Japanese Gamers Tired Of The Pummeling

Remember Star Fox, Sonic the Hedgehog, and PaRappa? If you do, you may not
have bought a computer game recently. These days, those once-hot game titles
have been shoved aside by bad-boy gangstas shooting their way through the urban
dystopias of the Grand Theft Auto games. Even blockbusters such as Nintendo's
Pokémon and Super Mario have been trampled by linebackers pounding downfield in
the Madden NFL series and skateboarding teens doing kick-flips and 180s in Tony
Hawk's Underground 2.

Once the undisputed champs of the game industry, Japanese developers have
fallen on hard times. In 2000 about half of console games sold in the US were
Japanese. By 2004 Japan's share had plummeted to 29% of the $10 bn US market,
according to brokerage Credit Suisse First Boston. Japanese game makers
pioneered storytelling, transformed sounds from bleeps and bings to orchestral
scores, and created cinematic scenes-and they continue to churn out hit
role-playing games at home. But Japan's game makers were slow to expand
overseas, and were muscled out by aggressive Americans who catered to a growing
appetite for action among gamers worldwide. "People underestimated how big
the US and European markets would become," says Yoichi Wada, CEO of
Tokyo-based Square Enix, which makes the Final Fantasy series.

Magic tie-ins Harry Potter gets a lift on film sales; Super Mario has less clout

Worse, Japan's game makers underestimated the importance of creating games
for a maturing audience. The latest generation of game machines-Sony's
PlayStation 2, Nintendo's GameCube, and Microsoft's Xbox-are far more
powerful than the previous generation. That allows developers to create
landscapes with far more nuance and detail than older games. While most Japanese
developers continued to create impressionistic, family-friendly fare, rivals
offer plenty of blood, bullets, guts, and gore to satisfy the gunslinger in
every game player. Faces contort in pain when characters are shot. Muscles
ripple when the quarterback throws the ball. Sparks fly when a car hits a wall.

CULTURE GAP 

Problem is, Japanese developers are better at pure fantasy than adapting
real-world scenes to games. Grand Theft Auto from Take-Two Interactive Software
piles on American hip-hop references and ghetto street shots that teens love-and
that Tokyo-based game writers have little instinct for. "For the North
American market, local creators can make games that are more appealing than
Japanese creators," says Hirokazu Hamamura, president of EnterBrain Inc, a
Tokyo-based game-market researcher.

Some critics say Japan has the chops to create world-beating games-the
country produces first-class animation, after all-but they haven't figured
out what non-Japanese gamers want. Whereas EA, Take Two, and other US companies
have set up studios around the world to better understand consumers' tastes,
the Japanese have largely kept their resources at home, coming up with offbeat
products such as Sony's Mad Maestro-about an orchestra conductor-and Mr
Moskeeto, where the player is a mosquito trying to suck blood without getting
itself swatted. "Japanese developers seem to be making games to satisfy
themselves rather than the customers," says Jay Defibaugh, an analyst at
CSFB in Tokyo.

Japanese game makers, unlike their US rivals, have also eschewed movie
tie-ins. EA has made Harry Potter, James Bond, and Lord of the Rings games into
solid, bankable franchises year after year, and Santa Monica (Calif)-based
Activision makes games tied to Spider-Man and X-Men. Because the characters are
instantly familiar to casual gamers, movie deals have become an important
component of the $24.5 bn worldwide industry. But Japanese developers have inked
far fewer movie deals, and Konami, for one, sold fewer than 62,000 copies of a
game tied to King Arthur in its first three months on the market.

The
Americans' surge-combined with a stagnant market in Japan-has hit the
profits of Japanese game makers. Consumer software operating profits at Konami,
which makes games including Metal Gear Solid and Frogger, are projected to fall
2.6%, to $150 mn, on sales of $937 mn for the year ending in March; they may
plunge a further 13% next year, according to KBC Securities. Sales at Sega,
producer of Sonic the Hedgehog, slumped even after the company exited the
hardware business in 2001. In 2002 revenues from Sega's game business were
$816 mn. By 2004 they had fallen to $585 mn, although the company says sales
will rise to $642 mn in the year ending in March. At Nintendo, KBC expects
earnings from console games to fall by 5.6%, to $272 mn on sales of $776 mn for
the year ending in March-although the company's sales of games for its
handheld DS are booming.

One bright spot is Square Enix. The company sold 3 mn copies of Dragon Quest
VIII for the PlayStation 2 in the first three days after its November release in
Japan, while its Final Fantasy franchise has sold over 35 mn copies worldwide.
Square Enix is also betting on the success of Internet gaming: an online version
of Final Fantasy has 300,000 subscribers. The company says its online division
will see sales jump 57% to $134 mn in the year ending in March, and expects
networked games to account for half of its sales by 2010.

Others are revamping their operations to regain their competitive footing. In
November, Sega beefed up central control over 10 game-development houses in
Japan to help it control costs and better coordinate the direction and release
of new games. In March, Sega bought British game developer Creative Assembly,
whose Total War PC game series has sold over 1 mn units in the US and Europe.
And in January, Sega merged its European and US arms. That will "allow Sega's
Western regions to aggressively pursue products that appeal to Western
consumers," says Naoya Tsurumi, CEO of the merged units.

Konami, meanwhile, is streamlining its development teams. The company in
April plans to merge three subsidiaries that have fought one another in the
marketplace. And Konami has just appointed a senior executive to head up its US
and European operations. That move is part of a wider strategy of tailoring
games to regional tastes. "To meet local needs, we'll go into each market
and make products which meet the needs of local consumers," says Michihiro
Ishizuka, CEO of Konami's computer and video game arm. That should mean more
role-playing games such as its Vandal Hearts series at home, and more action and
fighting games in the US.

And Nintendo is planning a return to glory by reintroducing some of its goofy
characters when its next-generation machine comes out next year. "Intense
graphics is not the only path," says Satoru Iwata, Chairman of Nintendo.
"In this industry, there are still many franchise characters." Will
Super Mario and Donkey Kong knock out the gangstas of Grand Theft Auto and the
linebackers of Madden football? It's too early to tell, but it's certainly
not Game Over just yet.

In BusinessWeek. Copyright 2005 by The McGraw-Hill Companies, Inc