Nintendo 2004 Annual Report Download - page 38

Analysis of Operations and Financial Review
(5) Development of New Products
Although Nintendo continues to develop innovative and appealing products, in the field of computer entertainment, the
development process is complicated and includes many uncertainties. Various risks involved are as follows:
① Despite the substantial costs and time needed for software development, there is no guarantee that all new products will be
accepted by consumers due to ever shifting consumer preferences. As a result, development of certain products may be
suspended or aborted.
② Hardware requires a long term development span. On the other hand, while technological advancements occur continuously,
the possibility of inability to acquire the adequate technology which can be utilized in entertainment exists. Furthermore, in
the case of a delayed launch, it is possible that market share cannot be secured.
③ Due to the nature of Nintendo products, actual development and distribution may significantly differ from initial projections.
(6) Competition in the Market
In the video game industry, it may become even more difficult to generate profit as more research and development fees and
marketing expenses are demanded at the same time that price competition intensifies with giant enterprises competing in the
video game market. As an outcome, Nintendo may find difficulty in maintaining or expanding its market share as well as
sustaining profitability.
(7) Product Valuation and Adequate Inventory Securement
Short product life cycles and sharp increases in demand around the holiday season characterize the video game market.
Although, production is targeted at the equilibrium point of supply and demand, accurate projections are extremely difficult to
obtain, which may lead to the risk of excessive inventory. In addition, inventory obsolescence could have an adverse effect on
Nintendo’s operations and financial situation.
(8) International Activities and Overseas Business Expansion
Nintendo engages in business in territories other than Japan; they include The United States, Europe, Australia, and Asia.
Expansion of business to these overseas markets involve risks such as ① unpredicted amendments of law or regulations, ②
emergence of political or economical factors that prove to be a disadvantage, ③ inconsistency of multilateral taxation systems
and diversity of tax law interpretation leading to a disadvantaged position, ④ difficulty of recruiting and securing human
resources, ⑤ social disruption resulting from terrorist attacks, war, and other factors.
(9) Dependency on Outside Manufacturers
Nintendo commissions a number of certain outside manufacturers to produce key components or assemble finished products. In
the event of their commercial failure, significant components or products may not be adequately provided. In addition, in
periods of high demand, certain manufacturers may not have the capacity to provide the ordered amount of components. The
lack of key components could lead to issues such as high pricing, insufficient supply, and quality control. This may impair the
relationship between Nintendo and its customers.
(10) Limitations of Protecting Intellectual Property
Through the years, Nintendo has built up a variety of intellectual properties that can clearly be differentiated from other
products in the market. In certain territories, counterfeit products are already circulating in the market, violating Nintendo’s
intellectual property rights. In the future, it may not be possible to fully protect its intellectual property.
(11) Defective Products
Nintendo products are manufactured based on quality control standards accepted in each worldwide region. Although, in the
future, defective products may be discovered leading to a large-scale return request. In addition, defective products that require
product liability compensation would create additional costs and leave Nintendo with an unfavorable reputation, adversely
affecting its future performance and financial position.
(12) Litigation
Nintendo may be subject to litigation, disputes, or other legal proceedings relating to its domestic and overseas operations
which could have an adverse effect on its business.
(13) Business Operations Affected by Seasonal Fluctuation
Since a major portion of demand is focused around the holiday season, Nintendo is subject to the impact of seasonal
fluctuations. If the launch of key titles were to miss the period of high demand, it would have an adverse effect on Nintendo’s
business performance.
(14) Administration of Personal Information
Nintendo possesses personal information through its online membership service. If this information were to leak, it would
adversely effect its future performance and financial position.
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Nintendo Co., Ltd. and consolidated subsidiaries