WSJ.com - Games

TOKYO -- Hoping to boost sagging sales of its Xbox console and win over more Japanese video-game fans, Microsoft Corp. is betting on a cat that can fast-forward time.

Now, if only the cat could teach the software maker to perform the same trick in real life.

Shipments of Microsoft's Xbox console in Japan are so low that many industry executives say Microsoft's best shot at a rebound may only come in 2005, with the expected launch of the next-generation Xbox machine. But a defeat in this market, even if temporary, could threaten the future of the Xbox world-wide. That leaves Microsoft some tough choices.

Japan is vital to Microsoft's global video-game ambitions. The world's second-biggest video-game market, behind the U.S., Japan also is home to a raft of important game developers and to Microsoft's two main rivals in the field: Nintendo Co., maker of GameCube, and Sony Corp., maker of the top-selling game console, PlayStation 2.

Blink from the coming Xbox game.

At the Tokyo Game Show this past weekend, Microsoft was hoping to revitalize Xbox sales by announcing details of its forthcoming online-game service, Xbox Live. It also showed off a handful of new games, including one called Blinx, centered on a green-eyed feline who skirts tricky situations by rewinding, pausing, or fast-forwarding time, as if it were a videotape. But industry executives say the new service and new titles won't solve Microsoft's fundamental problem: low sales of the Xbox console .

Microsoft has shipped only 274,000 consoles in Japan since launching Xbox here in February. Worse, the PlayStation 2 continues to outsell the Xbox, even though the Sony machine is now two years old. In total, Sony has shipped 10 million PlayStation 2 consoles in Japan. Meanwhile, in the U.S., the Xbox remains a strong contender, where Halo, a popular shooting game, is helping drive sales of the machine.

But in Japan, some developers are focusing more on their PlayStation games. Japanese developers make some of the world's most popular games. But they are growing reluctant to write exclusive games for Xbox when it is languishing in their home market.

Industry executives say Microsoft must do something bold and expensive, such as buying a popular game developer, to spark sales and game development for Xbox in Japan. On Friday, rival Nintendo said it sold Microsoft its 49% stake in Rare Ltd., a British studio that has created video games popular in Japan, such as Donkey Kong Country.

Microsoft executives declined to comment.

For now, Microsoft still lacks a strong video-game entry in the role-playing genre popular now in Japan, in which players may be immersed in a fantasy world for tens of hours of play. Last year, Sony took a minority stake in Square Co., maker of the Final Fantasy role-playing series, in what many executives saw as a blocking maneuver against Microsoft. People familiar with Microsoft say it had been in talks about investing in Square, and also separately in Sega. But those talks fell apart.

Microsoft is discussing internally whether to launch a bid for one of several Japanese game developers, though no decision has been made, according to people familiar with the discussions.

Rival Nintendo, meanwhile, is shoring up support for GameCube system among developers in Japan. Nintendo's former president, Hiroshi Yamauchi, last year started a fund to pay for development of games for both GameCube and the Game Boy Advance hand-held player. One recipient is Square, which will be bringing Final Fantasy to both the GameCube and Game Boy Advance.

Microsoft also could pay a game maker to make a popular title exclusively for Xbox. Or, Microsoft could spend more on marketing to expand the Xbox brand beyond Japan's hardcore game players, who make up most of its users in here.

Microsoft knew Japan would be a tough market back when it decided to launch the Xbox several years ago. Japanese game players are considered demanding and fiercely loyal to Sony. Still, Microsoft forged ties with several important developers and had several solid games ready in time for the Japan launch.

Microsoft executives emphasize they are in the video-game business for the long haul, and they are prepared for temporary setbacks. Bryan Lee, general manager of Microsoft's Xbox business, says the Redmond, Wash., company will focus on games like "Blinx," the cat game, that show off the Xbox's unique features. The game's time function is possible because the Xbox has an internal hard drive; Sony's PlayStation 2 doesn't.

Still, Mr. Lee acknowledges Microsoft must keep drawing mainstream games onto the Xbox. As for acquiring a Japanese developer, he says Microsoft "is always open to those kinds of things," declining to elaborate. "Truth is, it's going to be a long, hard battle," Mr. Lee says.

Typically, a game system can't thrive unless it is popular in the U.S., Europe and Japan. "You've got to be successful on all three continents," or a console loses crucial support from game developers, says Bernie Stolar, a former executive at Sega.

In Europe, Microsoft recently slashed the price of the Xbox by more than 15%, in the second cut since Xbox's European launch in March. The console's long-term survival is unclear there, developers say. To date, Microsoft has sold about 500,000 Xbox consoles in Europe and needs to hit the two million mark by year's end, says Yves Guillemot, president of French game publisher Ubi Soft Inc. If it can't reach that level, "most publishers will reduce their Xbox games in the pipeline and put them on other consoles," Mr. Guillemot predicts.

"If they don't perform this year they're out," of contention in Europe, he says.

-- Khanh T.L. Tran in San Francisco contributed to this article.

Write to Robert A. Guth at rob.guth@wsj.com

Updated September 23, 2002 12:13 a.m. EDT