ZhugeEX Blog

Project Scorpio – ZhugeEX Notes

7th April, 2017 · ZhugeEX · Leave a comment

Microsoft has unveiled the specifications of Project Scorpio via Eurogamer / Digital Foundry.

http://www.eurogamer.net/articles/digitalfoundry-2017-project-scorpio-tech-revealed
I think it was a good idea to get the specs mumbo jumbo out of the way for the super hardcore fans and just let the official reveal be about the games, experience and USP’s. We’ll get this more structured and official reveal either before E3 at E3.

Nothing too surprising from the spec reveal. It’s clear the Microsoft have ticked all the right boxes for hardware though based on what a mid gen upgrade should have. It seems it’ll be launching in a more complete state than PS4 Pro and actually benefit standard XB1 titles with super sampling (or whatever that thing is called) + have other features like 4K Blu Ray and moar power. This is something of note and is a USP for the console.

One thing that was missing from the reveal today was talk about Virtual Reality and Mixed Reality. It’s certainly something that Microsoft have been pushing on the PC side and they even had a partnership with Oculus for the original Xbox One. It’s unclear how exactly VR/MR will work on Scorpio but the system is clearly powerful enough for it and the ability to use these technologies should be there from day 1 so that it’s a selling point for the console. It’s also worth noting that Sony’s PS VR is already in the market and Microsoft will be keen to outdo PS4 Pro in every category with Scorpio.

It’s clear that the strategy both Sony and MS are going for this gen is the “Double down on the core gamers who are spending” strategy. So it’s why we’ve seen PS VR launch at $399. It’s why PS Plus and XBL aren’t going anywhere. It’s why Xbox Games Pass and PS Now / Vue exists etc… Pro and Scorpio are the next step in the whole “Lets keep our core base spending on our ecosystem and boost hardware ASP’s whilst we’re at it”. Project Scorpio is going to appeal to the Xbox One early adopters and the guys on the fence about buying a new high end PC gaming rig.

The issue I see though is that Sony and Microsoft are targeting a niche within a niche. Granted that niche is larger than it was 10 years ago and is the most profitable part of the console audience. But it also shows how the platform holders have seemingly given up any hope of growing the overall audience of the consoles by appealing to the casual / family / semi – casual gamer. They seem to have ceded that market to smartphone gaming. Which explains why Sony and Nintendo now have mobile game divisions. Right now these moves are more about Xbox and Sony retaining an audience than growing it.

Not that the above is a bad thing right now. In fact it makes sense for them to do that. I just hope they have a plan for next gen given how this group of gamers is going to be expecting more for less in a world where dev budgets are increasing but game prices are not.

Anyway. Still a lot of open questions here about price, branding and content. It’s sounding like it could be above $400 at this point and that to me just doesn’t sound good given the current positioning of Sony and Nintendo. Of course we know Xbox One S will be the main driver of sales but that initial buzz has worn off. If we have another $599 situation then the initial impact of Scorpio will be limited and it’ll take a while for it to actually sell any meaningful amount.

Overall there isn’t much to discuss and what has been revealed today hasn’t exactly made me think much different to how I was before. We need more info before coming to any real conclusion of how it could perform in the market.

Steam Powers On in China – Growth of Standalone games

1st December, 2016 · ZhugeEX · 4 Comments

The following blog post was first posted on Gamasutra.

It’s no secret that Chinese gamers prefer Free-to-Play (F2P) online titles on their PC and mobile devices. The overwhelming majority of China’s gaming revenue is from online games and only a few titles such as Blizzard’s Overwatch, which is published by NetEase in China, can charge money upfront and be successful. That being said, we at Niko Partners have noticed a growing contingent of gamers who are willing to spend on paid games as well. Services such as Steam and Tencent’s Game Platform (TGP) have been gaining traction in the country and recently Valve noted that Asia is the fastest growing region for Steam with gaming revenues up 500% in the last 2 years. We’ve seen indies, both in China and the West, benefit from Steam and TGP with the traditional paid game model and even larger publishers are finding success on these platforms in China.

Niko Partners has tracked the Chinese games market since 2002, and for several of those early years our Chinese market intelligence included what we called “PC packaged games”. There were very few units sold in boxes at stores for full price, because there were very few offered – and that is because piracy rates are so high for physical disks. However, we track the demand in the market and gamers told us that they loved to play standalone games. In fact, from about 2002-2005 gamers reported that roughly 50% of their gaming time was spent on standalone games, but they downloaded them for free or bought cheap copies in a pirate store because they were not available otherwise. Hence, there is precedent for Chinese gamers to play standalone titles, even while the world watches their consumption of nearly $17 billion in PC online games in a year. This is where Steam and Tencent come in.

Steam’s Beginnings in China

Steam was unknown in China until Dota 2 came along a few years back. Valve and Perfect World opened a Chinese server for Dota 2 in the second half of 2013. All Dota 2 accounts needed to be connected with a Steam account to work. Many players saw this as a hassle and complained that the Steam account was like a zombie account since Dota 2 was the only game they owned. But this was how Steam started to acquire Chinese users. Perfect World has done a great job growing Dota 2 in China and the game is still very popular there. In fact, it’s the third largest region in the world for Dota 2 players according to SteamSpy. Perfect World will also be localizing Counter Strike: Global Offensive soon as well which is already a popular title among Chinese gamers on Steam.

Steam is unique in China in that it doesn’t follow the same rules that other game stores must follow. This means that publishing a game on Steam works the same way in China as it does in the West, and there is currently no regulation on the Chinese Steam store from the government. This has led to certain games like Grand Theft Auto V being distributed via Steam in China with no issues when really it would be banned on any other Chinese games service. There is no real reason for why Steam is still allowed in China but many speculate it could be due to Perfect World backing Dota 2, which requires a Steam account. Microsoft doesn’t have the same privilege and were forced to remove Gears of War 4 from the Chinese Windows 10 store for being too violent. Yet Grand Theft Auto V is still on the Steam China store.

It is worth keeping in mind that the Chinese government could very easily impose restrictions and regulations on Steam in China at any time. This could make it harder for games to be published on the platform and many games could be banned from being sold in China if they are deemed as being immoral. Right now, these restrictions are not in place and so Steam remains an opportunity for many indie and larger publishers to target the niche of gamers in China who are willing to pay upfront for games.

The fact that Steam had banned games peaked the curiosity of a few Chinese gamers who wanted to try out this platform and this led to many of them purchasing their second game on Steam, Grand Theft Auto V. Grand Theft Auto V (GTA V) already had a huge presence globally and was marketed as the game to experience the American way of life. GTA V had a localized Chinese version and was considerably cheaper than the Western version of the game. The popularity of the game in China led to many live streamers playing the game on their channel and this in turn led to many more creating Steam accounts to buy and play the game.

According to SteamSpy, China is the second largest region for Grand Theft Auto V in terms of owners, which is a huge achievement when you consider just how big the game is worldwide. The game, along with Dota 2, also led to the increase of users in China but there were still a number of barriers to further growth. The first is that games didn’t really support Simplified Chinese or even make their presence known in the region. The second was that a credit card was needed to pay, which is a significant barrier, and the third was that the games cost money (unlike the typical F2P titles, which are downloaded for free).

Steam Starts to Take China Seriously

All three barriers were removed in November 2015 when Valve’s Gabe Newell decided to take the China market more seriously. Steam started to support the Chinese yuan, which became a boost for the service. In addition, AliPay (the “PayPal of China”) and Union Pay now allowed for direct payments on Steam and last month we saw WeChat Pay and TenPay were introduced as official payment methods. Valve also introduced parity pricing for the service, meaning games were almost 50% cheaper than US pricing (this is a critical pricing topic that Niko additionally addresses directly in our recent 2016 Southeast Asian Games Market Report & Forecast).

Games were also clearly marked if they offer Simplified Chinese support and this allowed Steam to have an instant boost in users and revenue. In fact, there are now more than 10 million Steam users in China, which makes it the second largest Steam region. It also allowed the average number of games owned to jump from 2-3 per user all the way up to 11 games owned per user in China. Removing these barriers had a hugely positive impact for game sales on Steam. A Chinese New Year sale went further towards growing the Steam user base.

Chinese gamers are willing to spend their hard-earned money on digital games as a relatively inexpensive and pervasive form of entertainment. Chinese players are showing more and more of their purchasing power on Steam. Many developers have started to pay more attention to localization in order to attract Chinese players. For example, the latest entry in the Civilization franchise, Civilization 6, now has Chinese audio and Simplified Chinese text. We’ve already seen that around 1/3^rd of the reviews are from Chinese gamers and that many of the reviews left are positive due to the added Simplified Chinese language support.

Another game that has seen success in China recently is the action RPG beat’em up Lost Castle by Chinese indie developer Hunter Studio. The game, which is published by Another Indie has seen huge success in China with around 70% of the 200,000 paid unit sales from China alone. Lost Castle became a hit with streamers across China and many purchased the game based on this and to support the indie game scene. Lost Castle was also able to stand out from the crowd due to its unique graphics and gameplay. Mainstream media in China also gave the game a boost when they noted how successful it was becoming. In addition, the team at Another Indie built up a strong community among China’s Steam gamers and encouraged purchases through well timed sales. The National Holiday sale led to another 20,000 copies being sold over the week.

Paid indie games are really coming into their own on Steam in China with titles like Dead by Daylight, Don’t Starve, BattleBlock Theater and Ark: Survival Evolved doing well recently. That being said, Grand Theft Auto V has led to more AAA titles like Left 4 Dead 2, Borderlands 2 and even Rise of the Tomb Raider, which has both Chinese voice and text, doing well. All of the games mentioned also have some sort of Chinese language support. There is no doubt that having some sort of competent Chinese language support will lead to adoption of the game in China. However, if the game is very simple to play then language support doesn’t matter too much.

Tencent’s TGP and its Integrations with Steam

Tencent is the largest games company in the world and are the owners of Riot Games and Supercell, with large investments in other games companies as well. Tencent Games Platform (TGP) is a PC-based client that gives users access to all Tencent games and extra benefits with more than 180 million registered users. It’s very similar to something like Ubisoft’s uPlay or EA’s Origin. Tencent wants to augment its service offering to include competing in China directly against Steam, and so are committing to bring third-party titles to their store from developers and publishers around the world. Tencent handle the localization, publishing and promotion. A recent game that they bought over to Chinese gamers was Don’t Starve. The game has been localized for the Chinese market both in language and in the game’s content (like special costumes) and has a cheaper pricing model than the Steam version. This has led to over 1 million copies being sold on TGP in just a few weeks. The game is priced at 24 yuan on TGP, similar to the Steam price.

There is certainly an opportunity for developers and publishers to bring standalone games to China and the examples above should prove that. Tencent has noted this opportunity too and they’ve committed to developing their TGP to support more than 100 standalone games by the end of 2017. Tencent has become the largest games publisher in China by leveraging its WeChat and QQ services which are now used by over 800 million and 900 million people respectively. This gives them huge channel reach and ultimately gives them a massive advantage over Steam in China, which is tiny in comparison.

Whilst both platforms have their respective advantages and disadvantages, they cannot be ignored if you are a developer or publisher of standalone paid games. Steam is continuing to grow in China and TGP is a new opportunity with an already wide reach. These are just two of the many interesting ways for a foreign game company to enter the Chinese market, and we would be very happy to discuss them with you if you email Daniel@nikopartners.com.

Koei Tecmo H1 FY2016/17 Report: Attack on Titan sell in exceeds 700k worldwide

12th November, 2016 · ZhugeEX · Leave a comment

Koei Tecmo has released its H1 FY2016/17 report for the 6 month period ending September 30th 2016. This blog post is a continuation of the in depth reports I write on Koei Tecmo each six months. I’ve been following Koei Tecmo for a while and they are my favourite video game publisher and developer. This is due to my fascination with the Dynasty Warriors and Romance of the Three Kingdoms video game franchises which I grew up playing. I love sharing data on the video games industry in general, so why not share my findings on Koei Tecmo here!

First I have to thank the one and only Kite Stenbuck who was able to translate all of the text into English. This blog post is the only place you can find a full English translation of the financial results presentation as the time this was posted. Please feel free to support Kite at his Patreon here.

Koei Tecmo H1 FY2016/17 Report

Koei Tecmo have launched a number of games this fiscal year. I will talk about each of these games under the five Koei Tecmo brands:

In the Kou Shibusawa brand: Romance of the Three Kingdoms XIII was released for PS4 & Steam in America and Europe. The brand also published Winning Post Stallion, a horse racing simulation games for smartphones that was released in September. Social and smartphone titles in the catalog, such as 1 Million Nobunaga’s Ambition, Uncharted Waters V and Nobunaga’s Ambition 201x are continuing to do well.

In the Omega Force Brand: Toukiden 2 for PS4, PS3 & PSV launched in July. So far the game has sold in 250,000 units in Japan and Asia which is a notable decline over the first installment of the game which sold in 470,000 units in the region. Attack on Titan: Wings of Freedom was released in North America and Europe on PS4, PS3, PSV, XB1 & Steam. The game has sold in 350,000 copies in the West and a cumulative 700,000 copies worldwide. The game has been a hit for Koei Tecmo and is on it’s way to the 1 million unit milestone. Omega Force also released a strategy RPG spin off for the Dynasty Warriors franchise called Dynasty Warriors: Heroic Legends for PS4, PS3 & PSV.

In the Team NINJA brand: Dead or Alive 5: Core Fighters has surpassed the 7 million download milestone worldwide. Team NINJA note that collaboration DLC contents for the game has seen high sales and is a good monetisation strategy. Team NINJA plan to release Ni-Oh exclusively for the PlayStation 4 in February 2017. The game will be published by Koei Tecmo in Japan and Sony Interactive Entertainment in America and Europe. So far the game has received numerous awards and praise and the recent beta demo that was published in August received a 95% positive rating from American and European players.

In the GUST brand: New IP creations are progressing with the announcements of 2 new IPs – Heroic RPG BLUE REFLECTION: Girl’s Sword Dancing in Illusion, and Augmented Reality Girls Trinary, an anime cross-link RPG which fuses anime and game.

In the Ruby Party Brand: Geten no Hana with Yume Akari Collector’s Edition (PS Vita) has been released. In the Event segment, 6 events have been held, including Neoromance Festa: La Corda d’Oro: Seiso Academy Festival 5 and Harukanaru Toki no Naka de 2: Ushiromuki Jirettai Live. Ruby Party are also actively making efforts with new technologies, such as implementing Virtual Lives using three-dimensional video presentation.

Koei Tecmo achieved a new record for H1 results. Both Sales and profit were up for the period. Koei Tecmo reported sales of ¥16,576 million for the six month period ending September 30th 2016. This is a 9.3% increase YoY and can be attributed to the amount of titles released and published overseas. Last year the majority of games released during this period were Japan only. This year we saw Attack on Titan perform well overseas with 350k units sold in, contributing to the increase in sales. Operating Profit was ¥2,748 million, up 11% YoY.

It was the entertainment segment which remained the biggest again for the company. The entertainment segment includes Koei Tecmo’s console, PC, mobile and social games. Sales in the entertainment segment were up over last year at ¥14,638 million. The entertainment segment accounts for 87.5% of Koei Tecmo’s total sales revenue. The remaining 12.5% is split among Koei’s other activities such as Arcade Management and Real Estate management.

Sales were up across the board when looking at regional splits. Sales revenue in japan led the way thanks to the strong console and social game segments with mobile seeing growth too. Total sales revenue in Japan was ¥12,228 million, up 7.7% YoY and accounting for 74.8% of the total sales revenue. Koei Tecmo note that the Japanese economy is gradually recovering and that there is a continuous improvement in employment and income environments which is leading to higher spending among consumers.

Overseas sales were up 14.1% YoY, led by the release of Attack on Titan. Overseas sales revenue was ¥4,348 million, accounting for 26.2% of total sales revenue. America led the way overseas with an 11.7% share of total sales revenue. Europe had a 5.8% share. Asia has been a growing market for Koei Tecmo thanks to the console, mobile and social gaming divisions and this has led to Asia becoming the second largest overseas region for the company in recent years. Asia accounted for ¥1,445 million sales revenue, up 13% YoY. An 8.7% total share.

Game Software:

Koei Tecmo shipped a total of 2.55 million units of game software during the six month period ending September 30th 2016. This was up 21.4% over the 2.10 million units shipped during the same period last year. Japan led the way accounting for 1.63 million units, a 63.9% share. The 101% increase over the prior year was primarily driven by larger hit games such as Toukiden 2 and Attack on Titan being released vs mostly spin off games last year. Catalog sales continued to be strong for the company.

Shipments overseas were down YoY. This was due to lower unit sales in America and Europe which were partially offset by an increase in unit sales across Europe. 920,000 units of game software were shipped overseas, a decline of 28.7% YoY. 400,000 units were shipped in America, down 29.8% YoY. 280,000 units were shipped in Europe, up 51.4% YoY and 240,000 units were shipped in Asia, down 55.1% YoY. Overseas shipments of game software accounted for 36.1% of total units shipped.

Financial Results:

Revenue and profit were both up for Koei Tecmo during the first half of the fiscal year. This allowed them to beat their earnings forecast on revenue but they fell short of the operating profit target. Koei Tecmo’s forecast estimated that operating profit would reach ¥3,000m but the actual number as mentioned in the summary above was ¥2,748. Net Profit however was higher than forecasted. Koei Tecmo notes that some titles were delayed into the second half of the year to improve quality and this has been a noticeable trend for Koei in recent years. Koei Tecmo are working towards an even better second half and a 7th year of consecutive profit increase since the Koei and Tecmo merger.

Koei Tecmo is working on various projects based on its new management strategy – “Creation and Expansion of IPs”. By actively promoting “Creation and Expansion of IPs” which puts brands and IPs as main axes, the company is moving to an organizational structure split into 5 brands, and making best use of each brand’s characteristics. The whole group is working towards raising corporate value. Koei Tecmo continue to expand the Toukiden brand through the release of Toukiden 2, now for home consoles. Attack on Titan was another collaboration title that builds on the development expertise of Koei Tecmo’s original genres. More titles are having tie ups, such as the Ni-Oh comic, and Koei Tecmo released Dynasty Warriors Heroic Legends which takes the musou franchise into a new genre.

All of these moves are being made with the aim to strengthen IP’s, maximise the value of those IP’s and in turn to maximise the value of each brand and the whole group.

Creation + Expansion of IP

The two slides below will show what Koei Tecmo is working on to achieve the creation and expansion strategy.

Koei Tecmo continue to innovate with new IP and genres. Ni-Oh is an upcoming action role-playing game developed by Team Ninja for the PlayStation 4. The gameplay, which has been compared to Souls series, revolves around navigating levels and defeating monsters that have infested an area. Nioh takes place in the 1600s during a fictionalized version of the Sengoku period, when Japan was in the midst of civil war prior to the ascension of the Tokugawa shogunate. Blue Reflection is another new IP from GUST which is set in a modern day Japanese school. In Blue Reflection, connections and human essence make up the themes. It is a “heroic RPG” that depicts a life-sized projection of female youth. Musou Stars is the latest new project from the company which is a crossover title similar to Warriors Orochi. Various characters from Koei Tecmo franchises team up to battle a new enemy.

In addition, Koei Tecmo will expand its current franchises this year with a sequel to the popular Nights of Azure, as well as new entries in the Samurai Warriors and Atelier franchise. The Musou franchise has been on a decline recently and Koei will really need to re-invent the franchise for the next generation. Dynasty Warriors 9 needs to be the title to do this, as do the upcoming collaboration titles.

