Why Xbox Failed In Japan

These people are waiting to buy the Xbox One console. Fans are lining up all over the world to receive the newest consoles and gaming products. But there is one place that has never seen a reaction like this to Xbox. Japan. In the early 2000s, when Microsoft launched the Xbox, Japan was the world's gaming giant. Japan was home to three major console manufacturers: Nintendo, Sega and Sony. And Japanese game developers were considered the best and most revolutionary on the planet. At the time of the Xbox launch, Japanese game developers were the largest in the world. The success of any new gaming platform depended largely on whether or not you can get the best Japanese game developers and their titles, most importantly, on your platform.

So when Microsoft launched the Xbox in 2001, the gaming world was suspicious of an American console made by a company known for its software, not its hardware. They were perceived as the bad guy coming to the Japanese market, invading the country and competing with Sony and Nintendo. All three Xbox releases were total flops in Japan. But at the same time, since its debut in 2001, Xbox has become one of the biggest consoles in the world. The launch of Xbox One in 2013 was a huge success for Microsoft. For three years after its launch, the Xbox One was the world's second most popular gaming console of its generation.

The Xbox One has sold nearly 46.9 million units worldwide during the second quarter of 2019, but only a small fraction of global sales (just 0.3 percent) have occurred in Japan. So why has the Xbox never been successful in Japan, despite its global acclaim elsewhere? When Microsoft began developing the Xbox in 1999, it was not known as a gaming company. Its reputation was mainly due to PCs, its office products, and a large antitrust lawsuit. Microsoft had a PC gaming business in the late '90s known for Microsoft Flight Simulator and Age of Empires. The development of the Xbox was part of Microsoft's plan to bring its technology to consumers' homes.

Sony was a leader in the consumer electronics market in the early 2000s. Its PlayStation 2 was considered a threat to Microsoft for its potential to replace PCs as a way to access the Internet at home. Bill Gates' motivation was rather to maintain Microsoft's dominance, position, and software ecosystem. Bill really understood it because games are entertainment software that can accompany a movie. Denise Chaudhari, a designer who worked on the original Xbox, remembers that Microsoft got into gaming as a challenge to Sony. Bill Gates wanted to bring Microsoft technology to Sony consoles, so he went to Japan and suggested a partnership.

Microsoft, Bill Gates specifically, saw an opportunity to take something that Sony was already doing with PlayStation and somehow integrate the technology and software that Microsoft was the master of, which was home computing, and bring them together. Sony wasn't interested. Sony basically said: thanks, but no thanks. And Bill Gates said, okay, then I'll do it myself. Gaming journalist Dean Takahashi believes companies were wary of working with Microsoft because of its antitrust lawsuits. There were already antitrust cases against Microsoft and everyone knew that if you let them in, it was like a Trojan horse. You could lose control of your business as the P.C. says.

Manufacturers like IBM had lost control of the business. This was not the first time that Microsoft heard a no from a Japanese company on the Xbox. Chaudhari says that Mitsumi, the company that made circuit boards for Sony's PlayStation controllers at the time, refused to make a circuit board for Microsoft. Mitsumi could have jeopardized its relationship with Sony by giving Microsoft the same technology. Mitsumi did not respond to CNBC's requests for comment. So Chaudhari had to use a larger circuit board for the Xbox controller. Microsoft acted quickly to launch the Xbox. The consoles hit shelves in the United States in November 2001 and in Japan in February 2002, later than expected.

Microsoft has launched three Xbox series consoles, Xbox, Xbox 360, and Xbox One. While all three console launches

failed

in Japan, the Xbox was a huge success in other parts of the world. Microsoft finally secured the coveted number one spot in the global market from 2011 to 2012 with the Xbox 360. Nobody expected us to be a successful product in Japan and we understood what the playing field was like and we were just trying not to. shame ourselves. Sega, Nintendo and Sony dominated the video game market in Japan when Microsoft entered the scene. Before the launch of Xbox, devices from Sony and Nintendo accounted for basically 100 percent of the global video game market, and not much has changed since then.

As of 2019, Xbox sales don't even begin to rival those of the PlayStation 4 or Nintendo Switch. There are three main reasons why the Xbox console did not sell well in Japan. Today, game developers come from all over the world. But in the early 2000s, most of the top developers were Japanese, and at the time the Xbox launched, Japanese game makers were hesitant to put their content on a console that wasn't popular in Japan. Japanese gamers and developers prefer role-playing games to the shooter-style games that were more common in the U.S. To convince gamers to switch to Xbox, Microsoft needed big-name Japanese developers to defect from Sony and Nintendo .

And developers saw the pros and cons of defecting to Microsoft. The Xbox's graphical power and its ability to create realistic games exceeded other consoles at the time. We were quite successful in convincing them that Xbox represented a platform that would allow them to do new and interesting things and, most importantly, allow them to sell those games to a Western audience. But for many developers, the disadvantages outweighed any potential advantages. Some game creators like the XBox's hard drive, which was faster than the PlayStation's CD-ROM. But they worry that the high cost of Microsoft's technology will scare away consumers.

