Square Enix 2008 Annual Report Download - page 8

Despite there being no particularly high barriers to entry, we
have no track record in this field. However, I view this as an
opportunity to enhance the performance of the entire Company,
and fully believe we are capable and seasoned enough to
successfully launch this venture.
With regard to game development projects with external
studios, we have heretofore only pursued this strategy within
Japan. Hereafter, we intend to add game development
functions to our North American and European operations, and
aggressively commission overseas development projects where
deemed appropriate.
Evolutional Stages of the Video Game Industry
In my view, evolution of the video game industry can be
perceived as moving through three distinct stages, and I believe
that execution of the optimal business strategy at each stage is
the core task for management.
Stage I: The era of hardware manufacturers
(Industry Conception to the early-2000s)
The appearance of game consoles led to the birth of a
completely new form of entertainment—video games. At
the time, since there was no general-purpose hardware with
interactive graphics capabilities available for consumers, video
games could only be played on specialized game consoles.
Video game console makers produced and marketed consoles,
while also developing and selling their own software. To enhance
network externalities, console makers also sourced game
software from third-party developers, with a large proportion of
these third-party games being fed through the console maker’s
own distribution network. Hence it would be fair to call this
industry ecosystem based on a completely vertically integrated
business model “the video game console industry.”
Since hardware during this phase was not yet able to satisfy
user expectations, enhancing console functional capabilities
was the number one priority. All console makers worked
vigorously to bolster the processing capacity of their game
consoles, while failing to adopt differentiation strategies such
as the incorporation of unique attributes. This is illustrated by
the fact that competition among console makers often focused
on central processing unit (CPU) performance, such as was
displayed in the “32-bit war,” and it is my view that competition
during that phase was unidirectional. The vertically integrated
business model inevitably resulted in a winner-take-all scenario
in the console market where competitive parameters remained
very limited.
Consequently, for third-party game software developers,
the most efficient strategy was to supply software only for the
most successful console manufacturer and to depend on the
manufacturer for marketing and all other operations beyond
game development. The main strategic choice for game
software developers was whether to adopt a high risk–high
return strategy by completely relying on the dominant console
maker, or alternatively, a moderate risk–moderate return
strategy by retaining room for discretion.
The former Square excessively adapted to the prevailing
environment. A corporate culture resistant to changes was
created by a lack of self-awareness of the fact that its success
was built on an extremely rare set of market circumstances
and depended on a very unusual strategy. This is the ultimate
reason why the reforms we are currently working on are taking a
long period to implement.
Stage II: The era of publishers
(Mid-2000s to early-2010s)
Around 2000, the popularity of video games spread through
most of the world and the following trends emerged:
• Variation in the timing of product permeation as well as
varying regional trends at the time games became popular
led to the formation of diverse user preferences among these
regions. These can be thought of as “geological layers” within
the game world.
• Since hardware performance capabilities in most consoles
had generally reached the level expected by users, makers
could finally focus on differentiation strategies related to other
product attributes.
• Games could now be enjoyed on platforms other than
specialized game consoles, including generic PCs and mobile
phones.
• Since a broad array of devices became network capable, a
completely vertically integrated business model based on
hardware alone began to lose its viability.
The era dominated by hardware manufacturers was
already drawing to a close as the environment that gave rise
to a dominant console platform no longer prevailed. In the
meantime, however, the game-playing population continued
to expand briskly, and computer games became recognized
globally as an important entertainment genre. This marked the
beginning of the “video game industry” as it is perceived today.
Software developers were no longer able to rely on the
ecosystem provided by a single platform manufacturer. Survival
now depended on the software developer’s own ability to exert
influence on markets stretching around the globe.
From a game development perspective, to reach the largest
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