Why Xbox 360 Isn't Playing Well in Japan

Microsoft's next-generation console has been a flop in a key market for video games. Can it make a comeback before Sony's competition arrives?

To get an idea of what's ailing the Xbox 360 in Japan, look around the Internet and check out the video game blogs. There, you'll find a litany of complaints directed against Microsoft's (MSFT) next-generation game console. The Xbox-bashing ranges from the machine's perceived uninspiring design to the overall scarcity of enticing must-have game titles to date. It's hardly the sort of word-of-mouth buzz the software titan would have hoped for some four months after releasing its new, souped-up game machine amid great fanfare in Japan.

Even Microsoft officials in Japan concede the Xbox 360 rollout has been less than stellar in Japan. "It wasn't a great lift-off," says a spokesman for Microsoft in Japan. Although a poor showing in Japan won't be a total disaster, since the Xbox is doing well in the U.S. and Europe, the market is one of the most competitive and critical in the $25 billion global game industry.

Since its launch in early December, the console has sold roughly 123,000 units, less than double the 62,135 that stores sold in the new machine's opening weekend, according to industry research firm Enterbrain. Compare that to the 123,000 units the first Xbox sold in the first three days of its launch in Japan in 2002, and you get an idea of just how disappointing sales have been.

"The Xbox 360 is not attractive... it's big and heavy," says Ichiro Ookawa, manager at Sofmap, an electronics retailer in Tokyo's Akihabara district. Because the consoles aren't selling, software makers have been slow to release new titles. "It's a vicious cycle," adds Ookawa.


  Microsoft won't have an easy time unseating Sony (SNE), the grand master of video games, after all. A few months ago, it didn't seem that way. As the first of the major console makers to sell a faster machine with high-definition graphics, Microsoft had a shot at getting a jump on Sony and Nintendo (NTDOY). Those two weren't scheduled to release their own next-generation games until this year, leaving Microsoft virtually uncontested in going after picky Japanese gamers.

Microsoft needed to fly out of the gates to really challenge Sony on its home turf. The first Xbox had a measly 5% share of Japan's gaming market, trailing PlayStation 2's 80%. To build buzz in the run-up to the launch, Microsoft had bought up prime ad space on billboards and trains and sponsoring trendy TV shows.

The company even opened an Xbox-themed café in Tokyo's swanky Omotesando shopping district for three months. In the meantime, Microsoft was courting big-name Japanese game developers to create a diverse roster of games that might appeal to local consumers, and beefing up the features of its online service, Xbox Live, the industry's best.


  But Japanese consumers weren't impressed. Unlike in the U.S., where production snafus led to severe shortages and months-long shipment delays, surplus Xbox 360s have sat on store shelves in Japan since the debut. Part of the problem has been brand recognition.

Sony's PlayStation franchise is the dominant brand, and its rich game title library has gained a strong following among Japan's hard-core gamers. Nintendo's legacy of offbeat, inventive games such as The Legend of Zelda and Super Mario 64 have allowed it to reach beyond gaming's traditional male 18-35 demographic. "Microsoft's advertising only made sense to people who already knew about the Xbox," says Akiteru Itoh, an analyst at Japanese game industry researcher Media Create.

The main reason was simply too few must-have Japanese games. At its launch, Xbox 360 had just six games on disk. They included FIFA06, two car racing titles, and a quirky party-pleaser called Everybody, as well as a dozen online offerings. (Dead or Alive 4, a 3-D fighting game released in late December, has been the Xbox 360's top seller, according to Media Create.)

And the hit and shoot-'em-up series Halo was only among fewer than two dozen Japanese software titles made for the first Xbox that were playable on the new machine. Disappointed, many consumers opted instead for handheld gaming consoles, such as Nintendo's DS and Sony's PlayStation Portable.


  On top of that, rumors that the graphics processor ran so hot it caused the machine to smoke, talk that the PlayStation 3 graphics would be more dazzling, and photos posted online of Xbox 360s for sale at second-hand electronics shops in Japan didn't help Microsoft's cause. "Let's be honest, it's been pretty dire here," says KBC Securities analyst Hiroshi Kamide. "The long and short of it is that it's not a good enough product for users [in Japan] to switch over" from Sony.

But the company isn't giving up. On Apr. 6, Takashi Sensui, the head of Microsoft's Xbox unit in Japan, trotted out the celebs of Japan's gaming industry for a splashy event in Tokyo featuring clips from 15 new games and other online fare slated for release by the yearend holiday shopping season. In the lineup were Bandai Namco Games' robot-action Zegapain Xor and Gundam Mobile Suit, Electronic Arts' 2006 FIFA World Cup Germany, and a collaborative effort, dubbed Project Sylph, from Square Enix and Game Arts. And while renowned game producer Hironobu Sakaguchi's long-awaited titles, Blue Dragon and Lost Odyssey, won't be out until late this year or early 2007, his trailers offered a tantalizing glimpse of what's to come. "We've repeatedly said that Microsoft's console won't be truly successful if it's not a hit in Japan," Sensui said. "My job is to make that happen."

Some analysts think Microsoft still has a chance to turn things around in Japan, thanks to Sony's decision to delay the PS3 until just before the year-end holiday shopping period in November. By then, Microsoft could have an impressive list of games and might even add more killer features to its online Xbox Live service. "What's going to be the most important thing is to keep... encouraging Japanese game developers to make the titles available for Xbox 360," says Jon Erensen, senior analyst at Gartner.


  On the world stage, the Xbox 360 could fare even better. Though it trimmed its forecasts for worldwide sales in the first 90 days, Microsoft says it expects to sell between 4.5 million and 5.5 million consoles globally by June 30, the end of its fiscal year.

Chris Crotty, senior analyst at iSuppli, reckons Microsoft could eventually win about 35% of the global market for consoles, vs. the PS3's 45% and 20% for Nintendo's Revolution machine. Yet Microsoft definitely needs to pick up its game in Japan.

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