These people are waiting to
buy the Xbox One console. Fans line up around the world
for the newest gaming consoles and products. But there's one place that's
never seen a reaction like this for Xbox. Japan. In the early 2000s, when
Microsoft launched the Xbox, Japan was the gaming juggernaut
of the world. Japan was home to three big console
makers — Nintendo, Sega and Sony. And Japanese game developers were
considered the best and most revolutionary on the planet. Around the time of the launch
of the Xbox, Japanese game developers were the most important
in the world. The success of any new game
platform depended in large measure on whether or not you can get
the best Japanese game developers and their titles, more importantly,
on your platform. So when Microsoft launched the Xbox
in 2001, the gaming world was suspicious of an American console made
by a company known for its software, not its hardware. They were kind of perceived as the
bad guy coming into the Japanese market, kind of invading the homeland
and competing with Sony and Nintendo. All three launches of the
Xbox were a total failure in Japan. But at the same time, since
its debut in 2001, the Xbox has become one of the
biggest consoles globally. The release of the Xbox One in
2013 was a huge success for Microsoft. For the three years following its
release, the Xbox One was the world's second-most popular gaming
console of its generation. The Xbox One has sold almost 46.9 million units worldwide through the second
quarter of 2019, but only a tiny fraction of global
sales — just 0.3 percent — have been in Japan. So why has the Xbox never caught
on in Japan, despite its worldwide acclaim elsewhere? When Microsoft
started developing the Xbox in 1999, it wasn't
known as a gaming company. Its reputation was all about PCs,
its office products and a big antitrust lawsuit. Microsoft had a PC
gaming business in the late 90s known for Microsoft Flight Simulator
and Age of Empires. Developing the Xbox was all part
of Microsoft's plan to bring its technology into consumers' homes. Sony was the leader in the
consumer electronics market in the early 2000s. Its PlayStation 2 was considered
a threat to Microsoft for its potential to replace PCs as a way
to get Internet access at home. Bill Gates's motivation was
more about maintaining Microsoft's dominance and position and
ecosystem of software. Bill really got it because games
are software that is entertainment that can stand right
alongside a movie. Denise Chaudhari, a designer who
worked on the original Xbox, remembers that Microsoft got into gaming
as a challenge to Sony. Bill Gates wanted to get Microsoft
technology into Sony consoles, so he went to Japan
and suggested a partnership. Microsoft, Bill Gates specifically, saw
an opportunity to take something that was established that
Sony was already doing the PlayStation and sort of integrate
technology and software that Microsoft was the master of, which
was home computing and kind of bring that together. Sony
was not interested. Sony was basically like,
thanks, but no thanks. And Bill Gates said, okay,
then I'll do it myself. Video game journalist Dean Takahashi
thinks companies were wary of working with Microsoft because
of its antitrust lawsuits. There were already antitrust cases happening against Microsoft and everybody knew
that if you sort of let them in the door, it was
kind of like a Trojan horse. You might lose control of your
business the way say the P.C. makers like IBM had lost
control of the business. This wasn't the first time Microsoft would
hear a no from a Japanese company on the Xbox. Chaudhari says Mitsumi, the company
that made circuit boards for Sony's PlayStation controllers at the time,
refused to make a circuit board for Microsoft. Mitsumi could have jeopardized its
relationship with Sony by giving Microsoft the same technology. Mitsumi didn't respond to
CNBC's requests for comment. So Chaudhari had to use a
larger circuit board for the Xbox controller. Microsoft moved quickly
to launch the Xbox. The consoles hit shelves
in the U.S. in November 2001 and in Japan
in February 2002, later than expected. Microsoft has released three consoles in
the Xbox series, the Xbox, the Xbox 360 and the Xbox One. While all three console releases failed in
Japan, the Xbox was a huge hit elsewhere in the world. Microsoft eventually secured
the coveted No. 1 spot in the global market from
2011 to 2012 with the Xbox 360. Nobody expected we were going to be
a hit product in Japan and we understood what the playing field was like
and we were just trying to not embarrass ourselves. Sega, Nintendo and Sony dominated the
video game market in Japan when Microsoft came onto the scene. Before the Xbox launched, Sony
and Nintendo devices accounted for basically 100 percent of the global
video game market and not much has changed since then. As of 2019, sales of the Xbox don't
even begin to rival that of the PlayStation 4 or Nintendo Switch. There are three main reasons the
Xbox console didn't sell well in Japan. Today, game developers are from
all over the world. But in the early 2000s, most of
the best developers were Japanese and at the time the Xbox launched,
Japanese game creators were hesitant to put their content on a
console that wasn't popular in Japan. Japanese gamers and developers favorite
role playing games over the shooter style games that were
more common in the U.S. In order to convince gamers to
switch to Xbox, Microsoft needed big name Japanese developers to defect
from Sony and Nintendo. And developers saw pros and
cons in defecting to Microsoft. The graphics power of the Xbox
and its ability to create realistic games exceeded other consoles
at the time. We're pretty successful convincing them that Xbox represented a
platform would enable them to do new and interesting things and
most importantly, would enable them to sell those games
to a Western audience. But for many developers, the
disadvantages outweighed any potential upside. Some game creators like the
XBox's hard drive, which was faster than the PlayStation CD-ROM. But they worry the high cost
