Friday, 10 January 2002
By the second week of January, ZEPS 4 had moved beyond the stage where Zaboru could still comfortably describe it as a development project. The hardware was finished. The operating system was stable. The first-party launch software had entered final certification, duplication tests for ZAGE Blue-Ray Disc were already running through AKAI's manufacturing network, and regional distribution partners had begun receiving confidential volume forecasts. The marketing campaign had also been approved after several days of meetings between Zaboru, ZAGE Marketing, the regional branches, and the hardware division.
Most importantly, ZAGE had finally selected a launch date.
2 February 2002.
2-2-2002.
Zaboru had liked the date immediately. It was memorable without requiring any effort, visually distinctive on advertising, and close enough that the launch campaign could remain intense without dragging for months. It also gave ZAGE only a few weeks to complete manufacturing ramp-up, software certification, retailer allocation, launch-event preparation, and the enormous logistical operation required to place a new console across several major markets almost simultaneously.
The promotional side excited Zaboru enormously.
The financial side was considerably less romantic.
That was why several of ZAGE's most important executives were gathered inside one of the larger conference rooms at ZAGE Tower that afternoon. Sayuri Yamaguchi, head of ZAGE Finance, sat closest to the main display with several thick folders of cost projections and manufacturing forecasts. Her husband, Shinsuke Yamaguchi, head of Marketing, had retail projections, consumer pricing studies, and regional demand estimates open in front of him. Shiki Spence, head of Licensing, had prepared royalty structures and third-party publishing models. Yuna Kanai, head of Subsidiaries Management, represented the enormous network of ZAGE-controlled manufacturers, distributors, logistics firms, and service companies that would support the launch. Her twin brother Yugo Kanai was also present as one of ZAGE's senior game-development leaders, though for once he seemed content to listen rather than dominate the meeting. Zanichi sat near the end of the table, smoking quietly while looking considerably less enthusiastic about spreadsheets than he had about the completed machine itself.
Zaboru stood near the presentation screen and rested both hands against the table. "Okay. The fun part is basically settled. The console works, the games are almost ready, the campaign is being prepared, and we have the date. Now we talk about the part that decides whether Sayuri-san sleeps peacefully or spends the next five years wanting to murder me."
Sayuri looked at him without smiling. "That depends entirely on the next slide."
Zaboru chuckled and changed the presentation.
A detailed cost breakdown appeared.
At the top sat one uncomfortable number.
ESTIMATED EARLY PRODUCTION COST: ¥40,000 PER UNIT
The room became quiet despite everyone already having seen earlier versions of the figure.
Zaboru crossed his arms. "Forty thousand yen. Approximately. The exact amount moves depending on HDD model, yield, factory, shipping origin, component contracts, and production scale, but that's our current average for the launch period."
Zanichi finally spoke, his voice calm. "That number includes the consumer package, not just the motherboard. Raijin CPU, Amaterasu GPU, 768 MB GDDR3, eDRAM, HDD, wireless modules, Blue-Ray drive, compatibility hardware, power supply, cooling, chassis, standard controller, Z-Remote, cables, packaging, and the rest."
Sayuri added, "It does not include every downstream expense. Once we add warehousing, international shipping, warranty reserves, regional customer support, retailer margin, launch losses, and returns, our effective cost per sold unit is higher."
Zaboru nodded. "Exactly. Which is why nobody here should look at forty thousand yen and think selling for forty-four thousand means we make four thousand."
Sayuri turned one sheet around so the rest of the table could see it. "At current assumptions, the margin on launch hardware is effectively negligible. In certain territories, depending on import structures and freight costs, it may be slightly negative. Japan is easier because much of the production and distribution chain is internal. North America and Europe require more careful allocation."
Yuna glanced through her own figures. "Using ZAGE-controlled subsidiaries helps significantly. We are not paying an independent distributor at every stage, and several regional warehouses belong to companies under the ZAGE group. But those subsidiaries still have real operating costs. We cannot pretend internal ownership makes transportation free."
"Right," Zaboru said. "Which is why I don't want accounting tricks making the hardware look profitable when economically it isn't."
Sayuri gave him a small approving nod.
Zaboru changed slides.
PROPOSED JAPAN RETAIL PRICE: ¥44,444
Shinsuke stared at the number for several seconds before looking toward Zaboru. "You're still committed to that?"
"Absolutely."
"It is memorable."
"That's the point."
Sayuri, however, was focused on something else. "At ¥44,444, we are intentionally giving up almost all meaningful launch hardware margin."
"Yes."
