Industrial Reports (c) JETRO, 2007

1
Japanese Video Game Industry


Japanese Economy Division

Summary
In 2005, shipments of home video games increased for the first time in four years, bolstered by
launches of the Nintendo DS and Sony PlayStation Portable. Next-generation game consoles, such
as the Nintendo Wii and Sony PlayStation 3 to be marketed from the end of 2006, are expected to
further expand the home video game market into 2007.

Since the release of Nintendos Family Computer (Famicon) in 1983, J apans electronic game
industry has come to depend on home video games to such an extent that it can be interchangeably
called the game console industry. In recent years, the spread of broadband, flat-rate
telecommunications services has enabled new platforms for games, such as online and mobile,
further broadening the industrys base. This report, however, covers only the home video game
industry, which still accounts for a significant portion of the industry.


1. History of video game industry

J apanese video game companies have been overwhelmingly competitive in the international
market, but competition in the hardware sector has intensified in recent years, following the entry of
Microsoft.

A. Desktop game consoles

The industry dawned with the runaway success of the Atari 2600, a home game device with a
plug-in ROM cartridge, which was launched by Atari in the U.S. market in 1977. Third-party
software could be developed freely, because Atari made the programming specifications openly
available. As a result, numerous software packages appeared and were well received by users. Over
time, however, user support steadily weakened as inferior software also began to circulate. The
market for the Atari 2600 rapidly declined due to stiff competition during the 1982 Christmas season,
and the U.S. market remained in the doldrums until the arrival of the Nintendo Entertainment
System (NES) in 1985.
In J apan, on the other hand, the video game market expanded rapidly from the time Nintendo
released the Family Computer in 1983. Many manufacturers launched home game units around this
time, but from 1983 to 2000 competition mainly involved three companies: NEC Home Electronics
(NEC), Nintendo and Sega Corporation. Since 2000, however, the major players have been
Microsoft, Nintendo and Sony Computer Entertainment (Sony) (Fig. 1).
Industrial Reports (c) JETRO, 2007
2
1977 TV J ack1000, 1200, 1500, 2500, 3000 (Bandai)
1978 Visicom(Toshiba)
Video Computer System(made by Atari, sold by Epoch)
Supervision8000 (Bandai)
Cassette vision (Epoch), Pyu-Ta (Tomy)
Game PasocomM5 (Sword / Takara)
Max Machine (Commodore)
Family Computer (Nintendo), SG-1000, SC-3000 (Sega)
PV-1000 (Casio), OseroMaltibision (Tsukuda)
TV Boy (Gakken), My Vision (Kanto Denshi / Nihon Bussan)
Cassette vision J r. (Epoch)
SG-1000 II (Sega), Super Cassette vision (Epoch)
RX-78 (Bandai), Pyu-Ta Mk II (Tomy)
1985 Sega Mark III (Sega)
1986 DiscSystem(Nintendo), Twin Famicom(Sharp)
1987 Master System(Sega), PC Engine (NEC)
1988 Megadrive (Sega), CD-ROM (NEC)
1990 Super Famicom(Nintendo), Neogeo (SNK)
1991 MegaCD (Sega), PC Engine Duo, Super CD-ROM (NEC)
1992 Wondermega (Victor)
1993 Laser Active (Pioneer)
PlayStation (SCE), 3DO Real (Panasonic)
3DO Try (Sanyo), Saturn (Sega), PC-FX (NEC)
Playdia (Bandai), Neogeo CD (SNK)
Super 32X (Sega)
1996 Nintendo 64 (Nintendo), PiPPiN@Atmark (Bandai)
1998 Dreamcast (Sega)
2000 PlayStation 2 (SCE), Psone (SCE)
2001 Nintendo GameCube (Nintendo)
2002 X box (Microsoft)
2003 PSX (Sony)
2005 X box 360 (Microsoft)
2006 Family Computer (Nintendo), SG-1000, SC-3000 (Sega)
SCE =Sony Computer Entertainment
Source: Computer Entertainment Suppliers Association, 2006 CESA Game White Paper.
Fig. 1 Milestones in Home Desktop Games
1994
1983
1981
1984
1979

Industrial Reports (c) JETRO, 2007
3
1) From 1983: 8-bit CPUs
Nintendo released the Family Computer and Sega the SG-1000 in 1983. Both consoles contained
eight-bit CPUs and games were played using proprietary plug-in cartridges. The major difference
between the two consoles was that Nintendo offered a large lineup of games developed under license
by third parties, while the SG-1000 only accepted games developed by Sega.
Over time, however, Nintendo began licensing to third parties due to its limited capacity to
develop competitive games. As a result, by 1984 outside companies were producing hit games for
the Family Computer, such as Galaxian by Namco, the leading arcade game manufacturer, and Lode
Runner, a smash hit that sold 1.2 million cartridges, by Hudson Soft, a major PC software developer.
As a result, the Family Computers wide variety of games helped it lead the market with 62.91
million units shipped, including 19.35 million in J apan and 42.56 million overseas.

