MSFT, Xbox 360 and Japan: Failure-in-a-Box

[Jeremy Charette]

<div class='os_post_top_link'><a href='http://www.informationarbitrage.com/2007/04/msft_and_japan_.html' target='_blank'>http://www.informationarbitrage.com/2007/04/msft_and_japan_.html</a><br /><br /></div><i>"The success (or lack thereof) of Xbox 360 has been a hotly debated topic across both the blogosphere and mainstream media, with an amalgam of sober and utterly confused views depending upon one's vantage point: analyst, investor or gamer. After taking a step back and looking at some objective numbers - those taken from Microsoft's own financial statements and comparative console sales figures extracted from VGChartz.com and Wikipedia.org - I have concluded the following:"</i><br /><br /> <img src="http://www.digitalmediathoughts.com/images/billgatejap.jpg" /> <br /><br />I've been having a spirited debate over on Roger Ehrenberg's blog about the link between Japan and the success of the Xbox 360. It's an interesting article, and worth the read, along with the comments that follow. Check it out.

[Jason Dunn]

I can only imagine Microsoft's frustrating at competing in a country that is so crammed full of gamers that you can't ignore it, but is also culturally biased toward products made "at home" and tend to ignore anything not made in Japan. Being an American company, Microsoft can never win in Japan.

[Jason Dunn]

BTW, I read through most of the comments and you had some excellent points Jeremy - you should turn them into columns here. :lol:

[Felix Torres]

I can only imagine Microsoft's frustrating at competing in a country that is so crammed full of gamers that you can't ignore it, but is also culturally biased toward products made "at home" and tend to ignore anything not made in Japan. Being an American company, Microsoft can never win in Japan.

Don't feel sorry for MS.
The failure of the Japanese market to respond to western gaming is, on a long-term basis, a *great* development for MS. :-)
Protectionism is never a good thing for markets because artificially shielding local producers (by law or custom) from the competitive realities and trends of the global markets will only result in the marginalization of those very producers.

Japan as a gaming market counts in two ways; first, as a consumer of games and consoles, where the locals refuse to support even a good foreign product solely because it is foreign, and second as a producer of software for those local consumers and for export.

Isolating the local market fractures the synergy between those two aspects and puts local producers at a competitive disadvantage. Both the local software *and* hardware producers suffer because of this.

By now we're all familiar Wii/360 path to MS victory in this console generation, right? The idea that if Wii wins Japan handily (as it is) it puts Japanese software developers in a quandary; games developed for Wii are by default Nintendo exclusives as very little of the effort that goes into a Wii game can be recycled for PS3 or 360. Yet, a Wii victory means that the PS3 installed base will be too small to support next-gen game development costs. So PS3 games will need to go cross-platform to 360 and PC to make financial sense. This will strengthen 360 and PC as competitive platforms and weakens PS3.

MS dominates NorthAm, that is not going to change this generation. MS is at least second in Europe, quite possible first. And MS is aggressively courting the rest of the markets. Well, Japan by itself currently consitutes only 20% of the world gaming market and that share is dropping as new markets develop in Brazil, India, China, and elsewhere. 360 can survive and prosper without Japan but Japan software developers are going to need 360 to survive.

You get a bankshot; Nintendo wins Japan, Sony loses everywhere, and MS wins by strengthening the PC as a gaming platform as well as building 360 into a living room platform unto itself.

What the original article neglects is that japan doesn't matter as much as it used to and that XBOX is not an isolated business unto itself like Nintendo nor is it the anchor to which corporate profitability is tied to, like the PS3. Xbox is just a means to an end for MS. A strategic part of a larger, longer play to which they committed with eyes wide open and no illusions. If need be, they can easily absorb the losses for another console generation if they had to. But they won't have to. 360 performance is, by all credible accounts slightly ahead of what MS expected and much better than they feared. (MS feared PS3 would ship with 4 Cell processors and do ray-traced graphics in real time locally in a game, not merely in a cluster for a tech demo; instead, they got one Cell and a mid-range 2005-vintage DirectX9 PC graphics chip. An honest to goodness windfall.)

The original XBOX had one mission: establish MS as a serious player in the console business, regardless of the cost. That mission was accomplished. The 360's mission is to maintain that position and achieve profitability within its own lifecycle. That's it. 360 does't need to kill Sony or Nintendo. All it needs is to break even while denying a significant part of the gaming market to the other two players. And that is something that is already a given.

