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


Please look at slide 13. This is just an image diagram, so I am not in any infringement with any contracts. I abide by the confidentiality agreement, and I am not criticizing anyone. It's simply a diagram. This is about how much the publishers were getting, and it wasn’t that great. There were other challenges that I am not mentioning on the slide. To copy the data on the ROM cartridge, the lead time would take up about two months, which was a huge burden. You don't know if the game would sell well two months later. Suppose we place a big order for the ROM cartridge and the title didn't sell at all, they would be returned to us as dead stocks. But if we didn’t have enough manufactured, we may suffer from opportunity loss. When we want additional shipment because a new title sells more than expected, we would have to wait another two months for the lead time, by when the consumers may have lost interest. Too many may cause excess inventory, and too little may result in opportunity loss, so it was a catch 22 situation. And the price tag for the consumers was around 10,000yen. So the whole industry except for Nintendo decided to switch to CD-ROM. Many new device makers entered the market, such as Sega, Sony, NEC, Panasonic, and I believe the last one was Bandai. This was the time when Japan was considered to be the kingdom of home electronics. The shift to CD-ROMs is why the Nintendo market came to pieces. With the CD-ROM being a disc and not a complicated device like the ROM cartridge, the cost of the recording media came way down. The lead time was also much shorter, and if the production was at its full steam, it didn’t even take a whole week. This enabled more accurate production planning, reducing the inventory risk and lowering the distribution margin. The wonderful thing about the CD-ROM club was that the device makers gave back all the cost savings to the publishers and the consumers. Usually, if the device makers achieve such a big cost benefit, they are inclined to reap that benefit themselves, but over the decade, they had learned the impact of network externality, so thanks to the wonderful intention of Sony and other makers, they decided to give it all back to the game developers and the consumers. This is the reason why the market expanded exponentially. This is the first part of the two wars. Sony didn’t take over because there were excellent game titles. It is self-explanatory if you look at the right half and the left half of this slide. This is truly intriguing. This in fact is the dilemma of innovation. When the market saw the advent of the 64 bits era, Nintendo was still persistent on the mask ROMs. And it was completely a different reason why Sony won the war, and not Sega, Panasonic, nor NEC. It was because Sony had a contents business and they had the mind for it. It's Sony Music Entertainment. PlayStation business is owned by Sony's subsidiary called Sony Computer Entertainment, which was a in-house joint venture created almost instantaneously by aggregating the three internal resources; Sony's expertise with the home electronics, people who were accustomed to dealing with the creative talents at Sony Music, and the highly competent administrative team. That was why they prevailed. Sony had instant access to all of those three elements. The others, except for Sega, did not have it all. Sony was also able to leverage on their CD-ROM distribution network, which they had built with Sony Music Entertainment. They were already selling music CDs. Neither Sega nor NEC had such channel. NEC would probably start with their PC distribution. The companies who were versed with the entertainment business were probably Sony, Sega, and Bandai. It was Sony that was able to aggregate all of these factors in a split of a second, and that is why they were the winner. The game software war that is often talked about is really Nintendo's self-disintegration, and NEC and Panasonic not being able to exert their presence, and it was a one on one fight between Sony and Sega that was really intense. This was the finishing blow, and the world war had already ended before that time.

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