Chuo University Speech(Nov 25th, 2011)
"The Structural Transformation of the Game Industry"


Now let's move to slide 10. In the last three decades, the home game console market exerted huge influence (although that may not necessarily be the case today), so let me quickly talk about how it is structured. This is how the current market size of four trillion yen can be broken down. Basically, there are three game console makers, and their revenue is about this much. They wholesale to the retailers for the devices to be distributed, so there would be some retailers’ margin. The console makers, Sony, Microsoft, and Nintendo, will enjoy this much sales (in blue), and the retailers would generate about this much sales (in red). The sales for the publishers worldwide in total will look like this (in yellow). Game publishers like us pay format royalty fee to the console makers when developing games for the devices, be it PlayStation, Xbox 360, or DS. I can’t say how many percentage points, but what you see on the right is a rough image (the blue bar). For example, the game publishers pay royalty fee to develop games that would be played on the PlayStation platform, (although Sony doesn’t help in developing the games), and this is one of the revenue sources for the game console makers, represented by the blue bar. On top of the revenue generated by the sales of consoles, device makers also enjoy royalty and media production fee from the game publishers. The media used for PS3 is Blu-ray, and for Xbox, it’s DVD. There are few medias for UMD. In reality, the console makers dominate the manufacturing of different medias. Let's assume that we are developing a game for PS3. As we are the developer of the game, we obviously know what kind of data has to be recorded on the Blu-ray. There are many Blu-ray plants all over the world, yet we cannot manufacture the media ourselves. They request the media to be manufactured at Sony's plant. Nintendo created this business model, and it was a well-designed innovation with a tremendous impact. However, the console makers are not exploiting from the market. This ecosystem becomes viable only when it is also beneficial for the consumers. The reason such regime works out is because the consumers can buy the console with extremely high capability at an affordable price, and they also get access to an ample pool of interesting games. The royalty revenue is a reimbursement for the hardware makers for their cost base. PS3 is a very good example. You can play games, watch videos, have Internet access, and use it as Blu-ray player, and you get all these functions at such an attractive price. It is cheaper than the eBook (already outdated), and iPhone, and much more affordable than the Blu-ray players. If you install torne, you can also record TV programs. Blu-ray recorders are extremely expensive. So the game console is extremely cheap over any other hardware. That is the reason why this ecosystem can exist. It is highly convenient for the consumers, and that drives up high penetration, and that is how you reach that sales number of few tens of millions of units. So even after paying the royalty fee, the business pays because there is a big pool of consumers. We publish many games, the console makers make profit for the big lot manufacturing of the software, and the profit can be used for R&D and manufacturing of the improved platform. There is a positive cycle, and that is the ecosystem surrounding the game console business today. However, as the platform migrates toward the web environment, I expect a third wave of industrial transformation, and that is where we stand today. Let me talk about what kind of innovations was observed in the previous waves.

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