Xbox in Japan? Understanding the Distinctions of the Japanese Video Game Market to Increase Microsoft's Competitive Advantage

University of South Carolina University of South Carolina

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Senior Theses Honors College

Spring 2022

Xbox in Japan? Understanding the Distinctions of the Japanese Xbox in Japan? Understanding the Distinctions of the Japanese

Video Game Market to Increase Microsoft's Competitive Video Game Market to Increase Microsoft's Competitive

Advantage Advantage

Sekani Adebimpe

University of South Carolina

Director of Thesis:Director of Thesis: Dr. Nancy Buchan

Second Reader:Second Reader: Mr. Alex Heise

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Adebimpe, Sekani, "Xbox in Japan? Understanding the Distinctions of the Japanese Video Game Market

to Increase Microsoft's Competitive Advantage" (2022).

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XBOX’S COMPETITIVE ADVANTAGE IN JAPAN 
2 
Table of Contents 
Abstract .......................................................................................................................................... 3 
Introduction ................................................................................................................................... 4 
Expected Outcome and Potential Significance ....................................................................... 6 
Literature Review ......................................................................................................................... 7 
Japan’s Gaming History........................................................................................................... 7 
Microsoft’s Gaming History .................................................................................................... 9 
Xbox in Japan .......................................................................................................................... 11 
Main Insights ........................................................................................................................... 13 
Methodology & Approach .......................................................................................................... 13 
CAGE Distance Framework Analysis ....................................................................................... 16 
Country-Level Analysis .......................................................................................................... 16 
Industry-Level Analysis.......................................................................................................... 19 
Interview Insights........................................................................................................................ 23 
Discussion..................................................................................................................................... 27 
Potential Solutions ...................................................................................................................... 29 
Tailor Game Pass to Japanese Preferences .......................................................................... 30 
Forge Relationships with Biggest Japanese Publishers ....................................................... 30 
Secure Exclusivity Deals with Big Japanese Games ............................................................ 31 
Pursue Organic Growth from Within ................................................................................... 31 
Acquire a Smaller Japanese Game Developer ..................................................................... 32 
Conclusion ................................................................................................................................... 33 
References .................................................................................................................................... 35 
Figures .......................................................................................................................................... 43 
Figure 1 .................................................................................................................................... 43 
Figure 2 .................................................................................................................................... 44 
Figure 3 .................................................................................................................................... 45 
Appendices ................................................................................................................................... 46 
Appendix A. Interview Questions and Answers with Dr. Serkan Toto ............................. 46 
Appendix B. Interview Questions and Answers with Mr. Nathan Brown ........................ 50 
 
 
 
 

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

Abstract

As the video game industry has evolved into the world’s largest entertainment markets,

Microsoft, Nintendo, and Sony remain the biggest players in the video game console space.

While all three companies have achieved worldwide success, Microsoft’s performance with the

Xbox brand in Japan is an outlier for its historically poor sales numbers dating back to its 2001

debut. Despite several efforts to tailor the Xbox to the Japanese market, Microsoft has never

managed to launch a console that competed well against Nintendo or Sony. The purpose of this

thesis is to unearth the various cultural distinctions inherent to the Japanese gaming industry that

Microsoft must consider to gain a stronger foothold in the country, as well as diagnose the

biggest issues facing Xbox with Japanese consumers. To accomplish this, the CAGE distance

framework and Hofstede’s cultural dimensions were used to assess the differences between the

United States and Japan at the country level and the video game industry level. In addition, two

interviews were conducted with professionals in the video game industry to gain additional

insights into Microsoft’s shortcomings in Japan. After compiling the information, it is evident

that the magnitude of the differences between the U.S. and Japan on a cultural and economic

level are vast enough to outweigh the commonalities they share as two of the largest world

economies. The differences seen at the country level parallel those at the industry level. For

example, the inherent differences between English and Japanese reinforce the difficulties of the

video game localization process between languages. In addition, there is a gap between the

uncertainty avoidance and long-term orientation scores of the U.S. and Japan run against

Microsoft’s general business strategy that is tailored more to short-term gains and high-risk

endeavors. Finally, the interviews revealed more differences between the preferences of U.S. and

Japanese consumers for the genre and design of video games. With this information, a handful of

solutions were created to help Microsoft gain a competitive advantage in Japan, which includes

tailoring the selection of games on Xbox Game Pass to target a Japanese audience and securing

exclusivity deals with Japanese developers to attract new audiences. Even though Microsoft is

not positioned to become a market leader in Japan due to the dominance of the Nintendo Switch,

there is room for them to build a sizeable, reliable consumer base with Xbox Game Pass and

exploit the differences between the U.S. and Japanese gaming industries.

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

Introduction

The video game industry dominates as one of the largest entertainment sectors in the

world, currently projected to generate $159.3 billion in revenue in 2020 in the midst of

COVID- 19 (Wijman, 2020, p. 14). Mobile gaming has driven a large portion of the market’s

expansion within the last decade with the existence of the App Store and Google Play Store as

platforms facilitating game distribution, and technological advancements broadens the scope

of games that are playable on the go.

However, the foundation of the gaming industry continues to revolve around console

gaming, constituting a $45.2 billion share of the overall market (Wijman, 2020, p. 14). Within

and outside the gaming sphere, Microsoft, Nintendo, and Sony are regarded as the three

gaming giants due to their legacy of intense competition in the 2000s. But while this might

hold true around the world, it has not translated to equal success for all three parties. In Japan,

often considered the birthplace of home console video games, Microsoft historically struggles

to establish a significant market presence against its Japanese-based rivals, despite early

concerns that the “entry of Microsoft with Xbox may undermine the exclusive advantages on

cultural proximity Japanese software publishers enjoyed over the last two decades” (Aoyama

and Izushi, 2001, p. 442). According to the most recent aggregate of video game console sales

in Japan, Microsoft’s Xbox One S and Xbox One S have only sold a combined total of

110,000 units, compared to the 14.52 million and 9.20 million units of the Nintendo Switch

and PlayStation 4 (PS4) families respectively.

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

While the obvious answer might be attributable to Nintendo and Sony’s origins as

Japanese video game companies, it does not explain how the Xbox brand failed to resonate

with audiences, nor its subsequent decline with each console generation. Within the last five

years, Microsoft has released Xbox Game Pass, a Netflix-like streaming service that hosts

hundreds of games for a monthly fee. In addition, upcoming initiatives such as Project xCloud

are geared towards increasing the accessibility of high-fidelity gaming to mobile technology.

Microsoft and Sony also debuted their next-generation consoles during the 2020 holiday

season, representing a fresh start for the former to officially recapture brand relevance and

market share it lost during the last generation. Whether or not Microsoft’s long-term strategy

to increase the accessibility of video games to new audiences regardless of platform succeeds

will be determined by its ability to translate its efforts to international markets, and Japan

remains the most essential one ripe for expansion.

The purpose of this thesis is to uncover what cultural distinctions in the Japanese

gaming industry must be considered for Microsoft to establish a competitive advantage

over its rival companies with the Xbox brand. I intend to use a cross-cultural analysis of

the United States (U.S.) and Japanese gaming industries utilizing well-respected

frameworks and research methods to provide tangible solutions based on the conclusions

drawn. As someone passionate about the collective success of the video game industry

across each of its sectors, this thesis also serves as an opportunity to foster more interest

in gaming as a medium for research in a business context.

I am confident that the scope of my thesis is manageable with the research available in

the literature. While the scholarly work on video games is still young due to its recency, there

is ample research material on industry-specific practices, cultural analysis, and international

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

strategy that I can use to support my research. In addition, gaming is a creative medium that

introduces another qualitative dimension to my research (i.e., exclusive games, studio

acquisitions, game development processes), which can also be used to assess Microsoft’s

position (or lack thereof) in the Japanese gaming industry.

Expected Outcome and Potential Significance

After the completion of this thesis, I believe it will contribute an applicable framework

for other gaming companies to consider when creating and distributing games on an

international scale. The amount of research specific to the gaming industry is still in a

maturing phase, with a significant portion focused on the correlations between video games

and real-world violence. An ever-growing niche exists to conduct research on the gaming

industry from the discipline of international business, especially as video games become more

accessible to audiences worldwide. I hope to contribute to the literature in a manner that

encourages current and future generations to assess the business of video games with a more

critical eye.

On a personal note, I also wanted to conduct thoughtful research within a medium I

hold great passion for. I hope to work at a major gaming company in the future, and this thesis

is a fantastic opportunity to showcase a deep understanding of the gaming industry, let alone

the Xbox brand. Additionally, I hope it will open doors for me to pursue research

opportunities in Japan on other areas of entertainment, such as Japanese animation.

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

Literature Review

Japan’s Gaming History

The driving reason for the Japanese video game industry’s persistence in reputation and

global reach lies in its origins, of which it is attributed as the bedrock of gaming as an economic

and social force. Put in the words of Blake J. Harris, the author of Console Wars: “Without the

contributions of Japan, we wouldn’t have a video game industry” (Prisco, 2017). While the first

video games were developed in the West, with the first game believed to be Tennis for Two

created by American physicist William Higinbothan in 1958, Japan’s unique position in the

creative and technical spaces fostered the conditions for gaming to prosper (2008). In several

respects, Japan can be considered an early adopter of the medium that capitalized upon its

potential.

