Japan's arcade industry slumps as Wii takes off

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)