Cloudy Outlook for Japanese Game Developers

We see overall game industry trends being challenging for the Japanese game developers, considering rising costs and a shrinking mobile game market in Japan.

There are multiple trends we see in the industry that are pressuring game profitability:

1. Rising development costs: Due to improving graphics in the 9th generation consoles and rising labor costs, we see a rapid increase in development costs. Meanwhile, due to rapidly changing tastes of players, the risk of games being impaired (especially for game developers that capitalize their costs) are also rising.
2. Low installed base limits shipments: The installed base of 9th generation consoles is still materially lower than that of the 8th. With more game developers moving toward 9th generation exclusive game title releases, we see total shipments being limited. That said, we expect companies with higher PC exposure to be less impacted by this trend, considering PCs' faster growth.
3. Shrinking mobile game market and increasing external threats: Japan's mobile market already shrank to the pre-Covid level in 2023 and we expect the top grossing titles to continue to shrink in 2024. Furthermore, foreign developers are entering the Japanese market with more powerful game titles, which poses a severe threat to the traditional Japanese mobile game developers whose mobile games have limited overseas exposure. The Japan mobile game market used to be a "galapagos" (protected by its isolation). The highest grossing game titles in Japan used to be relatively casual puzzle RPG game titles (requiring relatively less time spent on each turn). In the beginning, it was relatively difficult for high grossing titles in other markets such as Korea or China to directly enter the Japanese market due to their requirement for high dedication to the game in terms of time. However, especially with the Chinese game developers spending time and money researching the Japanese game market, we have seen this situation gradually changing.