A Tale of Two Markets

The following article is part of a series of daily year-end content on GamesIndustry.biz analyzing the most notable news and trends we've observed over the last 12 months

If videogames can be said to have a spiritual home, for many gamers, it lies somewhere in Japan - the hallowed ground of Nintendo's headquarters in Kyoto, perhaps, or the reflecting neon of Tokyo's famous (if inevitably a little disappointing) Akihabara district. Even leaving aside the deep historical connections between Japan and videogames, and the sheer number of publishers, developers and beloved franchises that hail from these islands, it's easy to see why Japan holds a special place in the collective imagination of game fans. Perhaps more than anywhere else in the world, Japan has accepted and assimilated game culture into its mainstream. Before the PlayStation pushed gaming into the cultural mainstream for a generation of Europeans and Americans, a generation of Japanese people now in their late thirties and forties was being raised on Dragon Quest, Final Fantasy and Mario, and the enduring love affair with those franchises and many other contemporaries and successors has made gaming into something that isn't an identity claimed by a minority, but simply something almost everyone does, to some degree or another.

Perhaps that's exactly why the story of gaming in Japan in recent years has been so focused on mobile games - to the dismay of many gamers overseas who love the country's console game output. When gaming is just a hobby that everyone dabbles in, doing so on a smartphone is the logical, convenient way to do it. 2016 has been no exception to this rule. Japan's mobile market continues to grow and develop while the console sector struggles. Konami's shift to being primarily a mobile publisher is emblematic of this change, not least because Konami's management seemed determined to lose as much goodwill from international fans as possible while carrying out this pivot, but Konami is far from alone. Their mobile games are not well known overseas, but Bandai Namco, Square Enix and Sony are all making significant revenue from mobile - publishing games like The IDOLM@STER (Bandai Namco), Fate/Grand Order (Sony) and Hoshi no Dragon Quest (Square Enix) which regularly occupy top spots in the revenue charts in perhaps the most lucrative (per capita) mobile market on the planet.

"The PS4, though doing relatively well, really is something of a niche, core product. Smartphone games are part of the reason for that, but it would be remiss to ignore underlying economic factors"

Nintendo is still almost certainly the biggest game company in Japan by any reasonable metric - at the time of writing, Pokemon Sun and Moon have just enjoyed the largest launch week of any game this year, and Niantic's Pokemon Go is the only overseas-developed game to have cracked the Japanese mobile game charts - but its competition for the top spot is full of names that will be unfamiliar to many gamers overseas. Mixi, formerly known for operating the social media and blogging platform of the same name, is now Japan's biggest mobile publisher thanks to the success of Monster Strike, a game barely known outside Japan but yet often the world's top-grossing monthly title. LINE, an immensely popular messaging platform, is also a hugely successful game publisher thanks to leveraging its messaging app for customer acquisition (and a deal with Disney to create the wildly successful Tsum Tsum mobile game hasn't hurt). Companies like CyberAgent (GranBlue Fantasy), GungHo (Puzzle & Dragons) and Colopl (Shironeko Project) are now ranked alongside much more famous firms like Square Enix and Sega among the nation's top game companies.

As the competition in the sector heats up - there arguably aren't a lot of untapped consumers for mobile games in Japan any more, so firms need to try to lure people away from competitors' titles - above the line marketing has become unavoidable. Prime time TV advertising slots are filled with ads for mobile games, and mobile titles jostle with the usually dominant FMCG category products for attention on the most prominent out-of-home billboards. Marketing for console titles, by comparison, is rare, and most often confined to niche TV programming - late night anime shows, for example. It's actually eye-catching when a company, usually Sony, makes the effort to really drive its games and systems with prime-time TV slots and well-known celebrities.

For all that the mobile sector's growth is far outstripping the console market, Sony's efforts in 2016 have paid off to some degree. The PS4 is the only console whose sales will show growth between 2015 and 2016; aided by the arrival of new hardware and the launch of big-hitting software (most notably Persona 5 and Final Fantasy XV), it'll beat last year's Japanese sales total fairly comfortably, and should be on its way to 4 million units sold by the end of the year. PS4 will likely outstrip the Vita's lifetime sales (somewhere north of 5 million) sometime in 2017, but short of a major demand surge as the price ticks downwards in the coming years, it's looking increasingly unlikely that it'll match the PS3's lifetime total of around 10.5 million units.

