Around the world, the amusement industry is finding itself increasingly vulnerable to the economic impact of natural disasters. Suppose a hurricane off the coast of Louisiana wrecks a few oil refineries. Why should an amusement professional care about this if he lives 12,000 miles away? Because the loss of those refineries can push up global oil prices, resulting in a small but measurable impact on energy costs for arcade operators as far away as India.
If a mudslide in China buries a single toy factory, to cite another example, it can ultimately increase plush prices for the redemption industry in New Jersey. Scientists who are proponents of complexity theory call this the butterfly effect, that is: If a butterfly flaps its wings in Brazil, it ultimately affects weather patterns in Russia.
The latest example of the butterfly effect impacting the global amusements industry is not theory, but a tragic fact. After a massive earthquake struck northeast Japan on March 11, the industry received perhaps its most dramatic demonstration yet of the interconnectivity of commerce. Even the smallest company, located across the globe from the epicenter of the disaster, can feel the economic aftershocks.
The magnitude 9 temblor in Japan was one of the largest recorded in modern history. According to the U.S. Geological Survey, an agency of the federal Department of the Interior, the epicenter of the March 11 quake was a fault on the Pacific Ocean floor, about 8.4 miles long and some 19 miles beneath the ocean surface (by the way, the slippage in the fault itself occurred five to 12 miles below the sea floor). The epicenter was located about 60 miles off the east coast of Japan's main island of Honshu, about 231 miles northeast of Tokyo.
Natori bowling center is used as a makeshift morgue.
The major temblor struck at 2:43 p.m. local time on a typical Friday afternoon, lifting the sea floor several yards. Over the course of the next two or three minutes, said USGS, this initial quake triggered additional slippages on other faults across an estimated 240 miles of ocean floor.
The violent shaking of four linked tectonic plates caused widespread building damage and fires across major Japanese cities and swept a major tsunami with 23-ft. high waves into Japan's coast. Even in this highly sophisticated country, initial reports revealed horrific scenes of devastation and a high loss of life. Casualties were estimated at 35,000, and are still rising.
The tsunami's deluge, captured on video and televised globally, also caused a third calamity: multiple nuclear incidents at one coastal complex. At the Fukushima Dai-Ichi nuclear power complex, a number of reactors suffered meltdowns. Contamination has hit Level 7, equal to the 1986 Chernobyl reactor disaster. Since Japan gets 20% of its power from nuclear plants, the full impact of the original quake has yet to be felt.
The human impact of the quake has been well reported; to a lesser extent, the business press has also covered the resulting catastrophe for Japan's -- and the world's -- economy. What follows here is a survey of the disaster's impact on the amusement sector, both in Japan and internationally. It is more extensive than many industry professionals probably realize.
Within Japan's home islands, the biggest impact on operators' ability to run their amusement facilities has come from rolling power blackouts, caused by power generators knocked offline. Reliable power is expected to be a problem for many more months.
Japan's leading amusement manufacturers, which include Sega, Namco, Konami and Capcom, run the nation's largest arcade chains. There also are many independent Japanese arcades run by operators. Both arcade operation types suffered from the quake.
Beyond the inconvenience of darkened facilities, the blackouts have compromised the industry's ability to run the infrastructure that supports Japan's modern amusement sites. In particular, the Internet servers that run MMOGs, or massively multiplayer online games, and host player tournaments and statistics services have proved all too vulnerable to rolling blackouts.
Sega-Sammy Holdings admitted to closing its amusement sites in the east of Japan; other centers and manufacturers have modified hours due to rolling blackouts. Capcom announced the temporary closure of 10 amusement sites, looking at over a month of closures while the situation is assessed. Likewise, Namco and Taito reported moves to change the opening hours of their fun centers.
In the theme park sector, Tokyo Disneyland and Tokyo DisneySea provided humanitarian aid to those at the parks on the day of the quake. The parks closed for business and turned into a tented city in the days following the quake. They remained only partly operational as of mid-April, and were aiming to resume full operation by May, following safety checks.
The news media have provided images of at least one bowling alley in the tsunami-impacted coastal towns of Natori, which was used as a makeshift morgue. This stark vision rammed home the actual human cost of the disaster.
