OCT. 3, 2007 • Since the 1980s, Japan has been a giant when it comes to video games. Of course, this is in large part because after the U.S. game industry collapsed around 1984, it was left to the Japanese publishers and manufacturers to fill the void. Japanese companies Nintendo, Sega and Sony dominated the video game hardware market for over 20 years. Microsoft is the only non-Japanese company to become a major force in video game hardware.

Of course when it comes to actual consumption of games, Japan remains a leading market, number two in the world behind the U.S. However, this has been a market that has struggled since the late 1990s. Nintendo and Sony found their greatest success in the U.S. as a result. Meanwhile, many of the large Japanese game publishers have seen little growth since the heyday of the early 1990s. During the 128-bit era the Japanese game market actually declined.

The good news is that the video game market in Japan is on a resurgence thanks to the explosion in sales of the mobile side of the business. This has been driven by Nintendo’s renewed success in Japan.  The Nintendo DS has been a massive hit product over the past two years and the Wii is off to a very strong start.  In fiscal 2007, Nintendo’s revenue from Japan increased over 100%.

The big annual trade show in Japan is the Tokyo Game Show (TGS) sponsored by the Computer Entertainment Supplier’s Association (CESA). TGS is both a business trade show and a consumer event. The most recent TGS was held last month, and over its four days over 190,000 people attended. For an outsider to the Japanese market, TGS is an overwhelming experience. DFC Intelligence does not usually cover TGS. It tends to be a very crowded event that showcases First, games we are able to see at locations closer to home, and second, products that will only be released in Japan. Furthermore, the big no show at TGS is Nintendo, the current driver of the Japanese video game industry.

For foreign companies, a show like TGS drives home two key points about the Japanese market: One, it is dominated by Japanese companies; and two, there are many titles released in Japan that are not released in the rest of the world. For example, with the PlayStation 2, Sony reports that over 5,000 different software titles were released in Japan versus only about 1,500 in North America. Popular software for game systems in Japan extend far behind actual games, to include cooking titles, language training and other quirky applications.

The one thing that most all of the products that are successful in Japan have in common is that they were published by Japanese companies, and usually developed by Japanese developers. Large U.S. publishers like Electronic Arts have not really figured out how to penetrate the Japanese market. Therefore, foreign companies often ignore Japan because it does not represent a revenue opportunity.

However, ignoring Japan is dangerous for any company involved in the video game business. For one, a renewed Japanese market will mean growth for Japanese publishers and developers. This means that games from Japan are likely to become increasingly competitive in the global market. In other words, growth in the domestic Japanese market will affect the entire global game business.

There may also be a growing opportunity for foreign companies to have success in Japan. Broadband and PC penetration is growing significantly in Japan. This is helping open Japan up to the rest of the world and can allow companies a way around the traditional distribution channels. South Korean companies like Nexon and NHN are already enjoying success in the growing Japanese online game business.

Of course, entering Japan is easier said than done. Electronic Arts has been trying to penetrate Japan for years. At the 2007 TGS, EA once again announced they were looking for partners in Japan. This is nothing new. Back in 1998, EA formed a joint venture with Japanese game publisher Square (now Square Enix) called Electronic Arts Square K. K. The goal was to bring EA products to Japan. This never really panned out and the partnership was discontinued in 2003, around the time Square and Enix merged. Electronic Arts went its own way in Japan, and even partnered with LucasArts in an unsuccessful attempt to bring the massively multiplayer online game (MMOG) Star Wars Galaxies to Japan in 2005.

The foreign company that has made the most notable effort to enter Japan is Microsoft. Microsoft felt that Japan was important if they were to become a major player in the video game hardware market. The original Xbox launched in Japan in 2002, but sales were close to non-existent. With the Xbox 360, Microsoft made a major effort to line-up Japanese developers. One major effort was securing the talents of Japanese development company Mistwalker to create some exclusive products for the Xbox 360. Mistwalker was founded by Hironobu Sakaguchi, a legendary developer who helped co-found Square and the Final Fantasy RPG series which was a massive success in Japan. For the Xbox 360, Mistwalker agreed to develop the RPGs Blue Dragon and Lost Odyssey. The first game, Blue Dragon, was released in Japan in December 2006. The title sold well and passed the 100,000 unit mark. However, so far it appears it has done little to help the fortunes of the Xbox 360 in Japan. When it comes to video game hardware in Japan, DFC Intelligence believes it is now between Sony and Nintendo.

A big focus for DFC Intelligence is on looking at Japanese companies and their potential impact on the global game business. In coming months we will be profiling many of the leading Japanese companies. For this issue, we thought we would present some highlights of our recently released forecasts for Japan. DFC Intelligence does scenario forecasting and for the purpose of looking at Japan we summarize the market under the Nintendo Best Case Scenario and the Sony Best Case Scenario.

Nintendo Best Case Scenario
• The Nintendo DS becomes the best-selling game system ever in Japan with over 32 million units sold by 2012.

• The Sony PSP stagnates in Japan after 2008 and ends up with total sales of about 7 million units.

• A new portable system is launched in 2010 and is included in the forecasts.

• The Nintendo Wii is the best-selling system and equals the success of the PlayStation 2 with over 22 million units sold by 2012.

• The PlayStation 3 is a solid second place with over 10 million units sold by 2012.

• There is expected to be a new console system(s) launched around 2011/2012. This is NOT included in the forecasts.

Sony Best Case Scenario
• The Nintendo DS is still a dominant force with 29 million units sold by 2012.

• The Sony PSP has a solid steady life and has total Japan sales of over 13 million units by 2012.

• A new portable system is launched in 2009 and is included in the forecasts.

• The Nintendo Wii is barely the best-selling system in Japan with over 15 million units sold by 2012.

• By 2012, the PlayStation 3 has sold nearly as many units as the Wii at slightly under 15 million. However, by 2012, software revenue for the PS3 is significantly higher than for the Wii.

• There is expected to be a new console system(s) launched around 201/2012. This is NOT included in the forecasts.