Despite its origins as a hanafunda (Japanese playing card) company, Nintendo took a

strong interest in swerving to consumer electronics. By collaborating with Sharp and Mitsubishi

Electric, two of Japan’s manufacturing powerhouses, Nintendo utilized the expertise of engineers

to develop arcade games and original hardware, which culminated in the released of the

Famicom in 1983 (Aoyama & Izushi, 2006, p. 1847).

Around this time, the U.S. video game industry was undergoing a severe economic crash.

The lucrative potential of video games led multiple companies to cash in on the medium with

video games on their own. This created an oversaturation of the market with a race to the bottom

in terms of quality due to the lack of controls to ensure functionality and enjoyment, tarnishing

consumer confidence in the medium. With Atari and Intellivision at the forefront of the U.S.

gaming industry, these companies were slammed with abysmal sales and eroded revenues that

brought the rest of its contemporaries down with it. Overall revenues of the video game industry

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

had stood around $3.2 billion in 1982, but that number dropped to $100 million by the end of

1985 (Caruso, 2009).

However, the impacts of the video game crash did not trickle outside U.S. borders. In

fact, the Famicom managed to flourish in Japan after its 1983 release. In spite of a graphics chip

issue at launch that led to a national recall of consoles, the Famicom managed to become the

best-selling console in Japan at the time with over 2.5 million consoles sold by the end of 1984

(Goldberg, 2005). By the time Nintendo started looking towards an international release of the

Famicom in the U.S., it had the foresight to address the lingering skepticism that remained from

the video game crash.

In addition to rebranding the Famicom as the Nintendo Entertainment System (NES) for

the Western markets, Nintendo implemented rigorous standards, such as game release quotas, to

ensure that games released for the console met Nintendo’s expectations. Emblematic of these

policies was the Nintendo Seal of Quality that was meant to give consumers assurance

(McFerran, 2019). When the NES launched in 1985, its immediate success completely

overshadowed its competitors to establish itself as the market leader in video games. During its

peak, Nintendo captured over ninety percent of the U.S. video game market, which persisted for

a short time into the 1990s with the release of the Super Nintendo Entertainment System (SNES)

in 1991 (Pham, 2003).

These years in Nintendo’s history are an essential part of Japan’s worldwide dominance in

the video game space, particularly because it paved the way for other Japanese countries to

establish themselves in international territories. The 1990s represented a vibrant era for gaming,

whether it be the “console wars” between Nintendo and SEGA or Sony’s debut of the PlayStation

in 1994. In addition to Nintendo becoming a household name through successful releases in the

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

Super Mario and The Legend of Zelda series, third-party Japanese companies capitalized on the

resurgence to create titles that captured domestic and worldwide acclaim, including Final

Fantasy VII from Square Enix. As a result, the Japanese gaming industry became a stand-in for

the global industry because it lacked viable competitors anywhere else.

Microsoft’s Gaming History

As video games exploded in popularity, it was inevitable that the largest technology and

entertainment companies were exploring options to incorporate the medium as part of their

business model. Yet the fierce competition between Nintendo, SEGA, and Sony during the 1990s

led to such market dominance and innovation as to make it extremely difficult for new entrants

to gain traction. During this time, Microsoft was the most equipped to enter the gaming space

given its enormous amount of capital. It also had a massive incentive too: former Microsoft

CEO Steve Balmer expressed that Microsoft “needed to penetrate the living room” with home

entertainment out of fear that Sony was overtaking the space with the PlayStation brand (Bass,

2021).

While Microsoft’s strongest competencies lied with Windows, pressures from the gaming

publishers prompted their engineers to create an original device with custom architecture that did

not utilize Windows software, much to the dismay of Microsoft co-founder Bill Gates, but it

ultimately received the blessing and support of the company to move ahead with production.

(Bass, 2021). Because SEGA was losing market share in the game console space from a weak

Dreamcast launch, Microsoft was eager to court support from some of the biggest Japanese

gaming publishers, including Square Enix and Koei Tecmo, to bolster their games lineup.

Microsoft also reached out to Nintendo with an interest in acquiring the company for software

development, but nothing tangible came from the discussions. This resulted in Microsoft

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

redirecting their focus towards the acquisition of Bungie, a PC game developer responsible for

creating the Halo franchise, and courting their games for timed exclusivity on Xbox (2000)

In January of 2001, Bill Gates officially unveiled Xbox at the Consumer Electronics

Show (CES), and the console launched in U.S. stores in November of the same year (NeoGamer,

2020). The console had a tremendous launch, selling 1.5 million consoles through the end of

2001, driven by the enthusiasm around Halo: Combat Evolved as a launch title (Dyer, 2021).

Establishing itself as a viable force in the video game console market, the Xbox continued to

experience unprecedented success across its lifetime. Microsoft introduced Xbox Live, an online

gaming service that enabled users to play games with others online and access downloadable

content (DLC) that allowed older games to be updated with new content. And in 2004 Microsoft

released Halo 2, which became the most successful entertainment launch in U.S. history with

$125 million in sales (2008).

As a result of the Xbox’s success, Microsoft has debuted three more generations of

consoles: the Xbox 360, the Xbox One, and the Xbox Series (X and S). The Xbox 360 is the

most successful console from Microsoft, where it doubled down on online gaming as its

competitive advantage to attract a hardcore audience. Since then, it remains one of the ten best-

selling video game consoles in the world (Sinari, 2021). However, the Xbox One experienced

middling success after its debut in 2013 and vastly underperformed against the PS4. To recapture

relevance in the gaming industry, Microsoft took steps bolster the breadth and depth of the Xbox

brand, which included the acquisition of other gaming studios such as Obsidian Entertainment

and ZeniMax Media. On January 18, 2022, Microsoft announced its intentions to purchase

Activision Blizzard, the developer and publisher behind franchises like Call of Duty and World

of Warcraft, in an all-cash deal valued at $68.7 billion that will become the largest gaming

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

acquisition of all-time assuming it goes through (Mukherjee & Patnaik, 2022)

Xbox in Japan

Even tracing back to the successful global debut of the Xbox, Microsoft’s lack of success

in the Japanese market remains its most consistent sour spot. The original Xbox came out in

Japan in February of 2002, a few months after its North American release. At the time, Microsoft

Japan’s Managing Director Hirohisa Ohura indicated that Japan was “the most challenging

market for the Xbox” due to its need to compete against the Nintendo GameCube and

PlayStation 2 (PS2), both created and manufactured by beloved Japanese gaming companies (Lu

Stout, 2002). However, two other major issues were identified with the console’s performance in

Japan. First, the large size of the console was incongruous with the designs of Japanese

households, which tended to smaller than homes in North America or Europe. Second, the

console’s games lineup skewed towards the preferences of Western players. One of the most

persistent stereotypes in the industry is that “Japanese gamers like role-playing games (RPGs),

and Western gamers prefer first-person shooters (FPS)”, and Microsoft’s massive marketing push

with Halo 2 further entrenched consumer preferences (Ashcraft, 2012).

Because Japan remained one of the top gaming markets in the world, Microsoft took its

shortcomings in the country to heart during the development of its next-generation console: the

Xbox 360. Peter Moore, a former Xbox marketing executive, recounted how the design team

travelled frequently to Japan to workshop designs and test their appeal with Japanese gamers

(Hayes, 2010, p. 13). Microsoft also made stronger attempts to secure Japanese titles such as

Final Fantasy XIII and Tales of Vesperia, the latter a timed exclusive. When the Xbox launched

during the 2005 holiday season, it cost 39,795 yen (about $330 at the time), which was cheaper

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

than the $399 launch in North America (2005)

This combination of factors helped Microsoft achieve higher success in Japan than the

original Xbox, with numbers speculated to be around 1.65 million units sold by 2013 (Fleming,

2013). However, this number still pales in comparison to its Japanese rivals; the PlayStation 3

Nintendo Wii sold around 9.50 million 12.75 million consoles despite both releasing one year

after the Xbox 360 (Fleming, 2013). As of writing, the Xbox 360 is the best-selling Xbox

console in Japan.

Microsoft’s next console, the Xbox One, performed abysmally in the Japanese market.

The console had already underperformed globally, and it was mired in controversy prior to

launch due to anger surrounding the console’s “always-online” policy and forced bundling of the

Xbox Kinect (Microsoft reversed course on both decisions). However, the International Data

Corporation reports that only 0.3 percent of Xbox One consoles were sold in Japan. (Haigh,

2019). There are no official sales numbers for the Xbox One, but the current estimates lie around

50.19 million consoles sold across its lifetime, meaning the console failed to sell more than

200,000 units in Japan (D’Angelo, 2021).

