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Growth Strategy 1: Consumer Business Expansion

Expand scope of sales while maintaining a highly profitable structure and operating margins of 20%

As stated in the CEO's message, the Consumer market at present is going through huge changes due to the expansion of the digital download market and the transition to the next generation of game consoles (current game consoles).

Three years ago, Capcom was late responding to the rise of digital download contents and we had quality issues with titles outsourced overseas, both of which impacted our performance. However, we swiftly implemented improvement measures in stage 1 of our reform efforts, which significantly increased profitability and lifted operating margins from the single digits into the 20% range during the fiscal year ended March 31, 2015.

In terms of the Consumer market going forward, even the stock market is divided. Some investors are worried that development costs skyrocketing amid the continued adoption of current game consoles and the rise of mobile content will cause profitability to plummet. On the other hand, some investors expect that since a large number of software companies have been shaken out of the Consumer market, the survivors who are able to secure capital and ensure high quality will be able to reap their rewards.

I tend to agree with the latter of these two opinions. The reasons for this include the fact that (1) even in 2019, the Consumer market is still expected to be a major market accounting for approximately 30% of the overall game market, (2) Capcom possesses a large amount of popular IPs, (3) Capcom is ensuring a sufficient number of development personnel and capital to expand our title lineup and (4) we have quickly responded to DLC and other new business models.

As a result, we expect operating margins of 20% or higher.

Going forward, the issues will be maintaining a high profit structure with an operating margin of 20% while expanding the scale of sales and achieving the medium-term business goal for cumulative operating income.

To this end, Capcom is strengthening digital download content and expanding our title lineup through full-fledged operation of the 60-month title development plan, and will create a title portfolio enabling sustainable growth over the medium- to long-term.

Creating a Development Structure Focused on Internal Game Creation and Expertise

In addition to the above, another factor behind achieving a 20% operating margin in the Consumer sub-segment is our intention to improve product quality and accumulate expertise through the transition to in-house game creation rather than outsourcing. This was a significant factor that had the effect of reducing the cost of sales by 4.1 billion yen compared to the previous fiscal year.

In general, compared to internal development, outsourcing is recognized as involving less risk from the perspectives of fixed expenses and technologies. However, changes to business models and technologies in the game industry are often drastic, and since time is required to change agreements with outsourcers pertaining to specifications and other conditions, and an increasing number of development companies are late to respond to technological changes, occasionally titles that do not meet market needs and do not achieve appropriate sales can be seen.

Thus, given the massive changes in market environment conditions at present, including the entrance of the current game consoles and DLC market expansion, I have determined that the transition to an internal game creation development structure is the best policy, as it will enable us to learn about the new technologies surrounding current-generation game consoles, which will lead to improved quality, as well as allow us to accumulate management business expertise with respect to the strategic release of add-on content. In addition, we have adopted a 52-week map to strengthen the management of development staff allocation and improve our employee utilization rate. These initiatives have also contributed to achieving operating margins of 20% in the Consumer sub-segment.

Number of Developers and Internal R&D Ratio Human Capital

diagram: Number of Developers and Internal R&D Ratio

Measure 1Strengthening digital download contents

Efforts to further strengthen digital download contents resulted in a digital download sales ratio of 26% this fiscal year, which we will continue to improve. The aims behind improving the DLC ratio include (1) avoiding inventory risk and reducing package production costs through full-game downloads, (2) additional earnings opportunities through full-game downloads of catalog titles whose package sales are difficult for retailers and (3) capturing users through ongoing add-on contents and stable acquisition of additional revenue over the long term. These are one countermeasure aimed at concerns over rising development costs and increased volatility (relying on hit titles) in the consumer business, as pointed out by investors.

Strengthening DLC Strategy

diagram: Strengthening DLC Strategy

In terms of the results of reforms promoted over the past two years, (1)(2) have led to growth in full-game downloads, with the digital download sales ratio increasing each year, from 11% two years ago, to 18% one year ago, then to 26%. As a result, profitability increased and the cost of sales in the fiscal year under review declined to 1 billion yen.

Digital download Sales Ratio (Capcom and Market Average Comparison)

diagram: Digital download Sales Ratio (Capcom and Market Average Comparison)

Going forward, in addition to (1)(2) we will strengthen (3) to improve Capcom's DLC ratio to be in line with the overall Consumer market's ratio of 50%. Specifically, we will simultaneously launch download and package versions of "Monster Hunter X (Cross)" and "Street Fighter V" while selling full-title digital versions in developing countries through Steam and other online platforms. After the sales launch of major titles, we will strategically release add-on DLC to lengthen game lifetimes.

Measure 2Expand Title Lineup through the Full-Fledged Operation of the 60-Month Title Development Plan

We will create a title portfolio with ongoing growth potential thorough the full-fledged operation of our medium-term strategic 60-month title development plan. Specifically, we will (1) promote support for multiple platforms, both current and older game consoles, and (2) release new titles in popular series once every 2.5 years.

Ratio of Units Sold by Hardware Production Capital

diagram:Ratio of Units Sold by Hardware

Long-Term Portfolio Strategy

diagram: Long-Term Portfolio Strategy

The reasons for this are, with regard to (1), while the older game consoles has a larger install-base its popularity has peaked, whereas the current game consoles is hot but not yet fully adopted, thus to maximize earnings we will release one popular title for both game consoles. In terms of (2), three to four years are required to develop a major title, and if we only have a small number of hit titles, it will be difficult to launch a series every year, which will create unstable earnings. Accordingly, it is important we stabilize earnings by either creating a large number of popular titles, or by shortening the time required to launch new titles. Capcom will proceed with both (1) and (2) to pursue stable earnings and growth, increasing the number of titles launched each year. At the same time, strengthening DLC will allow us to improve profitability and maximize earnings.

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