360 is stealing japanese exclusives from Sony.
It is building up its own portfolio of first-party franchises.
And it is gearing up to bring in revenue from sources Nintendo and Sony can't or won't develop (online gameplay, digital media, IPTV, etc). Odds are that by this summer, MS will have 360 in the black. (They said so in an SEC filing, guys. It hasn't been ammended...)

This gaming generation, MS will end up no less than second in a three-way dogfight. With no less than 40% market share. And with a balance sheet in the black. That is a victory no matter what any pundit or analyst chooses to say. Not a disaster but a win. And that is the worst case scenario.

Best case scenario is Wii performs like a typical Nintendo console with large upfront sales slowly declining over time with seasonal peaks during toy-buying season. In other words, like a Toy.

(Yes, Wii is hard to find outside Japan. Maybe because Nintendo is trying to fully crush Sony at home and secure that market for themselves? Japan may not matter to MS but it is vital to Sony.)

If Wii actually follows the same seasonality as other Nintendo products *and* exhibits the same brand loyalty from its customers (who overwhelmingly favor Nintendo games over third-party games) then MS will win, by default, the fight for the hearts and minds of developers. Which means they get the lion's share of the advanced games. MS could easily peak at 60% market share in a best case scenario.

No matter what the naysayers say, MS has already achieved the bulk of its goals for 360. It is no longer up for debate whether 360 will do well enough for there to be a third XBOX; the only question is just how high the 360 will go. Things are going to be interesting.

[RichL]

To say that the Xbox 360 is failing in Japan because it's an American product is naive.

Imagine if a Japanese console was released over here and the only games available for it were complex RPG and gundam games. No matter how great the console would be in the eyes of Japanese gamers, it wouldn't sell over here because it wouldn't have games that suit Western tastes.

If you look at the games on the Xbox 360, the vast majority are 1st/3rd person shooters, racing and sports games. These aren't the kind of games that will sell a console in Japan. Even the Japanese output from companies like Capcom and Konami have been very Western in approach (games like Lost Planet and Dead Rising).

It's no surprise that the biggest selling Xbox 360 game in Japan is its only Japanese RPG.

I own an Xbox 360 but I'm hoping that it doesn't "win" this generation. They've already started doing some worrying things, like stopping Epic from releasing free content and blocking 3rd party wireless accessories. Microsoft are a lot more consumer-friendly when they're playing catch up.

[Felix Torres]

I'm not the only one to call the lack of Japanese sales of 360 nationalistic or call Ehrenberg on his assessment. I was, howver, overstanting the size of the Japanese share of the gaming market.
They're actually down to 17%.
(North Am 45%, europe 35%, ROW 5%).
http://www.next-gen.biz/index.php?option=com_content&amp;task=view&amp;id=5296&amp;Itemid=2

As pointed out Japanese don't buy foreign products if there is a local supplier.
Period.
What is naive is to think the national origen of products doesn't matter.
It matters in japan, it matters in Europe, it matters in China, and it matters (to some) in the US.
As a rule, American-made/owned products have to be significantly superior to the alternatives to gain traction in many markets solely because of anti-american bias.
Simple fact of life and part of the price of doing business.
As MS did, you just factor it into your business plan.

[RichL]

As pointed out Japanese don't buy foreign products if there is a local supplier.
Period.
What is naive is to think the national origen of products doesn't matter.

Whilst most consumers prefer to buy local goods, it's vastly over-stated in the media. It's a myth to excuse poor performance in a tough market. As long as you adapt your product for the local market, there's no reason why it shouldn't succeed.

I've been to Japan. I saw European cars, I saw American beer and I saw Korean music. If the Japanese only buy Japanese goods, how is it that the iPod is doing so well in Japan (http://www.businessweek.com/globalbiz/content/feb2006/gb20060223_774050.htm)? Japan isn't exactly short of locally sourced mp3 players.

[Jeremy Charette]

If the Japanese only buy Japanese goods, how is it that the iPod is doing so well in Japan (http://www.businessweek.com/globalbiz/content/feb2006/gb20060223_774050.htm)? Japan isn't exactly short of locally sourced mp3 players.

As a rule, American-made/owned products have to be significantly superior to the alternatives to gain traction in many markets solely because of anti-american bias.

[Felix Torres]

Still more challenges to the premise:
http://gamesfirst.com/?id=1514