From Game Consoles to Game Phones

With the game console market maturing and its revenues slowing, Hokkaido-based developer Hudson Soft turns to the wireless Web.

Hiroshi serves today as president and CEO, and while Hudson Soft may not be well known, CEO Kudo has capitalized on development tie-ups with such heavyweights as Nintendo, NEC, and, most recently, NTT DoCoMo to take his firm public last December on Nasdaq Japan (Ticker 4822). Kudo also wins over new business partners and deals with his genial affability and his networking experience. His ability to close the deal probably contributed to Hudson Soft becoming the first third-party software seller to Nintendo back in 1984, and the company hasn't looked back since.

Hudson Soft was launched in 1973, initially as a hardware firm tinkering in the amateur radio components market. Over time it became a seller of PC-related products and finally a system integrator and software developer focusing on games, operating systems, databases, and middleware. The company scored some early triumphs with sales to the likes of Nintendo, Sharp, Toshiba, and Fujitsu. Speaking recently at a Hokkaido Interna-tional Business Association meeting, Yoshinao Aoki, professor of engineering at Hokkaido University, said, "Some of the early successes were due to the entrepreneurial spirit and freedom to move in any direction." That freedom gives Hudson developmental flexibility, says John Greiner, international manager at Hudson. "We have always stayed away from being tied down with any one hardware company in the console business," he says. Hudson jointly developed a popular game machine, the "PC-Engine," in 1987 with NEC, and in 1994, the firm independently created a 32-bit LSI chipset (the HuC62 Series), which was used as an embedded processor in the "PC-Fix," a home game machine launched by NEC.

While the firm produced a major hit with Lode Runner, a Nintendo game that sold 1.2 million copies starting in 1984, the most prominent original-brand Hudson products are Bomberman and Momotaro, games developed for the Sony, Nintendo, and Sega platforms that have together sold over 20 million copies. The firm also developed Teku Teku Angel, a development tool for creating animated characters that has sold over 2 million copies.

But while its products have been hits in several national markets, Hudson Soft still doesn't enjoy much international brand awareness, and making a profit has become more difficult as the game console industry has matured. This has forced Hudson to concentrate on strengthening its relationships with all the major platform partners, as well as looking for new markets and platforms. But there are only a handful in the industry these days, and even with Microsoft entering the market, the company doesn't expect the numbers to grow.

Hudson Soft is now hoping that its experience in the console industry will help it gain a foothold in the mobile gaming market. The firm has been able to initiate a growing partnership with NTT DoCoMo, operator of the i-mode wireless information service. For example, it's developed an "Intelligent Server System," key technology that allows i-mode server software to overcome the memory limitations inherent in tiny cellphones and still provide subscribers with a dynamic gaming experience. Further, Hudson's huge library of games -- easily recognizable to gamers in Japan -- helps make Hudson a significant i-mode platform partner for DoCoMo. Hudson currently provides services to 15 i-mode sites, four of which employ the recently launched i-Appli Java system. Games include golf, interactive adventure role-playing, racing, and shooting. Hudson tries to produce games that are simple but that can be developed further so as to keep player retention high, which, with the low price of mobile games, is key. "Any company that has a real intention to survive and prosper in the mobile arena is concentrating on designing collaborative addiction, which is the confluence of entertainment, lifestyle, and to a degree education," says Derek Schneiderman, president of Tokyo-based CTR Ventures and ex-head of Gateway 2000 Japan.

Hudson recently began providing gaming services in Hong Kong through Hutchison Telecom, which holds a 33 percent share of Hong Kong's cellphone market. DoCoMo provided considerable support in the deal, as the Japanese wireless giant has pumped several infusions of capital into Hutchison, and rumors of i-mode's launch in Hong Kong are circulating on the open press. The DoCoMo-Hutchison relationship is the first Asian deployment of a Japanese wireless information service, and together with DoCoMo's plans to launch i-mode in the US and Europe, it could generate a lot of excitement (read: paying customers). The challenge for Hudson is to port its mobile game library to Hutchison's WAP (Wireless Application Protocol)-based network system, but in return for the effort the company will foster potentially lucrative relationships with two heavyweights of Asia's mobile Net scene. The company is clearly hoping to go where DoCoMo goes, and that could be far.

While mobile entertainment is becoming hugely popular, no one knows whether there will be a big pay-off down the road. Developing for mobile platforms will only get more difficult, though, as cellular technology advances. Competition and pricing in mobile gaming are expected to be fierce as more services become available to compete for mobile surfers' time, eyeballs, and pocketbooks. "Mobile is much cheaper to develop [and requires] a much shorter time span than console games," says Jay Defibaugh, industry analyst at Credit Suisse First Boston Securities. "[Although] traditional gaming will still bring in the majority of revenues for the next three to five years, there will be meaningful revenues for smaller companies," he says.

Meanwhile, Hudson is seeing increased game development work for some major console platforms, including PS2 and the recent Gameboy Advance. The company plans to bring 20 to 25 products to market this year, compared with only seven in the recent past. The firm has installed a new mass-production facility for game development tools, which should help developers accelerate design and programming and is expected to bring in major revenue this fiscal year.

Hudson recently formed a joint venture with Infogrames Entertainment, headquartered in France. The partnership will provide a major distribution channel for Hudson's games and other products throughout the world. "Infogrames is a great partner for Hudson, as they have extensive international exposure compared to other possible choices," says Arka Roy, computer programmer at Japanese gaming company Inis and long-time Japan gaming scene watcher.

With markets and revenues looking positive and a solid 25-year history as a private company, why did Hudson decide to go public last December? The primary reason was the bankruptcy three years ago of the company's main bank, Sapporo-based Takushoku Bank. When the smoke cleared, a lot of Hokkaido-based companies had gone down with Takushoku, and while Hudson Soft wasn't one of them, the firm wasn't diversified enough in its borrowing portfolio and had to really tighten its belt, which hurt financing for new product development. Hudson went from non-consolidated net sales of ¥27.5 billion in 1996 to ¥10.4 billion last fiscal year (2000). Also, some of the outsourcing deals slowed as the industry matured, with NEC's exit from the game platform industry striking a particularly hard blow. "Going public gives us flexibility in the kind of funding available, and it's more cooperative funding," says Naoki Hirai, Hudson's public relations manager. The company now also has sufficient capital to compete with the bigger players and move more aggressively into mobile and foreign markets. Hudson is now trading at the ¥1,000-level (after a post-IPO high of over ¥1,500) and has not deviated from that price point much since the IPO. "International exposure and the strong relationship CEO Hiroshi Kudo has with Softbank's Masayoshi Son are reasons we chose Nasdaq," says Hirai. Softbank is a minority shareholder (3 percent).

As for the future, Hudson is likely to do well so long as mobile gaming and console sales continue to be firm. And games offered via wireless platforms may just be the company's sweet spot, which should come as no surprise considering that Hudson started as a supplier of amateur radio components, under the name CQ Hudson. Looks like once wireless, always wireless.