Team Finland Future Watch Report: Further research on game market in Japan

Further Research onGame Market in Japan

Organization MembersResearch and Consulting Division,Japan Research Institute

2-18-1 Higashi-gotanda, Shinagawa-kuTokyo 141-0022 JAPANPHONE:+81-3-6833-0900FAX:+81-3-6833-9480

Project LeaderKoji YAMAURA (Associate Senior Consultant)yamaurakoji@jricojp +81-3-6833-5369

AdviserHideyuki ASAKAWA (Senior Consultant)asakawahideyuki@jricojp+81-3-6833-2815

Project MembersYohei KOTAKE (Consultant)kotakeyohei@jricojp +81-3-6833-6333Yuki KUWABARA (Consultant)[email protected] +81-3-6833-6587

AssistantTakako IMAI (Assistant)[email protected] +81-3-6833-1562

Contact information

Tekes – the Finnish Funding Agency for Innovation

Tekes is the main public funding organisation for research, development and innovation in Finland.Tekes funds wide-ranging innovation activities in research communities, industry and service sectorsand especially promotes cooperative and risk-intensive projects. Tekes’ current strategy puts strongemphasis on growth seeking SMEs.

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JapaneseGamingMarketOverview

The gaming market size in Japan isabout € 5,712 M and accounts for 13 %of the global market.

The personal expenditure for game inJapan is about € 44.69, which is nearlytwo times higher than the other regionsat least.

In Japan, the feature phone gamingmarket accounts for about 45% of thewhole market, but there is a possibilityto shrink rapidly in the future due to thespread of smartphone.

The smartphone gaming market isgrowing rapidly and is expected to bethe largest market in Japanese gamingmarket in the future.

[Figure] Market Overview

(Source) The Japan Research Institute summarized from public information

Positioning of Japanese gaming market

Japan,€5,712M,

14%

NorthAmerica,

€13,623M,33%

Europe,€12,911M,

31%

China, India,Korea,

€9,208M,22%

Gaming market by region (2011)

Personal expenditure for game (2011)44.69

25.7717.47

3.490.00

10.0020.0030.0040.0050.00

Japan NorthAmerica

Europe China,India, Korea

EUR

"Personal expenditure for game "= "Gaming market" / "Population"

2012 MarketSize (M€)

CompositionRatio

1,937 27.8% -1.3%

Feature phonegame

3,108 44.5% 55.7%　　 (*)

Smartphonegame

918 13.2% about300%

1,014 14.5% 1.1%

Type of game Growth Rate(y/y)

Home video game

Mobilephonegame

PC online game

* There is a possibility to shrink rapidly in the future due to the spread of smartphone.

Gaming Market by type of game in Japan

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Efforts of theJapaneseGovernment

There are various problems to besolved in the social gaming market andsmartphone gaming market, becausethe major company and business modelof two gaming markets are very differentfrom ones of home video gamingmarket.

Consumer Agency, METI ( Ministry ofEconomy, Trade and Industry ), MIC( Ministry of Internal Affairs andCommunications) have efforts forenvironmental arrangement, industrialpromotion and consumer protection.

The common point of the efforts ofMETI and MIC is that they try not to setpenalties for malicious company but toconstruct environment where users canselect safe apps and gamesthemselves. There are many foreigncompanies in smartphone and socialgaming market, and if the governmentset penalties for malicious foreigncompanies, it will be a little impact onthose companies, so they are forcusingon to construct environment for users.

[Figure] Efforts of the Japanese Government


Smartphone game and social game are provided on the Internet. When user playthem, they are always connected to the Internet

There are various problems about environmental improvement, consumerprotection and industrial development

The major company and business model of the two gaming markets are verydifferent from ones of home video gaming market

Efforts of the Japanese government

Agency: Consumer Affairs Agency, Government of JapanOverview efforts, Project name:The Regulations Banning "Complete Gacha" (2012/07)Purpose, Details:In order to prevent high demand by social game, it banned "CompleteGacha" which was the most popular billing system in social gamingmarket

Agency：Ministry of Economy, Trade and IndustryOverview efforts, Project name:Research study about development of Network-based gamingenvironmentPurpose, Details:Clarifying the problems of social game, Study about development ofenvironment where people can play the game safely

Agency: Ministry of Internal Affairs and CommunicationsOverview efforts, Project name:Construction of database and validation system of smartphone appsPurpose, Details:Construction of mechanism to inform user the evaluation result of safetyof smartphone apps, Construction of the environment where users canselect safe apps themselves

Protection ofconsumer

Businessenvironmentalarrangement,Industrialpromotion

Efforts1

Problems of social game and smartphone game

Efforts2

Efforts3

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Impact onthe GameIndustry inJapan bySmartphone

It was very difficult for feature phonegaming makers to enter home videogaming market and, on the contrary, itwas very difficult for home video gamingmakers to enter fearture phone gamingmarket.

Due to the spread of smartphone,structure of the game industry in Japanchanged as below.

