M+E Daily

by Terence Keegan

Nintendo plans to market downloads of video games for its 3DS handheld system day-and-date with packaged media versions beginning in August, as the company redoubles its efforts to establish a digital distribution business to rival those of Sony and Microsoft.

Nintendo president Satoru Iwata outlined his company’s digital distribution initiatives in an investor presentation on Friday, following the disclosure of the company’s first-ever annual loss (via The Guardian).

The company also aims to have digital distribution in place for the launch of its Wii U console later this year. Iwata offered details on how Nintendo plans to enlist third-party game retailers as marketing partners for game downloads.

Gamers ultimately will have to download software from Nintendo’s own eShop, which will be accessible via Internet-connected game systems. But Nintendo’s retail partners will be able to run the same sorts of discounts and promotions on download codes for titles that they do with packaged media, Iwata said.

“When it comes to the digital download software that our retailers are going to deal with,” said Iwata, “just as they do so for our packaged software, we will ask them to decide the price points.”

The executive added that third-party retailers play a crucial marketing role in launching new Nintendo games.

“Nintendo’s basic strategy is to expand the gaming population,” Iwata said. “We would like as many people as possible, regardless of age, gender, and game play experience, to have access to our product messages.

“From that perspective,” he continued, “for our digital business to grow drastically, it is imperative for us to expand the exposure of the digital download products to potential consumers.”

Elimination of Inventory Risk

Using Nintendo’s “point of sales activation” (POSA) technology, retailers can stock download codes “without any inventory value,” Iwata said. The retailer’s purchase from Nintendo, he said, “is realized when a consumer buys the software and activates the software exchange code through a POS register.” Hence, retailers “do not have to stock [digital] inventory until the actual sale occurs, which further increases the advantages of this distribution system.”

Downloads Preclude Pass-Alongs, Pre-Owned Market

Iwata also noted that download versions of 3DS games will be different in one key aspect from their physical counterparts: the software will be nontransferable between users.

“The digitally downloaded software will be stored in the consumer’s SD memory card and be playable only with the hardware to which it was downloaded so that, unlike how you can share the packaged software which are stored in game card format, the consumer cannot share the software with other Nintendo 3DS systems owned by other members of the family or friends,” Iwata said.

The nontransferable nature of the downloaded software will preclude the development of a used market for digital copies. Pre-owned discs are a lucrative business for third party video game retailers, and a source of vexation for publishers, which profit only from the first sale of software. Nintendo’s digital initiative represents an attempt to tip the dynamics of distribution further in its favor: while retailers are essentially paid to help market the title, Nintendo retains control over the end transactions with consumers.

Nintendo’s move finds some parallels with the video business, where studios are hoping to redefine retail with cloud-based services such as UltraViolet. But as UltraViolet marketers have recently discovered in trying to sell consumers on a more nuanced concept of a “digital copy,” there is potential for consumer pushback.

For video game consumers, a disc’s trade in value has long helped offset the cost of new titles. But the lack of transferability will not lead to any price discrepancy between downloads and discs — at least from Nintendo’s standpoint.

“In terms of the fact that the company is offering the value of the software itself, we do not have an idea to act on such a belief as, ‘digital download software should be sold at a cheaper price point than the packaged software counterpart,'” Iwata said. “In terms of the Japanese ‘maker’s suggested retail price,’ in principle we intend to set the same maker’s suggested retail price point for a software title.”

Though he did not address the elimination of a pre-owned market directly, Iwata claimed that consumers already appreciate that “the packaged and the digital download formats both have their own merits.

“Nintendo,” Iwata added, “will ensure to properly explain to consumers the different merits associated with the packaged software and the digital download software so that they can make the purchase decision they prefer.”