"Even though early demand will almost certainly support a higher price."
"Yes."
Sayuri leaned back. "Then I want the reasoning stated clearly before Finance signs the final plan."
Zaboru nodded. The joking expression disappeared almost completely. "Because I don't want the first question a family asks when they see ZEPS 4 to be whether they can justify buying it. The machine is already expensive. Forty-four thousand four hundred forty-four yen is not cheap. If we push it much higher just because early adopters would tolerate it, we shrink the installed base and slow down everything that actually matters later."
He pointed toward several figures on the screen. "Every ZEPS 4 we sell creates a customer for software, expansions, accessories, downloadable games, online services, media purchases, and whatever else we add during the next five to seven years. I would rather make almost nothing on the hardware and have twenty million active machines than make a comfortable margin on every box but sell ten million."
Sayuri nodded slowly. "So you're treating the console primarily as an ecosystem-acquisition cost."
"Exactly."
Shiki leaned forward. "Which means software attach rate becomes critical."
Zaboru smiled. "Now we're getting to the part I actually like."
The next slide appeared.
SOFTWARE ECONOMICS
A standard major ZEPS 4 game would launch at approximately ¥4,500, though lower-budget releases, smaller games, expansions, and promotional pricing would vary. Unlike the hardware, software economics were far more attractive.
Zaboru gestured toward Shiki. "Explain the physical side."
Shiki nodded. "For first-party software, ZAGE controls nearly the entire chain. Development is obviously internal. AKAI and ZAGE own the Blue-Ray technology and a large portion of the manufacturing infrastructure. Replication, packaging, distribution, and many retail channels are either directly owned or closely partnered. That reduces external licensing leakage dramatically."
He turned to another page. "At a ¥4,500 retail price, after retailer share, disc manufacturing, packaging, freight, returns reserve, marketing allocation, and regional costs, we can conservatively expect around ¥800 to ¥1,000 operating contribution on many full-price first-party physical games once production volume is healthy. Some titles will be higher. Some lower. Similar what we always does"
Sayuri added, "The important part is scale. One thousand yen is not spectacular on one copy. One thousand yen on ten million copies is ten billion yen."
The room stayed quiet for a moment.
That was the arithmetic that mattered.
Zaboru smiled. "Exactly. And unlike the console, players don't buy one game."
Shinsuke looked toward the projections. "Our current ZEPS 3 data suggests the most active households buy significantly more than 8 full games over the life of the system. Core users can easily exceed twenty."
"And ZEPS 4 should increase that," Zaboru replied. "Especially because digital distribution makes smaller releases easier."
Sayuri flipped to another sheet. "If the average customer buys only four first-party-equivalent software units over the system's life, the hardware subsidy is already economically tolerable. Once we include third-party licensing, downloadable content, accessories, digital software, and media transactions, the lifetime value becomes considerably larger."
Zaboru nodded. "That is why I don't care about winning on the first transaction. I care about owning the relationship for years."
Shiki then moved to third-party publishing. "Third-party economics are different. We obviously do not take the entire software margin. Developers and publishers need their own revenue. ZAGE makes money primarily through platform licensing, Blue-Ray replication, certification, and distribution services where applicable. I would recommend keeping royalty rates competitive, especially during the first two years."
Sayuri agreed. "Aggressive third-party fees would increase short-term revenue but damage software supply."
"Exactly," Zaboru said. "I want developers looking at ZEPS 4 and thinking, 'I can actually make money here.' If we squeeze them because our hardware is popular, eventually they start looking somewhere else."
Yugo finally spoke, more seriously than usual. "And if teams know the installed base is growing quickly, they're more willing to build ambitious games specifically around ZEPS 4 instead of treating it as another port."
Zaboru nodded toward him. "That matters more to me than squeezing another few hundred yen out of every disc."
The presentation moved again.
BLUE-RAY COST CURVE
This was where Zanichi became more interested.
Zaboru looked toward his father. "Dad?"
Zanichi exhaled smoke and said, "The Blue-Ray drive is one of the expensive parts right now, but that won't remain true. Early optical hardware is always painful. Laser assemblies, optics, controller chips, mechanical tolerances, manufacturing yield—all expensive before volume improves. If AKAI gets adoption outside ZEPS 4, drive cost drops faster."
Yuna checked one of the subsidiary forecasts. "AKAI already plans Blue-Ray movie players, computer drives, and professional storage equipment."
"Good," Zanichi replied. "Then ZEPS 4 stops carrying the entire scale problem alone."
