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Video-game firms expect shake-up as costs increase

A merger between Square Co and Enix Corp, two of Japan's largest video-game makers, may accelerate consolidation in the US$20 billion industry as rivals join forces to make games for Sony Corp and Microsoft Corp.

As game-development costs surge, companies that can't afford to hire designers for more sophisticated game consoles may follow next year's planned merger, according to game-makers and analysts.

"Consolidation in the industry is a fact and it's going to progress," Hideki Sato, president of Japanese game developer Sega Corp, said in an interview this month. "The time has passed when five or six game designers can get together in a room and make games by tinkering with some software." The strongest impetus for the shake-up may be from the hardware producers, game developers say. Analysts and investors expect new game consoles from Sony, maker of the PlayStation 2, and Microsoft, which entered the console business with the Xbox last year, within two or three years.

Japan's Capcom Co and US developer Midway Games Inc, which said Monday that holiday sales of its adventure-based games are falling short of forecasts, are among the companies that have been the subject of takeover speculation, analysts said. THQ Inc and Activision Inc also cut sales forecasts this month.

Shares of both Square and Enix have fallen since the merger was announced Nov. 26. Square shares fell about 16 percent, while Enix stock dropped 5 percent.

Gamemakers expect the successor consoles to the PlayStation 2 and Xbox to boast more sophisticated graphics chips and enhanced Internet capabilities.

In turn, games designed for the new boxes will probably have higher production values like orchestrated soundtracks, life-like sound effects and enhanced graphics -- all of which contribute to higher development costs.

"It's a given that the new consoles will have higher technical specifications," said Ryosuke Tanaka, a spokesman for Osaka-based Capcom. "It will be a challenge for game-makers" to design games for the new boxes, he said.

Sharing game development costs may not be the only motivation for consolidation, analysts say. Even game-makers like Microsoft, with its cash and deposits of US$38.6 billion as of June 30, 2002, may snap up smaller game developers to expand its game library or to gain a stronger foothold in the industry, developers say.

More specifically, Microsoft may be interested in adding a strong game franchise to the line-up of Xbox game titles, duplicating Sony's success with Square's Final Fantasy series of games or Nintendo Co's Legend of Zelda. In October, Microsoft bought a 49 percent stake in Rare Ltd for US$375 million in cash from Nintendo Co, the world's second-largest video-game maker. UK-based Rare developed the popular series of Donkey Kong games for Nintendo.

The need to consolidate may be strongest among Japanese developers since the Japanese video-game market has contracted for two years in a row after peaking in the year ended March 2000, analysts say.
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