McKinsey Quarterly

Staying in the game

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Ten years ago, the Japanese game industry was No. 1 in the world: Japanese companies created more than half of the 50 best-selling game titles. In 2002, we claimed about 50 percent share of global revenues. Not any more. Nintendo continues to be wildly successful; otherwise, there are now only a few Japanese games in the top 50, and Japan’s share of the $60 billion global game industry has fallen to 10 percent.

We’ve forfeited our lead in technology; Japanese game technology is now at least five years behind that of competitors in the United States. And our approach to content has not changed much in the last decade. The technical quality and the user interfaces have improved some, but the ideas, the game play, and design are basically the same. There’s not enough originality.

Look at Dragon Quest, which was Japan’s best-selling game in 2009. The content hasn’t changed that much from when it was introduced in 1986; it even uses the same characters. Now compare Call of Duty, developed by California-based Activision and currently the world’s most popular video game. The look and design are completely different from the original version released in 2003. The technology has raced ahead and gives the player a real feeling of being in the middle of a battlefield.

So we—meaning Japanese game creators, company management, users, all of us—have to admit that Japan has fallen behind. If we fail to acknowledge this, we will not be motivated to learn from the United States, the current leader, and to change.

Many factors have contributed to the Japanese game industry’s loss of global leadership. But I think there are three big reasons: game creators are like salarymen, the costs and risks of game creation are increasing, and Japan doesn’t know how to compete in overseas markets. One of the most fundamental problems is the way Japanese game companies are organized. They tend to be structured like any other big Japanese company. The key managers join for life and advance by seniority. Even the game creators think like salarymen, not that differently from bureaucrats. These salarymen don’t have to take risks. They’re not interested in working hard. Month in and month out, they can count on a steady paycheck as long as they avoid making mistakes. No one is motivated to generate ideas or try new things.

In the West, game creators are often independent. They get evaluated and rewarded according to their results. In-house game creators change companies regularly. The model is similar to that of Hollywood, where people jump from project to project depending on what talent is needed where. A director will work with one set of actors or a certain team of special-effects experts for one film, and with a completely different group for his next film. Japan’s game industry is more like the old Hollywood system, where players were under exclusive contract to a particular studio. What’s interesting is that over time, the Japanese movie industry is becoming more like Hollywood of today. I believe the economics of Japan’s game industry will eventually force it to follow that pattern. But for now, we’re stuck in the past.

For game companies, retaining the traditional Japanese corporate organizational structure is a huge liability because such a structure restricts the ability to hedge risk. In the past, creating a new game title cost about 200 million yen,1 but these days, producing a successful game can cost more than 10 times that. The cost of failure has gone way up. “Shooter” games such as Call of Duty are hugely popular outside Japan. But they’re expensive to develop, so Japanese game companies have shied away from them. The obvious solution is for a Japanese game company to team up with an experienced US game developer who knows how to create a shooter game, and thereby minimize the risk of failure. But Japanese companies won’t do that; instead, they insist on working only with their own in-house game creators.

So for now, the Japanese game industry is trapped in a vicious cycle. The global industry is changing drastically. The technology, especially from the United States, is racing ahead, and production costs are soaring. But Japanese companies won’t adapt. They don’t know how to collaborate with outside partners. They’re oblivious to what’s happening overseas. And they’re still trying to develop hit games on the cheap; they are reluctant to invest the billions of yen required.

In the past, Japanese makers could get away with ignoring overseas competition because of the size of the domestic market, and because Japanese players weren’t all that interested in games from overseas. But now the Japanese market is shrinking. And the smaller Japan’s home market, the less Japanese companies have to invest in games that might be competitive outside Japan. In Korea, where the domestic market is smaller, the game industry recognized from the start that it would have go global to survive. Now they’re ahead of us in many ways. So what first looked like an advantage for Japan’s game industry—a large domestic market—has proved a handicap.

Of course, Americans still buy some Japanese games. There are many fans of, say, Super Mario, guys in their 30s and 40s who like it because they’ve been playing it since they were 10 and it gives them a feeling of nostalgia. But for young kids, who are just discovering games, Japanese titles don’t have much to offer.

For the most part, games created for the Japanese market aren’t successful outside Japan. There is a different sensibility between gamers in the two countries. If you look at US games, the lead character is often nontypical. He might be bald, or some bearded old guy. In Japan we would never have a nonstandard lead character; we have a kind of cliché image of a hero or heroine. Also, overseas games are often more aggressive, with lots more violence and blood, than Japanese games.

Why? Because Japanese game developers aren’t familiar with other cultures, and so far have had little incentive to learn. We find it difficult to understand these nuances. At Capcom, I argued for years that we should try to develop games tailored exclusively for Western markets. One of our early efforts was Shadow of Rome, which was a game involving battling gladiators. It was the right idea, but we went too far. There was a lot of hacking off of limbs; it was just too bloody. What we learned was just adding a lot of violence is not enough to make a successful game.

So we tried some variations. Eventually, I came up with Dead Rising, which was the same concept but involved battles with zombies instead of human gladiators. In some ways it’s even gorier than Shadow of Rome: not only can you slice off zombie arms but, if need be, you also can pick up a severed zombie arm and fight with it. But changing from gladiators to zombies made all the difference. It was a subtle change—to the extent that zombies can be subtle—but it worked. And it worked because we took the time to figure out what non-Japanese users would accept.

Mergers and acquisitions can help Japanese game companies to acquire the technology and cultural know-how to thrive outside their home market. But these factors are only part of the solution. You can’t just buy a company and say, “Okay, now we can make good games.” You need to be able to retain and motivate people at the company after you’ve acquired it. You need to study how people in overseas markets live, how they think, how they talk, how they play games, and what motivates them to improve their game skills.

In sum, for Japanese game companies to regain their global competitiveness, they will need to invest more creatively, act less like bureaucrats, and do a better job of understanding other cultures. But even in a creative sector such as games, it’s hard for large, established organizations to change. Last year, after 23 years at Capcom, I decided to follow my own advice about taking risks. I left the company and have decided to strike out on my own. I want to try to change the industry. And I felt that I didn’t want to end up being known only as “Capcom’s Inafune.” Instead, I want to build my own brand. Think of Steven Spielberg. He’s not “Universal’s Steven Spielberg.” He’s just Steven Spielberg, even though he started with Universal.

It may be too late—or too hard—to tackle the US market at this point. The next big market is China. There I see many opportunities. My sights are on Asia.

As part of a yearlong effort, McKinsey has been going beyond the news to prepare an in-depth report with 80 top authors on the future of Japan. For more information, see Reimagining Japan: The Quest for a Future That Works.

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