[1] “Development environment” and“Operating terminal” of mobile phonegame changed significantly. These twoelements come closer to ones of homevideo game. “Developmentenvironment” changed to have highflexibility of development which meansthe makers are allowed to use manykinds of development languages andfunctions of mobile phone.

The interface of mobile phone turnedinto touch screen, this change enablesfor users to play game which requirescomplicated command.

[2] Due to the two changes, some gamemakers can release full-fledged gamesfor smartphone and some of the gamescan be released at a high price. "Users","User Needs" and "Business model"come closer to ones of home videogame.

[3] So it become easier for smartphonegaming makers to enter video gamingmarket and, on the contrary, it becomeeasier for home video gaming makers toenter smartphone gaming market.

[Figure] Change of business environment of mobile game by smartphone


Feature phone game Home video game

DevelopmentEnvironment

Low flexibility ofdevelopment

BusinessModel

Free-to-Play( itemcharging ( microtransaction ),advertisingrevenue)

Small screen, 12keyboard for one-handed operation,Low spec terminal

OperatingTerminal

User Needs Killing time,Enjoying easygame

Very casual userswhich want to playgame for free

Users


High flexibility ofdevelopment

BusinessModel

PackageSales( High price)

Big screen,Proprietarycontroller, Highspec terminal

OperatingTerminal

User Needs Enjoying full-fledged game

Casual users,Heavy users

Users

×[0]significant hurdleto market entry-> each marketsare independent

Smartphone game


High flexibility ofdevelopment

BusinessModel

Free-to-Play( itemcharging(micro transaction),advertising revenue),Package Sales( middle price)

Middle screen, Touch screen,High spec terminal

OperatingTerminal

User Needs Killing time, Enjoying full-fledged game

Very casual users ,Casualusers, Heavy users

Users

[1]Developmentenvironment andOperating terminalchange significantly

[2]These changeshave impact on"Users", "UserNeeds" and"Business model"

[3] It become easierfor the companies ineach market toenter each market

"BigWall"

5

“GalapagosPhenomenon”of HomeVideo GamingMarket

It is difficult for foreign gaming makersto enter the home video gaming marketin Japan. And it is difficult for Japanesegaming makers to enter the globalmarket too. These difficulties that called“Galapagos Phenomenon” arecomposed of the following factors.

1. Some popular games in Japan areproduced based on local cartoon films,local comics and local TV programs.

2. The needs of users in Japan are verydifferent from those of foreign users.

3. In Japan, portable games are morepopular than stationary games.

"Galapagos Phenomenon” will continuein the future, because factor-1 and 2won't change.

[Figure] Three factors of “Galapagos Phenomenon”


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Action ofSmartphoneGame Maker

Gung Ho translated its popularsmartphone game called "Puzzle &Dragons" into home video game called"Pazudora Z". It was released onDecember 12 and achieved one millionsales in three weeks.

Success factors of "Pazudora Z" arethat the company targeted childrenwhich don't have a smartphone andenabled user to play "Pazudora Z" forunlimited hours without waiting time.

Other smartphone gaming makersmight enter home video gaming marketmore aggressively because of thesuccess of "Pazudora Z".

JRI thinks that Gung Ho might releasethe cartoon films, comics and goods of"Puzzle & Dragons" such as “Pokemon”and the series of "Puzzle & Dragons"for home video game such as the seriesof “Final Fantasy”.

[Figure] Unit sales and Success factors of “Pazudora Z”


No. Ti tl e Release date Uni t sa les（ '000）

1 Pokemon X · Y 2013/10/12 3,977

2 Monster Hunter 4 2013/9/14 3,2933 Animal Crossing Tobidase 2012/11/8 1,7394 Tomodachi Collection : New Life 2013/4/8 1,5805 Dragon Quest VII - Warriors of Eden - 2013/2/7 1,205

6 Pazudora Z 2013/12/12 1,006

Total unit sales of "Pazudora Z"

The unit sales ranking 2013 of home video game in Japan"Pazudora Z" achieved one million sale in three weeks

"Pazudora Z" is located at the 6-positioneven though it was released in December

535

8071,006

1,158 1,197 1,228 1,250

0200400600800

1,0001,2001,400

12/09-12/15

12/16-12/22

12/23-12/29

12/23-1/5

1/6-1/12

1/13-1/19

1/20-1/26

Thousand Unit

Success factor of "Pazudora Z"The company targeted children which don't have a smartphone-> Strengthening of RPG elements-> Eliminating item billing function in order to enable parents to givetheir children the game with ease

User can play "Pazudora Z" for unlimited hours without waiting time-> Users who feel the stress to "Puzzle & Dragons" purchase the game

Smartphone gaming makers might enter the home video gamingmarket more aggressively

Next step of Gung Ho (Consideration of JRI)* Gung Ho might release the cartoon film, comic and goods of"Puzzle & Dragons" such as "Pokemon"* Gung Ho might release the series of "Puzzle & Dragons"for home video game such as the series of "Dragon Quest" and "Final

Fantasy"

7

Action ofHone VideoGamingMaker

SQUARE ENIX has done various effortsto enter smartphone gaming marketearnestly since 2013.

