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


Now, please take a look at slide 15. The business model will undergo a definitive change. Pricing revolution is under way. I cannot help but say that this is a revolution. This is feasible only because of the network and the digital aspects. The consumers have the say in deciding the price. Micropayment started in South Korea back in the late 90s, and widely penetrated in China in the early 21st century, and around 2005, reached the Japanese and US markets. Now, you see it everywhere around the world. Most of the social games make money by the micropayment business model. Some say it's politically incorrect to make profit off of young children, but this should not be put out of context on focusing on the small details. The point of substance is that the products are broken down into smaller pieces by what they offer, and consumers can decide how much they want to pay. In the past there was one price tag for one item. Yet, for the same item, depending on what value you see, the price can be different, so there would be different price tags on the same article. Letting the customers make the decision on the price is mind-blowing. Initially, it will be under social scrutiny. There are also many negatives about this, but this is a topic of essence that is not just confined to the game industry, and I believe that this will disseminate in other industries as well. This means a great deal, but is scarcely understood. Many times I hear comments like people no longer pay a few thousand yen to play games. They are only willing to pay a hundred yen, or even want to play free of charge. But there is a dislocation here in the argument. There are those who want to play without paying anything, and others who are willing to pay 10,000yen. When consumers can make the choice, market usually expands as a result of that availability. This trend does not trigger a pricing war where the price is consistently eroded. This is a very important point. Conceptually, the x axis on the slide is the expectation and the y axis is the price, and to date, there was only a single price for a game, say 6,800 yen. This implied that we only captured the consumers who would fall in the dark pink area on this graph. To calculate the revenue accurately, I have to take into account the z axis which would give the exact number of users with different expectation levels, and multiply the corresponding price on the y axis, but the implication won't change so let me use the x and y axis anyway. Consumer with an expectation lower than the blue line in the middle were not willing to pay 6,800 yen, so they will not buy. Consumers with a higher expectation than the threshold were willing to accept a higher price, but they couldn’t pay more than the fixed price. At the end of the day, we were doing business within the limited boundary. However, if consumers can decide on the price, we can over come the limitation and cover the whole market. Customers with lower expectations will pay up to a certain amount, but consumers who are having a blast playing the game will pay a much higher price. Sot the whole market becomes accessible. Market actually expands and everyone is happy, because they get exactly what they want and pay how much they want to pay. This is truly a revolutionary concept.

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