2) From 1988: 16-bit CPUs and CD-ROMs
The market for 16-bit consoles, which offered improved graphics and sound over 8-bit models,
began in 1987 with the NEC PC Engine, which featured an 8-bit CPU but 16-bit-equivalent graphics
and processing. The first true 16-bit models were the Sega Mega Drive in 1988 and the Nintendo
Super Famicom in 1990.
Although the 16-bit Super Famicom was the successor to the Family Computer, games for the
latter were not compatible with the former. Nevertheless, the Super Famicom was superior to the
NEC and Sega models in terms of audio-video performance, so it captured an overwhelming market
share amounting to 49.10 million units shipped, including 17.17 million in J apan and 31.93 million
overseas.
Segas Mega Drive was the first console with a true 16-bit CPU. As the successor to the Sega
Mark III and Master System, the Mega Drive could accept games for these earlier models via an
optional adapter. Games were also available from third parties. Despite these features, however,
Sega was unable to take the lead in 16-bit models due to the Super Famicoms overwhelming
popularity.
Following the launch of 16-bit consoles, manufacturers released outboard CD-ROM drives to
play software. Sega released the Mega-CD for its Mega Drive, and NEC the CD-ROM
2
and Super
CD-ROM
2
for its PC Engine. CD-ROM software offered far better graphics and sound, as well as
more capacity, than cartridge software. They also could be produced faster and at less cost. Soon
CD-ROMs were the standard medium for game software. Interestingly, Nintendo was engaged in
developing a CD-ROM drive for its Super Famicom, but never released it.

3) From 1994: 32-bit and 64-bit CPUs
A series of 32-bit game consoles came out beginning in 1994, offering yet again higher
performance than existing models. Most of these consoles used CD-ROMs.
The 3DO Real, based on specs developed by the 3DO Company of the U.S., was released by
Matsushita Electric Industrial. The unit price was undercut significantly by the subsequently
launched PlayStation and Sega Saturn, so 3DO faded from the market.
The 32-bit game console market was divided between the Sony PlayStation and Sega Saturn, but
the PlayStation seized an overwhelming share based on the success of hit titles, particularly Final
Fantasy and Dragon Quest, both by Square Enix. Sony shipped 102.49 million PlayStations,
including 21.59 million in J apan, 40.78 million in North America and 40.12 million in Europe.
Two years after the launch of the PlayStation, Nintendo released the 64-bit Nintendo 64, but the
model was unable to break the PlayStations stranglehold on the market. Worldwide shipments
totaled 32.93 million units

4) From 2000: PlayStation 2
After the introduction of 32-bit consoles, Sony released the PlayStation 2 (PS2), Sega the
Dreamcast and Nintendo the GameCube. Microsoft then entered the market with the Xbox.
The PS2 is compatible with the PlayStation, but the other consoles are not compatible with their
respective predecessors. The PS2 helped to popularize DVDs for gaming, since it accepts DVD-
ROMs, and can even play DVD videos. The PS2 quickly grabbed an overwhelming share, largely
because it could use the huge number of games people had already purchased for the some 100
Industrial Reports (c) JETRO, 2007
4
million PlayStations sold worldwide. Worldwide shipments of the PS2 have amounted to 101.37
million, 22.83 million in Japan, 40.99 million in North America and 37.55 million in Europe. Segas
Dreamcast shipped only 9.13 million units, so the company dropped out of the hardware market.
Microsofts Xbox, plagued by initial product glitches and a glaring lack of appealing software, was
unable to succeed in J apan.

5) From 2005: Next-generation consoles
Microsoft, despite its initial failure with the Xbox in Japan, stole the lead on sixth-generation
models with the Xbox 360, launched in December 2005. Sony released the PS3 in November 2006
and Nintendo the Wii in December 2006.

B. Portable game consoles

The first portable game devices were the Game & Watch series, which Nintendo launched in
1980. Games were built in, and the consoles could not accept external software. Nevertheless, the
series was very popular, with some 13 million units shipped in J apan. The Game Boy, however,
revolutionized the portable game device market in 1989 (Fig. 2).

1980 Game & Watch (Nintendo)
1989 Game Boy (Nintendo), Lynx (Atari)
1990 Game Gear (Sega), PC Engine GT (NEC)
1994 Game Boy Bros. (Nintendo)
1995 Virtual Boy (Nintendo)
1996 Game Boy Pocket (Nintendo)
Game Boy Light, Game Boy Color (Nintendo)
Neogeo Pocket (SNK)
1999 WonderSwan (Bandai), Neogeo Pocket Color (SNK)
2000 WonderSwan Color (Bandai)
2001 Game Boy Advance (Nintendo)
2002 Swan Crystal (Bandai)
2003 Game Boy Advance SP (Nintendo)
Nintendo DS (Nintendo)
PSP (SCE)
2005 Nintendo DS Lite, Game Boy micro (Nintendo)
Fig. 2 Milestones in Portable Game Consoles
1998
2004
Source: Computer Entertainment Suppliers Association, 2006 CESA Game White Paper.


1) From 1989: Game Boy and killer games
Nintendos launch of the Game Boy in 1989 energized the portable game console market.
Software on ROM cartridges provided access to a wide variety of games. The console was equipped
with a monochrome screen, plus cables for connection with other game devices for competitive
playing. Games covered a range of fields, including action, puzzles, role-playing and more, and
some of them enjoyed huge popularity as killer games. In fact, so popular was the Game Boy itself
that retailers were frequently sold out. As of the end of 2005, the Game Boy was the most popular
portable gaming device ever, with shipments of 118.69 million units.
Portable units developed by other companies included Segas Game Gear, released at about the
same time, NECs PC Engine GT and Ataris Lynx. But the Game Boy maintained an overwhelming
share with its fine balance between pricing and performance, as well as its extensive menu of
popular games.

