To Our Shareholders

Next, let me comment on the earnings model. In the online game area, including games for mobile devices, flexible pricing models represented by free-to-play (“F2P”) have become mainstream. Sales units of F2P-based games are not physical discs, but rather are in-game items or virtual currency. Therefore, the F2P model is flexible in that earnings are adjustable according to players’ demand without any restriction on distribution of game products. My aim here is not to discuss the dichotomy between F2P and the fixed pricing model, but I would like to put emphasis on the major transformation of the game-playing environment in these days and big changes in consumer preferences regarding games. Devices for playing games are undergoing a rapid evolution and customer requirements for game experiences are becoming diversified accordingly. Consequently, the time has come for us game makers to take more flexible approaches in offering games and to devise various earnings models conforming to customers’ game-playing environments, moving away from the limited outlet of disc-based distribution of games. In this current of change, it is extremely important for the HD games category to enable transition from a disc-based earnings model to a more flexible one. This will define the future way we pursue HD games development.

The evolution of devices, particularly smartphones and tablets, is progressing at an amazing pace. Consumer game consoles are becoming smarter as well. It is too soon to predict if all of these devices will ultimately converge or diverge, but regardless of the direction taken, we still have to have the capability of supplying games to any platform. On top of all that, the market has even more choices: new game machines called microconsoles, as well as the upcoming commercial launch of cloud gaming services. The market for our HD games has considerably expanded from the days when games could only be played on conventional PCs and consumer game consoles. That is to say, consumers can now enjoy playing HD games on various devices and in various environments. This is an enormous paradigm shift. Under the conventional disc distribution business model, development and sales were separated as different functions, with total optimization achieved through partial optimization in each function. Since games were provided on discs, we set a price of a game upon a unit-basis, we concentrated our development efforts on the completion of a gold master, and we were able to maximize profits through maximization of the number of discs shipped and unit prices. However, the spread of smart devices has now enabled multi-device, multi-environment experiences of HD games. Once distributed exclusively on discs, HD games are now available through other media. We must shift away from the traditional divided structure in favor of a unified system that aligns earnings models with game development.

This is a new challenge for us—a big one that requires a new skill set. If we can resolve the challenge successfully, we will open the door to new business opportunities. We are the company developing games and delivering them to customers. No matter how devices evolve or how the game environment changes, we still have to have the capabilities of delivering games to our customers. The environment supporting high-end games is definitely expanding, and this fact convinces me of the advent of a new age when we can fully demonstrate all the game development capabilities we have accumulated to date. The big difference from the past practice is the earnings model. A priority in the fiscal year ending March 31, 2014 is to build a firm business structure as quickly as possible to address changes in the earnings model while providing customers with excellent game experiences that make us stand out from the others.

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