The Xbox Series X and Xbox Series S, Microsoft’s newest consoles, debuted worldwide

in 2020. Despite its tumultuous history in Japan, the company expresses affirmation that the

Japanese gaming market remains important for Xbox. Phil Spencer, the head of the Xbox brand,

stated in an interview that Xbox’s position in Japan “isn’t acceptable to [him],” elaborating that

he wants to ensure that it becomes easier for Japanese players to engage with the Xbox brand

with services like Xbox Game Pass (Robinson, 2020).

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

Main Insights

When considering the histories of the Xbox brand and the Japanese video game industry

in isolation, both are influential stories that shaped the business and creative trajectories of video

games forever, pioneers of innovation in their own respects. Yet when considering them

together, the incompatibilities of the two paint a different picture. Microsoft never managed to

get off the ground running in Japan because the console did not address the preferences of

Japanese consumers. The dominance of Nintendo and Sony in their home country inherently puts

Microsoft in an underdog position that requires greater efforts to overcome. And because Japan

is intrinsic to the historical success of video games, Microsoft is committed to leaving its

footprint in the market. Research about the business of video games is in its early stages.

Moreover, there is a small body of literature that assesses the success (or lack thereof) of video

game companies on an international scale. This research intends to address the Xbox’s

shortcomings in the Japanese gaming market using a methodological approach that unveils how

Microsoft can leverage its existing strengths while adapting to the needs of Japanese players.

Methodology & Approach

In order to fulfill the goals of this thesis, there are two areas that I intend to focus on:

1) the cultural differences between the U.S. and Japanese gaming industries and 2)

Microsoft’s gaming initiatives in context of these differences and its competitors.

For the first part, I intend to reference two cultural tools to map out the characteristics

that distinguish the U.S. and Japan from one another: Pankaj Ghemawat’s CAGE distance

framework and Geert Hofstede’s cultural dimensions. The CAGE distance framework is useful

for highlighting the differences that arise between places at the country and industry levels

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

according to their “distances” on four metrics: cultural, administrative, geographic, and

economic. This model accommodates my research because it can be used to showcase the

distinguishing factors between the United States and Japan as well as their respective gaming

industries.

Geert Hofstede’s cultural dimensions are rooted within management theories meant to

help comprehend the tenets of businesses and organizations but is popularly used to quantify

cultural values on a country-per-country basis to aid international negotiation and

communication. There are six dimensions to consider: 1) power distance, 2) individualism vs.

collectivism, 3) masculinity vs. femininity, 4) uncertainty avoidance, 5) long-term vs. short

term orientation, and 6) indulgence vs. restraint (Hofstede Insights, 2021). Each one implies

specific characteristics of culture depending on how a country scores. While these values do

not hold constant for every individual of a given country, it gives an overview that facilitates

the navigation of different cultures. Hofstede’s cultural dimensions will be used as a

supplement to the CAGE distance framework to provide additional explanation for differences

between the U.S. and Japan.

It is essential to cross-reference multiple tools with each other to simultaneously draw

the most relevant insights while accommodating for their shortcomings. For example, the

CAGE distance framework’s purpose is to highlight the importance of considering the

differences between countries alongside the similarities, but its application is not ideal for

assessing specifics. Meanwhile Hofstede’s cultural dimensions are helpful in extrapolating the

cultural values of a given country in a business context but are limited when applied on an

individual basis. Together, the CAGE distance framework and Hofstede’s cultural dimensions

can address the limitations of each other while garnering a clearer picture of the U.S. and Japan

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

gaming industries and their intersections with culture.

The CAGE distance framework will be used to compare the U.S. and Japan at the

country level, as well as the U.S. and Japanese video game markets at the industry level. The

purpose of doing both the country-level and industry-level analysis is to ensure that as much

relevant information is compiled to understand both the differences between the video game

industries that is relevant for Microsoft, but also situates it within the context of both

countries. It will also provide strong reference material that holds practical use for assessing

the distinctions between the Western-based corporate culture of Microsoft against those

present within Japanese gaming companies. This also fosters a foundation for which practical

results can be composed for successfully revitalizing the Xbox brand amongst Japanese

consumers. To gather additional information,

I will conduct multiple interviews with video game industry professionals. The

individuals that will be interviewed for this research have experience navigating the American

and Japanese gaming markets, and they will be able to introduce relevant insights that are not

accounted for in the current literature. A survey was considered to gauge the video game

preferences of Japanese consumers and compliment the qualitative research. However, the

availability of reliable consumer data and the difficulties administering a survey outside the

United States made it unfeasible, and it is a limitation that future research hopes to overcome.

In the discussion section, actionable solutions will be created that are aimed at

exploring the avenues by which Microsoft can revitalize the Xbox brand in Japan from its

current position based on the research complied from the cultural tools and the interviews.

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

CAGE Distance Framework Analysis

The CAGE Distance Framework was used to compare the U.S. and Japan at the

country level, as well as the U.S. and Japanese gaming markets at the industry level. As a

reference, Figure 1 and Figure 2 show a comprehensive chart that breaks down the major

differences at the country and industry levels across cultural, administrative, geographic, and

economic lines. This section will begin with the country analysis to provide the foundation for

looking at the video game industries in both countries with sufficient context.

Country-Level Analysis

The most visible cultural difference between the U.S. and Japan lies with the language

barrier. English and Japanese are the official languages respectively, and both feature qualities

that foster different communication styles and cultural values. The Foreign Language Institute

also classifies Japanese as a Category IV language, indicating that it is one of the most

difficult languages for English speakers to learn alongside Arabic and Chinese (2022). While

the sentence structure and writing system pose challenges, the subtler qualities of

communication also contribute significantly to the distance between the languages. The

existence of keigo, a Japanese honorific system that roughly translates to “respectful

language”, accentuates the importance of hierarchy when addressing other people based on

factors such as age, professional status, and familial relationship. Non-verbal cues also play a

larger role in day-to-day Japanese communication to better understand one’s true message or

intentions, since the Japanese language reflects a preference for implicit communication

compared to the preference for explicit communication in the U.S. Japan’s cultural and ethnic

homogeneity simultaneously allows for indirect communication to flourish in day-to-day

interactions and traditional social values akin to maintaining order and valuing hierarchical

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

differences to persist.

Two of the qualities that Ghemawat notes as having the greatest impact on

international trade lie with colonial ties and common currency, both of which the U.S. and

Japan lack (Ghemawat, 2015 p. 1). The closest thing to a colony-colonizer relationship was

the U.S. military occupation of Japan upon the conclusion of World War II, which set the

precedent for a new political relationship between both countries. Currently, Japan is the

U.S.’s fourth-largest trading partner, accounting for 4.5 percent of U.S. international trading

activity, and remains one of the strongest world alliances despite their physical distance

(2022). Both countries do not share a trading bloc, but both maintain the U.S.-Japan Trade

Agreement and the U.S.-Japan Digital Trade Agreement to further reduce the economic

barriers for agricultural exports and strengthen the processes for exchanging digital

technologies and information (2022). Their presence as two of the largest free market

economies in the world also encourage the maintenance of a robust global partnership on

various grounds.

Briefly mentioned earlier, the U.S. and Japan are geographically far from each other in

terms of physical distance, but there remain other differences that separate them. One of the

most extreme differences lies with the time zones, which can range from thirteen to nineteen

hours depending on one’s location within the U.S. This creates an obstacle for timely cross-

cultural communication due to the reduced timeframes where the working hours of American

and Japanese individuals overlap. Japan’s isolation from the rest of the world as an island

nation bring difficulties from a logistical standpoint when needing to export or import

products or resources, as it shares no land borders.

Geographic differences also reinforces other cultural and economic differences

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

between the U.S. and Japan. Figure 3 shows a comparison of the U.S. and Japan based on

Hofstede’s cultural dimensions, and it highlights a major difference on the metrics of

uncertainty avoidance and long-term orientation. One of the common sources noted for such

high scores for Japan is the persistent threat of natural disasters in the form of tsunamis,

earthquakes, and volcanic eruptions that could bring devastating consequences for the entire

country. There is a seventy percent chance that an earthquake with a magnitude-7 rating or

higher will strike Tokyo in the next thirty years, and Japan has taken numerous steps to further

develop a robust infrastructure that anticipates the worst-case scenario, such as building

towers that resist sway (2021). While the U.S. has a wider range of geographic concerns that

are region-specific, its lowered severity relative to Japan means it plays a smaller role in

informing economic policy.

The U.S. and Japan are the first and third largest world economies respectively, but

digging into the overall economic picture unveils a distinct palate of challenges. For example,

the inflation trajectories of both countries run in opposite directions. The U.S. is grappling

with major inflation concerns after consumer prices posted the highest annual increase (7.9

percent) in forty years, which does not reflect the inflationary consequences of the Russia-

Ukraine conflict at the time of writing. (2022). Japan is experiencing the opposite problem.

