To Our Shareholders

Business Segment Overview

Digital Entertainment Business Segment

In the fiscal year ended March 2016, games for smart devices continued to demonstrate strong growth in the Japanese market, driving overall Group earnings. New titles released in the first half of the fiscal year ended March 2016, such as “MOBIUS FINAL FANTASY” and “KINGDOM HEARTS Unchained ,” which leverage key IP (intellectual property), delivered brisk performances throughout the fiscal year. Titles such as “HOSHI NO DRAGON QUEST,” “FINAL FANTASY BRAVE EXVIUS,” and “Grimms Notes” released in the second half of the fiscal year were also strong performers right out of the gate. With this accumulation of new titles, the percentage of total Digital Entertainment Business Segment sales accounted for by games for smart devices saw significant year-on-year growth in the fiscal year ended March 2016. Some are quick to point out slowing growth and increased competition in Japan’s smartphone game market, but it remains a market in which new titles can succeed by delivering new gaming experiences, and new titles frequently make their way to the upper end of the sales rankings. As device technology advances at a furious pace and consumers grow increasingly discerning, how companies go about delivering new gaming experiences has become the key determinant of success in a market where the true value of content is evaluated. We will also target further growth by rolling out titles that offer a variety of gaming styles and that run the gamut from derivatives of big franchises to brand new IP. We also released a wide range of HD (high-definition) games in the fiscal year ended March 2016. These included the latest installments in the major franchises from our Western studios such as “Rise of the Tomb Raider,” “JUST CAUSE 3,” and “HITMAN”; “DRAGON QUEST BUILDERS,” which offers a new way to enjoy the world of “Dragon Quest”; and “I Am Setsuna,” which leverages newly developed IP to bring a fresh sensibility to the turn-based JRPG (Japanese-style role-playing game) genre. All of these offerings serve to make our Group’s game portfolio richer. HD games are at the heart of our Group’s content portfolio, and we believe that continued investment in this domain bolsters our Group’s enterprise value in a variety of ways, including by helping us to acquire the latest technology and enhance our brand value. Moreover, leveraging the IP assets derived from our HD games in a diversity of ways provides us with further earnings opportunities, which is another reason why we see continued investment in HD game development as vital. In the MMO (massively multiplayer online game) domain, “DRAGON QUEST X” and “FINAL FANTASY XIV” continued to help generate stable earnings. We released new content for both of those titles in the fiscal year ended March 2016 via the launch of expansion packs. Player retention is a key earnings indicator in the MMO business, and the release of these expansion packs played a significant part in helping us not only retain existing players but also attract returning players and new players. We have no plans for expansion pack releases in the fiscal year ending March 2017, but we intend to continue to strive for customer satisfaction in the operation of our MMO games, with the aim of retaining existing players and welcoming new ones.

Amusement Business Segment

Performance at our arcades remained brisk, with year-on-year existing revenue figures topping 100% in the fiscal year. Demand from foreign tourists held strong, with arcade patronage by visitors from Asia especially helping to grow earnings. The e-money system we began rolling out in 2015 has made payment much more convenient for our customers and generated significant benefits for the arcades where it is available. We also garnered considerable attention in the field of game machine development, thanks in part to the release of “DISSIDIA FINAL FANTASY.” The consumption tax hike in Japan that had been planned for the fiscal year ending March 2017 has been postponed, but the Brexit vote has resulted in greater global economic uncertainty, and following a period of weakness, the yen is now appreciating against other currencies, raising questions about the future of inbound tourism to Japan. Against this backdrop, we intend to continue contributing to earnings through lean arcade operations and services that satisfy our customers. In the virtual world age, physical spaces are all the more meaningful. We need to create up-to-date arcade facilities by offering new real-world experiences that are not merely an extension of things that have come before. In doing so, we intend to create an amusement business that will even further enrich our Group’s content portfolio.

Publication Business Segment

Publication Business Segment sales and profits declined on a year-on-year basis in the fiscal year ended March 2016. The declines owe to a high hurdle set by television anime adaptations of our properties, which had been a major earnings driver in the fiscal year ended March 2015. Our mixed-media strategy of growing comic sales by developing anime adaptations has proven effective, so we will continue it going forward, but the fiscal years 2016 and 2017 represent a preparatory period between anime adaptations, thus a bit more time will be required before benefits appear. As such, we see the fact that we were able to maintain a certain profit level by creating an earnings base that does not rely on anime adaptations as a significant achievement. We will strive to move to our next stage of growth starting in the fiscal year ending March 2018 as we renew our commitment to the basic cycle of identifying high-quality titles and growing them into major properties. We also see our Publication Business Segment as a fertile ground for cultivating new IP. It serves as an effective IP platform that allows us to continuously identify new properties and test the waters with them. How to further develop the new IP born here is a very important strategic question for us. Comic content is increasingly digitized, and our anime adaptations are very popular overseas, especially in Asia. As such, we frequently receive licensing requests. In the fiscal year ended March 2016, we entered into a licensing arrangement with the major Chinese game publisher NetEase to launch the digital distribution of our Group’s comic content in China. This content is very popular in China, and our titles have been particularly well received in the Chinese market. By further heightening brand recognition through digital distribution, we hope to significantly increase our capacity to monetize them via future game deployments and other initiatives. As the above illustrates, the Publication Business Segment offers the promise of developing a major cross-border content business liberated from the bonds of traditional paper media by digitization. We place great value on this business for this reason and intend to develop it into a key growth driver.

Merchandising Business Segment

The Merchandising Business Segment delivered a stable performance again in the fiscal year ended March 2016. The segment is vital in that it leverages our original products to further enhance their brand value. The segment also naturally offers some products based on properties licensed in from other companies, but that reflects such parties’ high regard for our Group’s ability to create products based on external IP, and it has helped us significantly enhance those skills. The fiscal year ending March 2017 and subsequent years will see us continue to add to our portfolio of original content and expand our lineup of products that meet our customers’ diverse needs.

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