And then there was loyalty. It was really difficult to convince a developer who had already had a relationship with Sony and Nintendo to take a chance on Microsoft's unproven Xbox. The second problem is that the Xbox was too big. It was huge and Japanese houses were small. That was one of the first things that made the Japanese wonder: does this company know what it's doing? The controller was another problem. PlayStation used a folded circuit board made by Mitsumi in its controller. It was a single circuit board cut in half and stacked so that it was smaller than a typical circuit board.

The Microsoft team asked Mitsumi for the same circuit. And Mitsumi simply said: no, they wouldn't give in. They wouldn't give us the same circuit board. Since Microsoft couldn't get Mitsumi's folded circuitry, it had to make do with large circuit boards, which meant the controller was bulky. That controller was never actually released in Japan, so we can't know how Japanese consumers would have reacted. Instead, the Xbox team accelerated production of a smaller controller called the S controller for the Japanese launch, Chaudhari says. Even Microsoft's own team in Japan refused to endorse the Xbox due to its bulky design.

Finally, time was also an issue for Microsoft. The company delayed its launch in Japan until February 2002. That meant that console and game developers missed the crucial holiday period in Japan, when children received money from their relatives to celebrate the New Year. The Xbox 360 was the most successful Microsoft console among Japanese consumers. So what made it a minor flop in Japan? With the Xbox 360, Microsoft tried to solve some problems it had with the Xbox. First, Microsoft planned to release the console before the holiday season and before Sony launched its competitor, the PlayStation 3. Microsoft also worked with a Japanese design firm on the new console and collaborated with Japanese creators to create games for the Xbox. .

But that didn't make a dent in PlayStation's grip in Japan. Sales in Japan of the PlayStation 3, which launched in 2006, far surpassed sales of the Xbox 360, which launched a year earlier. Microsoft's next console, the Xbox One, also got off to a strong start when it launched in 2013. Microsoft sold more than 2 million Xbox One consoles worldwide in 18 days, breaking a record for the company. But in Japan, the Xbox One had another lackluster response. Of the 46.9 million Xbox Ones sold worldwide during the second quarter of 2019, less than half of the percentage were made in Japan. In comparison, PlayStation 4 sold 99.8 million units worldwide as of Q2 2019, of which 8.6% were sold in Japan.

In a statement to CNBC, Microsoft said that Japan remains an important part of our global gaming community and a major contributor to Microsoft's future plans. We are committed to bringing innovative and local content from Japan's leading game creators to a global audience. But Microsoft's inability to appeal to Japanese consumers may be the least of its problems right now. Global Xbox One sales have been lackluster as users shift more toward mobile and streaming games. Analysts say it is a problem that affects all console manufacturers. In Microsoft's earnings release for the quarter ended June 30, 2019, the company said Xbox hardware revenue declined 48 percent, primarily due to a decline in the volume of consoles sold.

Experts say Microsoft is adapting to a gaming future that doesn't rely on hardware sales by selling subscriptions to game libraries. Why is the Xbox 360 doing so well, or why are other people's things doing so well? It is that capability of the software and that is a bet we made at the beginning of the company. In fiscal 2018, gaming revenue increased 14 percent compared to fiscal 2017, driven by growth in Xbox software and services. Microsoft noted that Xbox hardware revenue was lower. Microsoft's 2018 annual report shows its move away from hardware dependence. The rise in popularity of streaming games has fundamentally changed Microsoft's relationships with one of its longtime rivals.

Microsoft and Sony made a surprising announcement in May 2019. They are working together to develop game streaming technology using the Microsoft cloud. Cloud gaming allows players to use any device with an internet connection to play. And Microsoft has made several big moves in this space, including plans for a new cloud streaming service called Project xCloud that would allow users to stream their entire Xbox One libraries to mobile devices. The partnership comes as giants like Google are getting into gaming by developing their own cloud gaming service. That represents a seismic shift in video games. With faster internet speeds, non-console games can be played on a cell phone or computer.

Cloud gaming is projected to account for less than 2 percent of the total gaming market expected by 2023. But Japan is poised to be a leader in that space. In 2018, Japanese consumers accounted for about 46 percent of the $387 million consumers spent on cloud gaming worldwide. Microsoft knew Japan was going to be its most challenging market, but Blackley says sales numbers aren't the only way to gauge the market over the long term. Microsoft didn't need Japanese consumers to make billions of dollars. When the console launched, it was crucial for Microsoft to bring in Japanese game developers. But Japanese consumers were less of a priority.

The problem with Japan was never the amount of revenue it represented. The problem was the amount of revenue that Japanese developers' games represented. Blackley says Xbox changed the philosophy of game development. One of the things about pre-Xbox game consoles was that the hardware was arcane. Xbox had a different philosophy. I really got the idea that Microsoft can address and capture the largest market through democratizing game development, making game development tools widely available and easier.