Industrial Reports (c) JETRO, 2007
5
2) From mid-90s: slumping sales
Although the Game Boy was the leading portable, sales began to wane in the mid-90s. But Game
Boy sales recovered in 1996 with the introduction of the highly successful game Pocket Monsters
(Pokemon), versions Red and Green. As a result of this success, a variety of other Pokemon
content was merchandised, such as animation, movies, trading card games and character goods.
Three firms Creatures, Game Freak and copyright holder Nintendo pooled capital to form
Pocket Monsters (now Pokemon) Co., Ltd. and develop the business through licensing.
High-performance portable game consoles with color screens appeared between 1999 and 2001,
including the WonderSwan Color by Bandai (now Namco Bandai Holdings), Neo-Geo Pocket Color
by SNK (now SNK Playmore) and Nintendos Game Boy Advance (GBA). These devices revived
intense competition in the market, with the GBA eventually winning out due to its compatibility
with previous devices (Game Boy and Game Boy Color) and large lineup of appealing software.

3) From 2004: Battle between Nintendo and Sony
In December 2004, Nintendo launched the NDS and Sony the PSP. The NDS is compatible with
the GBA and has unique dual touch-sensitive screens, a stylus and wireless LAN capability. New
games that make use of these features have been released, which has resulted in a broad lineup of
software for the NDS and popularity for the model among children and adults alike.


2. Market overview

A. Shipments overall

Shipments of home video games in 2005 jumped 49.6% to 1,359.849 billion, second only to the
record-breaking shipments of 2001, according to the Computer Entertainment Suppliers Association
(CESA). Hardware shipments shot up 98% to 872.74 billion, of which 70% was shipped overseas.

Fig. 3 Global Japanese Shipments of Video Games
538 517
430
487
540
940
788
441
873
567
563
578 475
468
455
482
510
705
1,360
1,048 1,049
1,017
1,118
1,457
1,262
1,134
909
0
300
600
900
1,200
1,500
97 98 99 00 01 02 03 04 05
billion yen
Hardware
Software
Total
Industrial Reports (c) JETRO, 2007
6
B. Exports

Combined exports of hardware and software rose 70.3% to 961.371 billion. Domestic shipments
increased 15.6% to 398.479 billion, or 29.3% of all shipments (Fig. 4). Hardware increased 113.5%
to 708.553 billion and software 8.7% to 252.818 billion. Manufacturers, anticipating a shrinking
domestic market, reinforced overseas sales.
North America was the main destination for exports, receiving some 50% of hardware and 60%
of software (Fig. 5). Although J apan is extremely competitive, global competition is heating up, with
Korean firms taking the lead in online gaming and Microsoft expanding its share of the North
American market with the Xbox.



Fig. 5 Video Game Exports, by Destination (2005)
0.03% 5.9%
50.1%
44.0%
Hardware:
708.55 billion yen
0.1%
59.8%
3.8%
36.3%
North America
Europe
Asia & Oceania
Others
Software:
252.82 billion yen
Fig. 4 Video Game Shipments (Hardware and Software)
532
485
349
398
635
972
874
564
961
472
423
482 389
345
595
577
517
785
1,360
1,048 1,049
1,017
1,118
1,457
1,262
1,134
909
0
300
600
900
1,200
1,500
97 98 99 00 01 02 03 04 05
(billion yen
Overseas
Domestic
Total
Industrial Reports (c) JETRO, 2007
7
C. J apanese market

The J apanese home video game retail market grew for the first time in five years in 2005, when
sales went up 13.9% to 496.549 billion. Hardware sales grew 51.8% to 182.422 billion.
Previously, sales of new hardware grew in 2000 and 2001, thanks to the launch of the PS2, but then
went on a downward trend from 2002. Sales rebounded in 2005 due to launches of major new
portable game consoles, such as Nintendos NDS and Sonys PlayStation Portable 2 at the end of
2004 and Microsofts Xbox 360 at the end of 2005. At the Wii Preview in September 2006,
Nintendo President Satoru Iwata said that consumer acceptance of the NDS had helped to revive the
popularity of games in J apan.
Software sales have continued to decline since peaking in 1997. Sales in 2005 dipped 0.6% to
314.127 billion. Discounted popular older titles and low-priced software have accounted for a large
share of sales in recent years, which is why sales have slowed. Fewer hit titles in 2005 compared to
2004 was also a factor in the slump.


3. Product trends

A. Hardware

1) Portable game consoles propel market
In 2005, domestic hardware retail sales grew 51.8% to 182.422 billion, the first annual rise
since 2001 (Fig. 7). Two blockbuster portable game consoles, the Nintendo NDS and Sony PSP,
contributed to this growth. Combined sales of these two portables alone jumped 212.9% to 134.721
billion (73.9% share of the market). In total, 4.25 million units of the NDS and 2.62 million PSPs
were shipped. The NDS took the lead by appealing to women as well as men, and to a wider range
of age groups.
Desktop hardware sales shrank 16.1% to 47.710 billion, just 26.1% of total hardware sales.
Sonys PS2 led with 40.286 billion, but this was 20.2% less than in 2004. Nintendos GameCube
and Microsofts Xbox also slumped, but Microsoft got a jump on other companies with the
December 2005 launch of its next-generation Xbox 360. Sony and Nintendo released their next-
generation hardware in November and December 2006, respectively, so growth is expected in 2007.

