Posted on: Friday, December 27, 2002
Gamemakers forced to merge
By Hiroshi Suzuki
Bloomberg News Service
Tokyo — A merger between Square Co. and Enix Corp., two of Japan's largest video-gamemakers, may accelerate consolidation in the $20 billion industry as rivals join forces to make games for Sony Corp. and Microsoft Corp.
As game development costs surge, companies that can't afford to hire designers for more sophisticated game consoles may follow next year's planned merger, gamemakers and analysts say.
"Consolidation in the industry is a fact and it's going to progress," Hideki Sato, president of Japanese game developer Sega Corp., said in an interview this month. "The time has passed when five or six game designers can get together in a room and make games by tinkering with some software."
The strongest impetus for the shakeup may be from the hardware producers, game developers say. Analysts and investors expect new game consoles from Sony, maker of the PlayStation 2, and Microsoft, which entered the console business with the Xbox last year, within two or three years.
Japan's Capcom Co. and U.S. developer Midway Games Inc., which said Monday holiday sales of its adventure-based games are falling short of forecasts, are among the companies that have been the subject of takeover speculation, analysts said. THQ Inc. and Activision Inc. also cut sales forecasts this month.
Shares of both Square and Enix have fallen since the merger was announced Nov. 26.
Shares of Square — whose U.S. subsidiary at one time hired more than 100 programmers and specialists to make its computer-animated feature film "Final Fantasy: The Spirits Within" in Honolulu, but closed after the movie didn't live up to expectations — have fallen about 16 percent, while Enix stock dropped 5 percent.
Gamemakers expect the successor consoles to the PlayStation 2 and Xbox to boast more sophisticated graphics chips and enhanced Internet capabilities.
In turn, games designed for the new boxes will probably have higher production values like orchestrated soundtracks, lifelike sound effects and enhanced graphics — all of which contribute to higher development costs.
"It's a given that the new consoles will have higher technical specifications," said Ryosuke Tanaka, a spokesman for Osaka-based Capcom. "It will be a challenge for gamemakers" to design games for the new boxes, he said.
Sharing game development costs may not be the only motivation for consolidation, analysts say.
Even gamemakers like Microsoft, with its cash and deposits of $38.6 billion as of June 30, may snap up smaller game developers to expand its game library or to gain a stronger foothold in the industry, developers say.
More specifically, Microsoft may be interested in adding a strong game franchise to the lineup of Xbox game titles, duplicating Sony's success with Square's "Final Fantasy" series of games or Nintendo Co.'s "Legend of Zelda."
In October, Microsoft bought a 49 percent stake in Rare Ltd. for $375 million in cash from Nintendo Co., the world's second-largest video-game maker. U.K.-based Rare developed the popular series of "Donkey Kong" games for Nintendo.
Japanese market
The need to consolidate may be strongest among Japanese developers since the Japanese video-game market has contracted for two years in a row after peaking in the year ended March 2000, analysts say. Game sales in Japan in the six months to Sept. 30 fell 9 percent from a year earlier, according to Enterbrain Inc., a video-game industry researcher.
"The (domestic) pie is not big enough anymore to allow game developers to make games in every category they want," said Jun Terasaka, who helps manage $163 million at Toyota Asset Management Co.
Merger rumors rampant
Even before Square and Enix announced their merger last month, speculation rippled through the video-game industry that some of the largest software development companies would team up.
In 2000, The New York Times reported Nintendo was in talks to buy Sega for about $2 billion. The report, denied by both companies, raised concerns among investors about Sega's future, especially since the money-losing company's shares had fallen 66 percent that year. Sega later scrapped its hardware business to focus on software development.
Lately, speculation has surfaced that Nintendo is in talks to buy Capcom, maker of a series of shooting games sold in North America under the title "Resident Evil." Capcom dismissed the reports which appeared on Gamers.com, an industry Web site, and the CBS MarchetWatch.com financial news Web site.
U.S. rivals
Gamemakers outside Japan are buffeted by the same peaks and troughs of demand in an industry that's grown far beyond hardcore fans. The video-game market topped movie box-office sales for the first time last year, and suffers from similar booms and busts.
Consumers who buy just a few games a year often flock to hits like Take-Two Interactive Software Inc.'s "Grand Theft Auto," hurting companies that don't generate best sellers.
Midway Games is a constant focus of takeover speculation. The maker of "Mortal Kombat" and arcade games hasn't had a profit since 1999. Another U.S. gamemaker, Acclaim Entertainment Inc., the maker of "Aggressive Inline" skaters game, has lost money for two of the past three years.
"I think there's going to be consolidation," said Jeetil Patel, an analyst with Deutsche Bank in San Francisco. "Midway and Acclaim are just dying."
Consolidation by itself may not return money-losing game developers to profit, say analysts, who add that differences in corporate culture and gamemaking philosophy may prove too difficult to overcome, discouraging developers.
"The next-generation game consoles are already on the horizon," Square President Yoichi Wada told Bloomberg News earlier this month. " We have to be ready for that."
