Can the Xbox One Survive Against the PS4 and Wii U in Japan?

Can Microsoft avoid repeating its mistakes when it launches its console in Japan this September?

Jul 31, 2014 at 1:46PM

Microsoft (NASDAQ:MSFT) will launch the Xbox One in Japan on Sept. 6, trying for the third time to succeed in one of its weakest markets -- 29 games, many of them previously released titles in the West, will be available for the console when it launches.

Six of Microsoft's own 11 titles -- Crimson Dragon, Forza Motorsport 5, Killer Instinct, Kinect Sports Rivals, Powerstar Golf, and Ryse: Son of Rome -- are Xbox One exclusives. Electronic Arts, Ubisoft, and Zenimax/Bethesda will all pitch in with previously released cross-platform titles like FIFA 14, Assassin's Creed IV: Black Flag, and Wolfenstein: The New Order.

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The Xbox One at the Tokyo Game Show. Source: Wikimedia Commons.

Japanese publishers Capcom, Konami, Tecmo Koei, and Square Enix will launch seven titles -- Strider, Metal Gear Solid V: Ground Zeroes, Warriors Orochi 3 Ultimate, Murdered: Soul Suspect, Thief, Tomb Raider: Definitive Edition, and Call of Duty: Ghosts (Square Enix publishes the Japanese version). However, none of these titles are exclusive to the Xbox One or Japan.

Will these games help Microsoft to expand into Japan, an elusive market completely dominated by Nintendo (NASDAQOTH:NTDOY) and Sony (NYSE:SNE)? Or is it destined to strike out on its third swing?

Understanding the cultural divide
Microsoft and Western publishers have a tough time in Japan because they repeatedly fail to understand the cultural differences between Japanese and Western gamers.

Japanese gamers generally prefer handhelds over consoles, smartphones, and PCs. They also favor linear RPGs, puzzle games, life simulators, and monster-catching games over high-budget, triple-A extravaganzas. Combine those two factors and it's easy to see why Nintendo's 3DS LL and Sony's PS Vita are consistently the best-selling consoles in the country.

Youkai Watch

Youkai Watch 2 for the 3DS, currently the top game in Japan.

Japanese gamers also rarely play PC games, making it the exact opposite of China, which is dominated by PC games due to a previous ban on consoles. In Japan, PCs are generally associated with productivity, while consoles are associated with games. This makes it hard for Western publishers, many of which rose to prominence making PC games, to make a lasting impression on Japanese gamers.

Considering these steep challenges, it's no wonder that Japan only accounted for 2% of global sales of the original Xbox and Xbox 360. By comparison, 27% of Wii U sales and 7% of PS4 sales come from Japan. In handhelds, Japan accounts for 35% of both 3DS and PS Vita sales.

Why the original Xbox failed
The core of Microsoft's original launch strategy for the Xbox in 2001 was a tight partnership with Sega, which exited the hardware business after nixing the Dreamcast earlier that year. Sega launched exclusive games for the original Xbox, including Panzer Dragoon Orta, Jet Set Radio Future, Sega GT 2002, Shenmue II, and Gunvalkyrie. In other words, the Xbox became the unofficial successor to the Dreamcast.

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Panzer Dragoon Orta. Source: Sega.

Unfortunately, Microsoft forgot that the Dreamcast was obliterated by Sony's PS2. By the time it was discontinued, the Dreamcast only sold 2.3 million units in Japan and 8.2 million units worldwide. The PS2 went on to sell 23.2 million units in Japan and 158 million units worldwide.

Positioning the Xbox as the "next Dreamcast" made sense from a Western perspective, since American gamers still loved Sonic the Hedgehog, but Microsoft just doomed itself to relive Sega's demise since many Sega fans in Japan had moved on to the PS2. In the end, the original Xbox only sold half a million units in Japan.

Why the Xbox 360 failed
Microsoft launched the Xbox 360 in Japan in 2005, which was also met with an icy reception. To warm things up, Square Enix launched Star Ocean: The Last Hope, a Japanese RPG that was launched on the 360 before the PS3. Square Enix also released The Last Remnant, a Japanese RPG exclusive to the 360 and Windows, and even brought Final Fantasy XIII to the 360.

Microsoft also released a mix of newer and classic games specifically chosen for Japanese gamers, including Tales of Vesperia, Resident Evil 5, King of Fighters '98, and R-Type Dimensions. Yet those ambitious efforts simply weren't enough -- the 360 just didn't have enough defining games to set it apart from Sony's PS3.

Star Ocean The Last Hope Review

Star Ocean: The Last Hope. Source: Square Enix.

To make matters worse, Nintendo charged out of left field with the Wii in 2006, splitting Japan into two markets -- casual gamers who bought a Wii, and hardcore ones who bought the PS3. The Xbox 360 got crushed again, but it fared moderately better the second time with sales of 1.7 million units.

Will the third time be the charm?
When we take a look at the Xbox One's launch titles, we see Microsoft's big problem -- it doesn't have enough exclusive Japanese titles to compete against Sony and Nintendo.

If Microsoft is serious about claiming the Japanese market, which is a central hub for console gaming across Asia, it should acquire one of the main Japanese publishers with its cash hoard of $85 billion. For example, acquiring a majority stake in Square Enix, which Sony recently divested its stake in, would deal a crippling blow to Sony by turning Final Fantasy and Dragon Quest into Microsoft exclusives.

Microsoft should also reconnect with the famous Japanese developers who have helped the Xbox in the past. Keiji Inafune (Mega Man), Tomonobu Itagaki (Ninja Gaiden), and Goichi "Suda 51" Suda (Lollipop Chainsaw) are all potential allies and fans of Western games who can help Microsoft regain credibility in the Japanese market.

The Foolish takeaway
In conclusion, Microsoft needs to get much more aggressive if it doesn't want the Xbox One to suffer the same fate as the Xbox and Xbox 360 in Japan. Offering the same exclusive launch titles as it did in North America won't help it succeed in a market ruled by Nintendo's 3DS.

Microsoft needs big acquisitions, strong partnerships, and better exclusive Japanese titles to carve out its niche in Japan. But if it finally does, it will serve as a valuable second launchpad in Asia to complement its ambitious efforts in China.

Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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