Fig. 6 Video Game Retail Sales (Domestic)
583
369
309 314
210
245
165
120
182
514
485
413
337
316
119
145
175
137
497
758
659
604
623
613
501
446
436
0
300
600
900
97 98 99 00 01 02 03 04 05
10 billion Yen
Hardware
Software
Total
Source: (Figs. 3-6): Computer Entertainment Suppliers Association, 2006 CESA Game White Paper.
Industrial Reports (c) JETRO, 2007
8


2) Next-generation desktop and portable consoles
All of the latest next-generation desktop consoles were released by the end of 2006 (Fig. 8). The
Nintendo Wii is aimed at enticing women and people in older age groups who have previously
showed little interest in games, thus increasing the gaming population. A line has been drawn
between Nintendo and other hardware models in terms of price and performance. The Sony PS3 will
be equipped with a high-performance CPU, a large-capacity hard drive and the latest technology,
including a Blu-ray disc drive, to enable large, high-resolution images. The Xbox 360 is also a high-
performance game console, and can be connected to PCs equipped with Windows XP.
Among portables, the high-performance PSP accepts a variety of digital content, while the NDS
focuses on new functions that expand the ways of playing games (Fig. 9).
Fig. 7 Video Game Hardware Unit Sales
118,904
210,164
244,889
164,636
137,156
120,146
182,422
0
50,000
100,000
150,000
200,000
250,000
300,000
99 00 01 02 03 04 05
a
PS2 (SCE) PS (SCE)
GameCube (Nintendo) Nintendo64 (Nintendo)
Dreamcast (SEGA)
box (Microsoft)
Xbox360 (Microsoft) Portables
Others Total
Source: Computer Entertainment Suppliers Association, 2006 CESA Game White Paper.
Industrial Reports (c) JETRO, 2007
9
Nintendo SCE Microsoft
Wii PlayStation 3 Xbox 360
60Gb HDD: open pricing Xbox 360: 39,795
20Gb HDD: 49,980 Xbox Core System: 29,800
Release date Dec. 2, 2006 Nov. 11, 2006 Dec. 15, 2006
Floating point
processing power
Not announced 2 TFLOPs 1 TFLOP
Proprietary 12cmWii disk (single or
8cmGameCube disk
Features
Compact size. Unique controller,
unlike those of other consoles.
Works with wireless LAN. Enables
downloading of Famicomand other
games via Internet..
Higher floating point processing
capabilities than current PCs with
new Cell CPU. Increased digital
connectivity for data exchanges
with cameras, portable music
players, etc. Movie-quality high-
resolution images.
Increased PC connectivity to
view HDTV programs and
movies recorded on PC. VoIP
capabilty to talk with opponent
during online competition.
PlayStation Xbox
PlayStation 2 (Only compatible titles)
GameCube: PlayStation 2: Xbox:
20.61 million 101.37 million 20.42 million
Sources: Ministry of Economy, Trade and Industry, Game Industry Strategy , and press reports.
Xbox 360 Memory Unit Storage media
Drives
Compatibility
4 million 2 million 10 million
Global shipments of
previous model
Year-end global
shipment target
Current version shipments are as of December 31, 2005.
GameCube
Fig. 8 Features of Next-Generation Game Consoles
25,000
SD memory card and GameCube
memory card
Price (including tax)
SD memory card, Memory Stick
and CompactFlash
Blu-ray, DVD, etc. DVD, etc.



Nintendo SCE
Product Nintendo DS PlayStation Portable (PSP)
Price (including tax) 15,000 20,790
Release date Dec. 2, 2004 Dec. 12, 2004
Size 148.728.984.7mm(WHD) 1702374mm(WHD)
Weight 275g 280g (with battery)
Top screen:
Three-inch backlit, translucent, reflective TFT color LCD,
256192 pixel resolution, 260,000 color display
Bottomscreen:
Transparent analog touch screen
Storage media / Nintendo DS cartridges UMD
compatible software Game Boy Advance cartridges Memory Stick Duo
Features
Dual panels and touch-sensitive screen. Standard equipped for
wireless LAN. Focused on gaming, so no video or music
playback features. Multi-console play with single DS cartridge.
Large, high-resolution Sharp LCD display. Audiovisual
playback and other features for PS2-equivalent
graphics. Movies and games available on UMD.
Available titles 113 108
Total global shipments 14.43 million 14.48 million
Nintendo DS measurements show when device is closed. Title, global shipment data as of December 31, 2005.
Fig. 9 Features of Two Major Handheld Consoles
Sources: Nintendo and SCE websites, press reports, and Computer Entertainment Suppliers Association, 2006 CESA Game White Paper.
IEEE 802.11 Wireless capabilities
Screen(s)
4.3-inch, 16:9 wide screen TFT LCD,
480272 pixel resolution, 16.77 million colors
IEEE 802.11, proprietary Nintendo protocol
Industrial Reports (c) JETRO, 2007
10
3) Outlook
The hardware market is expected to continue growing with the popularity of portable game
consoles such as the NDS and PSP. The NDS was doing well as of the end of September 2006, with
26.82 million units sold 11.52 million in J apan and 15.3 million overseas (Fig. 10). The PSP has
sold 22.94 million units 5.37 million in J apan and the rest of Asia, and 17.57 million elsewhere.
The PS3, Wii and other next-generation hardware are expected to be in wide use from 2007
onward, but forecasts of sales in J apan vary greatly. According to an Internet survey of 1,000 men
and women of ages 20 to 69, conducted by Nikkei Marketing J ournal from September 22-25, 2006,
less than 20% intend to purchase a next-generation game console, 10.8% plan to buy a PS3, 5.5% a
Wii and 1.1% an Xbox 360. In response to the high prices of next-generation machines, Sony
announced price cuts on its PS3 a month before it was launched. The price for the low-end model
equipped with a 20 GB drive was cut from 62,790 to 49,980. Microsoft also released a stripped
down version of the Xbox 360, called the Xbox Core System, for 29,800 in November. The
suggested retail price for the Wii is 25,000. Some think that these cuts are linked to the strong
initial sales of next-generation models.
Game magazine publisher Enterbrain forecasts cumulative sales of 4.13 million for the PS3 and
5.47 million for the Wii by March 2007. Since sales of portable consoles have not flagged, many see
the market becoming polarized between portables and next-generation models.