Zaboru added, "And every improvement feeds back into the console. If the drive becomes cheaper, later ZEPS 4 revisions become cheaper. If GDDR3 gets cheaper, memory cost falls. HDD prices will fall. CPU and GPU yields improve. Packaging gets optimized. We renegotiate contracts once volume is proven."
Sayuri brought up a five-year projection. "If the production curve behaves close to our conservative forecast, hardware losses disappear relatively quickly even without raising retail price. Eventually the same ¥44,444 price becomes comfortably profitable unless we choose to cut price instead."
Zaboru smiled. "And I would rather cut price."
Sayuri sighed softly. "Of course you would."
"More users."
"More software."
"Exactly."
The next subject was model segmentation. ZEPS 4 would launch with 60 GB , 80 GB, 100 GB, and 250 GB HDD configurations, but Zaboru did not want the cheaper model stripped of important functions. All three needed the same CPU, GPU, memory, online capability, backward compatibility, Blue-Ray support, controller support, and system features. Storage capacity would be the main meaningful difference.
Shinsuke supported the strategy. "That makes marketing much easier. We are not asking customers to understand three different versions of ZEPS 4. They are buying the same console and choosing how much storage they want."
Sayuri added, "It also avoids developers having to consider different hardware performance targets."
Zanichi nodded. "There will be no weaker CPU model. No reduced memory model. I'm not allowing developers to ask which ZEPS 4 they're optimizing for."
Zaboru grinned. "Exactly. One platform. Different storage."
They spent nearly half an hour discussing retailer allocation next. ZAGE-operated stores could tolerate lower direct margins because much of the software revenue remained inside the broader corporate group, but independent retailers still needed enough profit to justify shelf space, launch-night staffing, inventory risk, and promotional displays. Shinsuke argued strongly against using ZAGE's ownership of online sales and distribution to undercut physical retailers immediately.
"If we make our own stores dramatically cheaper," he explained, "retail partners will understand exactly what we are doing. We may gain a little margin but lose shelf support across thousands of locations."
Zaboru agreed. "No price war with our own partners."
That was especially important because physical software still mattered enormously in 2002. Digital distribution might be Zaboru's vision of the future, but broadband penetration remained uneven, large downloads still required patience, and millions of customers simply preferred buying a box from a store.
Then Zaboru changed the slide.
DIGITAL DISTRIBUTION
The financial atmosphere in the room changed immediately.
Sayuri looked at the numbers and smiled for perhaps the first time during the meeting.
Physical games had an enormous number of costs attached to every unit sold. Blue-Ray disc production. Case. Printed material. Warehousing. Freight. Regional inventory. Retail margin. Unsold stock. Damaged products. Returns.
Digital software removed most of them.
Server infrastructure was expensive, especially at ZAGE's scale, but the marginal cost of delivering an additional digital copy was tiny compared with manufacturing another physical package.
Sayuri pointed toward one scenario. "Even after bandwidth, payment processing, account support, storage infrastructure, fraud reserves, and taxes, the contribution margin on a successful digital title can be dramatically higher than physical."
Shiki added, "And we avoid overproduction. If a physical title underperforms, we may have warehouses full of inventory. Digital inventory cannot remain unsold."
Yuna looked toward Zaboru. "Financially, I understand why we want digital."
Zaboru smiled slightly.
Yuna continued, "My question is why the customer should want it."
That silenced the room again.
She gestured toward the physical software figures. "If a physical game costs ¥4,500 and a digital game also costs ¥4,500, the physical version offers a disc, case, artwork, perhaps a manual, something collectible, something that can be lent or resold. Digital offers convenience. That is valuable, but is convenience alone enough?"
Shinsuke nodded. "Especially while physical retail remains culturally dominant and people love collecting stuff."
Zaboru rested both hands against the table.
This was the question he had been waiting for.
"Exactly."
He changed the presentation one final time.
A black screen appeared with a single sentence in silver.
WHY SHOULD A PLAYER CHOOSE DIGITAL?
Zaboru looked around the table. "If all we do is remove the box and charge the same amount, digital distribution becomes a financial miracle for ZAGE and a mediocre deal for the customer. That's not sustainable. If I want people to change the way they buy games, there needs to be value on their side too."
Zaboru's grin slowly returned. "So now that we know how the money works, next we decide something more important."
Yuna raised an eyebrow.
Zaboru clicked the remote, leaving the question glowing across the display.
"How do we make digital worth choosing?"
And this time, nobody in the room treated it like a minor feature.
Because if Zaboru found the right answer, ZEPS 4 would not merely change how people played games.
It could change how they bought them.
To be continued.
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