The Game Console Market
During a recent interview, the SEGA (Japan) president outlined some of the company’s new strategies. SEGA produces both game hardware and software, and toys, and operates a chain of large game centers in Japan. A few years ago, SEGA entered into merger talks with Bandai. Bandai is well known in and outside Japan for its characters and toys. Mac users may also recall that Bandai’s attempt to enter the game industry came to a halt when Apple abandoned the Pippin platform. Since riding high from its Genesis (MegaDrive) days, the company has been slowly losing market share to rivals Nintendo and Sony. The Dreamcast was supposed to place them back in the game. However, sales have been very sluggish around the world, and now they face threats from new game systems from Sony, Nintendo, and of course Microsoft. Price cuts and Internet gaming have done little to reverse SEGA’s dwindling market share. Sound familiar?
So what can SEGA do to remain in the game business? Since iCEO Steve Jobs has a bit too much on his plate at the moment (i.e. Pixar, Apple, Apple’s stock, magazine cover photos) and can’t lend a hand, the president has been slowly moving SEGA towards new markets. He rose from the ranks of the software division, so he thinks that software (i.e. content) is key to SEGA’s survival.
And hardware? In his interview he mentions that the hardware division is an important asset to the company but it should be slowly phased out. What does this mean? Well, it means that at some point SEGA will stop making game consoles, or perhaps license their game platform to other companies. However, without a platform, how can they survive? First, let’s talk a bit about the console business.
Each new generation of consoles takes a huge investment to develop. The costs of development and the advanced technology used are so high that game consoles are sold below cost. This means that the price the consumer pays for the game console is less than the cost to manufacture the system. The key to this business is licensing. Developers pay SEGA and other game console makers to obtain an official license to release their game. The revenue from the licensee is where the hardware maker generates most of its revenue. Of course, hardware companies also have their own software house to create games for their platform. In Nintendo’s case, this is an area in which they excel.
Recently, game console makers have also allowed their core games to be published on other platforms, such as Wintel computers. So the key here is software and developer support. Long ago —though not so long in the gaming world — game console makers forbid developers (i.e. their licensees) to release the same game for another company’s platform. This practice has been shattered with developers like Squaresoft, Konami, and Capcom porting their hits for multiple platforms. As developers move towards the newer generation of game consoles, SEGA is left with fewer sources of revenue. SEGA has been working very hard to move the Dreamcast into the on-line world. This is of course a very sensible move but on-line console gaming really requires high bandwidth. However, we are still a few years away from broadband everywhere. Sharp readers will note that the PS2 is ready for broadband connection, and I expect the Xbox will also offer broadband Internet gaming.
So Where is the Market Heading?
Here are my predictions based on the joint-venture activity in the industry, as well as my crystal ball:
- Nintendo: Their new game Cube will be targeted towards younger players. I also expect strong in-house games from Nintendo for this new machine. The release of the Advanced Color GameBoy is really exciting for some, but the specs don’t seem much of an improvement over their competitor’s offerings.
- Sony: PS1/2 will keep rolling along as the market leader. The PS2 will slowly morph into a “Home Gateway.”
- Microsoft: Sorry, my Apple made Crystal ball displays an error when I try to access the Xbox’s future.
I left out SEGA from my list because SEGA relates to the title of this editorial. SEGA has been quietly working on two strategies that will move them into the new millennium:
- Fiber optics networked game centers
In a nutshell, SEGA has been connecting their game centers across Japan using a very high-speed backbone. Although the popularity of arcades in the US has declined over the years, they are still very popular in SEGA’s home market, Japan. The company has also hinted at going abroad with this vision.
Why the need for such a game center when everyone is buying Cable and DSL Modems? According to SEGA, their network will allow for unprecedented global gaming and put them more in the “theme park” category (i.e. not just games, but other types of entertainment).
Are You Ready For Wireless Gaming?
Ah, finally I come to the point of my editorial. Hopefully you’re still with me and not already flaming me in our forum. SEGA is working with various partners, for example Access Japan, on the emerging wireless device game market. Access is a leader in embedded-device technology for mobile phones, set-top boxes, and other devices. They have a very “Silicon Valley” approach to business, which is rare in Japan.
If any of you have visited Japan within the last four years, you probably noticed that 99 percent of the people on the streets, and driving in cars, are using mobile phones. Big deal? Actually, it is. On a recent trip to America my sister showed me her latest Motorola cellular phone. She was very proud of her phone’s small size as she handed it to me. After complimenting her on the brand because that company also sometimes makes CPUs for Macs, I let her see my Japanese mobile phone, which was half the size. She was quite amazed. Of course, US and Japanese mobile technologies are different so I couldn’t give her a full demonstration — hopefully this will change in the near future. If I did, she would have remembered one word as she walked away in sibling defeat: iMode.
The iMode system was invented by NTT DoCoMo. NTT is a bit like ATT before they were split into the Baby Bells. It’s interesting to note that NTT is engaged in acquisition of ATT’s wireless business unit. They have also moved into Europe so perhaps iMode may be in your future. So, what is special about iMode? Let’s take a look at some stats.
- 48.9% of Japan’s population uses a mobile phone for Internet access.
- DoCoMo iMode maintains a 57% market share for mobile phones in Japan. The next largest rival commands about 16%.
- NTT DoCoMo has the highest market cap in Japan. Higher than Sony, SoftBank, Toyota and even its own parent company. In US dollars the market cap comes out to about $36 billion. In a nutshell, DoCoMo is both the AOL and Microsoft of Japan.
- The 3rd most popular types of wireless sites were related to games/software.
- Games ranked as the 4th most purchased item by mobile users.
So from these stats, we can see that the mobile phone is an important platform in Japan. Mobile phone use is expected to rise even further in the future. The statistics also show that the game industry will be a very important part of this mobile revolution. By next summer, color-screens and improved audio fidelity will be common on most models. Handset makers will also improve screen-resolutions, integrate add-ons such as CMOS digital cameras, expand memory, and offer faster processors. Many models will also be able to handle removable media such as Compact Flash, the Sony Memory Stick, SD Cards, or mini-hard drives.
iMode phones will eventually be capable of using Java, and some other technologies that will make gaming on the go even better. NTT DoCoMo plans to launch the first third-generation (3G) cellular network sometime in May. This new network will initially be limited to 64Kbps, however, as network stability is tested, experts point towards 2 to 3Mps speeds. Just as Microsoft’s OS standard is being challenged in the computer market by Linux and Mac OS X, so too is DoCoMo’s position. They face some fierce competition from local and global players:
- WAP-based phones pushed by iMode’s rivals
- Palm OS based PDAs
- Psion’s EPOC platform (Managed by the Symbian consortium)
- Microsoft CE (Pocket PC) based wireless devices
- Wireless adapters for Nintendo’s Advanced Game Boy
So now we come back to SEGA and their wireless strategy. With all these mobile devices in almost everyone’s hands, SEGA is banking on becoming the premier content provider (i.e. Game Developer) for this huge market. Will they succeed? It’s hard to say but they have some very talented engineers, good intellectual properties, and an ambitious plan to make a seamless gaming world whether you are on the go, or inside one of their state-of-the-art game centers.