Japanese electronics have supplied the technology for much of the "gadget-centric" lifestyle that is shared today by billions of people around the planet. Before the March 11 quake, about 60% of the world's silicon, used to make semiconductor chips, was manufactured in Japan. Some 40% of the world's NAND flash memory chips and 15% of global DRAM supplies were made in Japan. This represents a large percentage of chips that support such popular consumer electronics devices as smartphones and the hot new generation of tablet-style computers like the iPad.
Global market watchers have already raised concerns that larger manufacturers in Japan and worldwide may begin hoarding chips as the fabrication process is impacted by Japan's power shortage. Specific electronic components beyond chips made exclusively in Japan could also be subject to logjams.
Panasonic, Toshiba and Hitachi said their LCD production plants have sustained earthquake damage and would be closed for at least a month. Specialist fabrication houses that build "badged" engineered electronics have also been hit hard by the quake, and by the disruption to imports caught at sea unable to be unloaded at the nearest ports due to tsunami damage or infrastructure upheaval.
Taking place in February before the quake hit, the 30th annual All Nippon Amusement Machine Operators' Union was the first major amusement trade event in Japan for the year. It featured a considerable number of new releases that had international potential. Those releases are now uncertain.
Garnering international interest was Sega's Let's Go Island 3D, using a special 52" lenticular screen. Also creating some excitement was Namco's latest in the Iron Fist series with Tekken Tag Tournament 2, a hugely popular fighting game that deployed a new Sony Playstation 3 architecture upgraded for the tournament and able to support a large player lineup. The new System 359 hardware has been greatly advanced to support the game's needs.
In Japan, both Sega and Namco are depending on smart cards and smartphone interactivity to build community between games and players. The BANA Passport is part of the AiME/ALL.Net contactless IC card network system under a longtime partnership between Sega and Namco. It can store multiple games and other games' characters on many Namco games. Those data are also assessable from Japanese players' smartphones, when linked to the network. But network reliability may be greatly reduced until Japan's power grid is fully restored.
Also at AOU, Konami Digital Entertainment was actively promoting a new card-based payment technology under the name PASELI, with the tagline "pay smart enjoy life." With this system, Konami led the charge at the show to establish the IC card system as an important component of future revenue sharing, building on the success of its already established e-Amusement architecture. All the companies' new releases rely on support from this infrastructure.
After the earthquake hit, these games and systems, along with other AOU show releases, fell under the shadow of suspension and possible shelving.
Beyond the AOU show, the Japan Amusement Machinery Manufacturers Association's Amusement Machine Show is the nation's main event. For the past 15 years, the JAMMA Show, as it's informally known, has been staged at the enormous Makuhari Messe convention center in Chiba, on the outskirts of Tokyo.
But this year's JAMMA Show could prove the next victim of Tokyo's ongoing blackouts. Tokyo officials went on record in April to state fears that the city's power grid may not be able to supply enough power for running thousands of games at the show, much less the lights, air conditioning and other electrical needs for hundreds of booths. As a result, officials said, the amusement show is among many events at Makuhari Messe that may have to be downsized, shortened or cancelled. However, JAMMA officials insisted that their current plans are to go forward with business as usual. It's scheduled to run from Sept. 8 to 10.
Japan's consumer games industry lost up to $88.9 million in potential sales due to the impact of the March earthquake and tsunami. This estimate comes from Japanese market researcher Enterbrain, parent company of a publisher of videogame magazines. However, there is no corresponding information on the disaster's financial impact on the amusement sector because data on the losses are closely held at each corporation. Some idea of the dollar cost of the quake and tsunami disasters on Japanese arcade operations might appear in the next quarterly reports.
Toyota announced in April that it cut its manufacturing and will halt auto production for two days each week in the UK and other countries due to the growing supply problems from Japan. In particular, overseas factories were experiencing a critical shortage of key subcomponents such as transistors and individual electrical systems that are exclusively supplied from Japan. This was reflected with a 70% reduction in production at U.S. Toyota plants -- the impact of the global supply chain.
As this news started to sink in, more rumors started to grow that those operators waiting for imported amusement pieces from Japan may have to check availability. The Japanese disaster hit some eight days after the U.S. trade's Amusement Expo ended. Jointly sponsored by the American Amusement Machine Association and the Amusement and Music Operators Association, this show is now the only dedicated national exposition for the American amusement trade. As such, it always features a good number new titles that originate in Japan (even if they are fully or partially built in the States).
