Microsoft sets sights on Sony’s home turf

New Xbox and PS devices launching this week will likely face an uphill battle in Japan, where Switch enjoys dominance

by BLOOMBERG/ pic by BLOOMBERG

TOKYO • In the battle of the next-generation gaming machines, two key players are moving in different directions.

Microsoft Corp is making a serious attempt to attract fans in Japan with its new consoles and network services. Meanwhile, Tokyo-based Sony Corp moved its PlayStation (PS) business headquarters (HQ) to California in 2016 and has built the US into its largest single market.

New Xbox and PS devices launching this week will likely face an uphill battle in Japan, where Nintendo Co Ltd’s Switch enjoys dominance with a family-friendly line-up of games.

But Microsoft’s targeting of the world’s third-largest video-game market — including with services that can be accessed across a variety of devices — could potentially yield strong results. As the Xbox has virtually zero presence in the country, there’s plenty of room for it to increase its share.

“The Xbox has a chance to make Japan its second-largest market after the US if it takes the right steps for years to come,” said Hideki Yasuda, an analyst at Ace Research Institute in Tokyo. “Sony’s attention is drifting away and fans have started to notice that.”

Sony has placed more importance on the US market after the PS4’s disappointing performance in Japan, according to employees who asked not to be identified discussing internal matters.

Global sales of the PS4 rose to more than 113 million from the PS3’s 87 million, according to Sony data. But the console sold fewer than 10 million units in Japan, less than its predecessor, according to Famitsu, a Japanese video-game magazine.

The US, meanwhile, accounts for 35% of the video-game unit’s revenue, compared to 10% for Japan, according to Macquarie Group Ltd analyst Damian Thong.

Any suggestion that Sony is shifting its focus away from Japan is incorrect and doesn’t reflect the company’s strategy, spokeswoman Natsumi Atarashi said. She noted that the PS5 is launching first in Japan and said “our home market remains of utmost importance”.

A senior figure inside PS HQ in San Mateo, California, said the US side was frustrated by the failure of the Japan marketing team to sell as many PS4 units as expected. The person asked not to be identified discussing internal matters.

As a result, Japan has been sidelined in planning the PS5’s promotion, according to several PS staff in Japan. Employees in Tokyo said they’ve been left awaiting instructions from California.

Japan-based developer support teams have been reduced by as much as a third from their peak, and the rolling contracts of a number of game creators at PS’ Japan Studio, one of the unit’s oldest in-house software ateliers, haven’t been renewed, former employees said. The US office believes the PS business doesn’t need games that only do well in Japan, employees in the California HQ said.

The PS5’s two main online promotional events both took place at 5am in Tokyo — making them more accessible to American and European fans — and lacked Japanese translation for some parts. The company also decided to standardise its PS5 control scheme, so that Japanese players would have to use “X” to confirm and “O” to cancel, like the rest of the world. That reverses a 26-year tradition in a country where circles signify positives and crosses mark negatives.

Local retailers said they haven’t received many more first-batch PS5 units than they did of the PS3, which had a limited initial production run.

“It’s analyst consensus that PS no longer sees the Japan market as important,” Morningstar Research analyst Kazunori Ito said. “If you want to know their take on the Japanese market, you need to ask about it because otherwise Sony wouldn’t talk about it.”

TV ownership among Japanese households has been falling for years, according to government data. That makes the market less attractive, according to Ace’s Yasuda. In order to play games on the PS, a user must have a TV or monitor, though some titles are also available to play on PCs.

Serkan Toto, a game consultant in Tokyo, said the PS5 should sell fewer units than its predecessor.

“Many PS4 owners in Japan would eventually move to the PS5, but that would largely depend on how strong the PS team in Tokyo will be in pushing the needs of Japanese customers to the American HQ,” he said. “Considering the current power balance between the US and Japan, I can’t expect much, unfortunately.”

To be sure, the PS4’s worldwide success suggests Sony’s strategy hasn’t been detrimental. CFO Hiroki Totoki said on Oct 28 that the company would be able to sell more than 7.6 million PS5 units in the first five months, more than the popular PS4 achieved in the same timeframe. The long-term goal is to sell as many units as the PS4, Totoki said.

And the company’s PS Plus subscription service, for owners of Sony consoles, reported a record increase in subscribers during the period of pandemic lockdowns.

But Microsoft, which is launching its next-generation consoles in Japan tomorrow, the same day it does so in the rest of the world, sees an opportunity in the country’s market. Microsoft didn’t start selling the Xbox One in Japan until almost a year after the US, which contributed to its disappointing sales in the Asian country.

The challenge facing Microsoft is steep. The Xbox One accounted for just 0.1% of console sales in Japan this year through Nov 1, compared to 10.1% for the PS4 and 89.8% for Nintendo’s Switch, according to Famitsu.

Microsoft is betting its Xbox Series S, the smallest Xbox ever, will help turn the tide. Previous consoles were criticised as being too large for Japanese living rooms, Ace’s Yasuda said.

The US company has been stepping up discussions with Japan-based game developers about releasing titles on the Xbox, said Sarah Bond, who oversees relations with game creators across the Microsoft gaming ecosystem.

Koei Tecmo Games Co Ltd is one of those firms. Hisashi Koinuma, president of the Japanese publisher, said he’s willing to consider releasing more games for the Xbox if the US company shows continued interest in Japan.

On top of that, there’s evidence Microsoft is seeking to make acquisitions in the country, though it hasn’t yet landed a deal with a big name there. Several Japan-based game developers, from small to big, said it had approached them about buying their businesses. They asked not to be identified as the talks were private, and declined to give details on how the discussions went.

When asked about potential purchases of Japanese companies, Jeremy Hinton, head of Xbox operations in Asia, said Microsoft is always open to discussions with creators that are a good fit. He said acquisitions are a possibility, but there are no announcements to share at this time.

“Japan has long been an isolated part of the Xbox world, but it appears Microsoft is changing that landscape,” Katsuhiko Hayashi, representative of Famitsu Group, said of Microsoft’s efforts to target the country.

The focus isn’t just on selling consoles. Hinton said the company is also banking on winning subscribers to the Game Pass Ultimate service, which includes the xCloud game-streaming offering. This service, which can be used for other devices, as well as the Xbox, offers more than 100 allyou-can-play games for a fixed monthly fee and will seek to entice the country’s growing cohort of mobile gamers.

While Japan has fallen behind China and the US in the size of its video-game market, Microsoft said Japan is still biggest when measured by per-capita spending.

But questions remain about whether the US company will be able to penetrate it given its lack of success in the past, according to game-industry consultant Toto.

“Microsoft will continue to have a hard time in Japan, and I don’t see any reason why the next Xbox should do better in Japan than the previous models,” he said. “All signs point that for the next years, Nintendo will stay king in Japan, and I really don’t understand why Microsoft is still so obsessed with Japan.”

Whether he’s right — or whether the US company can prise open the door to a market that has long eluded it — remains to be seen.

“Microsoft won’t be able to take Sony’s position as No 2 in Japan anytime soon, but at least, it has started to make changes,” Ace’s Yasuda said. “A big tide always starts with a small change.” — Bloomberg