After a period of economic collapse between 1991 and 2001 termed Japan’s “Lost Decade”,

the country has struggled with persistent deflation that is resulting in stagnant wages and

lower rates of corporate investment for two decades (Fujikawa, 2021). This translates to

higher prices for goods and services in the U.S. compared to Japan, but it also lends itself to a

more favorable exchange rate for the dollar against the yen. Also aligned with Japan’s

deflation trend is the “greying” workforce as the country undergoes a steady population

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

decline due to the birth rate not exceeding the replacement rate. As Japan’s population

distribution skews older, more economic burdens will be placed upon the working and

younger generations. The U.S. is also projected to experience a population decline over the

next few years, but it still posted a 7.4 percent growth rate between 2010 and 2020 (Frey,

2022).

Industry-Level Analysis

When applying the CAGE distance framework to the video game industries of the U.S.

and Japan, the differences assessed across the four dimensions on a country basis manifest in

more nuanced ways. It holds especially true on a cultural level since video games are an

audiovisual medium that Ghemawat would label as one with “high linguistic content”, where

he believes differences are most prominent. Just as learning Japanese as an English speaker

(and vice versa) is a challenging endeavor, the localization process from English-to-Japanese

or Japanese-to-English is arguably tougher. In the context of game development, localization

is the process for bringing a game to a foreign market through activities such as translating in-

game text or hiring new voice actors. It is not uncommon for game content to be altered to

meet local requirements. For example, a handful of games in Australia are not approved for

purchase each year because they prominently feature alcohol or drug content. The structural

and cultural differences inherent to English and Japanese are most commonly found when

translating dialogue and text. Since both languages feature phrases, words, and cues that are

not directly translatable to other languages, responsibility is placed on the translation team to

adopt the source material as accurately as possible while maintaining the original intent. And

with a significant time zone difference in the mix, additional consideration is needed for

coordinating schedules and meetings that accommodate the working schedules of employees

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

in the U.S. and Japan, with a stronger possibility for delayed communication.

Amongst the three biggest console hardware manufacturers (Microsoft, Nintendo, and

Sony), Nintendo and Sony both originate from Japan as the dominant competitors. Both

companies used to compete in the home console and handheld spaces dating back to 1994, but

Nintendo’s consolidation of its gaming console divisions with the Nintendo Switch and the

discontinuation of the PlayStation Vita in 2019 led to the investment of their resources in one

platform. As a result, Microsoft is the only non-Japanese console manufacturer of the three.

One can also observe major differences on the consumer level. Some video games

genres are heavily associated with one country: Japanese role-playing games (JRPGs)

emerged as its own subcategory to accentuate its unique features against other role-playing

games (RPGs), including the use of an anime art style or a greater emphasis on slower,

detailed storytelling techniques (i.e., Dragon Quest, Final Fantasy, Persona). These games,

alongside others in the RPG space, constitute the most-played genre amongst Japanese

gamers, where they were twice as likely to have played an RPG in a six-month timespan as

their global counterparts (Kuzuhara, 2021). Along those lines, U.S. video game players

demonstrate a stronger preference for games in the shooting and sports genres, with titles in

the Call of Duty and Madden NFL franchises consistently topping sales charts (Grubb, 2022).

The Japanese gaming market is also driven more by the mobile gaming sector relative

to the rest of the world. It is the largest source of video game revenue in Japan, and it accounts

for twenty-two percent of all global mobile gaming revenue (Chapple, 2020). While higher

smartphone adoption rates from country-to-country also position mobile gaming as a lucrative

segment in the video game industry, its dominance in Japan is also attributable to its unique

gaming landscape. Japanese homes tend to be smaller that U.S. homes, necessitating the

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

existence of “Internet cafes” as an outlet for console and PC gaming enthusiasts. In addition,

Japanese citizens rely heavily upon public transportation whereas U.S. citizens commute by

car more often. The free time opened up from public transit provided the perfect conduit for

smartphone games to flourish as a means to fill the time.

To ensure that video games are assigned a proper rating to reach the most appropriate

audiences, the U.S. and Japan depend upon independent rating boards. In the U.S., the

Entertainment Software Rating Board (ESRB) is a self-regulating organization affiliated with

the Entertainment Software Association, and the Computer Entertainment Rating

Organization (CERO) fulfills the same purpose as a non-profit organization in Japan. From an

administrative standpoint, the major difference between the rating boards is concentrated with

its stricter ratings. If a game receives a “Mature” rating from the ESRB, it indicates the

content is suitable for individuals aged seventeen or older and requires an ID to purchase it.

On the basis of age, the “CERO D” rating is the closest equivalent, but it does not require an

ID for purchase. The “CERO Z” better serves that purpose, banning the sale of games with

this rating to those under the age of 18, but the additional threshold means that a smaller

proportion of titles are inaccessible for purchase compared to the U.S. (2022).

Microsoft’s acquisition of Activision Blizzard is representative of the increasing

consolidation amongst U.S. entertainment companies over the past decade, but this trend does

not translate as accurately to Japanese business culture. One element that shields Japanese

companies from foreign mergers and acquisitions lies in the form of a popular business

partnership. Keiretsu, which roughly translates to “system” or “group”, refers to a network of

businesses who are intertwined through relationships and shareholdings that are represented

by a central bank (Twomey, 2022). A distinguishing characteristic of Japan’s corporate

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

governance policy, companies within a keiretsu foster harmony amongst affiliate companies

and protect themselves from potential takeovers due to the complicated nature of the social

and financial networks. The reduced risk associated with becoming part of a keiretsu is also a

reflection of Japan’s high uncertainty avoidance. Within the U.S., keiretsu would be frowned

upon based on antitrust law since the business groupings represent a potential threat to

competition, and its practice amongst American companies could undermine the role of the

stock exchange.

Due to the sheer size of the U.S. gaming market, there is more incentive for Japanese

gaming companies to establish local subsidiaries rather than vice versa. While Square Enix

concentrates most of its game development in Tokyo, for example, it also has an American

subsidiary that oversees the North American publication of games and assists in game

development at its U.S. studios such as Crystal Dynamics, best known for their work on the

Tomb Raider reboot. The international reach of video games also extends to game

development: outsourcing various parts of a project is an increasingly common practice to

reduce development costs and expedite game development. On geographic terms, the U.S. has

the easiest access to Canada and Western European countries for such purposes, whereas

Japan has the easiest access to East Asian countries.

The U.S. and Japan occupy the second and third spots when assessing the valuation of

their domestic gaming industries around the world, but it is separated by about $18.4 billion

(2022). Although both markets generate billions for their economies, the Japanese economy is

more intertwined with entertainment. In order to leverage Japan’s modern pop culture to drive

economic growth, the Japanese government directed the Ministry of Economy, Trade, and

Industry (METI) to establish the “Cool Japan Initiative” under the Creative Industries

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

Promotion Office in 2010 (2012). The U.S. does not currently have similar strategy that aligns

its pop culture with its economic outlook, signaling that Japan views its entertainment

properties as an essential medium for creating soft power and expanding its market. The

initiative is more pertinent for video games in recent years as Japan also faces stiffer

competition from China as an easy target for acquiring Japanese talent and drawing inspiration

from Japanese developers to create its own popular games such as Genshin Impact (Dooley &

Mozur, 2022).

Interview Insights

To gather additional information about the nuances of Xbox’s situation in Japan, I

interviewed two individuals with extensive experience in the video game industry. The first

person is Dr. Serkan Toto, the CEO and founder of Tokyo-based independent video game

consulting firm Kantan Games. His work and coverage focus on the Japanese video game

industry, and he is often tapped for commentary by international media outlets. Appendix A

includes a transcript of Toto’s interview. The second person is Nathan Brown, a freelance

video game consultant and writer, and the former editor of UK video game magazine Edge.

He currently runs Hit Points, a newsletter providing commentary on the video game industry.

Appendix B includes a transcript of Brown’s interview.

When asked to give an assessment on Xbox’s overall performance in Japan, Toto

described it as a “struggle” for Microsoft because of their lackluster performance in one of the

biggest gaming markets and most populous countries in the world (See Appendix A). Even

though the Xbox brand never took off in the manner that Microsoft hoped, their persistence is

attributable to their overall profitability. At its core, Microsoft is a services company that

generates most of its revenues from Microsoft Office Suite software and subscriptions. This

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

allows the company to invest resources towards its Xbox initiatives in Japan despite its

lackluster performance. Brown built upon this idea by noting that Game Pass is likely to

experience success during this console generation “in the context of itself”, meaning that it

would not pose a major threat to Nintendo or Sony in their home market (See Appendix B).

Toto noted that there two fundamental differences between the U.S. and Japanese

gaming industries, one concerning the supply slide and the other concerning the demand side

(See Appendix A). On the supply side, there is fierce competition between the publicly traded

companies in Japan, inclusive of Nintendo and Sony, which are quite large in scale. However,

the U.S. features a “much richer ecosystem on the supply side” of gaming because there is a

larger proportion of video game companies that deviate from the norm (See Appendix A).

There are a number of independent (indie) game developers scattered across the U.S., and the

indie gaming scene in the U.S. remains vibrant. Some of the most popular games of the last

decade came from smaller American creators, including Rocket League, Stardew Valley, and

Undertale.

