Capcom is targeting growth in content for connected consoles.

APRIL 19, 2013 • Changing consumer preferences in favor of mobile and online game platforms has led Capcom Co., Ltd. to announce a serious restructuring of its product plans. Capcom reviewed its business expansion strategy and restructured its game development organization to account for what it characterized as its own delayed response to the shift to digital media delivery being seen throughout the video game industry. Furthermore, the company admitted a decline in quality in the titles produced by development teams outsourced to overseas developers. Capcom concluded that as a result of the drastic changes in the industry’s market environment, its traditional retail business was seeing a concentration of successful AAA titles in the hands of few foreign competitors. To respond to these changes, Capcom has committed to boosting internal R&D so that the company can produce more digitally deliverable content, develop that content in Japan to maximize quality, and curtail projects in progress outside Japan. Terminating development of titles that do not further the Capcom’s new focus on digital content, and the discontinuation of development of unnamed titles outsourced overseas that are now suspect under the new business strategy, will result in a special a non-consolidated loss of  ¥7.3 billion ($73 million) to cover business restructuring expenses.

Impact: What Capcom has realized is that pumping out retail releases of major franchises is not a ticket to guaranteed success. Back in 2010 the company came to the conclusion that it had to employ overseas development if it wanted to release its franchise titles on an annual basis. If the industry had remained static, then this may not have been a bad idea. However, the last three years has seen a tremendous amount of disruption as smartphones, tablets and free-to-play options have resonated with consumers. Capcom is not doing too poorly, management just sees the writing on the wall. Resident Evil 6 was supposed to be their big hit last year, and was, yet the game could not meet original forecasts for the last fiscal year of 7 million units sold – the latest estimate is 4.9 million units. That’s still a respectable number yet declining sales at retail is what Capcom is facing like everyone else. Offsetting its video game revenue decline was an upswing in sales from the Resident Evil 5 Pachinko business, along with favorable foreign exchange gains, both of which led to Capcom realizing ¥500 million ($5 million) more in revenue than it had expected for the last fiscal year. We see Capcom’s change in focus as a healthy move, as well as a necessary adjustment. Better now when the money is still good, than later when doing business the old fashioned way could see revenue decline precipitously. The problem lies in the much leaner revenue equation that comes with mobile games. Capcom is obvious focused on creating content for connected consoles, but consumer expectations of what they want to pay via the PlayStation Network or Xbox Live are also less per title than retail. Capcom is right, a lot has to change in game design to make this new focus, and we will watch intently to see how the company meets that challenge.