In addition, Koei Tecmo are working on a brand new Nobunaga’s Ambition game after the success of the last anniversary game. The prior game sold considerably better than its predecessor and Koei Tecmo are looking to expand the franchise to a broader audience as well as appeal to core fans with the new installment.

Platform Expansion:

Koei Tecmo’s plan for the future revolves around using their own development tools to adhere to multi-platform/device solutions and continue maximising the profitability of each current and new IP. Koei Tecmo have expressed interest in developing for Sony’s new PlayStation VR and have already created a Dynasty Warriors VR demo for the console to test the capability. Koei Tecmo are also releasing an update for Dead or Alive Xtreme 3 shortly which will enable VR functionality in the game.

Koei Tecmo are also a confirmed partner for the upcoming Nintendo Switch. The company has already confirmed that they are bringing Nobunaga’s Ambition to the console. I expect Koei to announce a number of titles for the systems first year on the market.

In addition, Koei Tecmo are pouring more resources into the smartphone space where they have yet to have a hit game. Koei Tecmo first started porting console IP gameplay to mobile but learned quickly that this did not work. Their new strategy of creating unique and tailored games for smart devices based on internal IP is working better but the games have only been moderately successful so far. Koei is still pushing forward in its console expansion plans and hopes that its smartphone and social game business will grow too.

Collaborations:

Koei Tecmo are continuing to collaborate with IP Owners on new titles. Hyrule Warriors was a hugely popular title and Koei Tecmo have opened up a special collaboration game unit to create more hit titles with IP owners. Berserk is the latest title from the collaboration unit. However the recent anime feedback seems to be hurting sales of the game in Japan and it looks like the game may fail to meet or exceed expectations. Koei are still working on a bigger collaboration title that will be revealed in time.

Koei Tecmo are also developing the mobile title ‘Dissidia Final Fantasy’ for Square Enix. Koei Tecmo were responsible for the Arcade game of the same name.

Speaking of collaborations, a new original tie up promotion project has been announced by Gust and Toei animation. Augmented Reality Girls Trinary is being called an “anime cross-link RPG” which will fuse anime and video games for a unique experience. In Trinary, the characters exist on the other side of a device’s screen and players can interact with them. The animation will be done by Toei Animation and a weekly anime episode will be released through the app, as well as on Youtube, Niconico, and other paid distribution websites. Set in Tokyo, the story will revolve around a cast of young girls that must fight against enemies after a strange occurrence has altered the city.

A key element of the game will be communicating with the girls through mobile devices and will allow players to get to know the girls and create bonds with them. Augmented Reality Girls Trinary will be released for iOS and Android this year in Japan. It will be a free-to-play game with in-app purchases.

Regional Expansion

As noted before, Koei Tecmo are aggressively expanding into the Asia market where they have seen sales continue to grow. Asia is now the third biggest market for the company after Japan and Asia and this was originally down to the social game business there. Now Koei are seeing much more traction from its console and smartphone game business.

The company has benefited from the reversal of the console ban in China and it has now begun to sell the Dynasty Warriors, Warriors Orochi and Toukiden franchise for PS4 on the mainland. In addition, the company will be releasing Romance of the Three Kingdoms 13 in China for PS4.

Koei’s mobile strategy has mostly revolved around developing internal IP for release in the Japanese market. Overseas we’ve seen Koei Tecmo license its IP out to bigger developers/publishers. Dynasty Warriors Fierce Fights is a 3D 1V1 fighting game for smartphones that is being developed by Perfect World and will release in the China market on iOS and Android. Project Dynasty Warriors is being developed by Xpec and published Nexon and is akin to Dynasty Warriors 7 style of gameplay. The game will be released globally on iOS and Android.

Nexon also recently published ROTK: Cao Cao’s Legend in South Korea on mobile devices and the game has remained in the top 20 grossing charts since launch. Koei have licensed out IP to plenty of other developers in the region and this is one way that they are expanding their presence in the region. A Dynasty Warriors movie is also slated to release in China during 2018.

Digital Expansion

Koei Tecmo are continuing to focus on digital expansion of its business. Koei Tecmo’s social and mobile games business is seeing steady growth each year, but there hasn’t been any significant hit title in the business. Koei Tecmo are also seeing steady expansion in the digital console business through full game downloads, back catalog sales and DLC/MTX revenue. The success of the F2P version of Dead or Alive on consoles has prompted the company to replace more F2P versions of its paid games on console. This is a great way for consumers to experience the games at no upfront cost and adds as a gateway to the purchase of the full game.

Koei Tecmo is planning to have a nearly 50% digital ratio this fiscal year.

Outlook for full year:

Koei Tecmo still plan to have a record breaking year thanks to the continued success of their games software division and online and mobile division. Koei Tecmo plan to generate ¥42,000m in revenue for the fiscal year ending March 31st 2016. This would be up 9.6% year on year and be the fourth consecutive year that sales revenue had increased. Operating profit is forecast to reach ¥11,50m, up 3.9% YOY and would represent the sixth consecutive years of rising profits for Koei Tecmo. I actually believe that Koei may fail to hit this sales and profit forecast but still have a record year. Recent title performance has been week and this will have a negative impact on sales and profit this year, partially offset by the increased margin on digital contents.

Japan is once again set to account for 78.6% of sales revenue, up from 75.0% last year. Actual Sales value is expected to be ¥33,000 million which would be up 14.7%. North America is expected to account for 21.4% of sales revenue which would be down 3.6 percentage points versus the prior year. ¥9,000 million total revenue in North America would be down 7.7% YoY. Asia is also expected to see revenues decline due to no new big releases this year vs prior year. Europe is expected to see an increase in sales revenue due to the release of Ni-Oh this year, as well as continued sales of Attack on Titan.

Koei Tecmo plan to sell in 6.2 million units of game software for the fiscal year with 3.5 million sold in Japan, 1.1 million sold in North America, 0.9 million sold in Europe and 0.7m sold in Asia. Should the forecast come true then Japan will see an increase of 31.1% YOY whilst North America and Asia see decreases of 13.7% and 16.7% YOY. Europe should see an increase of 110,000 units compared to last year.

Please feel free to leave comments below.

Koei Tecmo have an interesting year ahead.

Pokemon Go – The Power of Mobile

19th July, 2016 · ZhugeEX · 2 Comments

A full 5,000 word write up on the success of Pokemon Go.

Pokémon Go was a hit the moment it hit the app store, jumping to the number 1 grossing spot in all launch countries within just a few hours. The new location based / AR game from Niantic and The Pokémon Company has done exceptionally well on both iOS and Android with more daily active users in the US than Candy Crush. The game also holds the number 1 grossing spot across all 34 countries that the game has launched in so far. Despite having officially launched in just 34 countries, it is clear that the game is already a global phenomenon with many in other countries downloading the APK through unofficial sources in order to get a taste of the game. It’s estimated that the game has already generated more than $40 million in gross revenue in just two weeks, a number that is generally unachievable unless you’re Supercell or another big mobile publisher.

The Pokémon franchise is a little over 20 years old at this point and to date has found success in traditional video games, trading cards, movies, tv shows and licensed merchandise. To date, more than 280 million units of Pokemon game software have been sold for Nintendo hardware and more than 21.5 billion individual trading cards have been sold to consumers. There have also been 18 full length feature films and an animated cartoon series which was hugely popular during the 1990’s. At retail, licensed merchandise generated over $2.1 billion in 2015 and overall the entire franchise has grossed over $50 billion in its lifetime, making it one of the biggest game related franchises ever.

The idea for Pokémon Go was created by Nintendo, The Pokémon Company and Niantic/Google. The concept was originally just an April Fools prank by Google that allowed you to catch Pokémon on Google Maps and was later announced as a fully fledged game in September of 2015. The development and publishing of the game was handled by Niantic, a start up that was spun off from google with a $20 million investment from Google, Nintendo and The Pokémon Company. A further $10 million was also put up on the condition of the company achieving certain milestones. Milestones which are no doubt met thanks to the hugely successful launch of Pokémon Go. Partnering with Niantic was a genius move as the company already has a ton of experience with AR, as well as a huge database of locations, from their previous game called Ingress. Pokémon Go builds on Ingress by utilising that database to create a world map and fuses that with the Pokémon IP and gameplay to create a new and unique mobile experience that resonates with gamers today.

Pokémon Go has been labelled the most successful mobile game in week 1 by many research firms due to the fact that it is the fastest game to reach number 1 on the iOS grossing chart and because the game has more daily active users on Android than Twitter and other popular social apps. The main takeaway from this is that the game has managed to not only reach a huge audience, it’s also encouraged users to spend in app and this has caused Pokémon Go to shoot to #1 on both the download and revenue charts in all launch countries so far. There are a number of factors as to why there has been this immediate response from gamers. The first point is that this was the perfect time to bring Pokémon to mainstream gamers on Mobile. The millennial audience which grew up with the original Pokémon games and anime are now in their late 20’s and early 30’s making them the perfect demographic for a new mobile gaming experience that features a nostalgic brand.

However brand & nostalgia alone are not the only reasons why Pokémon Go has been so successful, otherwise Pokémon Shuffle would have also been a hit. The location based gameplay and AR features play a role in why the game is so successful, but again it’s not the only reason, otherwise Ingress would have been a hit. Instead It is the combination of Pokemon’s brand, location & AR based gameplay, nostalgia and platform that has caused Pokémon Go to become a hit in such a short amount of time. It’s really no surprise that the game is doing well, but what is so surprising is how the game has sort of become a phenomenon on its own with little to no marketing. Publishers like Supercell and Machine Zone will spend millions on acquiring new users and it’s no secret that the cost per user is constantly increasing for publishers. With Pokémon Go the game wasn’t even featured on the app store front pages, nor was it heavily advertised on TV or in other ad form, yet it still shot to number 1 in a very short amount of time. Word of mouth for the game has been amazing and it really shows just how strong the Pokémon brand is.

What is also of note is how Pokémon Go has found success in a radically different category to what is in the top 10 at the moment. The most successful mobile games so far have typically been in the endless runner category, in terms of high downloads, and in the match three or Tower/Military strategy game category, in terms of high revenue. Instead Pokémon Go has proven that it can do well despite being in a completely different category thanks to the pairing of a nostalgic franchise and location based/AR gameplay. As noted above, this isn’t something that you can emulate as it took both the big franchise and location based AR gameplay for this game to do well. Data suggests that Pokémon Go is serving a portion of the market that is hungry for new gaming experiences on mobile. Slice Intelligence data shows that 53% of Pokémon Go players, who had made an in app purchase, made one or fewer in app purchases on other games in the last 6 months. In fact the demographics of Pokémon Go are quite unique overall with 52% of all buyers in the 18 to 34 age category. No doubt the brand is bringing in those who used to play the game on handhelds back in the day.

Despite the overwhelming success of the game, there have also been a number of issues for Pokémon Go. The most notable of which being that the servers seem to crash every time a new country is added or too many people try and play the game at the same time. It can serve to be frustrating to consumers on mobile who are used to games just working and the downtime could cause some people to abandon the game. However, the game itself is very unique in that it’s similar to an MMO where gamers are all playing in one world together and can see the same world and influence it together. This means that playing with friends is fun and so it makes it harder for users to leave the app when all their friends don’t mind the servers being down and will continue playing the game. It’s clear that the game has a huge amount of players, due to the servers being down all the time, and so far the number is seemingly continuing to grow. Therefore it’s not an entirely bad thing that the servers are down all the time and honestly it may have a minimal impact on churn.

There have also been a number of stories in the media of how Pokémon Go players are finding themselves in dangerous situations as a result of the exploration that is encouraged in game. Some have discovered dead bodies, been robbed and even been shot at as a result of playing Pokémon Go. This negative press has had some speak out about how the game is dangerous and shouldn’t be played. However a lot of the stories of this nature are fake and also the number of stories is tiny in comparison to the overall player number. These situations are just as likely to happen when using pretty much any social app on your mobile phone and it’s no different to the texting and driving situations. One other issue I want to point out is the issue of privacy in the app, at launch the game was able to access your entire google account with read/write access. This rightly outraged a number of users who realised how this data should not be in the hands of Niantic and The Pokémon Company and many complained about it. Thankfully Niantic quickly pointed out it was a mistake and quickly updated the app permissions to have basic level access.

Another issue I see with the game is how Nintendo have not had a huge amount of involvement with this game. What I mean by that is that this game is clearly not part of Nintendo’s push into mobile with DeNA, and whilst it’s great that Nintendo are working with other partners, it means that they’re fracturing the user experience for gamers. In Miitomo, you can log in with a Nintendo account and earn rewards in game through your Nintendo account. For Pokémon Go there is no option to log in with a Nintendo account, there are no rewards, there is also no way to add your friends list from Miitomo either. Whilst it’s understandable that Niantic would choose to focus on Google account integration and Pokémon account integration, adding a Nintendo account option would have been a great way for Nintendo to grow their new membership system and also create a consistent experience for all Nintendo IP games and properties. This is certainly something that should be considered for a future update as a lot of cross functionality can be added through the use of a Nintendo account to enhance the gameplay experience for gamers who are already invested in the Nintendo ecosystem / encourage new gamers to invest in the Nintendo ecosystem.

The main issue however, which links back to the first one, is how Niantic have managed the worldwide roll out of the game. Niantic have tried to get the game to as many regions as possible but each new launch leads to more server downtime. It leaves the company with a dilemma, in that everyone wants the game to launch in their region, but at the same time they want reliable servers. Niantic do seem to be prioritising new launches over server reliability right now and it seems to me that they want to maximise the opportunity for additional revenue as soon as possible. It may also be a way for Niantic to increase the value of their company as soon as possible or achieve company milestones attached to the additional $10 million from Nintendo/TPC/Google. I am sure there are many interested in buying Niantic, perhaps even Nintendo at this point.

Following on from the point above is that the game will face difficulties launching in countries like China and South Korea. The world’s 1st and 4th largest smartphone markets. The issue arises due to the use of google maps as the base of Pokémon Go. Google Maps is banned in China whilst in South Korea the maps service is very limited in terms of functionality. It’s highly unlikely that Niantic will be able to release the game in China unless they partner with a Chinese company like Baidu to use their maps instead, and with the new regulations in place that requires all mobile games to be approved, it’s highly unlikely that the Chinese Government will even approve a foreign GPS tracking game in the first place. It should be easier in South Korea but will still be fairly difficult to launch there.

Whilst this issue is very much outside of Niantic’s control, it is a problem for them as the game has already become huge in these countries outside of an official launch. The Pokémon Go fan page on Baidu Tieba has over 300,000 followers already and in South Korea there are reports of gamers flocking to the North of the country where the game is playable. In fact Pokémon Go has become so popular in China that a similar game called City Fairy Go is now the #1 game in China. It’s basically a Chinese version of Pokémon Go but with enough changes to make the game unique. Many gamers are downloading and playing that instead as there is no official release of Pokémon Go in sight. Pokémon Go does technically work in China, through a VPN, but it lack the ability to process payments. Given that the top grossing mobile games in China and South Korea can make a combined $150 million each month, there is a huge potential loss of revenue by not being able to launch in the two countries.

Pokémon Go also has a number of mechanics in the game that have contributed to the overall success of the game. The first mechanic being the overall simplicity of catching a Pokémon. In the console games you would have to start a battle and win in order to catch a Pokémon, with Pokémon Go the capture feature has been simplified in such a way that it just requires a flick to catch a Pokémon. It’s the mechanic that all gamers were taught through Angry Birds a few years ago and one that is simple, intuitive and makes the game much more accessible. The second mechanic of note is how the game is essentially a real world MMO with players seeing the same content on screen as friends that they are standing next to. It means that friends can play together, hunt the same Pokémon together, and see the status of nearby Pokestops and gyms together. This simple mechanic has allowed many players to interact with each other in the real world and keeps players engaged with the game.

However, there are a few mechanics that are missing from the game that were originally advertised in game. The ability to trade Pokémon, fight against other players and group events are still missing. Niantic CEO John Hanke has assured users that the game will receive regular updates every couple of weeks with new features and mechanics. The launch has been smart in a way as Niantic have put in just the right amount of content to keep players engaged. With the addition of the three features above, as well as other features like in game chat, new Pokémon and more, it means that Niantic can create a roadmap for Pokémon Go to continually release new content to keep players engaged and spending. It also allows users to gradually learn the game mechanics as time goes on, rather than be confronted with a bloated and hard to play game on day 1. It’s clear that mobile games today need to adopt the games as a service model in order to have any chance of remaining in the top 10 all year round, the game has done exceptionally well to get to number 1 already and this roadmap could be exactly what Niantic need to keep the game at the top through the next few years.

This brings me on to my final point about monetisation of the game. The primary way that the game is monetised is through the purchase of Poke coins. The prices range from $0.99 for 100 coins to $99 for 14,500 coins. These coins can be earned over time in game but purchasing the coins allows you to get instant access to various temporary and permanent items. Poke coins allow you to buy temporary power ups such as Incense, which increases the number of Pokémon that spawn around you, as well as Lucky Eggs, which double your XP for 30 minutes, and also Lure Modules which you can attach to a Poke Stop to spawn Pokémon there. Permanent power ups include backpack and storage upgrades which allow you to carry more items/Pokemon. You can also buy Pokeballs, these are used to catch Pokémon. It’s a fairly simple list, but what is of note is that the majority of micro transactions in the game provide temporary power ups to you and/or other players which encourages players to spend on these options more often.

Data from Slice Intelligence, Apple and App Annie suggests that the $0.99 option is the most popular option in most markets. What this shows is that in game spend is being driven by a high number of users and not just a bunch of whales who are spending huge amounts. The fact that the game continues to remain at number 1 in each market shows that gamers are also being enticed by the temporary power ups and are continuing to buy those each time they want to have a boost. With a roadmap in place for new content, microtransactions, features and events, Pokémon Go could keep users spending in app and this could very easily turn into the most successful game of the year. However there is still a lot of uncertainty as to whether Niantic will be able to add content that keeps users engaged.

However one other way that Niantic can generate revenue from the app is by utilising a monetisation model that they had in Ingress. In Ingress,Niantic were able to generate revenue through sponsorships of items and locations in game. These sponsorships encouraged players to arrange meet ups at certain locations and made the game more interactive for gamers and allowed Niantic and the sponsors to see the benefits through a constant revenue stream. The pokemon Gyms would be perfect for this, and the CEO has already confirmed that sponsored locations will be included in a future update. It could add a whole new dimension to the game and not only provide a boost in footfall for local business but increase engagement and spend in game (Not to mention rev. from sponsors).

In fact we’re already seeing some local businesses embrace Pokemon Go by offering customers money off products and many users have seen this as a positive thing. In a way, these unofficial sponsored locations are serving to keep people playing Pokémon Go and make their experience better. GameStop recently confirmed that they had run an event last weekend where they dropped lure modules across 462 pokestops that were near to their stores. This increased sales by 100% over the weekend and helped drive additional footfall in store. With official sponsored locations added in we could see an even bigger positive response from players. The game is due to launch in Japan tomorrow and McDonalds will be the first official sponsor for the game. Not only will this boost sales of McDonalds, it will encourage players to play more in order to reach the required levels to take advantage of each reward.