of Microsoft's technology would drive consumers away. And then
there was loyalty. It was really difficult to convince
a developer who'd already had a relationship with Sony and Nintendo to
take a gamble on Microsoft's unproven Xbox. The second problem is that the
Xbox was just too big. It was huge and
Japanese homes were small. That was sort of one of the
first things that made the Japanese people wonder, does this company
know what it's doing? The controller was another problem. PlayStation used a folded circuit board
made by Mitsumi in its controller. It was a single circuit board
cut in half and stacked so that it was smaller than
a typical circuit board. Microsoft's team asked Mitsumi
for the same circuit. And Mitsumi simply said, no,
they would not budge. They would not give us
the same circuit board. Since Microsoft couldn't get the folded
circuits from Mitsumi, it had to make do with large circuit
boards, meaning the controller was bulky. That controller never actually launched
in Japan, so we can't know how Japanese consumers would
have reacted to it. The Xbox team instead expedited
production on a smaller controller called the controller S for
the Japanese launch, Chaudhari says. Even Microsoft's own team in Japan
refused to endorse the Xbox because of its bulky design. Finally, timing was also
a problem for Microsoft. The company delayed its Japan launch
to February 2002. That meant that the console and game
developers missed the crucial holiday period in Japan when kids got
money from family members to celebrate the New Year. The Xbox 360
was Microsoft's most successful console with Japanese consumers. So what made it less
of a flop in Japan? With the Xbox 360 Microsoft tried to
address a few problems it had with the Xbox. First, Microsoft planned
to launch the console ahead of the holiday season and before
Sony launched its competitor, the PlayStation 3. Microsoft also worked with
a Japanese design firm on the new console and collaborated with
Japanese creators to make games for the Xbox. But that didn't make
a dent in PlayStation's hold on Japan. Sales in Japan of the
PlayStation 3, which launched in 2006, vastly outnumbered sales of the Xbox
360, which launched one year earlier. Microsoft's next console, the Xbox
One, also had a strong start when it was released in 2013. Microsoft sold more than 2 million
of the Xbox One consoles globally in 18 days, breaking a
record for the company. But in Japan, the Xbox One
saw yet another lackluster response. Of the 46.9 million Xbox Ones
sold worldwide through the second quarter of 2019, less than half of
a percent of them have been in Japan. For comparison, PlayStation
4 has sold 99.8 million units globally through
Q2 2019, with 8.6% of them in Japan. In a
statement to CNBC, Microsoft said Japan remains an important part of our
global gaming community and a major contributor to Microsoft's
future plans. We're committed to bringing innovative
and homegrown content from Japan's leading game creators
to a global audience. But Microsoft's inability to appeal to
Japanese consumers may be the least of its problems right now. Global sales of the Xbox One have
been lackluster as users shift more to mobile and streaming games. Analysts say it's a problem
impacting all console makers. In Microsoft's earnings release for
the quarter ended June 30th, 2019, the company said Xbox
hardware revenue declined 48 percent, primarily due to a decrease
in volume of consoles sold. Experts say Microsoft is adapting to
a video game future that's not dependent on hardware sales by
selling subscriptions to game libraries. Why is the Xbox 360 doing
so well or why's or other people's things doing well? It's that software capability and that's a
bet that we made at the beginning of the company. In
fiscal year 2018, gaming revenue increased 14 percent compared to fiscal
year 2017, driven by Xbox software and services growth. Microsoft noted that Xbox
hardware revenue was lower. Microsoft's 2018 annual report shows
its shift away from hardware dependency. The surge in popularity
of streaming gaming has fundamentally changed Microsoft's relationships
with one of its longtime rivals. Microsoft and Sony made a
surprising announcement in May 2019. They're working together to develop
game streaming technology using Microsoft's cloud. Cloud gaming allows players to use
any device with an Internet connection to play games. And Microsoft has made several big
moves in the space, including plans for a new cloud streaming
service called Project xCloud that would allow users to stream their
entire Xbox One libraries to mobile devices. The partnership comes as giants
like Google are getting into gaming by developing its
own cloud gaming service. That represents a seismic
shift in video games. With faster Internet speeds, games can
be played without a console on a cell phone or a computer. Cloud gaming is projected to be less
than 2 percent of the forecast total games market by 2023. But Japan is poised to
be a leader there. In 2018, Japanese consumers accounted for
about 46 percent of the $387 million consumers spent
on cloud gaming worldwide. Microsoft knew Japan was going to
be its most challenging market, but Blackley says sales figures aren't the
only way to measure the market in the long run. Microsoft didn't
need Japanese consumers to make billions of dollars. When the console launched, it was
crucial for Microsoft to get Japanese game developers on board. But Japanese consumers were
less of a priority. The issue with Japan was never
the amount of revenue that it represented. The issue was the amount
of revenue that the games from Japanese developers represented. Blackley says the Xbox changed
the philosophy on game development. One of the things about game consoles
prior to Xbox was that the hardware is arcane. Xbox
had a different philosophy. I really had the idea that the
biggest market can be addressed and can be captured by Microsoft
through democratizing game development, through making the tools of
game development widely available and easier.
