Capcom looks toward big changes after difficult FY13

Capcom's fiscal 2013 report has stressed the need for sweeping change in the company, as it rebounds from a difficult period straight into the costs of a new hardware generation and an increasingly competitive mobile market.

While revenue actually climbed from ¥82 billion ($820m) to ¥94 billion ($940m) in the year ended March 31 2013, the company's attempts to pivot in virtually every aspect of its Digital Contents business - which comprises console, PC and mobile development, and accounted 67.7 per cent of all revenue - saw profits fall by more than half to just $31 million. Barring 2010, when it made a profit of $22 million, that makes fiscal 2013 Capcom's least profitable year since 2005.

In total, Capcom sold 14 million units of its games at retail, and only three releases passed 1 million sales. Indeed, two of that group performed well short of expectations: Resident Evil 6 sold 4.9 million against expectations of 7 million, and DmC: Devil May Cry sold 1.15 million units on expectations of 2 million. Capcom's single biggest success story in the console/PC space was Dragon's Dogma, a new IP, which sold a relatively modest 1.3 million units.

"If the DLC we are providing to users is deemed uninteresting from the start, there will be no ongoing business to pursue"

Haruhiro Tsujimoto, COO, Capcom

Nevertheless, Capcom expects revenue to hold next year and profits to roughly double, bringing it back in line with fiscal 2012's results. If it meets those expectations, however, it's unlikely to be down to packaged retail releases.

Capcom has forecast even slimmer returns for the next fiscal year, with only 13 million unit sales expected from a line-up that includes Lost Planet 3, Monster Hunter 4 and Dead Rising 3. Monster Hunter 4, which is scheduled for release this month, seems likely to meet its expected 2.8 million sales by the end of March 2014. The console release of Resident Evil: Revelations, launched in May, should also hit its relatively lowly 1.2 million target. But Lost Planet 3 is another matter - it may only need to sell 1.2 million to meet expectations, but it is off to a poor start in Japan, and its sales in the UK suggest that it will be among the calendar year's most notable failures. Between them, Capcom's three biggest console releases for the rest of this fiscal year are not expected to sell more than an under-performing Resident Evil 6 managed in six months.

Capcom's annual report notes the sluggish performance of the all-important console market on several occasions, and it certainly isn't the only company to feel the negative effects of that slowdown. However its performance throughout this generation has rarely been more than solid, leaving it in a difficult position for the challenges ahead. At present, Capcom has just over $152 million in cash, which isn't much for a company attempting to navigate the costly transition to a new hardware generation and the company-wide implementation of a service-based infrastructure.

Any console titles that fail to perform in the next two years will be increasingly difficult to bear, and Capcom now has two mid-term strategies in place to mitigate that risk. First, to push for quality by bringing previously outsourced work back into the company, pledging to hire 100 new staff in each of its consumer, mobile and PC online teams by the end of fiscal 2014.

The second is a stronger commitment to DLC with its consumer releases, with an aim of maximising the profitable life of each product. In this area, Capcom has exemplified the common criticisms of Japanese console and PC companies by falling dramatically behind the times. By Capcom's data, the DLC ratio for consumer releases last year was 39.7 per cent, but it managed just 14.1 per cent with its own products.

"I regret to say that, up to now, we had few plans for the full-scale implementation of DLC," said COO Haruhiro Tsujimoto. "From here on out, we need to focus on the long-term provision of content starting at the earliest stages of development. Furthermore, in terms of user response, if the additional related content we are providing continually to users online is deemed uninteresting from the start, there will be no ongoing business to pursue. This means that, more than ever before, the creation of underlying content is the key to success."

"Today's mobile game industry is a world apparently full of dreams about making a fortune off a hit game. But if the hit is just a one-off, success is transient"

Haruhiro Tsujimoto, COO, Capcom

Capcom's other mid-term goals are associated with the high-growth market for mobile and online games. The company's online content was one of the few aspects of the business to show healthy growth, increasing 45.9 per cent to ¥22.9 billion ($229m). By March 2014, that is expected to increase a further 22.3 per cent, reaching ¥28 billion.

Exactly how Capcom intends to accomplish that is more difficult to pinpoint. Beeline's Smurf's Village has been the golden goose of the company's mobile and online strategy for almost three years, and the pressure is on to create another hit. Indeed, Capcom lists that very task as one of its key priorities for fiscal 2014, but the company is clearly aware of how fickle the mobile market can be, even to those building from existing success. For now, Capcom will concentrate on developing apps based on its existing brands.

"With Smurf's Village, we learned that there are not as many core users in this market as there are in the consumer market. Outside of Japan, people spend less money on mobile games, particularly in Europe and North America, making it a low-margin, high turnover business," said Tsujimoto.

"Today's mobile game industry is a world apparently full of dreams about making a fortune off a hit game. But if the hit is just a one-off, success is transient. For Capcom, it is crucial to maintain and deepen the user support we have worked so hard to earn up to now. We believe we can outperform other companies as long as we are able to continue this approach. This kind of strategy is already beginning to be implemented in Europe and North America, and we don't intend to be left behind. I keep coming back to this point, but the essence of a game's value is derived from it content-its worldview and characters, etc.

"Only companies that understand this and are able to continue providing customer satisfaction will be able to survive."