Overall Pokémon Go has been a hit for Nintendo. Investors have wanted to see Nintendo enter the Mobile games market for a while now and whilst Miitomo had a fairly poor launch, Pokémon Go has had the best launch ever. Pokémon Go has acted like a proof of concept for Nintendo as it shows the potential for Nintendo IP on Mobile is there and can be a success. With a few hit games, Nintendo could easily create another $1 billion+ segment, something that they could have used during the Wii U era. Pokémon Go solidifies Nintendo as a player in Mobile, the game has very high user acquisition at little cost to Nintendo due to the brand and gameplay mechanics encouraging strong word of mouth. The game is also the #1 grossing across all launch countries with what is arguably just a standard bunch of micro transactions and the game has generated increased brand awareness which can feed into Nintendo’s traditional console business and the upcoming releases of Pokémon Sun and Moon.

This has caused Nintendo’s market cap to double in the past week as investors are now confident that Nintendo can do very well with the right product in the Mobile games market. It’s shocking to think that only two years ago they were saying that they would never develop for mobile. Thankfully over the past couple of years we’ve seen Nintendo finally understand that diversifying the business is the best move to make right now as it’s become clear they can’t rely only on their traditional console business. Especially if the Nintendo NX fails to find a place in today’s market. With Mobile, Nintendo can not only create games that reach a wider audience, they can expand the popularity of their brand as well as cross promote their other products.

The reason I’m saying this is a hit for Nintendo (as well as for Niantic and The Pokémon Company) is because Nintendo will receive some of the earnings from Pokémon Go simply for giving the green-light to the project. Not to mention that they’ll earn revenue through the sale of Pokemon Go Plus hardware. Nintendo own the copyright to Pokemon, along with Creatures and GameFreak. As well as this, Nintendo are the sole owner of the Pokémon trademark. Don’t forget that Nintendo have a 33% stake in The Pokémon Company which is a joint investment between Nintendo, Game Freak and Creatures. Nintendo also have an undisclosed stake in Creatures as well, not to mention an undisclosed stake in Niantic. So to cut a long story short, Nintendo have a huge part in this game, even though they didn’t publish it.

To break it down, Apple/Google will take a 30% cut from the total gross revenue, leaving the remaining 70% to be split among The Pokémon Company, Nintendo and Niantic. Of course Niantic will get their cut, and The Pokémon company will get their cut. But Nintendo will not only have their own cut, as a stakeholder in The Pokémon Company and Creatures, they will be entitled to over 33% % of what The Pokémon Company earns. Not to mention anything they earn from their small share in Niantic and any other dividends. In other words, Nintendo are indeed benefiting from the success of Pokémon Go, but there are other benefactors here which means that overall Nintendo are still getting a small part of the pie.

It’s hard to say how big of an impact Pokémon Go will have on Nintendo’s financials this year. If the game remains at number 1 all year round then the game will certainly have some impact on Nintendo’s revenues, but even in the best case scenario I don’t expect the single game to have any significant or material impact to revenues/profits. However the addition of Animal Crossing and Fire Emblem this year, along with the success of Pokémon Go could cause a boost in Rev./Profit for FY16. Animal Crossing will no doubt be aiming for mass market adoption due to the popularity of the game whilst Fire Emblem will be aiming for a good number of core console fans to play and pay due to the game still being fairly niche/core overall. If these two games do well this year then they will certainly have an impact on Rev./Profit, however once again I don’t expect it to be significantly above what Nintendo have already forecasted. A full year of revenue from a handful of hit mobile games in FY17 will be what provides the biggest impact to Nintendo’s financials.

Unlike console games, mobile games don’t generate the majority of their revenues on day 1. The Free to Play + Games as a Service model means that Mobile games can generate just as much as console games, if not more, but it will take considerably longer to get there. Hence why I believe Nintendo’s mobile division will not have a material impact on overall rev./profit this year but has the potential to provide a huge impact in FY17. Assuming a Mobile game remains in the top 5 worldwide for a full 12 months, it has a huge chance to be a billion dollar generating game. Pokémon Go could be the first Nintendo game that reaches that benchmark and it’s not hard to imagine that another Nintendo IP paired with unique gameplay on mobile could do the same. Nintendo have gone from FY16 being a write off year, with the discontinuation of the Wii U, to this being a transitional year when we finally start to see Nintendo get serious about other opportunities outside of traditional consoles.

However, I should point out here that I’m not saying that Nintendo should stop making consoles or console games. The success of Pokémon Go has nothing to do with suggesting that Nintendo should get out of the console game and to suggest such a thing is ludicrous. The performance of the NX should be used as a measure as to whether Nintendo should continue in the console market. The success of Pokémon Go shows that Nintendo can diversify their revenue streams and add on Mobile as a new business segment. It’s clear that Nintendo still make the most money from their traditional hardware and software business where they control the ecosystem. Being a successful platform holder in the Console Games market and also being successful in Mobile games is considerably better for any company, rather than to just focus on Mobile games. Only if NX fails should a conversation be brought up about Nintendo going third party or purely mobile. Especially when you consider how fickle the Mobile market can be, remember ‘Draw Something’.

What is of note is how Nintendo are able to reach new audiences with their expansions into other mediums. On Mobile for example we’ve seen that Pokémon Go has indeed reached a younger audience and also a fairly casual audience which has been missing from the Wii U. Nintendo has an opportunity to reach out to the casual market again, which they haven’t had since Wii and the aim will no doubt be to use Mobile as a way to cross sell and promote their console products. This also serves as a lesson to other games companies, especially Sony and Microsoft, that they have a huge opportunity in mobile as well, not only the concept that big franchises can work on mobile, but the idea that they can reach a new demographic. Microsoft indeed discovered this with Minecraft, whilst Sony hasn’t really been able to have any presence in Mobile outside of their Sony Pictures/Aniplex games development company.

The Mobile market has been stagnant for a while with the same sorts of games entering the top 10 and staying there. There have been AR games for over a decade as well as many location based games too, but combining those two features with the brand of Pokémon has allowed Pokémon Go to become a killer app in an app category that was never popular before. The AR category. I should point out that this game isn’t true augmented reality, but it is the first experience that many will have with an augmented reality experience and can be the catalyst that drives more in depth AR experiences on mobile and could even allow AR to take off on dedicated devices (Hololens), however dedicated AR is still a way in the future. Pokémon Go is indeed taking all the AR related buzz at the moment and many are predicting that we’ll see lots of similar experiences pop up. Although how successful those copycat apps will be without a big brand behind it remains to be seen. Instead I believe this will open up the market to completely new AR experiences. Snapchat Lenses made AR popular and Pokémon Go took it even further into the mainstream. These are two completely different apps and are successful in their own right. With more unique apps like these two we could see AR play a big role on mobile and bridge the gap to dedicated AR devices in the future.

In Summary, Pokémon Go has been a huge success for Niantic, The Pokémon Company and Nintendo. The perfect marriage of the Pokémon brand with Niantic’s map database and AR functionality has allowed Nintendo to launch the right product at the right time and capture a large audience that either grew up with Pokemon or are trying it for the first time. The hype for Pokémon Go is amazing right now and the unique gameplay is empowering gamers to experience a new way to play. The game has acted as a proof of concept for Nintendo in the mobile space and investors have been quick to price that in. Although I should note that the game hasn’t even released in Japan yet so there is plenty of potential for Nintendo’s stock price to rise further should Japan respond favourably, which they will. Everyone will now be watching to see what Niantic does in order to enhance the game in the next few months to keep gamers engaged and spending. All eyes will also be on Nintendo’s upcoming games on Mobile this fall to see if they can replicate or prove successful in the mobile market. It’s shocking to think that Nintendo weren’t even planning to release any mobile games just a couple of years ago and now Pokémon has had the most successful launch on mobile ever and is driving sales of Pokémon related merchandise and games.

Nintendo’s financial results briefing will be on the 27th of July and they will certainly be talking about a roadmap for Mobile. Nintendo can very easily create a multi-billion dollar segment through mobile games with just a handful of hit games. If they continue to expand into content licensing (Movies/TV/Merchandise) and also create a successful console then we could be looking at a very different Nintendo in a couple of years from now.

Legal sales of PS4 & XB1 to exceed 1 million in China

12th July, 2016 · ZhugeEX · Leave a comment

PS4 & XB1 legal console install base to hit 1 million in 2016
Grey Market console install base to fall short of 2 million in 2016
PS4 continues to be the console leader in China
New Chinese consoles won’t have a huge impact in the market
Console gaming to remain niche overall as mobile continues to grow

With more than 400 million gamers on Mobile and 130 million gamers on PC, 2016 is the year where China shows its dominance in the worldwide games market by surpassing the U.S. to become the undisputed number 1 games market in the world. The march has been led in recent years by mobile, which has seen explosive growth and is on track to generate upwards of $7 billion this year. Client/Web PC games have been around much longer and have solidified their popular position among core gamers in the country, now generating upwards of $12 billion each year. China’s game market is on track to see revenues of over $24 billion this year (according to Newzoo) thanks to Mobile & PC . The two different categories are set to continue growing into the future. The U.S. market has also seen explosive growth from mobile and PC. but unlike China, the country has a huge console playing population of more than 70 million (according to EEDAR) and generated over $7 billion in revenues from Console game software at retail and via digital download (according to NPD & DFC – CY2015). The number of PS4’s & XB1’s now installed in the US is over 26 million with the number increasing every month. This is a huge contrast to China where the amount generated from console/tv games in 2015 didn’t even hit $100 million and where the install base of PS4 & XB1 is considerably low, despite a huge gaming population.

Shanghai Oriental Pearl, the distributor of PS4 & XB1 in China announced at the end of 2015 that the install base of both consoles in the country had hit 500,000. Please note that the figure quoted here refers to legal console sales in the country via official channels. It’s impossible to know how many consoles have been imported into the country, but having looked at some data from Niko Partners, spoken to retailers and others in the industry, I’m confident enough to say that the grey market will have accounted for an additional 1.5 million unit sales leading to a total of 2 million PS4’s & XB1’s installed in the country. The number is considerably low for a country with hundreds of millions of gamers and a population of over 1.3 billion.

It all stems from the fact that consoles have been banned in China for the past 14 years. The only way to buy a console in the country prior to 2014 was through the grey market and many just didn’t bother. Instead it was Internet Cafe’s that drove gaming back when consoles were originally banned. Many who wanted to game either couldn’t afford a PC or weren’t allowed one by their parents and so would go to an Internet Cafe where they’d pay a small fee to play online games. This led to games like Warcraft becoming hugely popular and more recently it’s free games like League of Legends that have dominated in China. Mobile has led the more recent gaming revolution in China as smartphones have become increasingly affordable, widespread and replaced PC’s at their jobs. Users in China use smartphones for everything, from paying for goods, to watching live content, to games. The fact that smartphone games are free means that everyone can play and there are now 400 million gaming on smartphones in the country.

Consoles have faced numerous challenges in the country. The first is simple brand awareness. Whilst many will have heard of Sony, through electronic devices, and Microsoft, through Windows PC’s, the PlayStation and Xbox brands are still relatively unknown across the country. Censorship is imposed on foreign games which means that a lot of popular console games in the West, like Call of Duty and Grand Theft Auto, are banned on console in China due to going against Chinese cultural values. Whilst some games can edit out 1 or 2 scenes in order to get around the censor, a game like Grand Theft Auto would need to be rebuilt from the ground up and be a completely different game to be approved for sale in China. This has discouraged many publishers from taking the risk to publish their games in China and so far there are less than 100 official games available for PS4 & XB1 today due to this as well as due to the long approval process that console games have to go through. It can take months for a game released in the West to be localised and approved to go on sale in China.

The next challenge is actually getting consumers to buy the console. Gamers in China are used to paying a small fee to game on PC’s or nothing at all to game on smartphones. With console the idea is flipped on its head and consumers are suddenly being asked to pay upwards of $350 for a console and at least $30 for each full game. That rules out a large portion of the gaming population in China who either can’t afford, or don’t have the will to spend that much for just a few extra games, especially when there is so much choice on Mobile & PC. With a low install base, many foreign companies are also discouraged from publishing their games there, however both Sony and Microsoft have done well in order to bring some foreign games to the market.

There are also a number of social factors at play here, the fact that Chinese gamers prefer games made for them is an important point that can’t be ignored. It’s why games like Dynasty Warriors can do well on console whilst others based on Western history may not be as successful. Many indie developers and big publishers in China continue to publish games on Mobile and PC whilst ignoring console due to the small install base and lack of opportunity there. Traditional Chinese families still have a lot of negative stigma around gaming, hence why many youngsters game away from the living room on smartphones or at Internet cafes. Many families in China only have one TV and so a games console in these households wouldn’t make sense to older parents who would block the move. That negative stigma is starting to go away but it’s something to be aware of, especially among the emerging gamer category.

All these factors combined have meant that only a very core audience has adopted consoles today. Sony and Microsoft have tried to appeal to the family and mass market through various advertising campaigns but so far they haven’t been able to have any significant impact in that market. It all comes down to the fact that the living room gaming experience just isn’t convenient for most Chinese gamers and with no familiar games on the consoles it means that they’d much rather stick to what they know. Even local Chinese companies such as Tencent, Fuze and others who have launched Android Micro-consoles are unable to find success. These micro consoles may have the same games as mobile and PC and be familiar to Chinese users, they are also considerably cheaper than a PS4, but the demand for living room gaming just isn’t there and as such it’s the TV streaming functionality that gets used more on these boxes. In fact sales of Smart TV’s and dedicated streaming boxes are outpacing games consoles and micro games consoles in China quite significantly.

It was clear from the start that console gaming would be fairly niche and after two years it’s become fairly clear that console gaming in China will remain niche. I don’t see there being a catalyst that will suddenly spike sales. But with continued promotion from Sony and Microsoft, lower cost to entry, more AAA games from Western + Japanese publishers, the introduction of more local Chinese games that take advantage of both paid and F2P models, as well as positioning the devices as home media entertainment systems for the family, Sony and Microsoft can see their games business in China grow gradually to end the generation in a good position.

Local Chinese consoles are also set to remain pretty niche. Fuze recently released their Tomahawk F1 which targets the mid core gamer. The Android console manufacturer has partnered with many AAA/AA and Indie developers in order to bring games like Saints Row 4, Dynasty Warriors and Hawken to their console in an attempt to attract Chinese gamers who want great game experiences at a low cost to entry. Whilst the concept is good on paper, Fuze are entering a market where most still do not want to pay upfront for a console and would rather only play games that appeal to them , that are found on Mobile and PC. So whilst I do expect this to have a niche level of success, this won’t have any impact on mainstream gaming in China. Tencent recently announced their TGP box in China. It’s effectively a Steam Box that runs both Windows 10 and Tencent’s Gaming Platform. However the cost of the console is not only ridiculously high, it’s also a product that already exists today with any custom built PC with the Tencent Games Platform downloaded to it. So far the console only has around 250 pre orders and this is another failed Chinese console in my opinion. It’s highly unlikely that it’ll find success and I’m not that bullish that the TV Gaming side of the console market in China will find success. Even with Fuze trying to capture the middle ground, I still believe that it’s Sony and Microsoft that will do best in China, but even then the level of success won’t be anything to shout about.

The potential for console sales growth in China hasn’t been very high this year, only a few new titles have released for PS4 & XB1, and whilst gamers can import from overseas, the majority of core gamers in China likely already own a PS4 or XB1. With a current install base of 500,000 legal PS4’s & XB1’s, I expect the total install base to double this year as more games release for the console later in the year. Final Fantasy XV is set to have a simultaneous worldwide launch in September, even in China, and this should do well in China due to the nostalgia factor there. I believe this, as well as the slew of games due to be announced at China Joy will play a strong role in maintaining PS4 & XB1 sales in the country. I’m expecting the number of PS4 & XB1 grey imports to decline this year as legal console sales finally take the lead. Grey Imports were at their highest in 2014, before the official launches of PS4 & Xbox One in China.

The current estimate of 500,000 legal console sales in 2016 and 400,000 imported console sales would take the total install base of legal consoles to around 1 million and the total install base for imported consoles to just under 2 million. The total console install base of PS4 & XB1 in China would therefore be somewhere just below 3 million by the end of 2016. New hardware due to launch from both companies should provide a boost to the install base of both in 2017 and as long as they continue to promote their products there then the overall install base of both consoles should hit 5 million (Legal & Grey Market) before the end of 2018. From what I’ve seen, legal software sales have been low in the country with the attach rate still under 4 games per console. It looks like many are still importing games from outside of China and a few online retailers show data that seems to support this notion. Right now I don’t see the console software market in China becoming a billion dollar market any time soon. With an estimated $25 billion due to be generated by games in China this year, revenue from console games software will continue to account for less than 1% of that.

UPDATE: New Mobile Game publishing regulations in China

11th July, 2016 · ZhugeEX · 5 Comments

It’s been a little under two weeks since new regulations were put into place by the SAPPRFT regarding the publishing of Mobile games in China. If you missed my previous article on the topic then I strongly suggest you read it first as it will help understand the overall situation as well as this article.

PREVIOUS ARTICLE

When the new regulations went in place on July 1st, Chinese developers found that their publishing tools, such as iTunes connect, would not allow them to publish their games without a code from the Government that proved their game had been approved. It is now known that SAPPRFT are taking this very seriously and we’re already seeing the impact from this. Below I’ll be discussing some new developments as well as responses from the SAPPRFT themselves. Whilst the responses do clear up some uncertainty about the new regulations, they also open up new questions and there is still some confusion as to how this whole thing will work and how it is of benefit to developers.

The first point I’d like to raise is how small developers are not happy with the new regulations. Many of them have already taken to social media to voice their complaints and some have a very valid reason to do so. A couple of developers, who submitted their games for approval, had the game rejected by the Government for having English language in the game. Now I should make clear that the game was indeed in Simplified Chinese, and only a few words were in English such as ‘Mission Start’ & ‘Lucky’. The English words weren’t vulgar or overused and some of them such as ‘HP’ were just common abbreviations of known words like ‘Health Points’. The only way the developers can get their game approved is to remove the English words and then resubmit their game into the back of the queue. A process that could be long and costly for a small independent developer.

This is an odd thing for SAPPRFT to regulate but they do point out that this regulation has always existed, but it’s never been enforced before. If you read my article on console games in China you’d know that they too have to be in Simplified Chinese in order to receive an official release in China, but I personally I can’t recall a time when they were so strict as to block a game from going on sale for having English text in the game. In fact I’m fairly sure that all foreign games published in China retain some English text and even Chinese games use plenty of English text in game as those uses are understood by nearly everyone across China. Many developers believe that this is a pointless regulation, and I honestly wouldn’t be surprised if big publishers don’t have to adhere to it, given how many of their games include English text.

SAPPRFT have been quick to respond to many of the complaints with stock answers that most would expect. Whilst a lot of it is just PR, some of them are fairly reasonable explanations and could actually benefit some. For example, SAPPRFT note that the Mobile market has grown to be huge in 2016 and so they want to make sure that the market continues growing whilst rooting out problems seen in the market today. Many games are poor quality, work against the interest of Chinese people, or are pirated apps from big games. They note that these type of apps go against the interests of the entire industry, which is true, and that the regulations they’ve put in place are essential to facilitate a healthier market for mobile games. The note about piracy will certainly give big Chinese & Overseas publishers some confidence in the Chinese market. Although, a Pokemon Go clone is the number 1 most downloaded game in China today (July 11th) so it doesn’t seem to be having any impact right now. It’ll be interesting to see just how strict the regulations will be against pirated apps and whether this actually will root out what is a huge problem with the app store today.