The most notable point of their efforts isthat the company is trying to establish"Package Sales" model, which ispopular business model in the market ofhome video game. Although insmartphone gaming market, the mostpopular business model is “Free-to-Play”.

If this "Package Sales" model will beestablished, other home video gamingmakers will enter smartphone gamingmarket more aggressively.

Other efforts are the release of portalapplication and a new title of “DragonQuest” series for smartphone and thecooperation with NTT DoCoMo insmartphone game.

NTT DoCoMo has focused ondevelopping services of smartphonesince 2012. SoftBank also acquired twofamous smartphone game makers,GungHo and SUPERCELL. Japanesemobile phone operators might have abig impact on the market.

[Figure] Action of SQUARE ENIX


Release of the past titles of "Dragon Quest" series insmartphone gaming market- Release of "Dragon Quest 7" and "Dragon Quest 1" for smartphone- Although the price of "Dragon Quest 7" was 28€ which was very high pricein smartphone gaming market, the sales was strong.-> The company want to establish "Package Sales"

Release of portal application and a new title of "DragonQuest" series for smartphone- Release of portal app where the company will sell new title of "DragonQuest" series for smartphone .-The company announced a plan to release a new title of "Dragon Quest"series for smartphone

The cooperation with NTT DoCoMo in smartphone game-"Dragon Quest X" are sold at NTT DoCoMo 's game platform called"d game"

Free-to-play

currentbusiness model

Free-to-play

Package Sales

Futurebusiness model

8

Impact onGameTerminalMaker bySmartphone

In January 2014, Nintendo hasannounced operating profit for the fiscalyear ending March will become a deficitof 250M€ from a surplus of 714M€ .

The cause of the downturn was sluggishsales of Nintendo’s terminal at the year-end shopping season.

The cause of the sluggish sales wasthat some of light users which areprimary customers of Nintendo’sterminal were changing to thesmartphone users.

In January 2014, Nintendo revealed aplans to develop smartphone apps forthe first time by the end of the year. ButNintendo also announced that thecompany will continue to develop newhome video game terminal and they arenot only focusing on smartphone gamemarket.

[Figure] Performance and Failure factor of Nintendo


714

-250-400-200

0200400600800

Past earnings forecasts(2013/04) Updated earnings forecasts(2014/01)

Operating profit forecast for the fiscal year ending March, 2014Million EUR

Significant downward revision

The cause is sluggish sales of the terminal

9,000

18,000

2,800

13,500

0

5,000

10,000

15,000

20,000

Wii U(Hard) 3DS(Hard)

Past earnings forecasts Updated earnings forecasts(2014/01)

Billion Unit Game terminal unit sales forecast

One third ofconventionalprediction

Change of using terminal by three types of userBefore the spread of smartphone

Very casual users

Casual users

Heavy users

Feature phone

Nintendo's terminal

Sony and Microsoft's

Very casual users

Casual users

Heavy users

Smartphone

Nintendo's terminal

Sony and Microsoft'sterminal（PS4, Xbox One）

TerminalSpecUsers

Low

Middle- High->Differentiated

High

Middle

Middle- High->Halfway

VeryHigh

Terminal

After the spread of smartphone

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Implicationsto enterGamingMarket inJapan

At first, foreign companies entersmartphone gaming market with acoalition of Japanese mobile phoneoperators or home video game makersbecause this coalition can be lower theentry barrier for them. They want toenter this market earlier as soon aspossible, bcause the market is growingrapidly.

Next, taking advantage of theexperience which are developed in thesmartphone gaming market, they enterthe home video gaming marke.

Finally, they release the next series ofthe game for home video game. Theyalso release cartoon films, comics andgoods of the game ( “Media Mix” ).

“Media Mix” has a possibility to enablecompanies to earn a huge profit forexample, the total sales of the “MediaMix” of Pokémon in Japan is € 12.1billion.

[Figure] Japanese game market entry step


Smartphone game market* Market size :1,927M€* Growth Rate :about 300%* Entry barrier :low* Business model- Free-to-Play( item charging(micro transaction),advertising revenue),Package Sales(Not mainstream)* Other features- There are various new entrants such as venturecompanies, overseas companies and home videogaming makers . Therefore, the market is verycompetitive.

Home video game market* Market size :918M€* Growth Rate :-1.3%* Entry barrier :High* Business model :Package Sales

Foreigncompany

Step 1Entry into the smartphonegame market with acoalition of Japanesemobile phone operators orhome video gaming makers

× Step2Entry into the home video game market bytaking advantage of the experience which aredeveloped in the smartphone gaming market

Other content market* comics, cartoon films, goods

Step3* Release of the series of the game* Media mix

Team Finland Future Watch Report: Further research on game market in Japan

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