Japan's arcade industry slumps as Wii takes off

TOKYO (Reuters) - Japanese superhero Ultraman vanquishes an evil enemy during a live performance at a Tokyo games arcade. But Ultraman's real battle is proving much harder -- enticing customers back to the nation's arcades.

Japan's $6.9 billion arcade industry has been whacked hard by new advances in gaming, particularly Nintendo Co Ltd's wildly popular Wii, the latest big craze to compete for the time and pocket money of Japanese kids.

Unlike many countries where the rise of Sony Corp's PlayStation during the 1990s wreaked havoc on the industry, Japan's arcades were more resilient, helped by a greater variety of machines and plentiful foot traffic in crowded cities.

But now some of the biggest chains are shutting many of their outlets.

"Arcades are expensive, noisy and filled with cigarette smoke," said 15-year-old Gene Sato, adding he'd rather save his money to go to a theme park. "Besides, I can stay home and play NBA Live on PlayStation 3."

The Wii, launched in late 2006, has introduced innovative games that have players jumping around as they simulate boxing, skiing and other sports.

That has robbed arcades of one important advantage they used to have over home devices -- being the best place to play active games such as Konami Corp's dancing hit Dance Dance Revolution, analysts say.

"A large element of the problem is innovation and in Japan, it's pretty clear that Nintendo has been the leader in innovation," said Jay Defibaugh, an analyst at Credit Suisse.

But it's not just the Wii. Industry officials and analysts tick off a long list of culprits.

With widescreen TVs in households across Japan and games with cutting edge graphics and audio standard fare, the traditional video arcade experience can easily be replicated in the home.

Analysts also estimate that the vast majority of Japanese kids own a handheld game player such as a Nintendo DS, or PlayStation Portable.

Even if they don't, games can be played on computers or cellphones. Mobile phones are also blamed for diverting youths away from arcades because a large share of kids' pocket money often goes towards paying cellphone bills.

Others point their fingers at high petrol prices, increased police checks to ensure young teens are not hanging out at arcades too late, and a lack of must-have prizes in one of the arcades' biggest earners -- crane machines.

Whatever the reason, Japan's arcade industry is hurting.

Sega Sammy Holdings Inc plans to close 110 arcades, around one quarter of its outlets, while rival Namco Bandai Holdings has announced that it will close between 50 and 60 stores, or roughly 20 percent of its arcades.

GLOOM BUT NO DOOM

Yet despite the gloomy outlook, industry insiders believe arcades will prosper again if another big trend takes off.

"We need to innovate, especially in the realm of games where people move their bodies," said Jun Higashi, president of Namco Bandai's Namco unit at an arcade expo in Tokyo in February.

"We also need to develop games that can't be played at home."

The last big craze, which peaked in 2006, combined video games and card collecting for kids aged around 4 to 8, such as the fighting beetles in the "Mushiking" King of the Beetles game.

The phenomenon drew families into arcades but the small machines have also done well as standalones in shopping centers and outside toy shops.

"Everyone is waiting for the next big thing, though perhaps the biggest problem is they are all probably hoping that somebody else will invent it and haven't made the proper investments," said HSBC analyst Carlos Dimas.

The arcade slump has hurt earnings but most big arcade operators are also diversified companies with big divisions in other areas of the game industry, whether that be toys, software, arcade machines or Japanese pinball "pachinko".

Analysts also say the industry traditionally goes through a slump when new home consoles, such as Wii, are at the height of their popularity.

But there are concerns that the sector could be hit even harder if the downturn hits the manufacturers of arcade game machines due to a drop in demand for their products.

"Some people in the industry don't think that is so remote any more," said Dimas.

Meanwhile, arcade companies are also trying new tactics and strategies such as the Ultraman live show at Namco Bandai's family-oriented arcade.

Tapping nostalgia, in particular, has become a hot theme as arcades try to attract more adults.

Capcom Co Ltd has launched Street Fighter IV, a new version of a classic fighting game that seeks to bring back old fans and perhaps their kids as well.

Taito Corp, the arcade unit of Square Enix, has revamped its brand design and stores around its iconic Space Invaders alien game.

But Square Enix President Yoichi Wada says the company must do more. Inviting non-arcade business people to open a franchised store to help bring in fresh ideas, developing games for couples or even the elderly -- all options should be considered, he said. "The industry is at a crossroads. We are going to have to change anyway, so we might as well take the lead."

(Editing by Megan Goldin)