One other complaint that SAPPRFT addressed was the policy that required developers to send in a phone with the game pre installed + active SIM card in order for the game to be approved. Whilst the actual wording was somewhat ambiguous, the SAPPRFT have clarified that this is one of three options in order to get your game approved. You can actually just send the APK to them, which they will download and install on a test phone. Alternatively you can send your own phone in with the game pre installed in order to control the test environment yourself. That is one policy which has been cleared up, and I’m glad it has as it was ridiculous to expect all publishers to send in a phone with the game pre installed.

SAPPRFT also cleared up another unclear policy. With the news that some games would be processed in less time, rumours started to spread that there would be a ‘fast approval’ option and that if you paid you’d be able to get your games approved in less time. In fact, plenty of middle men started to pop up on sites like Taobao that offered intermediary services that promised to get your game approved faster at a small cost. Thankfully SAPPRFT has said that these services are illegal and that there is no fast path process to get your game approved. They note that they’ll be cracking down on anyone offering this type of service. They also clarified that the approval process is free of cost to developers. Whilst this is excellent news, it won’t stop small developers from worrying how the long approval process will affect them in an industry where making mobile games is all about getting the app on the store as quickly as possible and using the profits to start development on the next project. Long approval times will end up costing these small developers both in time and money, even if the actual process itself is free.

It is also worth noting that some small developers may not even be eligible to have their games approved without approaching a publisher. One of the requirements for having your game approved is to hold a publishing license and lots of indie developers will not have one. Many may not even be eligible to apply for one. What this means is that a number of small developers may find themselves having to partner with a larger publisher just to get their game approved. Not only will this take time, the publisher will be entitled to take a cut of the earnings which means this new process will give indie devs a small cut of what they would be earning could they self publish their games. There is still a lot of uncertainty around this regulation and how it will work for small developers but at first glance it seems like this is just another regulation that favours big publishers in China and is detrimental to the small guys.

Top 50 mobile games in China. Revenue Share.

Whilst a number of these regulations, such as the one about preventing piracy, can be seen as good and a step forward, the majority of regulations are seen as bad. Not only do developers have to have every game approved, which could take months, they also have to make sure their games abide by all regulations, that they have all the right licenses, and that they themselves can afford the cost of the whole process. Many in China are predicting that this will affect the growth of the industry as small developers decide to stop making mobile games. Big developers and publishers could also be affected as some games may now be blocked due to having too much violence or going against another cultural rule. However most big publishers, who have the funds to get around these regulations, will not be affected. Especially as many big publishers will no doubt try to work with the Government to get their games approved faster. We could be looking at a very different mobile market within China in just a few years from now, one where only big publishers are successful and there is no indie developers.

Some indie developers have gone as far as to sue the SAPPRFT. Shanghai based Chen Yu has started a crowd funding campaign to raise money in order to launch a legal case against SAPPRFT. His complaints are based on everything that I’ve written in this article and the previous one, that these regulations will have dire consequences on small developers whilst favouring big developers who can afford all of the big changes. Chen believes that many of the new regulations, such as having to obtain a publishing license/publisher, having to censor their games, and having to wait months on end for approval will mean the small developers will stop making mobile games as the return will not be enough for them after going through the process. It’s obvious to anyone that Chen will not win a court case against SAPPRFT. But what he may be able to do is raise awareness about the issues facing small developers and in turn the SAPPRFT may change the approval process in order to be more accommodating of small developers.

It’s a very interesting time to see what will happen to China’s mobile games industry. Right now I don’t see the regulations having too much of a negative effect on big publishers in the country. They will no doubt continue to publish games in a timely manner and as the majority of revenue in China’s mobile market is generated by big publishers, I don’t see it drastically impacting growth of the overall market. But small developers may find that they need to sacrifice their independence and find a job at a big publisher in order to continue making mobile games.

(I posted about the impact on foreign games in my last article, please read that to understand more)

The challenge of publishing a Mobile Game in China

4th July, 2016 · ZhugeEX · Leave a comment

Comprehensive 3,500+ word report regarding new regulations governing Mobile Games in China and how this will affect domestic and foreign games companies. Suggestions for foreign game companies included below.

It’s time to talk about China again. A number of changes have taken place recently which will have huge effects on the Mobile & Online games industry. To be more specific, new regulations have been put in place that show China is getting extremely strict when it comes to the administration and approval of games in China. In China there are a number of Regulators and Ministries that are responsible for ensuring that Chinese values & laws are being promoted and upheld in the country. Or to put it simply, they’re responsible for censoring and regulating content in China. It’s no secret that China and censorship go hand in hand like… well… China & Censorship.

First there is the SAPPRFT (The State Administration of Press, Publication, Radio, Film & Television), this body regulate media in the country and are responsible for censoring anything that comes under the segments listed above. Secondly there is the CAC (The Cyberspace administration of China), they are the agency responsible for censorship and control over China’s Internet. Finally there is the MOC (Ministry of Culture), this ministry is responsible for culture policy in the country and promoting, protecting and censoring any form of cultural art.

Mobile Game Regulations

The big change that many of you may have heard about is that the SAPPRFT have introduced a new regulation that states every single mobile game must now be approved, prior to appearing on the Android and iOS app store. The regulation, which went in to place on July 1st, will have a huge impact on the gaming landscape in China and could ultimately have huge consequences. China’s Mobile Game market is currently the biggest in the world with over 400 million gamers and around $7 billion generated from Mobile games in 2015. There is also a fairly diverse portfolio of games and publishers with Tencent & Netease at the top, many companies in the middle and then a whole load of Indie developers who are also able to create mobile games and publish them on an app store. There are even popular foreign games on sale in China, such as Clash of Clans and others, and they have seen good levels of success.

With this new regulation, everything gets thrown out the window and now all new games will need to have Government approval before being added to an app store. But that’s not all, even games that were made before July 1st need to get approval from the Government before October 1st 2016 or they can risk their games being taken down. In other words, the whole situation is about to get a lot more messy. Lets take a look at these regulations in a bit more detail.

A developer will need to apply for either the simplified process or standard process

SAPPRFT have introduced a simplified policy for Mobile games that meet a certain set of requirements.

Game copyright must be owned by domestic (Chinese) individual or entity
Do not contain sensitive gameplay elements regarding politics, military, nationaility or religion
Have no storyline or very simple storyline
Are casual games like endless runners etc…

If the above applies to your game then you’re in luck and can start the simplified process outlined below. If not, then you need to follow the standard process.

Simplified process

The simplified process is far from simple and is quite absurd in many ways. In order to get your game approved you will need to submit your game to be approved at least 20 days prior from launch. The process involves filling out a bunch of paperwork, loading your game onto a smartphone with an active sim card and data plan, and sending it all to the SAPPRFT. Yup, you actually have to send a smartphone to them with the game pre-installed, in fact you have to send two smartphones if you plan to launch on both iOS and Android. It will then take an additional 5 working days for the auditor at the regional office to assess the game. Should everything be in order the auditor will then send a written letter of recommendation to the national SAPPRFT office who will make a final approval, this could take up to an additional 10 working days. Once the game is approved by the national office the regional office will then have 3 working days to inform the developer of the approval. (Sounds very not efficient)

Once that is done you can launch your game, but it’s not over yet. Within 7 days of the game launch you have to contact SAPPRFT again to report details on the launch of the game, such as the launch date, which app stores it is on and other details. Also, if you don’t launch the game within 20 days of approval then you also have to contact SAPPRFT in order to let them know why.

Standard process

The standard process is for when point 1 does not apply to your game, and seeing as lots of games aren’t just endless runners or match-3 games with no story, a whole lot of games will fall under the standard process. In fact most games will fall under the standard process. The standard process is very similar to the simplified process where you have to fill out forms and send in phones with the app pre loaded etc… but there is one very important and significant change, the approval time. It can now take up to 3 months for these games to be approved. But I wouldn’t be surprised if it could take longer, especially for smaller games. In 2015 there were over 10,000 mobile games released in China. That’s around 27 games each day. I have no idea how they expect to approve all these games in such a short time.

Impact on domestic companies

There is no escaping these new regulations and every single game now needs to go through this process. With thousands of games being submitted to app stores each month it really makes me question how SAPPRFT will keep up with the games approval process. Do they have millions of employees just playing games all day? Also how strict will this approval process be? China is known for censoring the smallest of things and to date mobile games have not been subject to anything like this before. Will we suddenly see popular games being rejected on the basis of something silly? There is way too much uncertainty around this regulation at the moment and its not hard to see why some are worried when you look at the list of game requirements below.

All Online games must not have-

Anything that violates China’s constitution
Anything that threatens China’s national unity, sovereignty, or territorial integrity.
Anything that harms the nation’s reputation, security, or interests.
Anything that instigates racial/ethnic hatred, or harms ethnic traditions and cultures.
Anything that violates China’s policy on religion by promoting cults or superstitions.
Anything that promotes or incites obscenity, drug use, violence, or gambling.
Anything that harms public ethics or China’s culture and traditions.
Anything that insults, slanders, or violates the rights of others.
Other content that violates the law

So with this in mind, we could start to see China’s government start to block foreign games, that previously wouldn’t have been blocked, as well as other domestic games that they just don’t feel like approving due to one of the silly reasons above. But that’s not the only worry here, just going through this approval process will take lots of time and lots of money. That’s something that a lot of small and mid size mobile developers just do not have and many analysts and internet commentators are already predicting that this could have dire consequences for smaller mobile developers in China. It’s no secret that the conditions are already tough for small developers in China, due to the utter domination of large mobile publishers, and this could be the final nail in the coffin. Spending all your time developing a game and then having to spend a ridiculous amount of money and time to get it approved, only to have the government reject it, is not something anyone wants to have happen and in most cases will leave small developers with no source of income to start a new project.

It’s estimated that it could cost anywhere between $3,000 to $6,000 for small developers to work with a publishing partner to get a single game approved in China. The reality is that not everyone can afford that, especially that one guy with the next genius mobile game idea who wants to put it on the app store himself. Indie devs may end up abandoning their plans to create mobile games if this becomes too costly or too risky of a proposition. For big mobile publishers this will be a barrier for them but one that they’ll be able to overcome in time. Especially if they start flashing money…. In the end it means the big get bigger whilst the small devs feel the brunt of this regulation.

This isn’t the only regulation that has been put into place. The CAC recently put out a new set of rules that need to be implemented on August 1st. Mobile App developers will now have to follow a strict set of rules that will give the CAC access to users personal information. Mobile app developers have been mandated to collect real name information of users using their apps through mobile phone numbers or other registration methods. They are also being told to implement inspection and management systems in their apps to stop the spread of illegal content or any content that goes against China’s culture. The app providers need to keep user records for at least 60 days at a time and report any illegal or suspicious activity to the CAC. In other words, mobile app providers are now being asked to monitor users of their apps and police them if they do something ‘wrong’.

All of this is being done so that China’s government can control and regulate the fast growing Mobile Games/App industry. No doubt there are financial reasons behind it, as well as the obvious censorship and control of mass media.

Chinese iOS Developers cannot publish games without a Government code

Impact on Foreign Games Companies

This whole time I’ve been talking about how this will affect China and domestic companies in China, but this has huge implications for foreign game companies as well. China have been sending a strong message to foreign companies that China is becoming more restrictive on foreign content and games being distributed in China. It wasn’t too long ago that China’s game market was completely dominated by domestic games only. The big video game publishers never bothered with localising their console games in China due to the console ban, PC game publishers never bothered unless they had an online game that would appeal to Chinese users, and mobile game publishers never bothered until the mobile game market started to explode.

Now consoles are unbanned and PC’s are more abundant, so this has caused many big gaming companies to take China seriously and publish console and offline PC games in the country. The Online gaming market has exploded in China and is very lucrative with games like Warcraft & League of Legends finding success. More recently we’ve seen games as a service take off in China and so many like Activision Blizzard have found success in China through publishing localised versions of Call of Duty Online and Overwatch as examples. China also has the largest mobile games market in the world and many western brands such as Angry Birds, Clash of Clans and Plants Vs Zombies have become household names in China due to successful launches of these games. It’s clear that China cannot be ignored by those in the West any longer as there is a huge opportunity here.

As noted, this will have big consequences on foreign developers who want to publish their games in China. Previously there were certain loopholes that would allow you to publish your game on iOS without having to follow any Chinese Government regulations. Now that loophole may be closed, in fact it already is for Chinese devs. Right now foreign devs are unaffected and can still publish apps in China on the Chinese Apple App Store via iTunes connect. But should the government decide to make the July 1st regulation applicable to foreign game developers it will mean that every foreign game will need to be approved by the Chinese Government before it goes on sale/app store. Anyone who has already tried to launch their game in China on Android will know that it’s near impossible to do so without a Chinese publishing partner. The reason for this is because Google Play is not widely used in China, instead there are a number of different Android App stores from various Chinese companies, each with varying market share. Therefore a Chinese publisher is needed in order for your game to reach these app stores.

Publishing games on Android, PC or console already requires a Chinese publishing partner and they could also be required to launch foreign iOS games as well if China are strict about this new regulation, thus closing the loophole. I will make clear that the loophole has only been closed for Chinese developers and not for foreign developers just yet. Launching games on any other platform for now will require a Chinese publishing partner who will be responsible for every single aspect of your game in China. From creating a localised version of the game that works with Chinese payment methods, to acquiring users, to promoting the game, to getting the game approved by the Chinese government.

Finding the right publishing partner can be tough due to cultural differences. It will take time and you’ll have to work out the right set up for your game (what you do and what they do) and you need to be ready to fully commit to this as you’ll be working with them throughout the lifetime of the game/games you’ll be offering. But this isn’t even the worst thing now. You may find a great publisher to work with but with these new rules in place they may not be able to get approval for your game if it breaks any rules that China do not like. You’ve already seen the list of rules above, they’re basically a list of “China can do what we want rules” and if they’re strictly enforced then it could mean that a lot of foreign games will no longer be accepted by the Chinese government to launch on Chinese app stores. What’s even worse is that the Government can start to blacklist publishers at any time for games or apps that go against Chinese cultural values.

Now more than ever, foreign game developers will need to be prepared when it comes to launching a game in China. You will really need to consider what sort of game you’re making and whether it will fit in with the Chinese censors.

So if you’re going to be developing a Grand Theft Auto style game then it’s very clearly going to be rejected by the Chinese government and it’s honestly not even worth the time to try and get it accepted. If you know your game vision is going to be against the values above then just focus on other markets. If you believe that your games fit with the values listed above then the next thing to consider is the business model for the game in China. On Mobile the best model to use is without a doubt the F2P model, that also applies to online PC games where the abundance of internet cafes has meant that online f2p client games have become the most popular style of games. The Paid game model can still work but this would mostly apply to console games for PS4 & XB1. If you’re thinking of launching a paid PC game then its best to talk to your publisher about that, I’d recommend just going through Steam and localising into Simplified Chinese. Steam is popular enough in China and with the right promotion a paid game can do well in China through that medium.

When working with a Chinese publisher, the topic of localisation will be key. A high quality localisation can favourably impact sales of a game in China and its likely the Chinese publisher will want to do this themselves. As noted above, the Chinese publisher role is quite big these days and so it’s important to really negotiate well and make sure that there are clearly defined roles for both yourselves and the Chinese publisher. It’s important to work out what suggestions you should listen to and what suggestions you should dismiss. It’s also important to protect your game on a technical level by implementing measures that can protect the game source code. It’s best to sign a formal agreement with your Chinese publisher that outlines how the game is to be localised and how the game source code is to be used to avoid the Chinese publisher doing something against your wishes.

It’s also best to trademark the game name, art assets and key characters/mechanics as quickly as possible to avoid another Chinese company from trying to create a rip off game under the same name. Usually trademarks are served on a first come first serve basis which can be terrible for you if you wait till the last minute to do this. In addition, you will need to obtain a ‘game source code copyright registration certificate’ from the Chinese Government to ensure that you are the owner of the source code in China and so the Chinese publisher can license it. This makes it less likely for your game to be copied in China and also speeds up legal court proceedings if they need to take place.

In the end it all comes back to one point. Does the game meet the censorship requirements in order to go on sale. If the answer is yes then it won’t be hard for the Chinese publisher to obtain approval for your game. It is important that all licenses and approvals are obtained prior to the game launching on Mobile, otherwise you could face harsh consequences from the Chinese government who will not hesitate to shut down the game. China wants to control the media that citizens consume and they also want citizens to favour Chinese companies. So it is very difficult for foreign companies to enter. It is imperative that all policies, regulations and laws are followed to ensure that your game can launch with no issues. The payoff can be great if the game does well there. You know you’re doing well when China is one of the top 3 countries for your app.

To sum up.

Decide if your game is right for China and will work with current censorship policies
Find a trusted Chinese publisher to work with
Outline a game licensing agreement with them (Strict localisation rules)
Register IP trademarks and copyrights
Make sure all Governmental approvals are in place before launching
Monitor game success regularly and adapt to trends

STEAM

So Console games, Online Games and Mobile Games now require regulatory approval before going on sale in the country. But so far, Steam has been unaffected by this. Steam is the popular PC store for games and it has grown immensely popular in China to the point where China is the 2nd biggest country in terms of users on Steam. Steam has grown in popularity thanks to DOTA 2 which requires the Steam client, it has also grown a reputation for having banned games and cheap games that can be bought in China. Banned games like GTA V can easily be bought by Chinese citizens on Steam and that’s great at the moment. Another reason why Steam is so popular is because Valve worked closely with Chinese payment companies like AliPay to ensure that consumers could use local payment methods.

However, recently Steam has been getting a bit too much attention and some streaming sites have started blocking lifestreams of banned games like GTA V. Also, AliPay recently withdrew support as a payment solution on Steam for unknown reasons. Now it could just be a coincidence that these two things happened but I’m fairly sure that Steam will be next on the censor/ban list. China have done it before with Facebook for example, which is blocked in China and I have no reason to believe they won’t do it again with Steam. It’s not a case of if, in my opinion, it’s a case of when.

Summary

It’s clear that these new regulations will have an impact on Chinese developers. With every game needing approval it means that small publishers need to invest more time and money in submitting games to the government for approval and waiting up to 3 months or more for the game to be approved. It has the danger of putting smaller companies out of business and also radically changing the pace of the mobile game market in China. For big companies it will likely be business as usual though as they can adapt to this in an instance and will no doubt have preferential treatment.

For foreign companies this could close the loophole on iOS and require that all foreign companies work with a Chinese publisher to bring games in. It also means that it will take a long time for games to be approved and that’s assuming they’re even approved in the first place. The government can easily demand changes before a game goes on sale or outright ban a game and blacklist the developer. Approval before launch now applies to console, PC and mobile games.

An update to this article is now available to read here- UPDATE

Koei Tecmo achieves record profit for 6th consecutive year

1st May, 2016 · ZhugeEX · Leave a comment

It’s earnings season in Japan again and so that means we’re getting updates from all major Japanese companies on how they did during fiscal year 2015, the 12 month period ending March 31st 2016. As I write about the games market, and Koei Tecmo are my favourite company, I thought I’d do a quick write up on how Koei Tecmo did this year and it’s good news all round the for company. In this article I’ll talk about Koei Tecmo’s financial performance, how each of their segments have performed, and what to expect from them in the future. I also have included a fully translated slide deck from Koei Tecmo’s earning report which can be downloaded below. The presentation was fully translated by Blackkite and so I would like to thank him for all the time and effort he put in to help out. Please be sure to follow him on Twitter as he is always bringing the latest Japanese gaming news in as it comes.