Fig. 10 Nintendo DS Sales
3,630
5,700
6,910
9,240
11,520
4,630
5,110
5,900
7,510
2,340
4,710
6,130
7,790
2,870
4,100
26,820
21,270
16,730
14,430
8,840
0
5,000
10,000
15,000
20,000
25,000
30,000
05/2Q 05/3Q 05/4Q 06/1Q 06/2Q
(thousand units)
Others
North America
Japan
Total
Source: Financial statements of Nintendo Co., Ltd.
Industrial Reports (c) JETRO, 2007
11

B. Software

Media Creates 2006 Video Game Industry White Paper reported that 1,052 game titles were
released in 2005 (Fig. 12). The PS2 commanded an overwhelming majority of desktop titles at 653
(636 in 2004), followed by 50 for the GameCube (54 in 2004), nine for the Xbox and Xbox 360 (60
in 2004) and six for the PlayStation (29 in 2004). With the exception of the PS2, all devices saw
declines in titles.
Among titles for portables, there were 113 for the GBA (195 in 2004), 113 for the NDS (14 in
2004) and 108 for the PSP (18 in 2004), evidence of the continuing changeover in game devices.
There have been two million-selling titles in Japan for desktop consoles and five for portables. None
have achieved the blockbuster status of Square Enix Dragon Quest VIII (3.63 million shipped) or
Nintendos Pokemon Fire Red and Leaf Green (2.9 million shipped). Nevertheless, the NDS had a
significant number of software titles that ranked high in sales.
Low-priced and discounted titles accounted for around 30% of total sales.
Fig. 12 Video Game Shipments, by Title (2005)
653
50
113
9
6
108
113 PS2
GC
Xbox/Xbox 360
PS
GBA
DS
PSP
1,052 titles
Source: Media Create, 2006 Annual Video Game Industry Report.
Fig. 11 Total Shipments of Playstation Portable
510
1,440
2,330
2,850
4,200
4,700
5,130 5,370
2,730
4,130
5,810
6,390
7,570
9,570
1,830
5,020
5,940
6,350
8,000
1,530
22,940
19,050
17,030
15,030
8,810
5,060
2,970
510
0
5,000
10,000
15,000
20,000
25,000
04/3Q 04/4Q 05/1Q 05/2Q 05/3Q 05/4Q 06/1Q 06/2Q
(thousand units)
Asia (incl. Japan) North America
Europe World
Source: Sony Computer Entertainment.
Industrial Reports (c) JETRO, 2007
12
1) 2005 sales rankings
Figure 13 shows the top 10 titles in 2005. A noticeable trend in recent years has been sequels to
million-sellers, which themselves generate profit and are among the top sellers. Among the leading
sellers in 2005, all four PS2 titles were sequels. This is a result of game software producers trying to
minimize development costs by limiting their numbers of titles. As a result, fewer innovative,
adventurous titles appeared, leaving consumers bored and less interested in playing games.
However, a number of new games for the NDS offer innovative, unique formats, such as split
screens, touch screens and wireless LAN capabilities. These have gained acceptance among
consumers. In particular, software ranking in the top 10 in 2005, such as Animal Crossing: Wild
World, Brain Age, Nintendogs and the voice-controlled DS Cooking Navigator (released in July
2006), have attracted new fans of portables, especially women.
In addition, licensees other than Nintendo have been releasing new software for practical or
tutorial purposes, turning portable gaming consoles into data terminals.