As at the AOU show, Las Vegas's Amusement Expo saw Sega Amusement USA launching Let's Go Island, powered by the Japanese-manufactured RingEdge hardware. The dependence on the Japanese parents' control of the hardware left Sega's U.S. subsidiary vulnerable to disruption of the supply line. Another new release using Japanese architecture was Sonic & Sega All-Stars Racing Arcade. Although developed by Sega UK, this game depends on key components from Japan.
Namco America Inc. also proved vulnerable to disruptions in the global supply chain, which could delay new releases. One of those eagerly anticipated releases is Dead Heat, the "real-world" street racer with Japan-sourced architecture. Similarly, a derivative of the PS3 arcade hardware (System 357) powered the swashbuckling adventure Deadstorm Pirates. Another U.S. release born of exclusive Japanese hardware was Pac-Man: Battle Royale.
Amusement Expo also revealed new partnerships between Japanese factories and key U.S. manufacturers. Global VR wowed the crowds at the U.S. show with a repackaged new release called Shh...! Welcome to Frightfearland. This exciting theme park shooter was known in Japan as Haunted Museum II and released by Taito. The Japanese game uses Taito's Type-X² architecture, ships from Japan and will be installed in a Global VR cabinet.
Another more-established Japan-U.S. partnership brings together Betson Enterprises and Konami Digital Entertainment. Through its U.S. amusement division, Betson repackaged Dance Dance Revolution X2 in its own cabinet, running Konami software and firmware.
In addition, some U.S. companies rely upon Japanese subcomponents -- but it's unclear what impact this may have on the global supply chain, and eventually on delivery of games. At presstime, no amusement company had issued any statements on the quake's expected impact to committed orders made overseas, nor had any U.S. licensee stated there would be any delay in scheduled releases. It is unknown how many of these companies would be forced to attempt to acquire critical subcomponents from other (non-Japanese) providers, or indeed if they would be able to do so.
LONG-TERM INTERNATIONAL IMPACT
Japan's economy is the world's third-largest. It is difficult to calculate the long-term impact that the March 11 quake and tsunami will have. Amazing feats had already been witnessed since the earthquake with the clearing of great swaths of destruction, and rebuilding of infrastructure (the Great Kanto highway was rebuilt in just six days after being wrecked). But a mountain of effort remains, and the true impact of the nuclear disaster will be measured in years rather than months.
Outside of the amusement industry, some corporations that rely wholly upon Japanese-sourced components have started to investigate (as a precaution) the possibility of sourcing from alternative locations in Japan and farther afield. It would be surprising if amusement manufacturers were not also investigating alternative suppliers. Naturally, this has led to speculation that the quake could have long-term impact on dependent electronic industries, including the console, amusement and attraction sectors.
Where would manufacturers turn as an alternative source of components? Attention is initially turning to the emerging development and manufacturing territories of South Korea, Taiwan and China.
Even greater impact on Japan's amusement industry may result if Japanese manufacturers start thinking about outsourcing production of entire machines to other countries … and if foreign buyers begin giving equally serious consideration to non-Japanese sources for entire machines for import. A number of new Chinese manufacturers has begun to gain international recognition by creating original amusement pieces of their own. Similarly, Sega had recently acquired a Chinese development and manufacturing resource. At Amusement Expo, the company launched its first wholly developed and manufactured video release from its Chinese studio, Sega Golden Gun.
At present there is no indication that the interruption in the lines of communication and freight shipping from Japan will last more than a month. The international amusement industry has worked hard to ensure that its vulnerability to possible delay will be minimal.
KEVIN WILLIAMS is founder and director of the out-of-home leisure entertainment consultancy KWP Ltd. His nearly 20 years of experience in global video amusements and high-tech attractions includes top management and design posts, with a focus on new technology development and applications. He is a well-known speaker on the industry lecture circuit, and has authored numerous articles. Williams is also editor and publisher of The Stinger Report, a leading industry e-newsletter and Web-based information service. Go to thestingerreport.com to sign up for a free subscription.