FULL DOWNLOAD FOR KOEI TECMO PRESENTATION

Do note that the presentation above is not currently available in English from Koei Tecmo so this is the only place you can get English translations at the moment.

First lets start with some sales data-

As of September 30th 2015-

Arslan: The Warriors of Legend – 60,000 units sold in Japan and Asia
Nights of Azure – 150,000 units sold in Japan and Asia
Samurai Warriors 4: Empires – 100,000 units sold in Japan and Asia
Nobunaga’s Ambition 201X – 600,000 downloads

As of March 31st 2016-

Romance of the Three Kingdoms 13 – 180,000 units sold in Japan and Asia
Attack on Titan – 280,000 units sold in Japan and Asia
Dead or Alive Xtreme 3 – 190,000 units sold in Japan and Asia
Atelier Sophie – 170,000 units sold in Japan and Asia
La Corda d’Oro 4 – 30,000 units sold in Japan
Dead or Alive 5: Core Fighters (F2P) – 6 Million downloads worldwide
My GameCity (Gaming Platform) – 870,000 Members and over 35 games

Attack on Titan: Wings of Freedom (PS4, PS3, PS Vita), a Tactical Hunting Action game based on the anime adaptation of a mega-hit comic that sold over 50 million books in total, was released and had favourable sales in Japan and Asia. The game is planned to release in the West in Fiscal Year 2016. Furthermore, Hyrule Warriors Legends (Nintendo 3DS), which is a collaboration title between Nintendo’s Legend of Zelda series and Warriors series, was released worldwide and has continued the success of the Warriors series. This year Koei Tecmo developed other titles in collaboration with many well known companies and IP’s. Yokai Romance of the Three Kingdoms (Nintendo 3DS) which is a collaboration title with the very popular series Yokai Watch and released by Level-5, also Square-Enix’s DISSIDIA FINAL FANTASY (Arcade) has started operating.

For Koei Tecmo’s IP, Romance of the Three Kingdoms XIII (PS4, PS3, Xbox One, Windows) which is the 30^th anniversary title of ROTK and Nobunaga’s Ambition Sphere of Influence: Sengoku Success Stories (PS4, PS3, PS Vita, Windows) were released, and managed to garner discussions and increase overall sales of the series. Furthermore, other than DEAD OR ALIVE 5 Last Round’s Core Fighters free-to-play version surpassing 6 million downloads globally, DEAD OR ALIVE Xtreme 3 Fortune/Venus (PS4, PS Vita) was also released, and had sales extended not only from inside Japan but also in Asia where the game performed well too.

For the Gust brand, other than the brand-new title Nights of Azure (PS4, PS3, PS Vita) pioneering a new fan base, expansions of existing IPs are also progressing with games like Atelier Sophie: The Alchemist of the Mysterious Book (PS4, PS3, PS Vita) and Atelier Shallie Plus: Alchemists of the Dusk Sea (PS Vita). Gust are also working on a new IP to launch in the future.

The collaborations with other publishers and new & old titles transitioning favorably, along with the Extension of Digital Content Sales and Usage of Self-Developed Tools are all contributing to the large increase of profitability, and Koei Tecmo are able to raise both revenue and profit, setting a record high Segment Profit ever since the merger between Koei and Tecmo.

Koei Tecmo had a record year in Fiscal 2015 as this was the third year of consecutive revenue increase and the 6th year of consecutive profit increase. Koei Tecmo saw revenues increase 1.4% YoY to ¥38,332 million yen and Operating Profit increased 14.7% YoY to ¥11,069 million yen. This represented an Operating Profit ratio of 28.9% which is up a total of 3.4 percentage points. Koei Tecmo have grown Operating Profit ratio from around 18% 3 years ago to nearly 30% this year which was their original target set all those years ago. It was the Game Software segment which remained the biggest and most profitable segment for Koei Tecmo once again accounting for 66% of total revenue for the year. The segment also accounted for 78% of Koei Tecmo’s overall Operating Profit which shows how Koei’s focus on expanding their current IP, Collaborating with others, streamlining development through in house tools and focusing on digital has helped increase profit margins and overall profit for the company.

Koei Tecmo’s Online and Mobile segment also saw an increase in revenue this year, up 6% YoY, but it was Operating Profit that was up 32% YoY that really shows how well the Online and Mobile division is doing for Koei right now. Koei are continuing to invest in online browser games and mobile games and plan to introduce more games to market soon with the hope of creating a hit title in the space. In Koei’s Media rights business they released the Neoromance 20^th anniversary title Angelique Retour (PS Vita, PSP) and La Corda d’Oro 4 (PS Vita). Furthermore, other than holding events like Neoromance Festa: La Corda d’Oro Featuring Jinnan High School Op.2 and Neoromance Festa Haruka Matsuri 2016, they progressed on new efforts like Virtual Lives using Stereoscopic Vision technology. The Media Rights business remained flat in FY2015 in both Revenue and Operating Profit.

In Koei’s SP business they released a total of 7 titles & 9 machines, including Pachinko CR Fist of the North Star: Ken’s Rage 2. Whilst revenue was down in this segment, Koei Tecmo were able to make development much more efficient which contributed to overall profit increase. Koei Tecmo plan to further increase their strength in efficient development within this business and attempt to will increase profit power much more. Koei Tecmo saw revenues decrease in their Amusement management business due to organizing unprofitable stores. However, Koei Tecmo introduced Kids Facilities into main stores, like Large-scale Indoor Athletics and Shooting Rides, and reconsidered policies around management costs for Prize Games. Both of these initiatives helped them increase overall profit in the segment.

Total sales revenue in Japan decreased 3.7% YoY but still accounted for 75% of total revenues which shows that the domestic market is still the biggest for Koei Tecmo. The total amount of sales revenue generated in Japan for the the full year reached ¥28,768m. Sales revenue overseas was up 20.7% YOY and accounted for ¥9,564m. Thus the total increase in revenue was primarily due to sales overseas more than offsetting the slight decline seen in Japan. However it wasn’t North America and Europe that contributed to rising revenues as North America saw revenues slide 8.7% this year and Europe saw a bigger decrease of 13.3% this year. It was Asia that has seen huge growth and this year took over both North America and Europe to become the largest region for Koei Tecmo outside Japan. This can mainly be attributed to the success of online and browser games in Asia as well as the successful console launch in China which saw Dynasty Warriors 8 with Xtreme Legends become a top seller in the country. Sales in Asia increased 129.8% YoY to ¥4,052m and accounted for 10.6% of overall revenue, or 42% of all overseas revenue.

North America is now the second largest overseas region outside Japan for the company as sales declined 8.7% YoY to ¥3,404 million. This gives North America an 8.9% of overall revenue share and the decline can primarily be attributed to the lack of mainline Koei Tecmo IP launching this year as the majority of titles were spin offs. Europe also saw a 13.3% revenue decline this year and is now the smallest region for Koei Tecmo with just ¥2,108 million giving them just 5.5% share of total revenue this year. It’s not to say that sales in North America or Europe are bad, it’s just that Asia has been a huge growth region for Koei Tecmo over the last 3 years and has gone from being the smallest region, outside of Japan, to now being the biggest region outside Japan.

GAME SOFTWARE

Koei Tecmo’s Game Software segment saw revenues increase 1.7% in total as declines in Japan, North America and Europe were offset by increases in Asia. Operating Profit in this segment was up 11% YoY as Koei Tecmo’s focus on in house development tools and digital business saw costs decrease and overall margin increase. Total software sell in for the year declined 20.9% YoY to 5.58 million units worldwide compared to 7.05 million unit shipments in the prior year. Shipments in Japan for the 12 month period ending March 31st 2016 declined 29.6% YoY, or by 1.12 million units in absolute terms. This meant that only 2.67 million units were shipped in Japan which was only 48% of total unit shipments. This meant that 52% of shipments came from outside of Japan which is the first time this has happened in a while and shows that Koei Tecmo are increasingly seeing overseas become a more important part of their Game Software segment during this transition to 8th generation.

Sell in to North America declined 24.1% YoY to 1.28 million units, down from 1.68 million in the year prior. However North America still accounted for 22.9% of total shipments which was only slightly down compared to 23.8% in the prior year. Software sell in to European regions declined from 1.1 million units last year to 0.79 million units this year, down 25.1%. Once again this didn’t have a huge impact on proportion of total sales with Europe still accounting for 14.2% of total sell in this year, just down from 15% last year. It was Asia that saw the biggest increase this year with a total of 840,000 units shipped compared to 520,000 units last year, a total increase of 61.5%. Asia has been seeing huge growth over the last few years with just 155,000 unit shipments back in fiscal 2010 to now nearly 1 million. Asia saw their total share of shipments grow from 7.4% last year to 15% of overall shipments this year. Asia has seen huge growth thanks to the launch of many console games in China this year + continued focus on releasing physical games and content in Southeast Asia.

ONLINE & MOBILE

Koei Tecmo’s Online and Mobile segment also saw an increase in revenue this year, up 6% YoY, but it was Operating Profit that was up 32% YoY that really shows how well the Online and Mobile division is doing for Koei right now. Smartphone native applications for Android and iOS are constantly being created and improved upon in order to create hit smartphone games based on their current IP’s as well as new IP’s. Koei Tecmo’s mobile title, Nobunyaga guruguru dungeon is heading towards 1 million downloads across iOS and Android. Koei Tecmo will continue to develop new Mobile titles with the plan to create big hit titles in the Mobile game space.

For the Social Game business, as a result of promotions like Multi-platform expansion, Continuously holding events, and Actively doing collaborations with titles from other companies, the 1 Million People series like 1 Million Nobunaga’s Ambition, 1 Million Romance of the Three Kingdoms and 1 Million Winning Post had profits exceeding last year’s. Furthermore, Uncharted Waters V is transitioning firmly as Koei Tecmo run the service in Asia. For my GAMECITY which is developed & managed by Koei Tecmo, the service expansion for smartphones gave contribution to the member amount reaching 870,000 members. For the Online Game business, each title has a stable transition, especially Dynasty Warriors Online Z which had successful measures like having a PS Vita version added.

SUMMARY OF FINANCIAL RESULTS

Koei Tecmo continue to grow as a company in terms of both revenue and profit and there is no sign of them slowing down anytime soon. Operating Profit and margin continues to increase as Koei Tecmo focus on collaboration titles and transitioning to becoming a digital business. Koei Tecmo are also focusing on growing their social and browser games business, especially in Asia where they have been very well received. They are now looking to expand this business overseas as well as to smartphones. Koei Tecmo also announced that they were moving to a new structure this fiscal year which encompasses a 5 brand approach. I will talk about this in depth a bit later and what it means for the company overall.

To sum up, this year has been great for Koei Tecmo with all segments seeing some sort of positive whether it be increased revenue, increased profit or increased profit margin. Koei Tecmo plan for FY2016/17 to see an even larger jump in revenue and expect operating profit to grow as well. This suggests that not only will the products they release this year generate more revenue, but Koei Tecmo will continue cost cutting/utilising in house development knowledge and transitioning to digital in order to increase margins.

LOOKING TO THE FUTURE

Koei Tecmo CEO, Yoichi Erikawa stated that fiscal 2016 has been very successful thanks to all their segments performing well. Koei Tecmo will continue their slogan of IP CREATION AND EXPANSION. Erikawa explained that Koei Tecmo’s slogan: “IP Creation and Expansion” is the creation of brand new titles for multiple platforms as well as expanding traditional franchise games to multiple platforms as well. Koei Tecmo this year are using their own development tools to adhere to multi-platform solutions and continue maximising the profitability of each current and new IP.

Koei Tecmo’s aim is to develop games for Console, Smartphone, Online browser, Online platforms such as Mobage (Japan) and even for Sony Interactive Entertainment’s new PlayStation VR and Nintendo’s new NX. Koei Tecmo released a technical demo entitled “Dynasty Warriors VR” at TGS this year and will be utilising this experience should they decide to go ahead and develop titles for the virtual reality system. So far the only confirmed title for PlayStation VR is Dead or Alive Xtreme 3 and there are no titles confirmed for NX.

Below I will be discussing this policy in more detail to explain what all of the above means and how this will be implemented in the future-

First let us take a look at Platform Expansion. Koei, Tecmo and Gust are all working on new titles to introduce this year. Games for smartphones are being developed as well. There will be active and intense promotion on Koei’s smartphone titles this year. Koei Tecmo will be promoting new and existing IP across various hardware, software and internal platforms. The hardware platforms announced for upcoming titles are PS4, PS3, PS Vita, PS VR, WiiU, 3DS, Xbox One, NX and other platforms like STEAM. The software platforms announced for upcoming titles are DeNA, GREE, dGAME, Mobage, as well as Android, iOS and traditional internet browsers. Koei Tecmo will also continue to promote their online, social and mobile titles via my GAMECITY which now has over 870,000 members and more than 35 games.

Koei Tecmo’s multiplatform strategy has worked for them very well in Japan due to the decline of the console industry there. As the PlayStation 3 is being phased out, the PlayStation 4 is not seeing fast adoption rates and therefore the dedicated console install base has seen a big decline in Japan. Even the popular handheld market in Japan is declining somewhat with PlayStation Vita unable to match the install base of PlayStation Portable. Koei Tecmo have taken to release games across PS4, PS3 & PS Vita and this has allowed their IP to see stable sales across all 3 platforms and in turn reach all players and increase total sell through.

In global markets we’ve seen Koei Tecmo cater to Asian audiences by releasing games there in physical formats more often, cater to North American audiences by releasing games on Xbox One and global audiences by releasing games on PC & Steam. Koei Tecmo hope to continue this strategy in order to maximise sales across all traditional console platforms and hope that this strategy will also work on Mobile and PC software distribution platforms.

Koei Tecmo reconfirm that this year is the year when they introduce new IP, introduce sequels and expansions to their current IP and, continue to collaborate with other companies on various IP. In fact the company recently set up a department that deals specifically with collaborations and as Koei Tecmo has experience in this sector they are now working on more collaborations than before. Examples given during the investor briefing were Dragon Quest Heroes II & Attack on Titan for PlayStation systems, Yokai x Romance of the Three Kingdoms for Nintendo systems & Dissidia Final Fantasy for arcade systems. Koei Tecmo also said that they have made a collaboration deal with a very big Western IP and look forward to bringing us news on this large scale collaboration in the future.

This year we look forward to Nioh which represents Koei Tecmo’s global strategy to simultaneously launch a new IP worldwide. Koei Tecmo are working to ensure that the game meets the requirements of global users and even launched an Alpha demo (Ongoing) in order to receive feedback on the game. This game is being developed by Team Ninja and will release exclusively on PlayStation 4 in 2016. Toukiden 2 is also part of Koei Tecmo’s IP expansion and multiplatform strategy with the game taking on a new open world genre and being released across many platforms in order to expand sales. This game is also due to launch in Japan during 2016. In terms of collaboration titles, Yokai x Romance of the Three Kingdoms has been more successful than Pokemon Conquest and has sold in more than 500,000 units in Japan to date.

Koei Tecmo also talked about game tie-ups after the success with the Samurai Warriors Anime. Koei Tecmo expressed that they would like to continue working with other organisations to build the brand of their IP’s. Koei is aiming for their IP’s to have additional support via Anime, Toys, Movies, Food, Books, Apparel, TV, Music, Events, CD, Performances and other areas. The Fatal Frame movie was given as an example of a successful tie up in the past.

This biggest news of this year is that a DYNASTY WARRIORS movie is in the works. Production of the movie will be handled by China 3D Digital Entertainment, a Hong Kong based company. The movie will be directed by Roy Hin Yeung Chow, whose previous credits include Nightfall (2012) and Rise of the Legend (2014), and written by Christine To (Chi-long To), who also handled the screenplay for said films. China 3D Digital Entertainment will prepare for shooting in 2016 and begin shooting in 2017, and the film will release throughout China, Hong Kong, and Macau in 2018. It should be noted that a Japanese and Western release date has not yet been announced.

The preliminary cast list includes – William Feng, Ethan Juan & Eddie Peng

The Asian market has seen huge growth for Koei Tecmo and now accounts for more than 10% of total revenue for the full fiscal year and 15% of game unit sales. Asia is now the biggest market for Koei Tecmo outside of Japan, and ahead of North America and Europe, so it is clear that Asia is becoming increasingly important for the company. Koei Tecmo are continuously releasing smartphone titles and online browser games in the Asia region and with the launch of PS4, PS Vita and Xbox One in China the company now plans to launch more console titles in the region. Uncharted Waters V and Samurai Cats have been very successful in the Korean and Taiwanese markets, Samurai Cats will continue to release across South East Asia as planned.

In China, Koei Tecmo finally have a chance to officially release console games after the console ban was listed last year and the company have been taking full advantage of this by launching games for all the systems thanks to support and marketing deals by Sony Interactive Entertainment and Microsoft Asia. We can expect to see Asia grow in the coming years.

Koei Tecmo confirmed last month that there would be an internal reorganisation within the company to help move focus to the company’s various IP’s. Starting on April 1st 2016, the company introduced five IP related brands to allow them to focus more on each of their established franchises as well as introduce new IP’s. This is in accordance to the company’s vision of being the “number one entertainment content provider in the world” through “IP creation and deployment”. With this change it means that the Games Software, Mobile & Online and Media Rights segments will be integrated into one “Entertainment” brand”.

The five brands introduced are listed below-

Kou Shibusawa – Led by Kazuhiro Fujishige
Omega Force – Led by Kenichi Ogasawara
Team Ninja – Led by Yosuke Hayashi
GUST – Led by Hisashi Koinuma
Ruby party – Led by Mei Erikawa

Please note that Akihiro Suzuki, the general producer of Dynasty Warriors series still remains within Omega Force.

What this allows Koei Tecmo to do is transition away from a company that has no brand value to one that is all about brand value and can leverage their IP to be successful through core titles, genre expansions, tie ups and collaborations. Ultimately this is all about giving each brand the freedom to create and expand their new IP to maximise the value of each IP which will in turn lead to increasing the value of their brands and the company as a whole.

Dynasty Warriors: Heroic Legends (tentative title), is an example of Omega Force expanding and strengthening the Dynasty Warriors IP by taking the series in a new direction as a console strategy RPG. The game is at its core a grid-based strategy RPG, but since it’s a Warriors series title, you’ll have a single military commander unit as well, and there will be tons of peons to destroy. During battles, it switches to action scenes, and while you don’t control the action, Warriors-style action scenes will seemingly unfold. The game is due to launch in Japan this year and the release date for the title will be announced on May 12th during a Nico Nico livestream.

Digital game sales continue to grow for Koei Tecmo thanks to their focus on online browser and mobile games as well as the increased focus on digital download and free to play content for consoles. Koei Tecmo noted that their digital download business now accounts for nearly 35% of total sales and they plan for digital to account for nearly 45% of total revenue by the end of fiscal 2016/17. Digital Download sales are also having an impact on Koei Tecmo’s bottom line as the high margin content means that Koei Tecmo are able to increase profit margins on digital content and therefore overall profit as well.

The majority of digital revenue is generated from their Online and Mobile games division but there is a clear trend of Games Software digital sales increasing as well. Full game downloads and DLC content for console and PC games generated around ¥4,000 million in revenue this year which was up from the amount last year. That represents that around 16% of total games software revenue came from digital console. This has been primarily driven by Koei Tecmo’s Free to Play games such as Dead or Alive 5: Core Fighters, their expanding DLC model, and the introduction of many games on Steam.