On the demand side, Toto believed the biggest difference lied in the different tastes of

American and Japanese players based on gameplay and design (See Appendix A). This aligns

with previous research asserting the dominance of RPGs in Japan, as well as shooting and

sports games in the U.S. Brown introduces another perspective that focuses on the general

priorities of game developers, with Western studios striving towards realism in games and

Japanese studios striving towards fantasy (See Appendix B). He summed up this point by

asserting that based on previous trends, “American users play Japanese games, but Japanese

users don’t play American games” (See Appendix A). The historic success of the Nintendo

Switch from a hardware and software perspective in Japan underlies this statement; Nintendo

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

accounted for eighty-seven percent of all video game hardware sales and half of all video

game software sales in Japan in 2020 (Dring, 2021). Brown further underscores with the

notion that portability is a driving factor behind the success of most handheld consoles in the

country (See Appendix B).

One of the questions centered around Microsoft’s acquisition strategy to bolster its

gaming catalog against its competitors, and whether it was feasible to acquire a Japanese

gaming company. Here, Toto acknowledged the homefield advantage Nintendo and Sony hold

compared to Microsoft because there is a lower barrier to entry in initiating business

discussions between two Japanese companies, but was also explicit in citing it as the key

element for Xbox’s lagging performance in the Japanese market (See Appendix A). Instead,

he traces back to the launch of the original Xbox in Japan as the source of the brand’s current

woes because the initial batch of consoles had issues with hardware quality (See Appendix A).

A common issue with the original Xbox arose when a flashing red and green light appeared

around the power button, meaning that there was a system failure. And when Microsoft

launched the Xbox 360, it reemerged in the form of the infamous “Red Ring of Death” that

indicated the need for service repair. Microsoft was already caught in a difficult position

attempting to enter as a third major competitor in the video game console market in 2001, but

hardware shortcomings tarnished Xbox’s reputation in the long-term.

Brown offered the argument that Microsoft does not need to purchase a Japanese

gaming studio, and that such a move “could be counterproductive in a way” in light of

concerns about the consolidation of game studios in the hands of a few major players and that

it would not translate to more Japanese players transitioning to Xbox (See Appendix B). His

commentary touched upon the idea of brand loyalty in video games, which is most prevalent

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

when someone sticks to a certain brand of video game consoles. One of the driving forces

behind consumers sticking with Microsoft, Nintendo, or Sony consoles lies with the exclusive

games available on each platform. Since there is a deficiency of Japanese video games on the

Microsoft platform, one acquisition might not be enough to draw people who enjoy those

games from its competitors.

An optimistic note during the interview accompanied the discussion around Xbox

Game Pass. The value proposition of Xbox Game Pass for Japanese customers is even more

compelling than its U.S. counterparts because the average game cost in Japan can trend

upwards of eight thousand yen, or eighty dollars in nominal terms (See Appendix A). The

average game cost for a new video game in the U.S. is $59.99, although many of Sony’s first-

party games (i.e., God of War: Ragnarök, Horizon Forbidden West) retail for $69.99. This

difference is intensified with the context that Japan is currently in a deflationary bubble, as

well as the notion that discounting is a less common pricing tactic for Japanese products and

services (See Appendix A).

Since Microsoft has competed in the Japanese video game space for over two decades,

Toto believes that Microsoft requires a “big solution” that amounts to more than the smaller

steps they have taken thus far because Nintendo and Sony are (and have been) are dominating

the Japanese gaming market. (See Appendix A). While Microsoft can take strides to improve

Xbox Game Pass or secure Japanese titles for exclusive distribution on Xbox devices, a big

step equates more to an acquisition of a Japanese gaming company or a brand-new initiative

that focuses on gaining market share. Building upon that, Brown touches upon an important

initiative that Microsoft seems to be moving towards: “untethering” the Xbox brand from

hardware to become accessible in as many formats as possible (See Appendix B).

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

Discussion

When viewing countries in terms of their economic power, it might indicate that the U.S.

and Japan share more common ground as two of the most developed nations in the world. Across

the various dimensions of CAGE, however, the sum of their differences is placed at the forefront.

One of the most apparent areas of divergence lies with the processes for communication. Much

of Edward T. Hall’s seminal work in cross-cultural research discusses the differences between

high-context and low-context cultures, with high-context cultures like Japan’s featuring groups

of people that “have extensive information networks… and who are involved in close personal

relationships” (Hall, 1990). This runs against the conventions of the U.S., which is a classified as

a low-context culture for its reliance on explicit social conventions.

Yet the difference run much deeper than the amount of information shared, and it

reinforces the cultural nuances that separate the two countries in various circumstances,

including business. When assessing the CAGE distance framework, one can see that many of the

differences at the industry level reflect those noted at the country level. As noted, the localization

process for translating video games from English to Japanese or vice versa stems from the more

general difficulties associated with translating between each language. This also extends to the

geographic separation between the U.S. and Japan, which consequently forces game developers

and publishers to remain conscious of time zone differences when conducting cross-border

communication.

On a broader scale, each dimension of the CAGE distance framework correlates with

specific elements of the U.S. and Japanese video game industries. The cultural differences

between the two countries translate to different tastes and preferences for video games amongst

the populations, with Toto reaffirming the deep associations of RPGs and FPS games with Japan

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

and the U.S. respectively (See Appendix A). Administratively, the laws and regulations of one

country not only impact the ease of access to certain video games based on their content, but also

the extent to which companies like Microsoft can pursue growth in the Japanese market when its

rules differ from the ones it is accustomed to. Because Japan is located west of the U.S.,

American gaming companies with Japanese ties tend to base their operations on the West Coast

to ease travel and communication to Japan, just as many Japanese gaming companies establish

subsidiaries in the same location with similar intentions. It is also no small coincidence that the

three largest gaming markets lie with the U.S., Japan, and China.

When Hofstede’s cultural dimensions are factored into the equation, some of Microsoft’s

key disadvantages as a competitor in the Japanese gaming market come to the forefront. Two of

the most glaring differences between the U.S. and Japan can be seen with their scores on long-

term orientation and uncertainty avoidance. The U.S. and Japan received long-term orientation

scores of 26 and 88 respectively, and they received uncertainty avoidance scores of 46 and 92

respectively (Hofstede Insights, 2021). Considered alongside each other, Japan’s high scores

indicate that Japanese businesses tend to behave in a manner that minimizes risk and prioritizes

sustainable growth, placing a more equal balance on stakeholders over stockholders. For

Japanese gaming companies, behavior reflecting this can include participating in a keiretsu

partnership or depending on past success to guide future business decisions.

From this standpoint, Microsoft’s general strategy with the Xbox brand runs counter to

the conventions of Japanese business. Besides the legal difficulties associated with acquiring a

Japanese company from outside the country, Microsoft is reflective of the opposite priorities

associated with U.S. companies, placing more emphasis on short-term needs and innovation to

drive their growth to new heights. For example, Microsoft has never turned a profit on an Xbox

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

console before and depends on game sales and subscription revenues to recuperates the costs

(Kent, 2021). On the other hand, Nintendo made it a priority to not sell the Nintendo Switch at a

loss from the moment it launched to turn a profit from the beginning, while also pricing it in line

with consumer expectations (Grubb, 2016).

What the CAGE distance framework and the interviews ultimately demonstrate together

is that the scale of the differences between the U.S. and Japan across multiple dimensions

informs how the video game industries of both countries developed with unique characteristics

that requires gaming companies to consider how to tailor their products and services to the local

market. The clear dichotomy between Microsoft’s success in Western markets against the

Japanese markets demonstrates room to improve Xbox’s performance. Even during the eighth

generation of video game consoles, where the Xbox One sold woefully against the PS4, it is

estimated that the console sold just over fifty million consoles, but Xbox One sales in Japan

constituted less than two hundred thousand of total sales (Alsop, 2022). With its Japanese

contemporaries finding consistent global success across the board, Microsoft can leverage the

cultural distinctions of the Japanese video game industry to lay the roadmap to fulfill its potential

in Japan

Potential Solutions

The goal of this research was to diagnose Xbox’s performance in the Japnaese gaming

market across its history, while identifying solutions that consider Microsoft’s competitive

advantages and disadvantages in the context of the nuances inherent to Japan as an economic

and gaming leader. After gathering information from the U.S.-Japan cross-cultural analysis and

the interviews with leading experts in the video game industry, five solutions were created to

provides avenues for which Microsoft can grow its presence in Japan.

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

Tailor Game Pass to Japanese Preferences

Xbox Game Pass is the driving force behind the current momentum in the Japanese

market due to its large catalog of games at an affordable price point. Even though it lags behind

Nintendo and Sony in hardware and software sales, the relative performance of Xbox Series X

and Xbox Series S compared to previous Xbox consoles is promising. Since the average

Japanese gamer is geared towards RPGs, appealing to this preference can focus Microsoft’s

efforts on the games it needs to include on Game Pass. Dragon Quest XI S: Echoes of an

Elusive Age and Yakuza: Like a Dragon are two of the headlining JRPGs on Xbox Game Pass,

and there are opportunities to expand the catalog to demonstrate Microsoft’s commitment

outside of the biggest, newest releases. For example, there is a gap in legacy content that Game

Pass stands to benefit from through the inclusion of older titles. Blue Dragon and Lost Odyssey

were two Xbox 360 exclusive JRPGs published by Microsoft Game Studios (now Xbox Game

Studios) that are currently unavailable on Xbox Game Pass. A precedent has also been set with

entries in popular JRPG franchises (i.e., Final Fantasy, Tales) appearing on the service, leaving

the door open for additional titles to be added in the future.

