Analysis: Trends in the Japanese Game Market

Author: by DFC Intelligence

The latest report from analyst group DFC Intelligence points out the firm's perception of the Japanese market as an industry bellwether -- but notes that recent subtle sales shifts don't necessarily point to a shakeup that will dethrone current industry leader Nintendo. The full text of the report follows: "At over $7 billion in annual revenue, Japan is the second-largest market for video games after the U.S. However, Western companies often ignore trends in Japan. Primarily, this is because titles from non-Japanese publishers have historically not sold well in Japan. Nevertheless, DFC Intelligence has always thought it is extremely important to watch trends in the Japanese market and how they might eventually impact North America and Europe. Much has been written about the decline of Japanese publishers over the last decade. While much of this may be true, Japan remains a key driver of the global video game business and its consumers tend to be at the forefront of major industry trends. In recent years, one of the biggest harbingers of coming global industry trends was Nintendo’s growing success in Japan and the increasing emergence of “casual games” in that market. In 2005, sales of the Nintendo DS started to soar in Japan and much of this success was attributed to non-traditional products like the Brain Training and Nintendogs titles. With over 22 million units sold in Japan, the Nintendo DS will end up as the best-selling system ever in that marketplace. However, back in 2005, Nintendo was still considered very much of an also-ran in Japan, a market dominated by Sony. It was from looking at the success of the Nintendo DS in Japan that DFC Intelligence forecasted that the DS would outsell the PSP in markets like the U.S. and Europe. Furthermore, in 2006, after Sony announced firm launch plans for the PS3, DFC came out and stated that the Wii was likely to be the first-place system. Today that seems like a no-brainer assessment, but at the time this was a very contrarian point of view. It was also an unwelcome point of view because Sony dominated the market and it was automatically assumed they would continue to do so. Leading industry players like Electronic Arts had hitched their fortunes to the continued success of Sony and the last thing they wanted to hear was that Nintendo could once again become a force. However, when looking at the Japanese market, the signs were strong that Nintendo was onto something. Being the bearer of bad news is not always a role to relish, but ignorance is not always bliss. Of course, the DS exploded on a global basis starting in 2006. Meanwhile, immediately out of the gate, the Wii became a global phenomenon that exceeded even our most optimistic estimates. These very Japanese products were proof positive that Japanese developers and engineers are still relevant on a global basis. Much ink has been spilled about the success of Nintendo and the emergence of a new “casual” game consumer. In many ways that is old news. The important point is the need to closely monitor trends in markets like Japan, even for companies not active in that market. Looking at the first part of 2008 in Japan, there have been some indications that it actually may be Sony’s turn to experience an upturn in sales. In other words, we must closely analyze sales in Japan to see how they may impact our global forecasts. The leading company for tracking Japan video game sales is Enterbrain. According to data collected by Enterbrain’s Famitsu magazine, the portable Sony PSP started to outsell the Nintendo DS in March and outsold the DS in Japan every month until August. In August, the DS slightly outsold the PSP in Japan, but much of that was possibly attributable to consumers waiting for the October release of the PSP-3000. Life-to-date, the DS has still outsold the PSP in Japan by more than 2 to 1, but in July, the PSP passed the impressive 10 million units sold mark in Japan. So what do the 2008 Japan sales tell us about the market, both in Japan and on a global basis? Is Sony making a major comeback? Is Nintendo slowing down? Is it some combination of both? Or do first half 2008 Japan sales even have any relevance to long-term market trends? The answer to those questions is of course open to debate and opinions are likely to vary. However, DFC Intelligence looks closely at these trends to help adjust forecasts. Right now we see no indication that Japan 2008 sales trends would cause a major change to our forecasts, for either Japan or the global market. From DFC Intelligence’s point of view the PSP is tracking closely to forecasted and the DS is slightly below expectations, but not by much. DFC Intelligence had expected the DS to outsell the PSP in all major markets, including Japan. However we also forecasted that the PSP would finish in a strong second place and over the next five years actually end with an installed base of half the DS in Japan. Currently the DS has outsold the PSP by 2.4 to 1 in Japan so the PSP needs to gain some ground to meet the DFC forecasts. Right now it looks that for calendar 2008 the PSP may actually outsell the DS in Japan. But, not by much, and thus we feel no need to alter our forecasts. The other issue is what this means for global trends. Are there any big changes coming out of Japan that would cause us to reassess our forecasts? The short answer is once again no. The Japan sales of the PSP just emphasize that this is very much a multi-platform world. It is also still very much a hits driven world. Much of the PSP increase can be attributed to the strong performance of Capcom’s Monster Hunter franchise. Whether or not this carries over to the rest of the world, DFC Intelligence has forecasted that, with a few more must-have hits and new form factors like the PSP-3000, the PSP will see a resurgence and end up selling over 70 million units worldwide by 2012. This only looks bad if you do a direct comparison with the DS. The Japan 2008 performance of the PSP just reaffirms our confidence in this forecast. The other major point of DFC Intelligence forecasts is that no system in this generation will have the dominance that Sony had with the PlayStation 2. In Japan, DFC Intelligence forecasts that the Wii will end up outselling the PlayStation 3 by a ratio of 2 to 1. However, currently the Wii is outselling the PS3 by a ratio of 3 to 1. From this perspective, Nintendo seems to be going stronger than expected. But in the end, DFC currently does not see any need to adjust its long-term forecast."