2) Trends by genre, and consumer preferences
CESAs 2006 Game White Paper uses data from a Media Works survey, and confirms the
general trends seen in other firms research data (Fig. 14). The action genre sold the best, accounting
for 27.0% of total sales,
followed by role-playing at
15.2%. The miscellaneous
other category grew on
strong sales of mental-exercise
games.
Around 70% of consumers
like role-playing games, 40%
action and 30% adventure,
according to a CESA poll at
Tokyo Game Show 2005.
The U.S. differs from
J apan in that best sellers are
sports and action games based
on hit movies (Fig. 15). Only
one J apanese-produced
software title ranked among
the top 10 in the U.S., which
explains why software
producers employ local firms
when they expand overseas.
Rank Hardware Genre Title Publisher Total sales
1 DS Other Animal Crossing: Wild World Nintendo 1,382,228
2 DS Other Brain Age Nintendo 1,157,870
3 DS Other Big Brain Academy Nintendo 935,535
4 PS2 Action New Dynasty Warriors 4 Koei 886,624
5 PS2 RP KingdomHearts II Square Enix 884,428
6 PS2 Sports World Soccer Winning Eleven 9 Konami 877,347
7 DS Racing Mario Cart DS Nintendo 836,478
8 DS Other Tamagotchi no Puchi Puchi Omisecchi Gohi-Kini Bandai 784,537
9 PS2 Action Dragonball Z: Budokai 3 SCE 659,975
10 GBA RP Mushiking: King of the Beetles Nintendo 624,292
Fig. 13 Top 10 Games for Home Consoles in Japan in 2005
DS =Nintendo DS, PS2 =PlayStation 2, GBA =Game Boy Advance, RP =Role playing, SCE =Sony Computer
Entertainment. Genres based on Computer Entertainment Suppliers Association, 2006 Games White Paper.
Source: Media Create, 2006 Annual Video Game Industry Report
Genre 2004 2005
Action 32.1% 27.0%
Role-playing 28.2% 15.2%
Sports 8.4% 8.8%
Action role-playing 1.9% 6.2%
Simulation 7.6% 5.2%
Racing 4.5% 4.5%
Simulation role-playing 2.2% 4.4%
Action adventure 1.6% 3.9%
Fighting action 4.1% 2.8%
Table 1.7% 2.2%
Puzzle 1.2% 1.8%
Adventure 1.7% 1.7%
Shooting 1.8% 0.8%
Others 3.0% 15.6%
Source: Computer Entertainment Suppliers Association,
2006 CESA Game White Paper.
Fig. 14 Software Sales Shares, by Genre
Industrial Reports (c) JETRO, 2007
13

Rank Hardware Genre Title Publisher
1 PS2 Sports Madden NFL 06 Electronic Arts
2 PS2 Racing Gran Turismo 4 SCE
3 Xbox Sports Madden NFL 06 Electronic Arts
4 PS2 Sports NCAA Football 06 Electronic Arts
5 PS2 Sports Star Wars Battlefront II Lucas Arts
6 PS2 Sports MVP Baseball 2005 Electronic Arts
7 PS2 Action SW Episode III: SITH Lucas Arts
8 PS2 Sports NBA Live 06 Electronic Arts
9 PS2 Action Lego Star Wars Edios
10 Xbox Action Strar Wars Battlefront II Lucas Arts
Sources: Computer Entertainment Suppliers Association, 2006 CESA Game White Paper , and official
websites for Playstation and Xbox.
Fig. 15 Top 10 Games for Home Consoles in U.S.A. in 2005


4. The industry

A. Manufacturing

Video game producers are broadly divided into hardware and software producers.

1) Hardware
Hardware is divided into desktop consoles that connect to a TV, and portable models with their
own LCD screens.
Hardware, also referred to as platforms, was being sold by three companies in J apan
Microsoft, Nintendo and Sony as of October 2006 (Fig. 16). Nintendo and Sony sell both desktop
and portable models.
Sega and Bandai are no longer in the market.
Microsoft is hoping to enter the portable market, but nothing had been officially announced as of
October 2006.

Manufacturer Desktop types Portable types
GameCube (Sep. 2001) Game Boy Advance (Mar. 2001)
Wii (Dec. 2006) Nintendo DS (Dec. 2004)
Playstation2 (Mar. 2000)
Playstation3 (Nov. 2006)
Mincrosoft Xbox 360 (Dec. 2005) -
Source: J ETRO.
Fig. 16 Video Game Hardware Makers and Top Products
Nintendo
Sony Computer Entertainment PSP (Dec. 2004)


Industrial Reports (c) JETRO, 2007
14
2) Software
Because Microsoft, Nintendo and Sony hardware platforms are incompatible, software producers
create and sell titles matched to the specs of each platform (Fig. 17).

Software producers ordinarily pay royalties to hardware manufacturers. For example, a company
that develops and sells a title for the PS2 would pay a fixed royalty to Sony. Royalties vary by
companies, products and sales volumes.
While some producers create games for the hardware of only one maker (closed platform), others
simultaneously produce and sell identical software for multiple makers hardware (open platform).
In recent years, more producers have developed open-platform software to maximize returns and
reduce risk.
Microsoft, Nintendo and Sony also develop and sell their own software. Other software
producers with businesses worth over 10 billion include Banpresto (owned by Namco Bandai),
Capcom, Hudson (owned by Konami), Koei, Konami, Namco Bandai Games, Sega (owned by Sega
Sammy Holdings), Square Enix, Taito (owned by Square Enix) and Tecmo.

3) Restructuring and diversification in software field
The software field has been increasingly restructured in recent years (Fig. 18). The main aims
have been to use content more effectively and to establish companies large enough to bear
development costs, which continue to rise because of the increasingly high performance needs of
hardware. The ultimate goal is to establish new revenue streams through expanded sales routes and
uses for game-console software. Since the video game market is in decline while new markets, such
as online gaming, continue to develop, software publishers must diversify.
Hardware manufacturers have usually taken the lead in establishing distribution networks, as
well as setting prices, but software publishers have had to devise their own strategies for developing
products for other devices, such as cell phones and PCs, often through merger or acquisition.