Forge Relationships with Biggest Japanese Publishers

Microsoft has the financial capital to acquire one of the large Japanese gaming

companies, but its status as an American company places it in a disadvantageous position against

Sony, which was founded in Japan, and those same companies are also potential acquisition

targets for bolstering the PlayStation brand. However, that does not prevent Microsoft from

establishing long-term partnerships. Last November, Microsoft and SEGA announced a strategic

alliance that “produce large-scale, global games in a next-generation development environment

built on Microsoft’s Azure cloud platform” (2021). The fruits of this effort will not be clear until

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

future SEGA titles are released, but it represents a major step towards engaging with the

Japanese game development scene through means that leverage other elements of Microsoft’s

business. Such ventures also create the ideal conditions to jumpstart conversations about other

elements of their relationship. In Microsoft’s case, this could extend to securing a publisher’s

title for release on Xbox platforms or funding development of next-generation games. This

approach also subverts some of the complications of navigating Japanese business law to bring a

large game publisher under its roof.

Secure Exclusivity Deals with Big Japanese Games

Whereas Microsoft aims to integrate new studios under Xbox Game Studios, Sony favors

locking in exclusive deals for major third-party games, especially Japanese ones, with Final

Fantasy VII Remake and Guilty Gear: Strive headlining the slate of games with PlayStation

console exclusivity. Even Ghostwire Tokyo, a game developed by Microsoft-owned Tango

Gameworks, has one-year timed exclusivity on PlayStation 5 until March of 2023 (Kiya, 2022).

Because high-quality games are the driving force behind the success (or lack thereof) of a video

game console, Microsoft has room to spend its capital smarter by taking greater advantage of

console exclusivity for third-party games. To maximize Game Pass engagement, it is wise for

Microsoft to target games that will encourage Japanese consumers to gravitate towards the

service. This distinguishes it from the previous recommendations because it offers Microsoft a

chance to strengthen its value proposition against its competitors.

Pursue Organic Growth from Within

Through the acquisition of ZeniMax Media, Microsoft finally acquired a reputable

Japanese video game developer in Tango Gameworks, headquartered in Tokyo. Starting with

The Evil Within, the studio has published three console games over eight years. Since Tango

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

Gameworks represents Microsoft’s only major footprint in Japnaese game development, it

should direct large investment efforts towards the studio to assist in game development and

expand their talent pool to foster better conditions for releasing a steady pipeline of high-quality

Japnaese games. Most of Microsoft’s strategy with the Xbox brand is centered around inorganic

growth, which depends on mergers and acquisitions to achieve greater economic benefit. While

it expands Microsoft’s gaming footprint quicky, it poses its own challenges in regard to

integrating new studios under a new management structure. To balance out its recent activity,

Microsoft should pinpoint areas to slowly grow Tango Gameworks into a bigger presence or

establish new studios in Japan from the personnel already developing games under Xbox Game

Studios.

Acquire a Smaller Japanese Game Developer

If Microsoft can navigate Japanese business culture well enough to position itself to

acquire a Japanese video game company, an ideal scenario has the company focusing on

bringing in a smaller Japanese game developer rather than a larger one. There are two reasons for

this: 1) assuming the successful acquisition of Activision Blizzard in 2023, Microsoft will have

its hands full integrating one of the largest gaming companies in the world and tackling its

promises to address the concerns about Activision Blizzard’s company culture, and 2) it allows

Microsoft to test the waters with a smaller investment and avoid the risks associated with a larger

acquisition. While a large portion of the competition in the Japanese gaming industry is

concentrated with publicly traded companies, there are a handful of smaller studios that are

strong candidates for acquisition. One of them is PlatinumGames, a private Osaka-based studio

that is well-known for action games such as Bayonetta and Nier: Automata. Microsoft and

PlatinumGames once partnered for development on Scalebound, an action RPG intended to

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

come out for Xbox One, but it was cancelled in 2017 due to development troubles. Since then,

several executives from PlatinumGames have expressed willingness in jumpstarting

conversations with Microsoft again, as well as an openness to acquisition conversations

(Robinson, 2022). Other potential candidates to bring under Xbox Game Studios include

CyberConnect2 and Kojima Productions.

Conclusion

When Microsoft first made its debut with the Xbox in the Japanese market, the

momentum it created in the U.S. and Europe did not translate to Japan because the nuances

inherent to the Japanese gaming industry amplified the shortcomings of the console and

positioned it as a non-competitor ever since. The Xbox 360 was the most successful console of

the brand, but it fell to a new low with the Xbox One. Evaluating the performance of the three

biggest console manufacturers (Nintendo, Microsoft, and Sony) in the most lucrative gaming

markets further cements Xbox’s disappointing performance in Japan. However, the recent debut

of the Xbox Series X and Xbox Series represents another opportunity for Microsoft to

reinvigorate the brand’s presence. Given Nintendo and Sony’s historical dominance in the

country, it is unrealistic that Microsoft can usurp either company in terms of market share over

the course of the next generation. Instead, Microsoft’s main goal should focus on building a

sizeable, reliable consumer base in Japan, with Game Pass as the foundation for attracting new

consumers to the platform. There is no question that the company has the resources to change its

fortunes, but it must be paired with a deep awareness of the nuances inherent to Japanese gaming

industry and Japan to pursue strategies that fulfill its promises to better serve the Japanese

market. Outside of Microsoft’s ambitions, however, encouraging healthy competition within the

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

video game industry from country-to-country fosters the conditions for its players to deliver

innovative experiences in the medium from a technological and artistic standpoint.

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

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XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

Figures

Figure 1

CAGE distance framework chart between the U.S. and Japan at the country level

Cultural

Administrative

Geographic

Economic

▪ English and Japanese

are both distinct

languages, and they

are some of the most

difficult languages for

native speakers to

learn respectively

(2022)

▪ Demographics are

distinct (U.S. is more

ethnically diverse

while Japan is more

homogenous)

▪ There are more

implicit cues in

Japanese

communication as a

result

▪ Insularity/nationalism

for both countries

manifest in different

contexts

▪ Traditionalism

resonates more in

Japanese culture

when it comes to

social norms (i.e.,

cuisine, hierarchy)

▪ The United

States and Japan

do not share

colonial ties

with each other.

▪ Tensions were

highest during

WWII after

Pearl Harbor

bombing, U.S.

military

occupation set a

new precedent

for country

relationship;

now considered

one of the

strongest global

partnerships

▪ U.S.-Japan Trade

Agreement and

U.S.-Japan

Digital Trade

Agreement

(2022)

▪ No shared

trading bloc;

closest was the

TPP before U.S.

withdrawal in

2017

▪ No common

currency ($ vs ¥)

▪ Both use free

mixed market

economies

▪ The U.S. and Japan

are about 10,000+

km away from each

other.

▪ Large time zone

difference (can

range from 13-19

hours)

▪ Japan is isolated as

an island nation

▪ Japan is much

smaller (the size of

California, but

higher population

per capita)

▪ More difficult

access to goods and

resources in Japan;

U.S. has easier ties

with Mexico and

Canada

▪ Robust

transportation and

intracommunication

systems within

Japan; U.S. has

weaker national

transportation

infrastructure

▪ Japan is more

susceptible to

natural disasters

▪ GDP per capita:

$63,593.40 in

the U.S. and

$40,193.30 in

Japan (2020)

▪ 1

and 3

largest world

economies

▪ Inflation

trajectories of

both countries

are polar

opposite. U.S. is

currently

struggling with

inflation

concerns

(Fujikawa,

2021) while

Japan continues

to suffer

deflationary

pressures that

are driving

consumer

prices down

and stagnating

wages

▪ Japan

experiencing

population

decline, which

will lead to

smaller

workforce (U.S.

still increasing

but will follow

the same

trajectory)

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

Figure 2

CAGE distance framework chart between the U.S. and Japan at the industry level (video games)

Cultural

Administrative

Geographic

Economic

▪ Video games are

considered to have

“high linguistic

content”, where

differences are

most prominent

▪ English to Japanese

localization is a

tough process (uses

different scripts,

indirect

translations are

frequent)

▪ Some video game

series are heavily

associated with

each country (i.e.,

JRPG has specific

connotation

compared to RPG)

▪ Mobile gaming

constitutes a bigger

proportion of

Japanese gamers

due to space

constraints and

constant mobility

▪ United States

gaming attitudes;

perception that

more men play

games than woman

(the ratio is roughly

55/45)

▪ In the Japanese

mobile gaming

space, the inverse is

true (55% of mobile

users are female)

▪ JRPGs, action-

adventure are more

popular in Japan,

whereas shooters

▪ U.S. and Japan use

different ratings

boards to assess the

content of games:

the ESRB for the

U.S. and the CERO

for Japan

▪ While both are

non-profits, the

ESRB is a self-

regulatory board

with more

independence

▪ If a game receives

an M-rating in the

U.S., you must

legally be 17 years

old to purchase and

show ID. In Japan,

it is similar for

CERO Z ratings

(but for 18 years of

age)

▪ Acquisition culture

is different

▪ Keiretsu is a

common form of

business

partnership that

links companies

together through

network effects

• Geographic

clusters of game

development

are more varied

in the U.S.

