What is happening at Konami?
After years of decline, one of Japan's publishing legends is poised to exit the console market
Bad news, like delayed buses, comes in threes. For Konami, it started with the swirling rumours of the departure of the firm's renowned auteur, Hideo Kojima, who will, it seems, part ways with the publisher after the launch of Metal Gear Solid V. Then we discovered that the contracts binding director Guillermo del Toro and actor Norman Reedus to the firm's ambitious return to Silent Hill (which del Toro was to work on alongside Kojima) had been allowed to lapse, and the project seemingly quietly killed off. Finally, the company dropped its listing on the New York Stock Exchange - a technical manoeuvre endowed with great symbolic meaning by the events surrounding Kojima, MGS and Silent Hills.
What on earth is going on? Konami is one of the pillars of the Japanese console games business, or so you'd think. Founded at the tail end of the 1960s as a jukebox company, it established its fame in the 80s as one of the world's top arcade game companies, and with the launch of the NES in 1985, became one of the most prolific and successful third-party developers for Nintendo's console. It's been a mainstay of the third-party publishing world ever since, with franchises like Metal Gear Solid, Silent Hill and Pro Evolution Soccer / Winning Eleven demonstrating a keen ability to succeed in both Japan and overseas - something which has frequently eluded Japan's top companies. Its headquarters occupies a gleaming tower in one of Japan's most upmarket developments, Tokyo Midtown; there's a shop in the basement stacked with game merchandise which is a regular pit-stop for game fans on a pilgrimage to Tokyo.
"How does a company like that end up ditching its NYSE listing, its most famous developer and the eagerly awaited revival of one of its most-loved game franchises, all in the space of a month?"
How does a company like that end up ditching its New York Stock Exchange listing, its most famous developer and the eagerly awaited revival of one of its most-loved game franchises, all in the space of a month? The short answer is simple; this is what happens when a console publisher no longer finds the console game business to be worth its time and investment. After thirty years in the console business (Konami started publishing on the NES in 1985), the negative news around Konami this month is a consequence of it lurching out of the industry that made its name - and knocking over a few flowerpots on the way out.
Before going into that, though, let's deal with the one piece of Konami news that's not (directly) related to the ongoing transition in the company's business - the NYSE delisting. Although the removal of Konami's stock from the exchange seems like big news, it's actually a relatively small technical change. Konami's primary listing, unsurprisingly, is on the Tokyo Stock Exchange; up until now, it has also maintained listings in London and New York. In the past year, over 97 per cent of trades in Konami's shares happened in Tokyo. A further 2 per cent were in London. Only 0.3 per cent were in New York. It costs money to maintain a listing on the NYSE; it makes no sense to spend that money in order to support such an insignificant volume of trades. Konami's shares remain traded in Tokyo and London, so it's not remotely the case that the NYSE delisting represents some kind of attempt to take the company private or shelter it from the fallout from recent negative news.
Ignoring the NYSE story, then, let's look at what else has come up - the departure of Kojima and the end of the Silent Hills project. On the surface, this looks like a very sudden change in Konami's policy. It's not. In truth, Konami has been slowly reducing its focus on console development for at least five years. Have a look at this table, drawn from Konami's publicly announced financial results since FY2010.
What you're seeing here is the percentage share that each of Konami's business units contribute to its revenues. The green bar in the middle is Konami's fitness club business in Japan - an extensive network of gyms, fitness clubs and sports venues which now consistently account for somewhere around 35 per cent of the company's revenues. The red and orange bars up top are "Gaming & Systems" (which actually means slot machines and casino systems, not videogames) and Pachinko, the "gambling-but-not-really-gambling-honest" game of choice for Japanese chain-smokers with a keen desire to end up owing money to the wrong people. It would be reasonable to combine those two into one category (Konami does not, because that would be a little too honest regarding the gambling nature of pachinko - gambling is illegal in Japan), which gives you a single category that's growing steadily and now represents over 20 per cent of the firm's revenue.
That leaves "Digital Entertainment" - the big blue chunk at the bottom. In FY2014, for the first time, this accounted for less than half of Konami's revenue. In the first 9 months of the current financial year (FY2015), it contributed 43.6 per cent of revenue. It's been steadily declining for a long time; as recently as 2009, over 60 per cent of Konami's revenue came from Digital Entertainment.
