To Our Shareholders

Next, I would like to cover the strategic issues of the Digital Entertainment segment, our Group’s core business. Since I was appointed to the position of President last year, I have been running the Group with emphasis on three major strategic issues: 1) revisiting long-term, large-scale development, 2) focusing on smart devices as game consoles, and 3) developing product portfolios tailored to local requirements. I will explain each item.

1) Revisiting Long-term, Large-scale Development
HD (high definition) games are the Square Enix Group’s DNA and a showcase for our creativity. HD game development will continue to be an integral part of our businesses. However, as I mentioned in last year’s annual report, there are serious structural flaws in the disc sales model that defines the current HD game business, and the question of how to deal with the issue is a significant managerial challenge. One major approach we are currently taking is to apply variable pricing models, such as F2P (free to play) games, to the HD games area. We are already introducing such models and have achieved success in several cases. Last year, platform providers began to promote content delivery services based on the F2P model, in addition to conventional paid content sales, for newly-released home game consoles. Promotion of online HD games based on this new business model is an important pillar of structural reform for us as well, and we conducted a large-scale review of both our HD games development and our European and American studios, in preparation for this course of action. The list of titles that have been announced is still limited at present, but we will be introducing new HD game titles featuring variable pricing models. In the previous year’s annual report, I mentioned that low asset turnover is another major issue for HD game development. The question is how to properly deal with increasingly protracted development periods. In addition, we have a number of challenges to tackle: to say nothing of research into technological aspects such as game engines and development tools. We are facing several business model issues of how to provide customers with additional content both before and after game launch, and how to introduce new development initiatives such as derivative product and episodic models. We are diligently undertaking these tasks, and will report the results of our efforts at a future date. Next, cloud gaming holds new potential on both technological and business model aspects. We have launched a new development project for cloud game technology, and are currently working on the business development to apply the technology to commercial opportunities. It is still fresh in our minds that the innovations in our technology received high acclaim from the media at the E3 trade show held in June. In addition, with the help of Taiwan’s Ubitus Inc., we have started a game streaming service of “DRAGON QUEST X” for smartphone and tablet, which will become available on the Nintendo 3DS platform from this September. Cloud gaming is already close to practical use, and we will be able to report several achievements in this area during and after the fiscal year ending March 2015. As you can see, the HD game business is showing signs of evolving away from the conventional disc-based sellout model for game consoles. The sellout model itself is rapidly shifting from disc-sales to full game downloads, and game sales are entering into an era of full-scale digital distribution. We see this change as a huge opportunity for us, and will endeavor to further expand the HD game business.

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