Merger date New company
Enix Co., Ltd. + Square Co., Ltd. April 2003 Square Enix Co., Ltd.
Sammy Corporation + Sega Corporation October 2004 Sega Sammy Holdings Inc.
Namco Ltd. + Bandai Co., Ltd. September 2005 Namco Bandai Holdings Inc.
Konami Corporation Hudson Soft Co., Ltd. April 2005 Hudson made wholly owned subsidiary
Square Enix Co., Ltd. Taito Corporation March 2006 Taito made wholly owned subsidiary
Takara Co., Ltd. + Tomy Co., Ltd. March 2006 Takara-Tomy Co., Ltd.
Sources: Company press releases.
Fig. 18 Recent Examples of Restructuring in Software Publishing Field
Pre-merger
October 2003 Wholly owned subsidiary of Atlus Atlus Co., Ltd.
Takara Co., Ltd. (now Takara-
Tomy Co., Ltd.)


Software producers have bought a number of overseas software publishers (Fig. 19), particularly
those with hit titles or games for the rapidly growing online and cell phone markets. In recent years,
there has also been an increase in tie-ups with foreign firms, and the establishment of operations in
MS =Microsoft, SCE =Sony Computer Entertainment
Source: Digital Content Association of J apan, 2006 Digital Content White Paper.
Fig. 17 Video Game Production Model
Development
License
License
Creation
Production
Hardware/software firms:
MS, Nintendo, SCE
Software publishers:
Banpresto, Capcom, Hudson, Koei,
Konami, Namco, Sega, Square Enix,
Taito, Tecmo
In-house development
Developers
Director
Producer
Programmers
Graphic designers
Scenario writers
Music producers
Industrial Reports (c) JETRO, 2007
15
new locations overseas, or strengthening of existing operations
1
(Fig. 20). Tie-ups with foreign firms
are usually related to online and mobile games, which are increasingly popular worldwide.
Especially notable is the large number of tie-ups with Chinese companies and the establishment of
business bases in China to develop the market.

1
A good example of restructuring is Capcom, which closed its U.S. sales subsidiarys software-development studio, reorganized
operational structure and reduced staffing overall, but added more sales and marketing personnel.
J apanese firm Overseas firmbought out Buyout date
Zipper Interactive (U.S.) J une 2006
Guerrilla Games (Holland) December 2005
The Creative Assembly Ltd. (U.K.) March 2005
Sports Interactive Ltd. (U.K.) April 2006
Secret Level, Inc. (U.S.) April 2006
Square Enix Co., Ltd. UIEvolution, Inc. (U.S.) March 2004
CapcomCo., Ltd. Cosmic Infinity Inc. (Canada) May 2006
Konami Corporation Blue Label Interactive, Inc. (U.S.) J une 2006
Konami purchased Blue Label Interactives primary assets.
Sources: Company announcements.
Sega Sammy Holdings Inc.
Sony Computer Entertainment Inc.
Fig. 19 Oversas Buyouts by Japanese Software Publishers
Industrial Reports (c) JETRO, 2007
16
Company Alliances Announcements
Partnership between firm's U.S. software development subsidiary, Namco
Hometek, and Flagship Studios (U.S.) to develop online games for PCs,
including Hellgate: London
March 2004
Licensed Eolith (Rep. of Korea) to use Galaga and Mr. Driller in Korea. J ointly
development of Galaga Online and Mr. Driller Online with multi-player game
content.
August 2004
Increased staffing fromabout 20 to 50 at company overseeing European
operations to prepare for sales. Also strengthened game development and
launched online game services.
April 2004
Launched PC online game business in China. Developed Chinese versions of
three software packages developed in Japan or ROK. Set up software
development site for Chinese market.
August 2004
Agreed to distribute selected game titles published by Take-Two Interactive
for home game consoles and PCs in Asia, including J apan.
J anuary 2005
Agreed with THQ (U.S.) on comprehensive tie-up giving Sega publishing and
sales rights in J apan to home game titles of THQ.
September 2005
Agreed with Beijing Gehua Cultural Development Group (Beijing) to establish
joint game R&D center in Beijing.
December 2005
Licensed Beijing Gehua Online Cultural Co. (Beijing) to develop PC game
content for China.
December 2005
Teamed with Auhui Sanlian Investment Group (China) to develop simulator
software for Chinese driving schools.
May 2006
Agreed with Sprint (U.S.) to provide content for PCS Vision mobile phone
data service.
May 2004
Established subsidiary Square EnixChina in Beijing. February 2005
U.S. subsidiary signed North America distribution agreements with Electronic
Arts (U.S.) for PS2 version of Samurai Warriors.
February 2004
Established overseas game development subsidiary in Singapore. February 2005
Subsidiary Koei France SAS established near Paris to develop European
sales.
February 2005
Began expansion of Canadian software development studio fromabout 40
people to 150-200 in around three years.
October 2005
Agreed with Digital Entertainment Art Co, Ltd. (Beijing) to develop Chinese
version of blockbuster online game Uncharted Waters Online.
J une 2006
Namco is now Namco Bandai Holdings. Sega is a subsidiary of Sega Sammy Holdings.
Sources: Various press reports.
Koei
Fig. 20 Software Producer Alliances with Overseas Publishers
Sega
Namco
Square Enix
Industrial Reports (c) JETRO, 2007
17
B. Distribution

Video game manufacturers usually deliver products to consumers via toy wholesalers, who then
sell to specialty toy retailers (Fig. 21). Typical toy wholesalers include Happinet and Kawada. The
J apan subsidiary of Toys R Us is another leading specialty retailer.
However, retail sales channels other than toy specialists have diversified to include CD and DVD
retailers, appliance mass merchandisers, convenience stores and home centers, along with other
increasingly common types of retailers, such as those specializing in catalog and Internet sales.
Distribution flow remains largely unchanged, from manufacturer to wholesaler to retailer.
Some general merchandising stores, discounters and Internet retailers use specialty software
wholesalers, such as SoftBank BB (formerly SoftBank Commerce) and Marubeni Infotec (formerly
Computer Wave), to link manufacturers and consumers. Also, some software manufacturers are
involved concurrently in wholesaling.