• Most game

development is

heavily

centralized in

Tokyo

(Nintendo is

rare exception

based in Kyoto)

• Many Japanese

gaming

companies have

American

subsidiaries

rather than the

other way

around

• Game

development is

more global

(i.e.,

outsourcing

parts of projects

to different

countries)

• COVID-19

pushed game

development

more virtually;

• During the

localization

process, distinct

time zones and

physical

distance require

very specific

timeframes for

communication

• Proximity to

• U.S. game

industry valued

at $40.5 billion,

Japanese game

industry valued

at $22.1 billion

(2022)

• They are the 2

and 3

largest

gaming markets

behind China

• Japan’s economy

is more

intertwined

with

entertainment;

major part of the

“Cool Japan”

initiative

• Nintendo and

Sony are

Japanese

competitors in

the console

hardware sector,

whereas

Microsoft is the

sole console

manufacturer in

the U.S.

• Japan once

dominated the

video game

industry (50%)

but it has fallen

under 10% with

the U.S. and

China

overtaking its

position

(Buchholz, 2021)

• Japanese labor

costs are rising

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

and sports are more

popular in the U.S.

China is an

important

consideration

in the gaming

industry with

China becoming

a star player;

economically

closer to Japan

(Phillips, 2022)

Figure 3

Hofstede’s cultural dimensions comparison between the U.S. and Japan

https://www.hofstede-insights.com/country-comparison/japan,the-usa/

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

Appendices

Appendix A. Interview Questions and Answers with Dr. Serkan Toto

Could you provide a temperature check on Xbox’s performance in Japan?

The best way to describe it is a struggle. Microsoft never really took off despite trying for

decades, but everything else works well for Japan. For Microsoft overall, Japan is one of the

biggest markets. It is one of the biggest economies in the world, there’s a lot of people here as

the 11

most populous country. So, Microsoft does make a lot of money in Japan, except the

Xbox.

So, the Xbox is very much an exception to the rule compared to their other products and

services?

Yes.

Got it. When I did some research initially, I know that the Xbox didn’t have the greatest start in

Japan. They were trying to find ways to adopt the Xbox 360 (in Japan) after the original Xbox

went out with a whimper even though they considered it an essential gaming market. They tried

to make adjustments, such as making it slimmer and making it more adaptable to the house. It’s

very interesting now that a lot of the PR from Microsoft executives claims that Japan is the

fastest growing market for [them] and it’s interesting how they’ve persisted and viewed it as an

important market despite [the Xbox] not flourishing as much as it did before.

There’s a couple of points about that. First, Microsoft has the money to do so. If it was an

American company, they would have stopped fifteen years ago. But Microsoft is such a

profitable company that they’re able to pump money into the Xbox brand in Japan. They’re

losing so much money every single week, every single day, every single month, so Microsoft can

stomach the loss from a financial perspective. I think the second point is that one of the big

reasons Microsoft is still doing that is because as you alluded to, Japan is still a major force in

gaming, and they want to have a certain presence in Japan. It reminds me back in 1999 when I

did an internship at General Motors (GM) in Japan. It’s another giant corporation that is quite

successful in its home market in the U.S. when it was unbelievably profitable, whereas they had

almost no presence in Japan. And they told me that the reason they were in Japan was for the

representation: they were the biggest car company in the world, and they couldn’t not be there.

Microsoft wants to represent, they want to show that the Xbox brand exists, and even though

they are not making any money with it they still have business in Japan. And there’s also a

certain level of corporate pride and the branding that comes with it.

If you had to list out two or three key differences between the U.S. and Japanese gaming

industries that someone should be aware of, what would they be?

One of them is on the supply side because of the much bigger competition in Japan. In Japan,

there are 10-15 publicly traded video game companies, and about six or seven of them are really

big. These are large-scale companies that have a billion-dollar valuation at least such as Konami,

Square Enix, Sony, and Nintendo. You don’t have that in the U.S., and in terms of video games

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

(not mobile games or PC games), there is a much richer ecosystem on the supply side with

smaller and mid-sized video game companies that are not publicly traded, as well as big publicly

traded companies on top of the pyramid.

On the demand side, I would say the biggest difference is one of taste in games and design and

genres. In Japan, the number one genre is RPG, and in the U.S., it is first-person shooters and

sports games. It’s not like people don’t play these games in Japan, but they play a much smaller

role in the gaming company compared to the U.S.

That was one of the stereotypes I had about gaming preferences as well. It was entrenched in my

mind that RPGs tended to be more popular in Japan compared to the U.S. and FPS and sports

were bigger in the U.S., especially when I look at the NPD numbers and see Call of Duty,

Madden reliably in the Top 5. In Japan, you usually see Nintendo games dominating the charts,

with the exception of a popular series like Dragon Quest or another prominent RPG.

It also changes all the time. As we speak right now, Nintendo controls 80-85% of the Japanese

video game market because the Switch is such a big platform here. The conversation would be

different five years ago when the PS4 was big and the Wii U never really sold. American users

play Japanese games, but Japanese users don’t play American games.

Much of the coverage I’ve seen about Microsoft trying to break into Japan was the need to tailor

their selection more to the Japanese. Xbox is selling better with Series X/S than the Xbox One.

Are consumer needs moving towards Xbox games, or is Microsoft better adapting to the

Japanese market?

I think it’s a little bit of both. If you look at the first Xbox, Microsoft didn’t do a lot of original

Japanese games, and it completely flopped. Bill Gates was over in Japan presenting the console

while he was still working actively for them. With the Xbox 360, Microsoft had localized games

made in Japan only for Xbox. Some of them are collector’s items now, and that didn’t work.

They soured on the Japanese market, and when the Xbox One came around there weren’t a lot of

games made in Japan for that platform anymore. And now with the newest Xbox, Game Pass is

the biggest seller. And I think the big driver for Xbox Series sales is that subscription service.

It’s not that Microsoft did a lot of “Made in Japan” games like the Xbox 360 times. They don’t

secure a lot of Japan-only games for themselves either; it’s really driven by Game Pass.

And the second point is that you can’t really buy the PS5 in Japan. The Xbox supply situation is

not great in Japan, but it’s much better than the PS5 situation. So, if you want to play next-

generation games now, financially and time-wise, you probably have to buy an Xbox Series X

and that is helping Microsoft this generation.

That’s absolutely true. It’s also the same case in the U.S., where it’s still difficult to find a PS5 or

Xbox Series X. You can’t walk into a store and find it; you have to order it ahead of time to

purchase one. I have seen Xbox Series S on the shelves whenever I go to Best Buy or Target, but

I cannot find PS5 or Xbox Series X.

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

In Japan, you will sometimes see the Xbox Series X, but you will never find the PS5. I am in the

retail stores all the time as part of my job, or “channel checks” that I do for my clients, and I still

haven’t seen one.

There’s been a lot of speculation about the possibility of Microsoft trying to acquire a Japanese

gaming company. First, do you think this is a real possibility for Microsoft given that Japanese

business law and culture poses different challenges to the U.S. Second, why do you think

Microsoft hasn’t taken a similar approach to Sony in going after specific Japanese titles?

Sony has a homefield advantage. Even though they’ve closed down development and

deemphasized Japan as a target for their consoles. They’re also allocating more hardware away

from Japan, they’re still a Japanese company. The Japnaese economy is much more closed than

the American economy and reflects a different business culture. There’s peace of mind with a

Japanese gaming company talking to another Japanese gaming company rather than Microsoft,

for example. Another point is because of Microsoft’s poor performance in Japan, that really

hasn’t instilled a lot of confidence in the local game makers that their games will be taken care of

properly in terms of marketing and customer support. In addition to homefield advantage, Sony’s

hardware is selling better overall.

Microsoft can do the same thing as Sony and sometimes go out to buy individual games for

timed exclusivity, but it is a different approach. The biggest reason for the different approach is

that Sony doesn’t have the capital that Microsoft has. They cannot go and buy Activision

Blizzard because it would have been half of their market capitalization, unless they pulled an

unbelievable financial stunt. You’re looking at two totally different companies in terms of size,

capital, power, and clout. Sony has to be more creative, and you can see that in their strategy.

With Nintendo and Sony being Japanese companies, that certainly is a factor when you consider

that Microsoft is the only non-Japnaese company of the three competing in Japan. Even though it

plays a role, do you feel that when someone says that Microsoft isn’t doing well in Japan

because there’s immediate preferences towards Nintendo and Sony that it’s overblown, or is

there a more complicated mix of factors?