FISCAL YEAR 2016/2017

One of the significant changes this year, as mentioned above, is that Koei Tecmo will now be removing the Games Software, Online and Mobile & Media Rights segments and putting them into one big segment called “Entertainment”. The SP, Arcade Management, Real Estate and Other categories will still remain. Koei Tecmo plan for a record breaking year in Fiscal 2016/17 with total revenue forecasted to increase 9.6% YoY to ¥42,000 million. Operating Profit is expected to increase 3.9% as well to ¥11,500 million whilst operating profit ratio will decrease ever so slightly. This could be due to higher investment this year in new technologies and areas compared to last year.

Koei Tecmo’s Entertainment division, which includes Game Software, Online & Mobile and Media Rights is expected to grow 11% YoY to ¥38,500 million this year whilst operating profit for the division is expected to remain flat. The increase in revenue will be explained a bit later as Koei Tecmo plan to increase unit sales of game software this year compared to the year just gone. All other divisions are expected to perform in line with current trends and if the forecast is met then we’ll have Koei Tecmo’s 7th consecutive year of growing profit and 4th consecutive year of revenue growth.

Koei Tecmo expect Japan to grow when it comes to total sales revenue this year. Koei Tecmo are forecasting that sales will be up 14.7% YoY to ¥33,000 million and also for sales to in Japan to account for 78.6% of total revenue. An increase of 3.6 percentage points over the year just gone. Overseas sales are expected to see a slight 5.9% decline to ¥9,000 million due to Asia seeing a slight decline in revenue. North America is expected to see slight growth this year and generate ¥3,500 million in revenue, up 2.8% whilst Europe is expected to see a bigger 18.6% to increase with sales revenue hitting ¥2,500 million. After growing rapidly, Asia is expected to decline this year by 26% down to ¥3,000 million. The decline can be explained by the closing of various online and mobile games this year and the lack of boost from China’s console launch. Asia will continue to be the second largest region outside of Japan though, bigger than Europe.

In terms of Game Software unit sales, Koei Tecmo plan to ship a total of 6.2 million units this year, up 11.2% YoY from 5.58 million units. Koei Tecmo expect sales to be rejuvenated in Japan by new titles as they forecast 3.5 million unit sales in the country, up 31.1% YoY. They also expect Japan to return back to being the premier market for Koei Tecmo with 56.5% of total unit sales compared to the less than 50% last year. Overseas sales are expected to decline by 7.1% slightly this year. North America and Asia are behind that decrease with Koei forecasting a 13.7% drop in sales in North America to 1.1 million. This is also considerably lower than the 1.68 million Koei Tecmo shipped two years ago when Hyrule Warriors came out. This suggests to me that Koei Tecmo are not expecting Nioh, their global new IP, to have a huge boost in sales overseas, nor are they planning to launch their big Western IP this year. Asia only see’s a slight decrease in unit sales from 840,000 to 700,000 whilst Europe is expected to see a 13.9% jump in sales to 900,000 units.

Operating Profit ratio is expected to slightly decline this year but Koei Tecmo are hopeful that it’ll pick up to the 30% that they are expecting in the next fiscal year. Overall it’s been a great year for Koei Tecmo and next year is set to look even better with new titles and games set to come out.

Here is a list of currently known console titles due to release in Japan this year:

Nioh
Toukiden 2
Dynasty Warriors Heroic Legends

Known console titles due to release in North America & Europe this year:

Attack on Titan
Nioh
Romance of the Three Kingdoms 13
Atelier Sophie

List above is correct as of March 31st 2016.

Note. Toukiden 2 and Dynasty Warriors Heroic Legends have not been confirmed for release overseas, however this does not mean that they won’t come overseas.

Disclaimer: Please note that the numbers and estimates provided above are based on Koei Tecmo company data and analysis by ZhugeEX.com. While every effort has been made to ensure the accuracy of the data presented, we cannot guarantee that all the numbers above are correct and accept no liability for financial decisions made based on the information contained in this article. Readers should be advised that the article does not represent a recommendation to buy or sell securities of any kind regarding the company involved.

NINTENDO FY 2015 Report – In Transition

30th April, 2016 · ZhugeEX · Leave a comment

Nintendo released their earnings for Fiscal year 2015 which is for the 12 month period ending March 31st 2016. The main financial highlights are as follows:

Net Revenue declined 8.2% YoY to ¥504.4 billion.
America accounted for 45% of total revenue, Europe & Other at 28%, Japan at 27%.
Operating Income increased 32.7% YoY to ¥32.8 billion.
Due to revaluation of assets in foreign currencies, exchange losses totaled ¥18.3 billion.
As a result, net profit declined 60% YoY to ¥16.5 billion.

This article will provide an in depth look into the current state of Nintendo, the performance of each major segment and what the future holds for the company.

HOME CONSOLE HARDWARE – Nintendo sold in a total of 3.26 million Wii U’s and 0.11 million Wii’s during fiscal 2015 for a combined total of 3.37 million hardware shipments. This was a 12% decline compared to the prior year when 3.84 million home console hardware units were sold in. What is of note this year is how Nintendo did not ship any Wii units to America and Japan, with the 110,000 unit sales coming from Europe and Other regions in the first half of the year. What this means is that it’s very likely, whilst not officially announced, that Nintendo have now discontinued the Wii and will no longer be selling Wii hardware worldwide. To date the Wii has sold 101.63 million units of hardware and this is likely to be the final sell in number for the console. The Wii is Nintendo’s first console to sell in over 100 million consoles and in turn is Nintendo’s most successful console to date.

Hardware revenues hit ¥102.4 billion for the Home Console segment. This was pretty much flat compared to the ¥105.5 billion generated in the prior year, despite overall unit shipments declining by 0.58 million. Much of the decline was thanks to the Wii whilst Wii U console sales remained pretty much flat YoY, only declining 3.5% compared to FY14. In turn this increased overall ASP’s for Nintendo from ¥27,486 in FY 2014 to ¥30,386 in FY2015. The Wii U has remained at pretty much the same price since launch and whilst sales of the console are somewhat dead, average selling prices have steadily increased each year. Wii U hardware unit sales are hardly anything to shout about but the success of Nintendo’s new IP Splatoon as well as Super Mario Maker helped stop the inevitable decline we would had seen had these two titles not released. Splatoon especially helped increase sales of the console in Japan where there are now more than 1.49 million copies of the game sold, making it the most successful Wii U game in Japan.

Nintendo are forecasting a sharp decline in Wii U unit sales for FY2016, a full 75% decrease in fact, down to just 800,000 units. This sharp decline will primarily be due to the lack of appeal the console has this year. Last year the console had many hit games whereas this year there are only 5 new first party games confirmed for the system and not many more third party games. Zelda has also been delayed to 2017 and confirmed to be an NX title which gives gamers even less of a reason to buy a Wii U. This forecast also matches the final year of GameCube production, which despite not selling well either, ended up selling much better than the Wii U with 21.74 million units sold LTD. That being said I do believe the forecast is a tad too low and that Nintendo may actually be able to ship more units this year, not that an extra few hundred thousand will make any difference as the Home Console Hardware segment is likely to see revenues drop from ¥104 billion last year to less than ¥30 billion this year. Nintendo have pegged the NX for a global launch in March 2017 and assuming that Nintendo meet this launch date then I would expect 1st month sell in to be in the region of 3 to 4 million units depending on demand. This would actually provide a much needed increase in hardware revenue and would therefore allow Nintendo to see growth in this segment compared to FY2015. Do note that Nintendo have not confirmed if the NX is a Home Console or Handheld console just yet but Nintendo seem to insinuate home so I’ll keep it in this section for now.

PORTABLE CONSOLE HARDWARE – Nintendo sold in a total of 6.79 million 3DS hardware units in FY2015. This was down 22% YoY as the effect of the NEW 3DS launch wore off during FY2015 and 3DS reached saturation point in Japan and America. This means that there is less opportunity for Nintendo to sell new 3DS hardware units and the majority of buyers for the NEW 3DS are old 3DS owners. During the fiscal year ending March 31st 2016, Nintendo shipped 240,000 original 3DS models, 510,000 3DS XL models, 1,170,000 2DS models, 1,030,000 NEW 3DS models and 3,840,000 NEW 3DS XL models. What is of note is that Nintendo have only sold 8.15 million NEW 3DS & 3DS XL devices as of March 31st 2016 compared to a total of 50.7 million other 3DS family devices. This means that NEW 3DS only accounts for 14% of all 3DS family devices sold and goes someway towards explaining how much portable hardware sales have decreased over the past few years. The primary reason behind decreasing portable hardware sales is that the Mobile market has now replaced pretty much all usage cases for handheld gamers. Many core and casual gamers now have a smartphone which can play games and these devices have enough casual and core content that the market for a dedicated handheld console has rapidly declined over the past few years. We’ve gone from a 240 million DS & PSP global install base this gen to 3DS and PS Vita only just reaching 70 million units combined this past quarter.

Along with a decrease in hardware unit sales, total revenue generated by the segment declined 24% YoY from ¥149.6 billion in FY2014 to ¥113.2 billion in the fiscal year just ended. The drop in revenue was of course due to the decline in hardware unit sales but also due to lower average selling prices for the 3DS. In FY2014 the average selling price of a 3DS for Nintendo was ¥17,138 which dropped to ¥16,600 in 2015. Nintendo are forecasting a further decline in 3DS hardware shipments this year, down from 6.79 million unit sales to 5.00 million unit sales. The decline will again be due to 3DS reaching saturation point in Japan/America, the continued growth of mobile gaming replacing handheld gaming, and due to the 3DS not having mainstream third party support this year. Nintendo’s forecast seems fair as it would be a surprise to see 3DS hardware sales grow this late into the console cycle and especially with the new NX on the horizon. Nintendo do plan to revitalise 3DS this year through big first party titles such as Pokemon Sun/Moon, but I would expect this to increase software sales on already installed 3DS’s rather than drive new hardware sales.

Should Nintendo hit their forecast of 5 million shipments in FY2016 then this will represent another decline for dedicated portable hardware as revenues would drop from ¥113.2 billion in FY15 to around ¥80 billion this fiscal year. It’s likely that 2016 will be the last major year of support for 3DS and whilst Nintendo are saying that NX won’t replace the 3DS, it’s fairly clear that 3DS is going to continue declining sharply through 2017 and users will either migrate to NX or other systems as both third and first party software support dries up. Ultimately it’s becoming increasingly clear that the dedicated handheld market is not as big as it once was and Nintendo’s 3DS will struggle to even ship half of what the DS sold last generation. Should NX be another handheld device then the device may sell in good numbers within Japan, due to the nature of the market there, however the appeal outside Japan would be somewhat limited. In Japan, around 60% of all software sales come from the PSV and 3DS which shows just how popular handhelds are there. Therefore it would be likely that Nintendo could launch another handheld console in Japan and young children and core gamers could lap it up in the same way that 3DS sold well in the country, however Nintendo would need to work hard to ensure that hardware sales and software sales do not slip too much in their upcoming generation as competition from smartphones starts to cannibalise handheld sales even more in Japan. As stated, a new handheld would only sell well in Japan so it remains to be seen what Nintendo’s handheld strategy would be moving forward.

AMIIBO AND ACCESSORIES – Nintendo’s amiibo and accessories division saw strong year over year growth in FY2015 with total revenues jumping up 36% from ¥38.2 billion to ¥52.0 billion this year. The large increase was primarily driven by amiibo figure unit sales which increased 135% YoY from 10.5 million in FY2014 to 24.7 million in FY2015. FY2015 also saw the introduction of amiibo cards for Animal Crossing and total individual card sales topped 28.9 million during the year as well. The combination of increased figure sales and the introduction of amiibo cards meant that the amiibo and accessories division is now generating around half as much as Nintendo’s home console hardware segment. amiibo is a new revenue stream for Nintendo and one that the company need to manage carefully to ensure that the segment continues to see growth each year. What has been worrying in 2016 is that Toys to Life unit sales and game sales growth have started to flatline in the US according to data from The NPD Group which could suggest that amiibo may not see as huge growth this year as it did in the last year. There is also concern around whether the Toys to Life market is another fad market like Rock Band and Guitar Hero accessories were about a decade ago.

There is no doubt that amiibo sales will grow this year as more models are introduced to the market but Nintendo need to find new ways for amiibo to continue growing such as expanding the demographic and target market as well as introducing new ways of interacting with amiibo. Nintendo did note during their earnings that they will further expand sales by offering new gaming experiences with the use of amiibo and that they plan to continue increasing the product line up. Nintendo have established certain evergreen amiibo figures in the US and Japan which is good to see and means that Nintendo are in a solid position overall within this segment. Hopefully Nintendo can deliver on their word to offer new gaming experiences with amiibo, perhaps by interacting with their mobile titles or Nintendo Account system?

HOME CONSOLE SOFTWARE – Despite declining hardware sales, the Wii U has seen a slight uptick in software sales during FY2015 with total software shipments up 12% from 24.4 million unit shipments in FY2014 to 27.36 million unit shipments this year. The increase in software sales was primarily driven by the successful launch of Splatoon, a new IP that combines unique gameplay with an expansive online community. Other titles such as Super Mario Maker provided a boost to software sales, as did the launch of Nintendo Selects titles for Wii U. Back catalog sales continued to be strong with Mario Kart 8 and Super Smash Bros for Wii U selling in an additional 3.54 million units combined in FY2015. Splatoon was the highlight of the year though with a total of 4.27 million units sold in worldwide, making the game a very successful new IP for the company. In addition, Super Mario Maker sold in 3.52 million units along with Yoshi’s Wooly World which sold in 1.37 million copies. It is worth noting that software attach rates for Wii U have been very high, as expected from a console with a low install base, with nearly 60% of Wii U users now owning a copy of Mario Kart 8 and 1/3rd of Wii U users now owning a copy of Splatoon.

Software unit sales for Nintendo’s Wii declined 37.5% YoY from 11.73 million unit sales in FY2014 to 7.33 million units in FY2015. The decline in Wii software sales is natural as the Wii is no longer actively receiving many new games with only 7 new titles released during the last year in the US alone, not to mention that the console is now 10 years old and is no longer shipping to customers in Japan and North America. The decline in Wii software shipments would probably have been sharper had there not been a re-release of Nintendo Selects titles for the console. Also the launch of Just Dance from Ubisoft keeps Wii software sales up each year as there is still a small but dedicated niche audience that still buys the game each year on Wii. In fact NPD reported that the Wii version of Just Dance sold more units than any other console SKU in 2015.

In total the Home Console software segment generated a total of ¥92.3 billion in revenue for Nintendo, up 9% from ¥84.7 billion in FY2014. The average selling price of home console software increased slightly this year as lower priced Wii software sales declined and higher priced Wii U software sales increased. Nintendo are forecasting a huge 45% drop in Wii U software sales, down to just 15 million units in FY2016. The reason for this is fairly obvious, the Wii U is on its last legs and is no longer receiving premium first party support from Nintendo, or third party support from anyone. Only 5 first party titles are being released this year on Wii U and none of them are big hitters. Even The Legend of Zelda U is now confirmed to be launching on NX as well which will hurt sales of the game on Wii U, like Twilight Princess did on Gamecube/Wii, as core Nintendo users opt to buy the game on new hardware over old hardware. With nothing to drive Wii U software sales this year it’s only natural that this segment will decline by around 50% to ¥45 billion. The NX launching in March will of course increase this number and increase the segment overall but at this point it is to early to put a number to it.

PORTABLE CONSOLE SOFTWARE – Software sales for the Nintendo 3DS continued to decline in FY2015, down 23% from 62.74 million unit sales in FY2014 to 48.52 million unit sales in FY2015. The decrease in software sales was primarily due to a lack of major titles like Pokémon Omega Ruby/Pokémon Alpha Sapphire and Super Smash Bros. for Nintendo 3DS, which energized the entire 3DS business during the prior fiscal year. It is also worth mentioning that the active number of 3DS’s in use has declined somewhat as many have migrated away to other consoles or smart devices where they can get a better gaming experience and/or a better selection of games. Back catalog sales for the 3DS continued to remain strong as titles like Mario Kart 7, New Super Mario Bros. 2 and Animal Crossing New Leaf each sold over 1 million units this fiscal year. Please see below for a full list of Nintendo 3DS software sales for million selling first party titles released during FY2015-

3.04m – Animal Crossing: Happy Home Designer
1.84m – Fire Emblem Fates: Birthright/Conquest
1.22m – Pokemon Mystery Dungeon
1.14m – The Legend of Zelda Tri Force Heroes

In total the Portable Console Software segment generated ¥109.2 billion in FY2015, down 27% from ¥150 billion in the prior year. What is fairly surprising is that Nintendo actually expect software sales to grow in FY2016 to 55 million unit sales, up nearly 14% YoY. Nintendo state that the release of Pokémon Sun/Pokémon Moon globally in Holiday 2016, along with Kirby: Planet Robobot and Metroid Prime: Federation Force will re-energize the platform and increase overall software sales. Strongly anticipated titles from third-party publishers are also scheduled for release and along with first party software aim to expand Nintendo’s reach globally to a broad audience, including female and younger consumer demographics. It is fairly clear that a new Pokemon will indeed boost sales of Pokemon software, however the pipeline suggests that the 3DS will not get many other hit titles this year that will sell well outside of Japan. Internal data from Nintendo, NPD and Media Create already shows that 3DS software sales are down in 2016 already compared to the same period in 2015 and whilst Pokemon is huge, I don’t expect it to be big enough to increase total software sales over last years total. I fully expect Nintendo to revise their forecast in the future and bring down the number to somewhere that is either in line or lower than the number of software units they sold in FY2015.

Nintendo’s portable software market is declining each year and we’re now at a point where Nintendo only generated $1 billion from 3DS software over the last 12 months. It is worth pointing out that Clash of Clans, a popular mobile game from SuperCell, is generating more than $1.4 billion in gross revenue each year through the iOS Store and Google Play Store which really puts into perspective how small the portable console software market is for Nintendo compared to the Mobile market which generated over $30 billion in 2015 and is set to grow to $35 billion in 2016. Declining handheld hardware sales aren’t helping the 3DS at all and it’s very likely that 2016 will be the last year that the 3DS gets full software support as well.

OTHER SOFTWARE & DOWNLOAD CONTENTS – Nintendo’s Download Contents business continues to grow as the industry shifts over to digital and as the company tries to focus on creating appealing DLC for their service orientated games. In FY2015 we saw Other & DLC revenue grow 36% YoY to ¥28 billion, when accounting for all digital sales (DLC, Full Game Downloads, Microtransactions and Subscriptions) the total hits ¥43.9 billion yen. Digital Sales now represent around 19% of Nintendo’s overall software business which is a huge increase over the 9% it accounted for just two years ago. Nintendo do not charge for an online service but it is clear that they see the potential of digital as it provides higher margin for them and also allows them to extend the lifecycle of their games and retain users on their service. Games like Super Smash Bros., Mario Kart 8 and Splatoon now receive regular downloadable updates that players can get for free or at a small cost. It’s all part of Nintendo’s plan to transition their games into services similar to Grand Theft Auto V where players will buy the game, play it, and then stick around for the additional content. It’s fairly clear why the three games I’ve mentioned are rumoured to be launching on NX as they are the best examples of service based games that Nintendo have to date and can help transition core Nintendo users over to the new hardware.