Convenience stores
Supermarkets
Department stores
Discount stores
Source: Yano Research Institute
Software houses and
convenience store
distribution wholesalers
(Koei)
P
r
o
d
u
c
e
r
s
Consumer electronics
mass retailers
Toy stores
Fig. 21 Video Game Distribution Routes
Internet Internet retailers
C
o
n
s
u
m
e
r
s
Secondary
and regional
wholesalers
PC and other wholesalers
(Softbank BB, etc.)
Toy wholesalers
(Happinet, Kawada, etc.)
Industrial Reports (c) JETRO, 2007
18
5. Japans expanding game market

J apans video game hardware and software markets have been enjoying revived sales of late, due
to growing demand for PC games, online games, cell phone games and arcade games.
The Digital Content Association of J apans 2006 Digital Content White Paper reports that the
combined market for game-related content and consoles has been growing since 2003 (Fig. 22) due
to robust expansion of the online and cell phone markets. Although the increased volume of product
has been a main factor, so has the spread of flat-rate broadband services, according to the paper.
The paper forecasts that the J apanese game market as a whole will grow in 2006, including
increased sales of online and cell phone games (excluding arcade games) and portable games.




2001 2002 2003 2004 2005 2006
Sales of software 424.8 403.0 369.8 377.1 376.5 377.0
Software for household game machines 368.5 336.7 309.1 316.0 314.1 314.1
Software for PCs 56.3 66.3 60.7 61.1 62.4 62.9
Sales of network games 1.4 6.0 12.9 36.7 59.6 72.0
Sales of mobile phone games 9.0 20.1 27.0 41.2 58.9 75.2
Sales of arcade game operations 590.3 605.5 637.7 649.2 649.2 -
Sales of household game machines 221.1 149.8 120.1 109.3 168.1 343.7
Desktop 168.7 120.4 81.9 52.3 42.6 32.1
Playstation2 134.6 87.7 63.9 46.7 36.4 27.5
Playstation 3.6 2.2 0.4 0.0 0.0 0.0
GameCube 27.6 20.3 16.0 5.1 2.3 0.9
NINTENDO64 1.2
Dreamcast 1.7 0.1
Xbox360 3.6 3.6
Xbox 10.1 1.6 0.5 0.3 0.1
Portable 52.4 29.1 38.0 57.0 125.5 311.6
PSP 10.7 57.9 185.4
Nintendo DS 18.6 57.7 118.1
Game Boy micro 6.2 6.2
Game Boy Advance SP 31.4 27.5 3.7 1.9
Game Boy Advance 39.1 25.9 6.6 0.2
Game Boy( Color included) 8.1 1.3
WonderSwan (Color and SwanCrystal included) 5.2 1.9
Others 0.0 0.3 0.2
1,246.6 1,184.4 1,167.5 1,213.5 1,312.3 -
Source: Digital Content Association of J apan, 2006 Digital Content White Paper.
Fig. 22 Market Scale of Game Industry
(billion yen)
Figures for 2006 are estimates. Totals are rounded off, so sums of figures may vary fromtotals.
Total
Industrial Reports (c) JETRO, 2007
19
6. Companies and organizations mentioned in this report
Name URL
Industry
Organization
Computer Entertainment Suppliers Association (CESA) www.cesa.or.jp
Nintendo Co., Ltd. www.nintendo.co.jp
Sony Computer Entertainment Inc. www.scei.co.jp
Microsoft Corporation www.microsoft.com/japan
Atlus Co., Ltd. www.atlus.co.jp
CapcomCo., Ltd. www.capcom.co.jp
Konami Corporation www.konami.co.jp
Square Enix Co., Ltd. www.square-enix.com/jp
Sega Corporation sega.jp
Taito Corporation www.taito.co.jp
Tomy Co., Ltd. (Kabushiki Kaisha TakaraTomy) www.takaratomy.co.jp
Tecmo, Ltd. www.tecmo.co.jp
Hudson Soft Co., Ltd www.hudson.co.jp
Namco Bandai Game Inc. www.bandainamcogames.co.jp
Hardware
Manufacturers
Software
Publishers



7References

2006 CESA Game White Paper, Computer Entertainment Suppliers Association

2005 CESA Game White Paper, Computer Entertainment Suppliers Association

2006 Video Game Industry White Paper, Media Create

2005 Video Game Industry White Paper, Media Create

J unjiro Shintaku, Tatsuo Tanaka, Noriyuki Yanagawa, Gemu Sangyo no Keiza Bunseki
(Economic Analysis of the Game Industry), Toyo Keizai, 2003

Nikkei Business Associ, August 15, 2006, Nikkei Business Publications

Gemu Sangyo Senryaku: Geemu Sangyo no Hatten to Miraizo (Game Industry Strategies: Game
Industrys Evolution and Future), Ministry of Economy, Trade and Industry, 2006


This report is an update of Trends in the Japanese Video Game Industry (May 2004), compiled
by J ETRO with data from Yano Research Institute.