Nintendo 2005 Annual Report Download - page 39

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Nintendo Co., Ltd. and consolidated subsidiaries
•Competition in the market
In the video game industry, it may become even more difficult to generate profit as more research and development expenses
and marketing expenses are required, and as price competition intensifies with giant enterprises entering into the market. As
an outcome, Nintendo may find difficulty in maintaining or expanding its market share as well as sustaining profitability.
•Overseas business expansion and international activities
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 ①unpredicted amendments to laws or regulations, ②
emergence of political or economic factors that prove to be a disadvantage, ③inconsistency of multilateral taxation systems
and diversity of tax law interpretation leading to a disadvantaged position, ④difficulty of recruiting and securing human
resources, ⑤social disruption resulting from terrorist attacks, war, and other events.
•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, these manufacturers may not adequately provide significant components or
products. In addition, in periods of high demand, certain manufacturers may not have the capacity to provide the ordered
amount of components. A shortage 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.
•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. Should the Company fail to meet the period of high demand in any of its business activities, including but not
restricted to the launch of attractive new products and supplying hardware, it would suffer unfavorable operating performance.
(3) Risks around legal restriction and litigation
•Product liability
Nintendo products are manufactured based on quality control standards accepted in each worldwide region. If defective
products are discovered, it would lead to a large-scale return request in the future. In addition, defective products that require
product liability compensations would create additional costs and leave Nintendo with an unfavorable reputation, adversely
affecting its future performance and financial position.
•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 currently circulating in the market, violating Nintendo’s
intellectual property rights. In the future, it may not be possible to fully protect its intellectual property rights.
•Administration of personal information and confidential information
Nintendo possesses personal information through its online membership service. If such information or other confidential
information pertaining to product development and business operation were to leak or be misapplied, Nintendo’s future
performance and financial position would be adversely affected.
•Change in accounting standards and taxation system
Unforeseeable changes in accounting standards or taxation system may possibly affect Nintendo’s future performance and
financial position. Furthermore, conflict of views between Nintendo and the tax authorities may cause additional tax obligation.
•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 performance.
(4) Other risks
Other than set forth above, factors such as uncollectibility of trade accounts receivable and notes receivable, failure of
financial institutions, and restrictions regarding environmental protection may adversely affect Nintendo’s future performance
and financial position.
Analysis of Operations and Financial Review