Investor Relations

2012 To Our Shareholders

The Transformation to Come

I have repeatedly stated that similar to other media industries, the game business will be enveloped into the upheaval of the ecosystem of the entire content industry. I believe that we are nearing that moment, and I would like to discuss my outlook on the future while touching upon the content industry as a whole.

The content business is composed of three functions: Production, Commercialization, and Marketing. Marketing includes promotion, distribution, and monetization. Taking an example of the music sector, composition and performance is the Production, recording and pressing on CDs is the Commercialization, and selling CDs at retail stores is the Marketing. In the game sector, the assets that we develop are programs, and we cannot sell these programs “as is.” Therefore, after Production, the Commercialization process is required.
Game console machines, on which game software can run, are manufactured and sold. Then the program is pressed onto DVDs and packaged. This is the Commercialization process, and the console manufacturers fulfill this function. Marketing is selling the packaged discs at retail stores. In any content industry the basic structure is the same.
Since content is intangible, in order to do business, the Commercialization, in other words reproducing the content onto media, is an inevitable process. Marketing methods were determined by the type of media. The content industry has been segmented in accordance with the method of Commercialization, which adds the highest value.Networking and digitization triggered the first transition of this structure.
The network became the media of content, and without requiring a specialized device for media playback, users could enjoy content, which led to a decline in the Commercialization’s value. Moreover, because it is so easy to make copies in the digital environment, content overflowed on the internet. Huge amount of user-generated content such as blogs created a situation where information and content were supplied more than demand could absorb. Now the function that could organize all this information and content grew to be valuable.
This new function belonged to the category of the Marketing. The words that symbolize this era’s culture are “free” and “share.” On the internet, the value of information and content declined dramatically, and it became difficult for those doing business on the Production and the Commercialization to survive. Also, internet service providers, who had been engaged in the Marketing, now had limited opportunities to generate revenue due to self-invited free content issues and at the same time engaged in fierce competitions to keep their customers. As a result, the functions of the content industry became imbalanced, and the industry faced a crisis of its ecosystem. We entered an era of “search engine” this century where a “winner-takes-all” situation was created. Interestingly, the content businesses that survived during this time were those with vertical integration models such as games and Japanese mobile phone services.

However, as Apple emerged, we saw change for the second time.
Every choice they made was opposite of the one from the prior era. Vertical integration models rather than horizontal integration, native applications rather than browser application, premium rather than free. Perhaps the internet users were feeling that while the then-existing environment was convenient and free, it was disordered and unsafe, and they flocked to the iPhone. Apple succeeded in complete customer lock-in. IT companies that were struggling to find a solution saw this success, and they switched over to the vertical integration model, one company after another. The archetype of this vertical integration model was the combination of iPhone, a physical device, and iTunes, an online marketing platform.
Google, Amazon, and Microsoft announced their intention to manufacture their own devices, and it seems that even Facebook may join the party. At this moment the main battlefield is tablet PCs. In order to become the ruler of the internet, IT companies are now competing over physical devices, which is a paradox.
For a company like ours that is specialized in the Production function, it is good news since content is now shifting from being free to paid. At the same time, it becomes necessary to support many devices and development work becomes inefficient.

Then, what is to come next?
I believe that two significant innovations, HTML5 and cloud computing, will dramatically transform the ecosystem once again. These two innovations will make it difficult to differentiate devices, and the IT companies that are competing for customers will lose their present weaponry. Apple’s vertical integration model will no longer work.
Since games are interactive content that are enjoyed by having consumers get involved in the virtual world, they are not replicable. Unlike other content, the value is placed in the consumer experience rather than code or data itself. Moreover, online elements are now implemented into games, and our relationship with customers has become continuous, rather than one-time upon purchase. Currently the only people standing between the customer and us are those that handle the Marketing functions. The above-mentioned innovations will be what will dissolve those that dominate the Marketing functions. For the first time since the Company was founded, we will be able to connect directly with our consumers.

The strategy that we are now executing is not only to secure the profit for today, but also to prepare for a new era. We wish to run after two hares; expanding the current business and leaping for the next era.

Lastly, I would like to thank our shareholders for your ongoing support.

Yoichi Wada

Yoichi Wada
President and Representative Director