Japan game sector disruption

Japan’s iconic game companies (Nintendo, Sony, Sega-Sammy, Bandai-Namco, Konami, Takara-Tomy, Square-Enix, Capcom, Tecmo-Koei) see brutal disruption by smart phone games

Japan game sector disruption: Three newcomers (GREE, DeNA and GungHo) achieve higher operating income than all top 9 incumbent game companies combined

Japan’s top 9 iconic game companies, Nintendo, Sony, Sega-Sammy, Bandai-Namco, Konami, Takara-Tomy, Square-Enix, Capcom, Tecmo-Koei created much of the world’s games markets, and many of the world’s most loved game characters.

They are now seeing brutal disruption.

Japan game sector disruption

With the Financial Year ending March 31, 2013, for the first time, just three Japanese newcomers (GREE, DeNA and GungHo) achieved higher operating income than all top 9 Japanese iconic incumbent game makers:

In FY2012 combined operating income of all 9 incumbent game companies was YEN 67.6 billion (US$ 700 million), combined operating income of the 3 newcomers was YEN 174 billion (US$ 1.8 billion) – even though for GungHo only the first 6 months of 2013 are included in the calculation.

More in our report on “Japan’s game makers and markets”, which we frequently update – subscribe to get the updates.

Operating income of Japan's top 9 games companies declined steadily since 2009 - combined operating income for FY2012 was YEN 67.6 billion (US$ 700 million)
Operating income of Japan’s top 9 games companies declined steadily since 2009 – combined operating income for FY2012 was YEN 67.6 billion (US$ 700 million)
In 2013, three newcomers (GREE, DeNA, GungHo) achieved higher operating income than all nine established Japanese game makers. Combined operating income for FY2012 was YEN 174 billion (US$ 1.8 billion) 
In 2013, three newcomers (GREE, DeNA, GungHo) achieved higher operating income than all nine established Japanese game makers. Combined operating income for FY2012 was YEN 174 billion (US$ 1.8 billion) 

The incumbents: Nintendo, Sony, Sega-Sammy, Bandai-Namco, Konami, Takara-Tomy, Square-Enix, Capcom, Tecmo-Koei

Because of its size, Nintendo has the greatest weight in the overall performance of Japan’s traditional game sector. Nintendo has been dramatically affected by the shift from traditional game consoles to smartphones. Still, Nintendo (as all other Japanese iconic game companies) has tremendous resources, tremendous creativity, globally loved characters and brands, and huge cash reserves. I don’t think that Nintendo (and other Japanese game companies) risk as much to follow Nokia and RIM/BlackBerry’s fate, but may be more resilient. However, there has been substantial consolidation in Japan’s games sector of recent years, and the current challenges could lead to more M&A in Japan’s games sector.

The disruptors

We have only picked three important new market entrants – there are many more in Japan’s vibrant mobile game venture scene. (Read more in our report on “Japan’s game makers and markets”).

DeNA

DeNA initially started as a mobile auction group, and sees continuous strong growth and high margins.

GREE

Of these three, GREE is currently suffering some set-backs originating from GREE’s business model. GREE started as a SNS and social game platform on Japan’s “galake” (Galapagos Keitai) relying on Japan’s mobile internet services i-Mode, EZweb and Yahoo-Mobile, where operators traditionally take 9% commissions. Initially GREE tried to transfer this “platform on platform” business model to other countries, but this does not seem to work out. So GREE is now pivoting to original games, and has seen setbacks.

GungHo

GungHo started as a joint-venture with a US company, the purpose of this JV was Japan market entry for this US company. GungHo then pivoted away from this joint-venture to become a games company, and produced a series of games, which all did well, but not extraordinarily well. That is, until GungHo created “Puzzle and Dragons”, which is growing spectacularly well: Jan-June 2013 operating profits increased 4050.1% (four thousand fifty percent) compared to the same period one year ago, and net profits increased 2507.8% (two thousand seven percent) compared to Jan-June one year ago.

The disruption

The shift to smartphones is hitting Japanese traditional iconic game makers from all sides:

  • the shift from TV to tablets and mobile phones
  • the shift from dedicated game consoles to smart phones and tablets
  • the shift from Japan’s “galake” feature phones to smart phones
  • the shift in business model from traditional US$ 40-60 game cassettes-type to free game downloads with in-game purchases and advertising
  • …and more

Japan’s game sector report

Learn more: read our report on Japan’s game makers and markets
(approx. 400 pages, pdf file)
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