Microsoft’s Xbox Faces Hurdles With Japanese Gamers

Attempting to succeed where others have failed, Microsoft Corp. Chairman Bill Gates today paid homage to Japanese video game fans as the software giant launches an aggressive campaign to push its Xbox game console in the land that gave the world Mario and Sonic.

Microsoft plans to spend $500 million whipping up worldwide demand for its black-and-green game machine. But nowhere does it face a more formidable challenge than in Japan--which accounts for more than a quarter of the $20-billion global game market but is notoriously disdainful of video games produced overseas.

Redmond, Wash.-based Microsoft faces three key challenges in Japan. First, it is a neophyte in the video game console business and will challenge industry titans Sony Corp. and Nintendo Co. on their home turf. Second, it might have difficulty navigating the country’s complex distribution systems, which are fragmented and decentralized. Finally, Japanese gamers like home-grown games, and their penchant for small, cute electronic devices might work against the bulky and heavy Xbox.

In remarks at the Tokyo Game Show, Gates tried to tantalize Japanese gamers with announcements that Xbox would host games from industry legend Sega Corp., as well as titles developed by Microsoft exclusively for Japan.

Gates also announced a partnership with NTT Communications Corp. to provide a high-speed online game service for Xbox, which will come equipped with a high-speed ethernet modem. NTT Communication’s parent company, Nippon Telegraph & Telephone Corp., also operates NTT DoCoMo, which sells the wildly popular iMode wireless Web service for cellular phones.

Whether Gate’s promises are enough to gain Microsoft a foothold in Japan remains to be seen. Even Electronic Arts Inc., the world’s largest independent game publisher, gets less than 4% of its revenue from Japan.

Microsoft has had some success in Japan. Its “Age of Empires II” was the second-best-selling PC game last year. And, as in the rest of the world, its Windows operating system dominates personal computers. Still, analysts remain skeptical of Microsoft’s ability to widen its appeal among Japanese gamers.

“Given Sony’s and Nintendo’s traction in the market and the inherent challenge of creating great original titles, Microsoft’s first foray into the console business looks like it will be a very expensive pair of training wheels,” said Larry Marcus, a partner with venture capital firm WaldenVC in San Francisco and longtime observer of the video game market. “Assuming they lose $2 billion trying to crack the market over the next four years, that’s essentially a billion dollars a wheel.”

Microsoft executives are keenly aware of the risks as they gear up for the fall debut of Xbox in Japan and North America.

“If you ask me what the biggest challenge is for Xbox, it is Japan,” said Ed Fries, vice president of games publishing for Xbox. “We have to make an extra effort to think about that market.”

By the time Xbox debuts in Japan, Sony already will have sold more than 8 million PlayStation 2 consoles there, according to estimates from International Development Group in San Francisco. At the same time, Microsoft will have to vie for attention with Nintendo, which plans to launch its next-generation Gamecube console this fall.

Despite the Xbox’s impressive hardware specifications--it boasts an 8-gigabyte hard drive and an ultra-fast graphics chip--it will be the presence of Japanese-centric games that will determine Microsoft’s success.

Microsoft has lined up many Japanese developers to make games for the Xbox, including Konami Corp., Capcom Co., Namco Ltd. and Sega.