Nintendo also launched their new Nintendo account system which allows users to sign up using their old Nintendo account or through a social media profile. The account is accessible on Mobile, PC and Console and can be used to manage digital services that Nintendo provide as well as download content directly to their console. This, along with the My Nintendo rewards scheme, is a great move from Nintendo and shows that they are serious about creating a unified account and membership system for all their games no matter which device you own. Nintendo need to keep growing their account system, both in terms of users and services with a focus to enhance the user experience as well as to retain users within the ecosystem and encourage them to spend on Nintendo games.

SMART DEVICES & ROYALTY/CONTENT INCOME – Nintendo’s new Smart Devices division has got off to a steady start in fiscal 2015. Only ¥5.7 billion was generated in this segment which covers Nintendo’s new mobile title, Miitomo and royalty fees that Nintendo are paid for licensing their IP. Miitomo as an application was an odd choice for Nintendo’s first application on mobile as it is not a traditional game as such. It does utilise Nintendo’s “Mii” IP that was made popular by the Wii last generation but the “game” was anything but a game, instead being a social network application where users could ask others questions and buy clothes for their Mii using in game currency or real money. It’s clear that Nintendo did not feel they wanted to start out with a big gaming IP on mobile first in case the launch went wrong and instead chose to launch Miitomo first in order start their presence on Mobile as well as test the waters both in terms of how smooth the launch went as well as what the user response was on the app. The app was also used as a base for Nintendo to increase the number of Nintendo Account users and it looks like this app now has at least 10 million Nintendo account holders who have used the app. What was also good to see from Nintendo is that they weren’t afraid to stick in microtransactions that went up to $80 and make them easily accessible with no warning panel like some game companies do.

In this way, Nintendo are trying to show that the reason they launched Miitomo was to use this app as a base/test and also to show investors that they are serious about Mobile by including a store and microtransactions. Their upcoming games, Fire Emblem and Animal Crossing are due to launch this Fall and hope to bring something unique to Mobile gaming for Nintendo. These two IP’s work very well as handheld games and could very easily translate over to mobile very easily. It remains to be seen how well these games will do but it seems in the short term at least that Nintendo have the right idea on which IP’s to launch, how to monetise their games and how to grow their Nintendo account userbase.

Shift from Traditional to New

Those of you who follow me on Twitter know that when it comes to Nintendo I always talk about two different revenue streams. There is Traditional revenue and New revenue.

In my model, Traditional revenue streams include Dedicated Home Console/Portable Hardware and Software as well as their Playing Cards segment. The New revenue streams I want to talk about today include:

Smart Devices
amiibo & Other Accessories
Download Contents
Content/Merchandise Licensing

So why do I now split Nintendo into two? It’s fairly simple. Nintendo, as of a few years ago generated more than 90% of its revenue from traditional revenue streams which are rooted in the traditional games console market. Now that’s great for Nintendo when they’re doing well in the console market, like they did with Wii and DS, but it’s a huge issue when they’re not doing well in the console market. Nintendo’s total revenue has declined each year for the past 8 years and Operating Income/Profit hasn’t fared well either with three years of losses for the company just recently. The reason is simple, Nintendo are not doing well in the traditional console market with both their home console and handheld device and this means that they have no new revenue stream to fall back on should traditional revenue dry up. Many use the argument that Nintendo have declined down to where they were during the Gamecube days but it’s important to remember that back then the Video Games Market was only worth $20 billion and Consoles were the biggest part. In 2016 the Games market will be worth $100 billion yet Nintendo are now generating lower revenue and income than they were during the Gamecube era. They are also in third place in the console market and nowhere to be seen on the larger than console, PC & Mobile markets.

Now I do want to make it clear that Nintendo aren’t on the verge of bankruptcy or anything, they have plenty of money and assets available and they’ve generated a small profit these last two years. They are now just much smaller than they were during the Wii era and are declining every year. The NX is Nintendo’s next attempt at being successful in the console video games market and it could succeed, but at the same time we’ve seen what has happened with the Wii U and so we have to assume this may happen again. Assuming the NX does fail then this leaves Nintendo with no other revenue streams and ultimately means they won’t be bringing in any money at all and that’s not something that Nintendo want to see happen. This is why Nintendo have recently changed their minds about Mobile, why they’ve introduced amiibo’s, why they are now focusing more on games as a service through download contents and why they are creating licensing deals and opening up theme parks with partners. It’s all about Nintendo being able to use their well known IP to generate revenue outside the traditional console space so that they have something to fall back on should the NX end up being another Wii U.

The issue is that they’ve left it a tad too late when it comes to generating revenue from these new revenue streams and right now these are very small, but growing, segments of Nintendo. What that means is that this really is Nintendo’s last chance to pitch a successful console. If the NX fails like the Wii U did then it’s very likely that we may not see anymore Nintendo consoles in the future and I’m hoping that this never happens because we need Nintendo in this industry. So let’s talk about these new revenue streams and what they represent.

Smart Devices:

Nintendo announced last year that they would be partnering with DeNA to jointly develop games and applications for smartphones and tablets with an aim to bring at least 5 games to market by the end of March 31st 2017. This marked a significant change in Nintendo’s strategy as they had said they previously said that they would not develop games for smartphones as it did not fit with their business model of not developing for third party systems. It’s good to see that Nintendo did change their mind about this and they are finally ready to reach more than 2.6 billion smartphone users on mobile, much bigger than the current 70 million install base they have on Wii U and 3DS this generation. Nintendo have been very clear that they want to develop games specifically for mobile in order have more consumers experience Nintendo IP, create a synergy with the dedicated business and to create a profitable smart devices segment on its own.

Their first game, Miitomo, is a social application that allows users to interact with friends through questions and answers. The application also shows how Nintendo plan to monetise through having the game or app as free to play and including micro transactions in order for users to purchase items. It marks a significant change in Nintendo’s traditional approach and shows that they are serious about creating game models that work on Mobile and resonate with mobile gamers. The pay to play market is somewhat dead at this point on Mobile and they stand to earn much more by sticking to paid games on console and free to play games on Mobile. A stat I posted above is that Clash of Clans generates more revenue than all 3DS software revenues for Nintendo combined, what this shows is that 1 hit game on Mobile for Nintendo could end up generating more than any individual 3DS game and if the game is implemented as a service could go on to be a long term revenue generator for the company. Nintendo have the opportunity to generate more revenue from their smart devices segment than their 3DS software segment which currently stands at $1 billion should they have multiple top 10 games.

Nintendo certainly need to focus on Mobile and they seem to be doing just that after carefully selecting two very suitable IP’s for their next mobile games. Both Fire Emblem and Animal Crossing started as home console games but have done exceptionally well to transition over to dedicated handhelds. It makes complete sense for these IP’s to come to mobile and most Nintendo users seem happy with the decision which in turn should lead to other gamers trying the games out. Fire Emblem will still have RPG gameplay elements but the specially developed mobile version will aim to make the game more accessible to newcomers and should also include aggressive monetisation. Nintendo will need to be careful not to alienate console users here and so will want to consider certain other game models such as Video advertisements to unlock certain items, a shareware model where new expansion packs come out each month with new chapters/levels and perhaps even a model that rewards console gamers with free content through Nintendo Account rewards.

Animal Crossing is a great IP to bring to Mobile as the game is already popular among many handheld gamers, the most recent gaming selling through over 10 million on 3DS. One of the things I said Nintendo should do is make sure that some of their mobile games interact with console games through Nintendo Account and this seems to be what Nintendo are doing here. The application can therefore work as both a game and also a companion application for the full console game and can allow for different monetisation models to succeed on both Mobile and Console. It’s going to be really interesting to watch Nintendo’s Smart Devices division as the opportunity for a hit game is there due to the popularity of Nintendo IP’s. I have no doubt that we’ll also see bigger IP’s such as Mario in the future. This can also work wonders in bringing users over to their traditional console business where gamers will have access to higher quality TV games through the same Nintendo Account and earn all the same rewards. However I should note that I don’t see there being a huge crossover like that, but it could work with some.

amiibo & Other accessories:

The Toys to Life market has seen huge growth over the past couple of years and not only has this market driven a high volume of amiibo figures, it’s also driven high volume of software that work with amiibo. amiibo acts as a gateway to Nintendo IP, similar to how mobile can, and so gamers will feel the need to purchase more Nintendo software in order to get the best value out of their amiibo purchase. Nintendo can grow this segment by continually introducing new toys as demanded by gamers, the new Splatoon amiibo’s announced today are a good example of that. Nintendo can also focus on releasing different variants of their evergreen amiibo’s in order to keep sales steadily increasing. On top of this, Nintendo need to ensure that all games moving forward take advantage of all amiibo in some way and there is also a huge opportunity for Nintendo to develop more software that specifically revolves around amiibo characters. Nintendo do also have an opportunity to bring amiibo to their mobile games as a new way to interact with them. It could work as a way around in game purchases for loyal Nintendo users, as an example.

Activision Blizzard announced a couple of years back that more than 250 million Skylanders toys had been sold and so far Nintendo have only sold 35.2 million figure amiibo’s which means that there is certainly some opportunity to expand to a wider audience and demographic. amiibo figures, cards and other accessories bought in nearly $500 million in revenue during fiscal 2015 and it’s clear that there is an opportunity for this to become a $1 billion a year segment if they can drive additional demand for figures and cards using the methods above.

That all being said, Nintendo need to use these ideas quickly in order to keep amiibo sales growing. The Toys to Life market has enjoyed success so far with Nintendo, Disney, Activision and Lego all seeing success in 2015. That being said it looks like toy sales are already starting to flatline in the US and are almost displaying a Rock Band/Guitar Hero fad trend. Nintendo also recently admitted that amiibo’s main appeal by a large margin was for collecting by hardcore Nintendo fans and not it’s toys-to-life purpose. Collecting may only last so long until it becomes too oversaturated. Therefore the above initiatives need to be put into place to ensure that Nintendo reach an audience that will use these Toys for their main purpose of driving engagement and spend in games.

Download Contents:

Digital sales account for 19% of all Nintendo software revenue and nearly 9% of Nintendo’s total revenue. In contrast the PlayStation Network accounts for around 35% of Sony’s total gaming revenue and Xbox Live no doubt accounts for a large chunk of Microsoft’s gaming revenue as well. It’s no secret that margins on digital software and goods are much better than physical and additional online services can help generate additional revenue for Nintendo outside of full game downloads and DLC. I’m not necessarily talking subscriptions here but that is certainly something that Nintendo could look at as well in order to increase download sales. Ultimately though what Nintendo need to do and are doing in this segment is to create a unified account system that offers the same or better functionality than PSN or Xbox Live and can act as a live dimension ecosystem for Nintendo gamers. What this means is that Nintendo are able to build up an ecosystem for gamers where their games, preferences, friends and settings are saved to Nintendo Account in the cloud and can be accessed on any device.

The issue right now is that Nintendo don’t have this huge ecosystem and so requiring users to create a Nintendo account before playing a mobile game is an excellent way to start growing the numbers. Miitomo already has 10 million unique downloads and so that can easily equal 10 million Nintendo accounts now in service assuming everyone logged in. It means that gamers could start building their own ecosystem of friends on mobile, digital games and content on console and preferences across all devices so that when they come to choosing a new dedicated console device they choose a Nintendo console because all their friends and online account preferences will be on that new console too. It’s similar to how Sony are trying to tie users into their ecosystem by making it accessible from all devices, introducing an instant games collection that stays with you and allowing you to game with your friends. Nintendo rewards is a good way for Nintendo to keep people in this ecosystem and grow engagement.

Also, Nintendo are aware that digital represents a huge opportunity for them to transition their games to services, as I mentioned earlier it means that their games can have longer lifecycles and higher engagement as gamers download additional free or paid dlc for the games each month to encourage them to keep playing. And of course there is the traditional model of paid full game downloads that will continue to grow inline with the industry and digital becomes a better option for gamers. This segment can stand to grow, first in terms of users and engagement, and then later in terms of revenue by offering DLC, services, rewards and more to users. Nintendo also have a huge opportunity to expand their Virtual Console to NX or even to Mobile. Based on current trends I expect digital (Including full game downloads and DLC) to account for 25% of all software sales by this time next year.

Content Licensing:

Nintendo have started to look into licensing their IP a bit more recently but they’ve always been very cautious when entrusting their IP to others. Nintendo have started to license their IP to game developers such as Koei Tecmo, Bandai Namco and many others and so far most of the investments have been worth it and have delivered for Nintendo. Nintendo need to take this same approach outside of traditional gaming and to be fair they have shown that they are now more open to invest in other opportunities such as the partnership with universal to open theme park rides at Universal’s Parks & Resort. Their investment into Niantic, a company that develops augmented reality software, who are developing a Pokemon game for mobile devices and of course their partnership with DeNA which shows Nintendo is finally getting serious about branching out which is something investors have been wanting to happen for a very long time.

There are many opportunities for licensing Nintendo IP to Film companies, TV companies, merchandise companies and more. Nintendo can do all this without damaging their IP and earn royalty fees whilst they’re at it. Nintendo have the opportunity to go transmedia with their IP and they should take that opportunity.

To sum up the above, Nintendo have the opportunity to generate billion dollar businesses outside of their traditional console gaming business in Smart devices, amiibo’s download content and licensing. From the chart below it’s clear that Nintendo’s new revenue streams have started to grow over the past couple of years and could potentially end up 1/3rd or more of total revenues over the next few years (assuming NX performs at an average level). Ultimately the current console market may not be able to support a 3rd HD console with third party support due to the declining number of console gamers, and we’ve already seen what happens when Nintendo uses their own IP as the only selling point. NX has a tough challenge ahead and it’s up to Nintendo now to make sure they make the console a success.

Speaking of NX, Nintendo are missing the holiday 2016 launch which shows that they’re not ready to launch the console just yet. As noted above, the traditional revenue streams still represent the biggest part of Nintendo and so the NX is crucial to the long term success of Nintendo. So right now they need to take the time to get this launch right and also ensure that they are watching their competitors in the console space closely as they can only launch the NX once (assuming it’s one ecosystem).

In the short term, 2016 is looking like an absolute disaster for Nintendo as they are missing an entire holiday season with no big Wii U games and only Pokemon Sun and Moon on 3DS. It’s an incredible amount of wasted potential and just goes to show why I now consider new revenue stream growth for Nintendo to be of the utmost importance in the short term in order to both grow total revenues and act as failsafe revenue stream in case NX fails. At least these new revenue streams don’t all 100% rely on there being a successful dedicated console business and so could help keep Nintendo profitable as they plan their next move.

All I’m hoping for now is that the NX is a success for Nintendo and that they can also grow new revenue streams for the company so that they can become an IP empire, rather than just a company that makes console games.

Please note: I will shortly be publishing a slide deck for Nintendo’s Fiscal Year 2015 which will include a number of charts, graphs and summaries of Nintendo’s financial performance in FY 2015. If you wish to get access to this please subscribe using the form on the right or bottom of the page to be notified when this is available.

Disclaimer: Please note that the numbers and estimates provided above are based on Nintendo company data and forecasts made by ZhugeEX.com. While every effort has been made to ensure the accuracy of the data presented, we cannot guarantee that all the numbers above are correct and accept no liability for financial decisions made based on the information contained in this article. Readers should be advised that the article does not represent a recommendation to buy or sell securities of any kind regarding the company involved.

The future of Games Consoles is evolutionary!

25th April, 2016 · ZhugeEX · 3 Comments

Let’s talk about evolutionary consoles and why we’re starting to hear from Sony, Microsoft and even Nintendo about how the future of consoles are going to be “iterative”, “evolutionary” and even “upgradable”. Nintendo were one of the first companies to talk about this strategy publicly back in 2013 and how they wanted to create one software ecosystem that could work across multiple hardware devices, essentially meaning that software development would be made easier and everyone would be able to experience the same games no matter which Nintendo hardware they had. More recently, Microsoft started to talk about their shift to Universal Windows Applications and how this could lead to upgradable and iterative consoles. Now we have Giant Bomb, Eurogamer and Kotaku all reporting on how Sony are planning to bring out a new iterative console codenamed NEO that acts as an upgrade over PS4 in terms of specs and plays all the same games but with extra perks.

The concept of evolutionary consoles is nothing new and is indeed something that has been discussed in the past as being the future of consoles and it looks like all three platform holders are ready to embrace the idea this generation. The console market today has changed from last generation or even the generation before that. Last generation there were more than 270 million consoles sold across the big 3 platform holders and the generation before that we saw more than 200 million consoles sold. This generation we’ve seen a huge contraction in the number of console owners, publishers and games being released. The number of 8th generation consoles sold to date is lower than the number of consoles sold last generation in the same timeframe and many market research firms are pegging lifetime 8th generation console sales at around the 150 million mark, which again is lower than the last two generations.

The traditional idea that a console will launch and then remain static for a whole 5 to 6 years is starting to go away and it’s clear why. Looking back to last generation we saw the Wii break records as the fastest selling console of all time, selling through to both core and casual gamers alike. But overtime we saw casual and core gamers start to abandon the Wii in favour of other gaming devices such as the more powerful Xbox 360 and even PC and Smartphone gaming. The Xbox 360 and the PlayStation 3 were able to capture a large gaming audience thanks to a unique offering of core games that couldn’t be found anywhere else, add on peripherals like Kinect and Move as well as new and improved slim versions. But even the casual audience on these consoles started to move on, and despite record breaking sales of PS4 and Xbox One early on, the majority of these sales have been to core gamers who have gamed on consoles for years. We are yet to see a large majority of the Wii audience move over, nor have we seen the bulk of PS3 and 360 owners move over as well.

We can see that this generation is smaller than last generation and that consumers started to move away from consoles early on with the Wii and many haven’t yet upgraded from Xbox 360/PS3. The reason is because consoles remained static last generation whilst the world moved around them. The Xbox 360 may have been a top end console in 2005 when it came out but during the middle of the generation we saw the growth of smartphones thanks to Apple and Google, the renaissance in PC gaming thanks to Steam and Minecraft, as well as the launch of game models such as Games as a Service, free to play and Early Access. Consumers everywhere were being moved by the idea of ever evolving software ecosystems such as iOS and Steam whilst console gamers were still stuck on the idea of software being tied to an individual device and then that software being obsolete once a new generation came round.

The static console generation may have made sense in the 80’s, 90’s and early 2000’s but the idea of a static console generation is now outdated and frankly one that isn’t helping the currently declining console industry. Back in the day a console would consist of a unique and exotic architecture that could provide a better than arcade and PC gaming experience and could be sold at a great price. No other gaming device could come close and consumers knew that they were getting the best gaming experience for the price they were paying. When the next generation came along it provided even better experiences than arcade and PC gaming so it made sense to upgrade. After the PlayStation 2 era we started to see other devices start to catch up. PC and Mobile hardware started to evolve at break neck speeds and publishers found that many were now gaming on their smartphones, tablets and PC’s and so started to bring games and IP’s to these devices.

What this meant is that developers were now bringing games to PC that could be played on pretty much any PC, and bringing games to mobile that could be played on pretty much any mobile. But developers weren’t able to bring their PS3 or 360 games to next gen straight away as the static console cycle meant that these games no longer worked on the new consoles. It’s no wonder that both Sony and Microsoft moved to x86 architecture this gen in order to standardise development environments for Consoles, PC and Mobile and it’s also no wonder we’ve seen so many remasters. There are now no legitimate reasons for console exclusives to exist, and rightly so as PC is now a huge opportunity for console game publishers. This move to x86 was the first sign that consoles are moving to be iterative and evolutionary and it removes the distinction between games consoles and PC’s.