Nonetheless, the PS4 is the top performer of 2016 in Japan - in hardware terms, at least. The 3DS has seen its sales drop off sharply, falling by well over a third year-on-year and dropping behind the PS4, though with an installed base of around 21 million, the console has still done very well indeed. Massive sales of Yokai Watch and Pokemon games on the 3DS will see around 10 million units of software sold on the system this year - a decline from last year, but enough to tip it over the 100 million lifetime software units mark, though like the PS4, it's unlikely to trouble its predecessor's record - the DS sold over 175 million software units in its lifetime.

The different roles that the PS4 and the 3DS play in Japan's gaming culture are clear from their respective software sales. As I write this, the entirety of the year's top five best-selling games are 3DS titles (we don't know Final Fantasy XV's first-week numbers yet, but it's likely to be the best-selling PS4 game of the year and may nudge into the top five). Pokemon Sun and Moon tops the chart, followed by Yokai Watch - then there's a sharp sales drop-off before we reach Dragon Quest Monsters Joker 3, Yo-kai: Sangokushi (a Yo-Kai Watch / Romance of the Three Kingdoms crossover that inserts the popular characters into Koei Tecmo's long-running turn-based tactics game) and Nintendo's own Kirby: Planet Robobot. The top PS4 titles, meanwhile, are Final Fantasy XV (presumably), Persona 5 and Dark Souls III. In other words, the 3DS skews towards child-friendly titles and massively outsells the PS4's software - almost certainly benefiting from the reluctance of many parents to give their children smartphones or access to app stores. The PS4, though doing relatively well, really is something of a niche, core product.

Smartphone games are part of the reason for that, but it would be remiss to ignore underlying economic factors. This year saw the release of a number of reports and datasets related to the economic situation of Japan's youth, and the country has been described, not unfairly, as having the most unjust inter-generational economic balance of any developed nation. Compared with the older generation, young people (the core market for videogames) are less well off, have vastly less job security and much poorer living conditions. PS4s are expensive, and game software is very expensive; moreover, decently sized TVs are expensive (let alone the 4K, HDR-ready sets required to take advantage of a PS4 Pro) and are bulky, taking up a lot of space in small, cramped living arrangements. If you want to know why Japanese gamers are turning increasingly to smartphones rather than consoles for their gaming fix, it's impossible to ignore the fact that even if they had space in their apartment for a big TV, buying a TV, console and a new game would represent the bulk, if not the entirety, of the monthly net income of a huge swathe of Japanese young people. There are cultural, creative and social factors involved too - but the economic ones loom large.

"If Switch can tap into the obvious love Japan has for Nintendo's titles, leverage rather than directly compete with mobile titles, and avoid the cost of entry issues which hold back the PS4, it could do very well in the market"

Looking at how other platforms performed this year, there's not really much point in talking about the Xbox One, which has yet to sell 100,000 units in total in Japan (and at its current rate of sales will probably never do so). What is interesting, though, is that the PlayStation Vita finally seems to be seeing a sunset of sorts. It's held out in Japan for far longer than in any other territory, but this year its top-selling title is the rather venerable Minecraft - released two years ago, but the only western-developed title to crack the Japanese top ten this year. Charming if shameless Minecraft clone Dragon Quest Builders and Dragon Quest Heroes II are the other success stories on the Vita this year. Everything else is quite far down the charts and mostly incredibly niche; Kan Colle Kai, for example, which is based on a web browser free-to-play card battling game whose characters are anthropomorphised World War 2 battleships in the form of pretty girls... Look, I said it was incredibly niche. Despite Sony announcing new Japan-only hardware colours for the Vita at TGS this year, 2016 feels like the year the console saw its final sunset in Japan.

The question we're all asking, of course, is where Nintendo's Switch is going to fit into this market. Between the enormous, attention-grabbing mobile titles dominating the mainstream, the 3DS largely hoovering up the kids' market and the PS4 filling in the remaining "core" niche, the market positioning of the Switch is going to be a tricky thing. The potential for the system to succeed in Japan certainly exists - it's worth noting that even as the Wii U failed, Japan never fell out of love with Nintendo's software, and the platform managed to spit out two million sellers (Splatoon with 1.5 million sales, Mario Kart 8 with 1.3 million) and two that came close (Mario Maker had over 900,000 sales, Smash Bros was north of 800,000) despite having an installed base of just over 3 million. If Switch can tap into the obvious love Japan has for Nintendo's titles, leverage rather than directly compete with mobile titles, and avoid the cost of entry issues which hold back the PS4, it could do very well in the market. That is, of course, a lot of "ifs" in one sentence. Nobody said carving out a slice of a market as divided and troubled as Japan's console space has become was going to be easy.