Still, 43 per cent is the largest segment of Konami's business; even if it's in decline, Konami remains primarily a videogame company, right? That's correct in essence - but it ignores the fact that what constitutes that big blue chunk of the graph has changed massively over the years. "Digital Entertainment" is a big jumble of all of Konami's videogame businesses; console games, yes, but also arcade games, mobile games, social games and so on. Reading Konami's financial reports since 2010, it's clear that the mobile and social gaming space has been growing steadily year on year. The most recent set of financials from the company note the success of games like Professional Baseball Dream Nine, Dragon Collection and CROWS X WORST - all of them mobile games whose success is confined to the Japanese market - and a handful of overseas mobile titles like PES Manager and Star Wars: Force Collection.
"even while Konami's mobile and social games continue to be successful, its revenues from Digital Entertainment overall have continued to decline"
Yet even while Konami's mobile and social games continue to be successful (as is the Yu-Gi-Oh! card game, which is also contained within the Digital Entertainment segment), its revenues from Digital Entertainment overall have continued to decline - both in absolute Yen terms, and in terms of their percentage contribution to the company's revenues. A decline in arcade game sales is undoubtedly partially to blame for this; but there's no doubt that Konami's console game revenues are also declining, with the slump in console software being steep enough that even good performance on mobile can't make up for it.
That drop in console software sales starts to make sense when you look at Konami's release schedule - which looks desperately anaemic. You may not have noticed this, but Konami barely publishes any console games any more. Looking at its overseas release schedules, in 2012, Konami published around half a dozen console titles - including HD remakes of its Silent Hill and Zone of the Enders franchise titles, but also a new Silent Hill title, a new Pro Evolution Soccer title and new overseas-developed games from the UK's Rebellion (Neverdead) and Russia's Gaijin Entertainment (Birds of Steel, Blades of Time). In 2013, it published two games; Metal Gear Rising: Revengeance and Pro Evolution Soccer 2014. In 2014, too, it published only two games (another PES and Castlevania: Lords of Shadow) and a demo of MGSV. Even adding Japan-only releases doesn't change the picture much; a baseball game or two each year, and that's it. In 2015, thus far, it has published nothing anywhere in the world. On the new generation of consoles, thus far, Konami's only full game release is Pro Evolution Soccer 2015.
It's pretty obvious from looking at the company's financials and its release schedule that neither Konami's head nor its heart is in console games any more. The firm's strongest growth area is in gambling machines and casino software; its most consistent revenue comes from fitness clubs; its best performing titles in the digital entertainment division are on mobile phones. In this light, a giant AAA console game like Metal Gear Solid V (or the late lamented Silent Hills) no longer looks like a pillar holding up the company, but rather like a peculiar hangover from a former era of Konami. It's no wonder Kojima no longer sees his future at Konami; this is no longer the company it was when he formed his studio, Kojima Productions, within its walls.
"Konami's management undoubtedly know the value of their own IP and franchises; the exit they seem to be orchestrating from console development doesn't mean those franchises will be buried"
Konami does still own some of the best IP in the business; Metal Gear Solid, Silent Hill and Castlevania are all great franchises, and some of its older arcade games are among the most recognisable icons of gaming. It's also got a couple of sports franchises which tie in closely with its other businesses (Pro Evolution Soccer and Power Pro Baseball, both of which have closely associated mobile and social titles) and whose perennial success makes them likely to continue in some form even as the firm bows out of the rest of the console business. Konami's management undoubtedly know the value of their own IP and franchises; the exit they seem to be orchestrating from console development doesn't mean those franchises will be buried. It's likely, though, that the company will seek to license out the franchises to other publishers, trying to extract the most revenue possible from them without actually getting involved in the messy, uncertain and bloody expensive business of AAA development and publishing by themselves.
Some of this, I should note in closing, is speculation; Konami has by no means announced or confirmed an intention to pull out of console publishing. Yet it seems unimaginable that a company like this would permit its console publishing revenues to decline so far and its release schedule to contract so much (I reiterate, only one full title on Xbox One and PS4 to date) simply by mistake. The downscaling of Konami's console business is deliberate and planned; whether the company retains the sports-game aspect of the business or not, it's clear that the curtains are being closed on its role as a key AAA console publisher.
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