil, if unemployment increases, we could be in something worse than a recession. At that point, all bets are off.  We are competitive with other entertainment choices. But we depend on consumers having discretionary dollars.

VB: There’s a long gap between when you introduce this in Japan on Nov. 1 and when you’ll introduce it sometime next year in the U.S. Do you worry that sales for the current DS will dry up in the U.S. in the meantime?

RF-A: I’m a constant worrier. Our mission is to help the potential new DS consumer understand that, given the experiences that are coming out, like the new “Pokemon Ranger,” there’s no reason to wait to buy into the hardware. The consumer can see that in Japan, the DSi will launch at a higher price than the current DS there. The consumer here can read into that. The most affordable option will be the current DS Lite.

VB: If sales for the current DS do fall off, you can lower the price.

RF-A: There’s always a range of options. We feel that DS Lite at $129 is a fantastic consumer value today.

VB: All year long, venture capitalists have been piling into the game industry like I’ve never seen before. Twice a week, I’ve seen new game companies come out of stealth. It could intensify now because everything else is going to hell and games are growing 30 percent plus this year. How do you look at that? Is this going to end? Or is it perfectly logical it will continue?

RF-A: It’s tough to comment across the whole industry at 50,000 feet. What we’ve seen is that it’s the power of the idea and the power of the creator — not how much money it takes to build a game. I’m somewhat concerned that some believe that if you invest a lot of money in a piece of software, that alone will make it great. We’ve been clear that “Brain Age,” which has sold more than 22 million units through last March, was built with a very small team on a small budget. It’s not about the dollars.

VB: This could be a good thing if the game developers create for your platforms?

RF-A: Sure. During the Internet boom, some companies took pride in how much cash they were burning through each week. It’s not a great thing. I hope the dollars are following great ideas.

VB: Microsoft’s first-party internal development has deteriorated this year. What’s your trend on hiring game developers?

RF-A: You’re referring to the fact that they’re closing studios. Our first-party is doing great. Our staffing has increased. We certainly have a wealth of projects. The Mario team is hard at work. The Zelda team is hard at work. There is a new Pikmin coming.

VB: “The Grand Theft Auto Chinatown Wars” title coming from Take-Two Interactive for the DS has the anti-violence and anti-drug activists concerned. “Mad World” is coming for the Wii. The argument goes that kids play the DS and the Wii more, so these titles could fall into the hands of kids.

RF-A: The starting proposition is incorrect. We’ve sold almost 80 million DS units worldwide and almost 30 million Wiis. That has a broad demographic range. There are a lot of 18 and older consumers to sell to. The Wii also has parental controls. If you’re a parent of young children, you can set the parental controls so that the mature-rated games won’t play. We want to focus on everything across all of the ratings.

VB: Is it a strategic goal to have more mature titles?

RF-A: Our strategic goal is to have a range of titles and to have the best software available.

VB: You’re in a good spot.

RF-A: That makes us proud. But it also makes us the most paranoid people in the world.