I think it doesn’t really play such a big role in this game. If you look at Apple, the iPhone is

unbelievably popular in Japan even though there are homegrown companies like Sony and

Panasonic that have their own handsets. The iPhone was accepted, and Apple became an

unbelievably popular brand. I think the American factor doesn’t play a role, but I think the real

problem for Microsoft was something we haven’t mentioned yet. When Microsoft launched the

Xbox in Japan, the initial batch of Xbox deliveries were really faulty in terms of hardware

quality with the “red ring of death” not only in Japan, but America and everywhere where the

Xbox was sold. Because Japan is a country focused on perfection, service, and the expectation

that everything works, it scarred Microsoft for life. That initial failure meant that some Japanese

customers never looked back, and they just bought a Playstation or Nintendo device as their next

console, which was bad branding and PR for Microsoft. But Microsoft being an American

company and having a strategic disadvantage probably isn’t the case.

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

We’ve talked about Game Pass being an attractive option for the Japanese market as a more

affordable option and letting users access a larger catalog of games. Another initiative is xCloud

that is still testing the waters, but offers the opportunity to play games on a mobile device or

screen. Do you feel that because mobile gaming is such a dominant force in Japan that xCloud

could benefit from it in the future?

It makes sense on paper, but it’s a little bit conceptualized. It sounds so good on paper that

maybe it has to be true, but as you noted it’s not a big deal outside of Japan. There are some

deals with carriers in Japan to bring xCloud to people’s devices, but it seems like a non-factor

right now. The big point is really about Game Pass. To also add this point, don’t forget that the

average game cost in Japan is higher than the U.S. So, if you want to buy the latest Xbox or

PlayStation game, you pay more than the U.S. There’s less discounts and less ways to save

money. In light of that pricing policy, the Game Pass offerings look even better in Japan than the

U.S. or Europe, where you can get certain games two months after release for $30 instead of $60.

Of course, in Japan, there are discounts, but they don’t have the discount culture as seen in the

U.S. And again, that makes the Game Pass offering even more attractive to Japanese users than

people in other territories.

In terms of the yen (Japanese currency), how much is the average game cost?

8,000 yen. It depends on the store, the game, and the platform, but it is not unheard of.

Do you see a future where Microsoft could rival Sony in terms of market share, and what do you

think is Xbox’s ideal positioning in the Japnaese market?

Their ideal position in the Japnaese market is that they’re killing Sony and turning the tides, but I

think that’s going to be difficult. What Microsoft really needs in Japan is an Activision Blizzard

type of deal. They need a big solution. Making Game Pass a little more attractive, purchasing

SEGA games to put them into Game Pass, agreeing to put a game like Final Fantasy XVI on

Game Pass… these are small steps that help, but if they really want to make a big step ahead in

the Japanese market, they have to pull out their camera. You cannot make baby steps anymore

because Sony’s too big for that, Nintendo’s way too big for that. To create meaningful business

in Japan, they need a big solution.

Are there any final remarks that you wanted to add that weren’t covered by the questions?

I don’t think so. The one thing I really wanted to focus on earlier was the initial disappointment

from the Japanese user base from the Xbox’s hardware quality. I guess one more thing to note is

that the Japanese has a religious, fanatical obsession with quality. You can make American users

mad when you deliver low quality products and things get broken, but in Japan it is on a

completely different level. When you disappoint the Japanese consumer, it’s almost impossible

to get them back. This is one of the factors that’s not being discussed a lot when talking about the

failing performance of Microsoft in Japan. The first impression of the Xbox in Japan was so

negative that Microsoft basically never recovered.

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

Appendix B. Interview Questions and Answers with Mr. Nathan Brown

Could you give a temperature check on Xbox's performance in Japan (past and present)?

The only Microsoft console to make anything you could reasonably call headway in Japan was

Xbox 360, with sales of 1.6 million, which can largely be attributed to the extra focus Microsoft

put on Japanese studios during that generation — four of the top five selling Xbox games in

Japan were Xbox 360 exclusives (see above link). But across Xbox’s 20 years of existence less

than one third of one percent of console sales have been in Japan. Phil Spencer has promised to

do better in the Xbox Series era, and there’s already progress of sorts: Series S and X have

already outsold Xbox One. But that’s a low bar to clear indeed. I think Game Pass alone should

see Xbox enjoy a certain level of success this generation, but only in the context of itself. I

highly doubt Nintendo or Sony are losing much sleep about being overtaken in their home

market.

What are the key differences between the U.S. and Japanese gaming industries?

Speaking in extremely broad terms, as a rule the Western game industry dreams a little bigger,

and thinks more globally. Western companies spend more on development on the assumption

that their games will find a big global audience and make a lot of money. Japan, by and large,

tends to have fewer resources to play with, and tends to think of its native audience before a

global one. (Japan’s industry tried to reverse this in the 360 era, but it didn’t really work: there’s

some good stuff on this here). Western developers tend towards realism, and Japanese to fantasy.

And while western gamers prioritise PC and console, in Japan mobile is equally, if not more,

precious. This isn’t just about phones: PSP was huge in Japan, largely thanks to Monster Hunter,

and I’d venture that Japan’s love of portable play isn’t only key to Switch’s success in Japan, but

was a driving factor in its original design.

Do you think Microsoft competing against Nintendo and Sony as the only non-Japanese

company plays a role in their weaker performance?

Honestly, I don’t know for sure. It’s a popular theory but I don’t think Xbox’s hitherto struggles

can be blamed on patriotism, or nativism, or whatever you want to call it. Instead, I think it’s

simply a reflection of Microsoft’s failure to offer a value proposition that appeals enough to

Japanese players to enable it to break through. Sure, it signed up a few exclusives in the Xbox

360 era, and that worked reasonably well. But let me put it this way: would you choose an Xbox

console to play four Japan-made exclusives, if doing so meant losing access to the dozens of

Japan-made exclusives on PlayStation? It’s only ever going to be additive, I think, the thing the

committed, and monied, core gamer buys when they’ve bought everything else.

Microsoft’s Xbox strategy centers around acquisitions (Bethesda, Activision). There’s a lot of

speculation about them trying to bring a Japanese gaming company under their roof. Is this a

real possibility given Japan's corporate governance, and is it a necessity?

I think the article I wrote about this speaks for itself, though one thing I’d add that I perhaps

didn’t focus on enough in the piece was that if Microsoft really, really wants something to

XBOX’S COMPETITIVE ADVANTAGE IN JAPAN

happen, then it can make it happen. As we’ve seen from the Activision deal, it will quite happily

pay through the nose for a company mired in scandal. It is willingly submitting itself to an

antitrust investigation and a number of misconduct lawsuits because it believes having Activision

in its stable will improve its gaming business. So yes, there are a lot of barriers to overseas

companies buying Japanese ones. But when you have access to infinite money, there are few

barriers that can’t be scaled.

I certainly wouldn’t say that a Japanese acquisition is a necessity for Microsoft. In fact I think it

could be counterproductive in a way. There is already unrest at the flurry of consolidation going

on around the game industry, but gamer’s darlings have, so far, been largely left alone.

Microsoft’s acquisitions to date have been almost entirely focused on the west (the exception

being Tango Gameworks, which it got as part of the Bethesda deal). If it starts picking up

Japanese companies and taking their games off PlayStation/Switch there will be uproar, and I’m

not sure that necessarily translates into sales. It just means a chunk of players don’t get to play

games that they would otherwise have bought. If you’re on, say, iPhone, and some new game

launches exclusively for Android, you don’t just go and get a new phone, right? Players who are

comfortable in the PlayStation or Switch ecosystem aren’t going to drop them because a game

they want is now only on Xbox. My fear, if I were Microsoft, would be that buying a Japanese

studio wouldn’t lead to that many new console sales or Game Pass subscriptions, and that it

would just mean games selling less because they’re less widely available, and western fans of

Japanese games having a stick with which to beat Spencer and Xbox.

Xbox’s flagship initiative Game Pass is an attractive option for its cheaper price tag and access

to games. Is this the key for Microsoft to make more headway in Japan?

I don’t have much insight into how popular subscription services are in Japan. I can certainly see

it bringing success on PC, though, and mobile. There were rumors going around a couple of

years ago that Microsoft was trying to get Game Pass on Switch; something like that would

surely do very well. And since Microsoft’s long-term plan is untethering Game Pass from

dedicated hardware — be that through an HDMI streaming stick of some kind, a native smart TV

app, or similar — then yes, I can see that penetrating the market in a way that Microsoft’s

consoles have not.

What do you believe is Xbox’s ideal positioning in the market?

As I said above, I think it’s more about Game Pass on non-dedicated hardware — PCs, phones

and tablets, and down the line TVs — than it is about signing exclusive games or buying

Japanese companies. I think Microsoft has long since realised that it will always be in third place

in Japan, and has pretty much made its peace with the fact. Unless it acquires PlayStation or

Nintendo, of course, but honestly I’d rather not think about that. The sky would fall in.