The definition of evolutionary consoles is to move towards a continuous growth of community where the operating system and game library is what becomes the core definition of the console platform. Moving to x86 means that Sony and Microsoft can do just this and make their next consoles with newer and more powerful components and still retain the same operating system, online services and games library. Combine this with the ever changing landscape of the gaming world and the fast pace of smartphone and PC iteration and it’s clear to see why Sony, Microsoft and Nintendo are thinking about evolutionary consoles as the future.

GROWING INSTALL BASES

How do evolutionary consoles help the industry today? In retaining user bases of course. One of the most volatile things about the console industry today is how user bases can disappear from one platform holder to another during a generational transition. We saw it during the 5th generation when gamers moved from Nintendo and Sega to Sony, during the 7th generation when gamers moved from Sony to Microsoft and Nintendo, and during the 8th generation when gamers moved from Microsoft and Nintendo back to Sony. Whilst brand loyalty is of course huge in gaming, there is no question that it ultimately doesn’t mean much when the “winner” of each generation is different. Consumers continue to buy new hardware to use software ecosystems like iOS and Steam because as they invest more in this platform, the more assets they have attached to these platforms and the more difficult it becomes to switch platforms. With evolutionary consoles a user will transition over to a PS4.5 or Xbox 1.5 and retain all their digital service settings such as downloaded games and friends list, their physical disc games which continue to work on the new system, and their current add on peripherals such as PS VR & controllers will also work.

It’s no coincidence that Microsoft suddenly introduced Xbox 360 backwards compatibility on Xbox One in order to encourage Xbox 360 users to upgrade to the new console. It’s also not hard to believe that Microsoft will carry this functionality and Xbox One backwards compatibility onto their new iterative console. We’ve even heard Phil Spencer talk about forwards compatibility as well which could be possible thanks to UWP. It’s also no coincidence that the rumours for PS4 NEO show that all PS4 games will work on both devices with the NEO versions seeing slightly improved graphics as allowed by the improved hardware spec. Not to mention that both Sony and Microsoft now charge for their online services, tying even more people into the software ecosystem with free games each month and discounts on other digital goods.

Rather than starting the install base at zero, an evolutionary console can help grow the overall console install base which means that publishers have an even higher potential audience on consoles and other games models such as Games as a Service and Free to Play can work on console just as well as PC or Mobile. New buyers of consoles have the choice of buying a standard PS4 at a lower price whereas new buyers who are willing to pay more for a better experience can purchase a PS4 Neo. It’s similar to the PC model where users can purchase a GTX Titan at a higher price than a GTX 960 in order to see better graphics in their games. It’s also similar to the smartphone model where a game may have better graphics or features on an iPhone 6S compared to an iPhone 5 but they still run well on both.

Apple continue to sell older iPhone models and Nvidia continue to sell older graphics cards. The myth that the standard PlayStation 4 or Xbox One will become obsolete is just a myth. An evolutionary or premium model would still play the exact same games but with new possibilities. The whole point of an evolutionary console is that Sony and Microsoft are not resetting the generation but instead trying to build on the current user bases they do have to create one big community. The existing PS4 or Xbox One base are not losing out on anything or getting a lesser experience than they were before. Most customers won’t even bother thinking about the evolutionary console when there is a cheaper base console on the market and the majority upgrading to a Neo or 1.5 will be enthusiasts who want to pay more for better graphics. Something that console gamers have been asking for since November 2013.

GAMES AS A SERVICE & FREE TO PLAY

During the 7th generation the rise of smartphones and renaissance in PC gaming led to new models being introduced for games. Free to Play started to take off and Games as a Service became a popular model to follow. Publishers in the console space are also starting to embrace these models as they try to move away from relying on a hit driven model to a live and dynamic model through Games as a Service.

The AAA market today is not as sustainable as it once was as production costs have ballooned over the years with the average selling price of a retail console game sticking at around the $60 mark. This in turn led to a number of mid sized publishers closing down at the end of last gen and many big AAA publishers halving the number of games they put out each year. Ubisoft for example have gone from more than 50 games per year during the peak of last generation to confirming that they’ll only release a total of 12 games this year. So not only are there less retail games being released this gen at higher costs, they’re also taking more time to develop. Gamers are also demanding for games to improve in terms of graphics and gameplay which only adds to the cost and when it comes to console games the core are only buying certain genres which limits the number of possibilities for AAA.

The solution for these AAA publishers is to adopt the Games as a Service model and we’ve seen big publishers like Activision, Take Two and Ubisoft become very successful with this. Using games like Grand Theft Auto V as an example, not only are gamers buying games in huge numbers at retail, they’re also spending on the game after release through paid DLC, micro transactions and subscriptions. Activision have done the same with Destiny and Ubisoft have seen success with The Division. Games on console are now making more than ever before and users are spending more per game, but with less games in development this also brings significant risk. For one it means that each game has to succeed. In the past a game could fail but it wouldn’t mean much as there would be another 30 or so successful games. But now with less than 10 games out in a year it means that if 1 or 2 fail then it could pose a significant issue for the company.

Lets say a more powerful PlayStation 5 comes out instead of an evolutionary console, it means that gamers are going to expect another ramp up in production costs to take advantage of the new hardware features, publishers will need to wait for the install base to grow on PS5 and also risk everything on next generation development. In turn it means that publishers will be forced to reduce the number of games they’re putting out each year as they can’t afford the manpower to create multiple games at this high level. Now if 1 or 2 games out of 5 fail then that could spell the end of the publisher and the mainstream industry on consoles. Publishers simply can’t afford another steep ramp up in costs and so an evolutionary console is one way of getting around this.

The PlayStation 4 Neo builds on the install base of the PlayStation 4 and developers are already familiar with the system and know that they will be creating a version of the game that has a potential audience of 40 million already and an even bigger audience when you factor in buyers of the Neo. More than 70% of PlayStation 4 games are also on PC which means that these developers are already used to scaling their games to work with more powerful specs and can adapt the game to perform better on PS4 Neo. Ultimately it avoids the ramp up in costs that a typical new generation would pose and means that publishers don’t need to wait for the install base to grow. Not to mention that technology upgrades are slowing down and it’s going to take longer for us to see a jump from PS2 to PS3 level this gen.

This also helps games like Destiny grow. Destiny is an IP that is planned to have at least one mainline game or expansion released every year and an evolutionary console is suited to supporting a game like this. For one it means that everyone with an original Destiny game disc can continue playing the game on PS4 Neo without Activision needing to redo the game and as all the online services are the same it means that the same install base can continue purchasing all the add ons and expansions no matter which system or game disc they have. There is also no risk for Activision in releasing a new disc version as that too will work on both the standard and evolutionary console. It’s similar to how Clash Royale works on every smartphone or how Counter Strike works on every PC. Whereas on console a PS4 game wouldn’t work with a PS3 console.

Free to Play games are starting to gain traction on consoles but ultimately they’re still a very small slice of the pie. Most free to play games are on Mobile and PC and many publishers don’t see the point in releasing a free to play game on console. Especially as free to play games that are on console do exceptionally better on Mobile or PC. Free to Play games require large communities to be successful and Mobile is able to provide a more than 2.5 billion install base whilst PC’s are able to provide a 1.5 billion install base. This means that there is much more potential of finding success on these devices than on a console install base of 150 million or so. Although I should note that console gamers are indeed more dedicated than Mobile gamers and therefore could spend more per user.

WarGaming recently spoke at GDC about their experience in bringing World of Tanks to Xbox 360 and Xbox One and how it took them a long time to get everything right as the Xbox 360 was not built to take advantage of the free to play model. It meant that WarGaming had to build the systems themselves, hire more staff to manage the console versions and adhere to strict policies that Microsoft had put in place. Ultimately if their game flopped then it would not have been worth the time, money and effort they had put in. Thankfully their game did well but the same can’t be said for other free to play games on console that were limited by the consoles inability to evolve at a fast pace to support new games models.

The main reason free to play doesn’t work on console is because the low install base of consoles holds it back. Using an example with a 40 million install base, a premium game that targets males over 25 could have 2 million buyers on console and generate $80 million in gross revenue at $40 a pop. If you have the same 2 million active users on a free to play game with a 25% conversion rate then that means you only have 500,000 paying users. Assuming that the ARPPU is around $30 in the first month for the game it means that the game only generates $15 million during that launch month. If you were to lose 60% of players each month then that means for the first 6 months you’d only just generate $25 million in revenue. Therefore you either need to get console gamers to spend more than they ever will, or rely on an evolutionary console to grow the install base so the potential number of downloads and paying users is much higher.

RETAIL MARKET & COMPETITION

Evolutionary consoles are also the new Slim models for Sony and Microsoft. Slim consoles have been a tradition for Sony since the original PlayStation and Microsoft since the Xbox 360. These slim models came in multiple configurations with at least one having a larger hard drive at a $50 or $100 premium over the cheapest model. This allowed the companies to continue to sell hardware at a cheaper price but also offer better experiences at a higher price for those who were willing to pay. This actually worked for Microsoft with the Xbox 360 Slim with the average selling price of the console increasing in 2011 over 2010. The upgrades this time are not the hard drive but to the CPU and GPU, everything else remains the same from the games library to the online services.

In previous generations the hardware was always sold at a loss, offset by high profit margins on software. The PlayStation 2 for example was priced at $299 and within a couple of years was already at $199. The original Xbox sought to compete on price and so took a $130 hit on each console sold just to be able to match the PS2 price whilst hoping that software sales would make up the difference. This generation has been slightly different with Sony and Microsoft opting to sell their consoles at a per unit profit. However competition with Sony has led to Microsoft selling their console under $300 this quarter whilst Sony have even dropped the price of their console by $50 in order to attract a new audience. Both companies will be looking to introduce evolutionary consoles to boost profit margins on hardware and encourage users to spend more on hardware.

Sony and Microsoft are also trying to emulate the Apple upgrade cycle where a new iPhone is released every year. Sony and Microsoft don’t need to release consoles every year but they do need to iterate on consoles more quickly in order to boost sales and increase profit margins in their gaming divisions. Console gamers spend more per person than any other group of gamers and so an evolutionary console isn’t going to be too hard of a sell to consumers who are used to spending hundreds of dollars per year on their hobby.

As mentioned before, consoles stood still last generation as Mobile and PC grew around them and in 2016 we’re now seeing Mobile really start to take off with many companies like ARM predicting that Mobile GPU’s will be as powerful as the base PS4 by 2018 and PC companies like Nvidia already advertising the fact that a $200 graphics card in 2016 will play games at a base 2013 PS4 like level. Both PC and Mobile gaming are growing fast and with many already owning a smartphone or PC, the evolutionary consoles from Sony and Microsoft are somewhat necessary to stay relevant in the gaming space. Mobile devices have already cannibalised the dedicated handheld market and if mobile devices or other such devices like smart TV’s or streaming boxes are able to provide console quality games on TV then it may mean publishers and consumers move to those boxes whilst the base PS4 stands still again.

At the end of the day this is all about each of the three platform holders trying to maximise revenue on hardware, retaining their customers in a software ecosystem and growing the overall install base, as well as making sure that publishers are able to succeed on console.

NINTENDO

Nintendo have hinted at taking the evolutionary console approach many times. Back in 2013 during an investor briefing it was the late Iwata who said that they wanted to make software development easier for their handheld and home console devices by using the same software ecosystem and architecture for both. Nintendo blamed their software shortages and network issues on both devices having different architectures and focuses during development. It meant the 3DS couldn’t interact with Wii U and vice versa and game development on both was completely different. Nintendo stated that they wanted home and handheld to no longer be different and to become a family of systems that run the same software, have the same connected services and use the same architecture.

What this means is that consumers would have an improved experience when it came to software and online services on all devices and Nintendo would also be able to save on costs and effort by developing games that would work on both systems. In fact Iwata himself likened this idea to iOS and Android and said that Apple is able to release multiple iPhone models because there is one standardised way of creating apps for all devices. It’s the reason that Android doesn’t have software shortages but why the Wii U and 3DS did. Ultimately what Iwata was trying to say is that he wanted to create an evolutionary platform for all of Nintendo’s future devices, whether it just be 1 home console or 5 different types of form factors.

In the end this seems to be the direction that Nintendo is taking and there is no doubt that their next console, the NX, will adopt this philosophy so that Nintendo can create games for all their devices easily.

MICROSOFT

The first thing Microsoft did to signify that they were looking at evolutionary consoles was to choose x86 as the architecture for Xbox One. Phil Spencer has openly talked about iterative consoles and it seems that Microsoft are keen for the Xbox division to become one portal for Xbox Console Games and Windows 10 Games & software. Ultimately the idea that Xbox is a static console has been dismissed in recent years as Microsoft have focused on providing their games and services across all Windows devices.

Ultimately this is a huge shift in strategy for Xbox and could signify the end of the traditional console cycle. Phil Spencer was keen to talk about things like backwards compatibility and forwards compatibility and this is certainly something we’d expect to see from a company that is interested in an evolutionary console. Whilst many see this as a fundamental shift away from the traditional console model, it’s not too different at all. First of all, Spencer dismissed the idea that we’d see upgradable parts or add ons to the Xbox but that instead we’d get a brand new iterations that evolve the Xbox One. You won’t need to upgrade parts but instead you’d just be able to buy a new Xbox and immediately be able to play all Xbox One games on there, the added advantage being that Microsoft have worked hard to bring 360 backwards compatibility to Xbox One.

Microsoft are giving choice to consumers by bringing games to both Xbox One and PC. Not every gamer wants to play games on PC and not every gamer wants to play games on console but the crossover between the two means that Microsoft is able to capture a large gaming audience. Console exclusives don’t play a huge role in selling consoles these days and the majority of the top selling games are third party titles that appear on both console and PC. Microsoft are trying to create a strategy that allows them to be leaders on both PC and Console but face tough competition from Steam on PC and Sony on console. Releasing a new Xbox One model with additional features could put Microsoft back on equal footing with Sony if they are able to play their cards right and Microsoft are in a prime position for evolutionary consoles to work thanks to UWP.

Ultimately there are two ways this can play out. Microsoft could find that they’re unable to compete with Steam and the Windows Store is unable to gain any traction at all among gamers. In turn this means that many PC gamers will stick with buying their games through Steam and also not bother with the Xbox One Console. Whilst an iterative console does put Microsoft on equal footing with Sony, the PlayStation 4 install base currently stands at 40 million and so many gamers with consoles today would be more enticed by an evolved PlayStation 4 which is rumoured to be in development.

Alternatively, Microsoft could bridge the Console and PC gaming divide if UWP and Windows store is able to take off and they could use their advantage of Windows OS installed base to their advantage over Sony. Microsoft could turn the Xbox One into something of a Steam box where all Windows UWP games are able to run on Xbox One and vice versa. An evolved Xbox One could also provide additional features that could put them on par with Sony such as VR support with third party headsets or even compatibility with Hololens further down the line.

Ultimately it’s all up in the air for Microsoft right now but it is clear that evolutionary consoles is the next step for them. As they are behind in the gaming market right now they may choose to be a bit more aggressive and feature rich with their evolved console.

SONY

Many major news outlets have been reporting on the fact that a PlayStation 4 Neo is real and is coming soon. The console is the very definition of an evolutionary console and marks Sony’s attempt to solidify themselves in the console market as well as grow the overall install base of PlayStation 4’s. The first thing to note, according to leaked documents, is that Sony are very much about not splitting the user base when it comes to Neo. The documents stipulate that games are to run exactly the same on both devices with the Neo having access to an upgraded mode that can make the game take advantage of the boost in hardware specs to make the game run and look better.

So far the reactions have been mixed but it seems a number of gamers are not understanding what Sony are actually doing here. It’s a fairly simple explanation, ultimately Sony are selling two PS4’s that have access to the same games, the same online services and the same operating system. One is cheap where as one is more expensive and provides some perks such as being able to run games better. Sony are no doubt introducing this console to introduce perks such as native 4K, UHD blu-ray and better VR support into the more expensive version so that gamers have the choice of paying more for more. This evolution of the PS4 is what we should expect to see in another 3 years as well. It’ll be a life cycle that never ends and is constantly updated with all games working on all versions.

Technological improvements are slowing down these days and the PS4 Neo is an evolution that benefits publishers by keeping game development costs low, gamers by allowing users to have the same or better experience on new hardware and the industry as a whole by keeping consoles relevant in a market where many thought they’d fail by now.

SUMMARY

This really is about consoles staying ahead of the game. This new evolutionary model is mimicking the successful model of smartphone iterations but with a long enough gap between each iteration.

This reminds me of how the DSi was successful in boosting DS sales for Nintendo and how the 360 Slim and Kinect provided a huge boost to the Xbox 360. This is slightly different though as rather than a PS5 in 3 years from now we may just see another evolved console. We’re moving away from the traditional console cycle and the PS4 may never really be discontinued by Sony, instead we may just see the base revision be discontinued by Sony whilst the more powerful versions live on under the same naming scheme. We are getting to a point where the Operating System and Gaming library define a console and where there are no more traditional generations where the install base starts from zero.

Consumers will adopt this model, and if they don’t then the only other option they have is PC gaming which can end up even more costly with upgrades needed each year in order to experience each game at a high level. For most it’ll make sense to stick with console and most will upgrade within the same platform holder in my opinion. This is a great way for Sony to solidify their lead.

To sum up, this move is all about ending traditional console cycles and moving to evolutionary ones where each new system plays the same games, runs the same OS and carries over your digital services. Evolutionary consoles allow the install base to continually grow so that consoles never start over again and instead every console owner is equal and can play the same games. It benefits game developers who cannot afford a ramp up in costs and allows them to bring more games to console and develop games with new monetisation models. On top of this the move marks the platform holders attempts to stay relevant in today’s fast moving market and stop gamers migrating to PC or Mobile. It also allows platform holders to generate more revenue from hardware sales.

The final point, which I’ve mentioned numerous times, is that this doesn’t make the base hardware obsolete. Instead it grows on that install base. The PS4 Neo and Xbox 1.5 aren’t products that replace anything, they’re just premium versions of a product. There is a reason why many games through this year are still releasing on PS3 and 360, publishers don’t want to miss out on that massive install base still on last gen, the difference here being that PS4 and PS4 Neo are the same console gen and there are already 40 million base PS4 users. Sony would be crazy to create exclusive PS4 Neo games and the leaked documents show that they are being very strict on ensuring that all games work on both consoles and the base experience is good. This really is just another DSi or an Xbox One Elite controller. You can also compare this to phones or computers, an iPhone 6s may have more features than an iPhone 5 but that doesn’t mean I’m being forced to upgrade from my iPhone 5. I certainly can if I want but it isn’t a forced upgrade and I’m not missing out on any apps because of it. Same with PC gaming, sure some people have a Titan in their rig and can play games at ultra settings whilst my PC is on medium. But at the end of the day I’m still playing the same game and it works the same way. The mass market understands these differences and knows if they want to spend more on a premium product or on a base product. At the end of the day plenty of people are still going to be buying base PS4’s because it’s the cheaper option and they know they can still play the same games. Developers can certainly optimise for both as they do on PC and Mobile, after all you don’t need a Titan to run a game, the game just runs better on a Titan. Ultimately consoles moving to this evolutionary cycle will allow console gaming to evolve faster than ever along with the rest of the gaming world.