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


Please look at slide 14. We don't see the names of Apple or DeNA or Zynga following Nintendo and Sony because sadly, we are still in a transitional phase. The home video game business model structured around the game consoles, or the vertically integrated business model is starting to crumble, but we have yet to see what is next. We are starting to witness some pioneers, yet we are still in turmoil created by the war. On the slide, you will see transformation from vertically integrated model to horizontal (ly integrated) model and divergence to multiple layers. I actually do not foresee a horizontal integration, so that is why that is written in a parenthesis. I also know it's not going to be a vertical integration. We won't see the Wintel structure in the PC market where one horizontal layer is dominated by a single player. That's the challenge, as well as the thickness of the horizontal layers, as the market gets more fragmented. It is already evident with the recent trend, with the games serving as platforms. People call them game platforms, but that is not accurate. They are the games like Kaito Royal, the fishing game, and Farmville. They have successfully grown their player base, so other games were sold to the same user base, which is just the good old cross-selling strategy. These are not game platforms. They are games. Look closely and you will see that these are individual games but other stuffs are also available there. It has yet to become a business model that can ensure sustainable growth. The user base is still roughly 30 million for DeNA or Gree respectively, compared to the user base of 300million for Facebook or Zynga. That's the size. It may be difficult to observe in Japan, but in the European and US market, PC is influential. The predominantly strong player in the PC game genre is a company called Valve, who developed a First Person Shooter, Half-Life, and they were not originally a publisher. They were developers and somebody else was distributing their games, so they didn't have any experience with the real stores. However, they are the decisive number one for mail-order catalog sales and download distribution. Worldwide, they have a base of 30 to 40 million members. Their attraction is the gamers’ community and built out their distribution channel on that asset. So this is a new layer. There is a new layer on the development side as well. I'm talking about the game engine. During the first decade of the 21st century, particularly in the latter years, game consoles had become really sophisticated. People often talk about "multi-platform", meaning that it's the new norm to develop a game for both XBox 360 and PS3. If we analyzed everything, the burden on the programmer would be excessive. That is why we needed a better environment to improve the development process, and this is what dominated the market. 80 to 100 game developing companies including us are using Unreal Engine. It's almost like the Photoshop for the graphics. And another layer is emerging on the infrastructure side; the cloud. New attempts to do the processing on the cloud side, not just the storage of data, are taking place already. A company called OnLive is creating a buzz for their upcoming IPO. So there are many new sprouts, but we have yet to see the final picture of how it is going to be segmented into different layers and ultimately stabilize.

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