In our recent 2024 predictions, I shared my belief that Japanese game publishers are poised to have a strong calendar year ahead. Specifically, I believe that will manifest in robust revenue growth relative to non-Japanese peers.
Let’s first examine the recent state of the Japanese games industry. When considering the public markets, we see that most (though not all) major Japanese gaming companies had a solid 2023.
Interestingly, the Japanese stock market as a whole was up 28% for the year, its fastest expansion in a decade, meaning that most companies actually underperformed. Nevertheless, Goldman Sachs predicts a “transformational year” ahead, forecasting a rise of 13% in the TOPIX (an index of Japanese stocks that includes Nintendo, Bandai Namco, and Sony, among others) by the end of 2024.
Japan is the third-largest video game market (after the United States and China), and has traditionally been a prominent player in the console and mobile spheres. Two of the three major hardware manufacturers (Sony and Nintendo) are Japanese companies, and Japanese publishers regularly produce top-selling titles — nine of the top 20 bestselling premium titles in the U.S. last year came from Japanese companies. Japanese mobile gamers also boast one of the highest average revenue per user (ARPU) figures in the world.
Market Context
At a macro level, my bet on continued Japanese game industry momentum is partially a bet against its peers in China, North America, and Europe. Put differently, I expect Japanese publishers will outperform relative to their overseas counterparts.
We’ve already seen markets panic over proposed new gaming regulations in China. Whether these are ultimately amended or not it is the latest in a series of anti-gaming moves by the Chinese government that has spurred publishers to seek investment opportunities elsewhere.
Japan has been (and should continue to be) one of the greatest beneficiaries of that trend, with both Tencent and NetEase establishing studios in Japan and staffing them with notable Japanese developers.
Even beyond Chinese capital outflows, Japan has been a beneficiary of increased foreign investment in 2023 as a result of recent stock market regulatory reforms. It wasn’t just Saudi Arabia’s Public Investment Fund pumping money into Japanese game stocks in 2023, but individual and institutional investors alike.
Meanwhile, gaming companies In North America and Europe continue to undergo layoffs, an unfortunate trend that seems set to continue in 2024 and will inevitably result in the delay or outright cancellation of many projects. While Western markets may not face the same regulatory challenges as their Chinese counterparts, they do still face uncertainty, as evidenced by the Microsoft-Activision antitrust saga from last year, the courtroom battles over Apple’s mobile stranglehold, and the evolving debates over distribution of web3- and AI-enabled games.
These are broad generalizations, but I mention them only in contrast to Japanese publishers, which appear to have a more favorable path to growth in 2024. Japan features a number of companies well-positioned for a strong year ahead, and has been more welcoming to web3 and AI. Should we see an unexpected breakout driven by these technologies, Japanese publishers may be best positioned to take advantage of them.
A Closer Look at PC, Console, and Mobile
As mentioned earlier, Japan has long been a leader in mobile and console gaming. However, the biggest surprise in recent years has been Japan's burgeoning PC segment. 2022 saw a 43% growth in Japan’s PC gaming market at a time when the console software segment grew just 5.9% and mobile games dipped 4.4%. This all comes after Japan’s PC gaming segment doubled in size over the three years prior. While the full data on 2023 is not yet available, there have been encouraging signs that the growth in Japanese PC gaming has continued.
Sony, specifically, has been a major player in this area, with head of PlayStation Studios Herman Hulst stating that “PC has grown to be a substantial part” of the PlayStation business. This will continue into 2024, with Horizon Forbidden West coming to PC early this year, alongside a multitude of big-name releases from fellow Japanese publishers: Square Enix’s recently announced Visions of Mana, the next Final Fantasy XIV expansion Dawntrail Bandai Namco’s Tekken 8, Capcom’s Dragon’s Dogma 2, and likely many more.
On the console front, Sony maintains a sizable lead over Microsoft and its Xbox ecosystem, with the PlayStation 5 outselling Xbox Series X/S at a nearly three-to-one margin in 2023. The company has shipped more than 50M PS5 consoles to date, with roughly half of those coming in the current financial year (ending March 31).
To be fair, Microsoft is (publicly, at least) not concerned with “outconsoling” its competitors. The company clearly has other priorities anyway, given the ongoing integration of Activision-Blizzard and potential plans to expand to mobile. While Microsoft plays the long game, I fully expect 2024 to be Sony’s year to lose. Sony’s gaming business is the company’s largest unit by sales, and its second-largest contributor to operating profit.
The Japanese game industry will further dominate the console hardware segment by riding the momentum of the imminent arrival of Nintendo’s new console. The company’s stock is already tasting all-time highs on rumors that a new Switch will hit the shelves this fall. Japanese gaming market expert Dr. Serkan Toto has predicted that the new console will retail for $400, with leading titles jumping up to $70 each. For its part, Nintendo has raised its forecasts for the current fiscal year (ending March 31) across the board.
Finally, the biggest story in Japanese mobile games last year was the acquisition of Rovio by SEGA Sammy for $776M. While Rovio is far from the powerhouse it once was, I expect this acquisition to contribute meaningfully to SEGA’s efforts overall as we start to see the Sonic IP make inroads on mobile. SEGA Sammy itself is an interesting candidate for a strong 2024 as it seeks to reinvigorate the blue hedgehog with a new movie, a new season of the “Sonic Prime” Netflix show, a spinoff “Knuckles” TV series, and potentially a new mainline game in the works. Despite recent underperformance in new game sales and an ongoing restructuring of its business (particularly in Europe), SEGA has actually raised its fiscal year forecasts after a strong H1 that saw its operating income jump 313.4%. For a detailed writeup on SEGA’s prospects, I highly recommend this deep dive from Dungeon Investing.
A Wellspring of IP
One major trend that we’ve observed in recent years has been the mining of old IP for profit via remakes, remasters, and reissues. Given Japan’s foundational role in the establishment of the game industry, it is only natural that Japanese publishers have the deepest well of IP to draw from for these initiatives.
We’ve written previouslyabout the masterful work Capcom has done in this area, for example, but it is far from the only publisher looking to capitalize on this trend. Square Enix put an entirely new spin on the idea of a reboot with its Final Fantasy VII Remake and is set to follow up with the hotly anticipated sequel, Rebirth, next month. Konami is also due to release remakes of its own classics (Metal Gear Solid 3, Silent Hill 2, even Felix the Cat) in 2024. Sony’s The Last of Us Part II Remastered was released just last week. SEGA, too, is on the lookout for old gems and has announced new Crazy Taxi, Golden Axe, and Jet Set Radio titles in the works.
Surely these are just the tip of the iceberg. If we accept that recycling IP will continue to be a relatively low-risk means of filling up a release pipeline, then it follows that Japanese publishers should be the best equipped to pursue that strategy. When taken in conjunction with Japan’s dominant position in the console hardware market, its rapidly growing PC audience, its openness to new technologies, and its slate of highly anticipated titles set to debut in 2024, I am confident that we’ll see a banner year ahead from Japanese publishers.
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