27 January 2014 Asia Pacific/Japan Equity Research

Softbank, Sony, KDDI and mobile games

Connections Series

Painting the future: Cross-sector investment strategy

■ Domestic hypothesis 1 (Nakayasu/Hayakawa) – Japan SNS game market about to hit a ceiling, high-end gaming developers could claim superior market position: The key to investing in game stocks is to get in early and exit early. Japan’s mobile ARPU (telecom fees + digital content charges) is rebounding and accounting for a higher percentage of users’ disposable income. However, as the telecom services market expands (increase of telecommunication expenditure), the domestic SNS game

market is hitting a ceiling. The market’s recognition of this trend is moving up The Credit Suisse Connections Series the exit timing for game stocks. Console game developers like Square Enix leverages our exceptional breadth of that can develop high-end games could be able to claim superior market macro and micro research to deliver position. incisive cross-sector and cross-border thematic insights for our clients. ■ Domestic hypothesis 2 (Hayakawa) – revaluation of telecoms nearly

completed as sector enters latter half of eight-year cycle: Our eight-year

Research Analysts mobile telecom cycle theory projects sales to expand as the industry moves Hitoshi Hayakawa to smartphones and LTE technology over a cycle consisting of five upbeat 81 3 4550 9952 years followed by three tough years. Smartphone penetration in Japan is [email protected] approaching 50%, but realizing takeup of smartphones by the so-called “late Shunsuke Tsuchiya majority” will entail higher costs and more compelling rate plans. We 81 3 4550 9740 [email protected] therefore are standing down from our bullish stance on the telecom sector and downgrading our sector weighting from Overweight to MARKET Yuki Nakayasu 81 3 4550 9966 WEIGHT. We also downgrade KDDI from Outperform to NEUTRAL. [email protected] ■ Overseas theory 1 (Tsuchiya/Hayakawa) – “Global Sony” and “Global Softbank”: Softbank has enhanced its position as a global company with the recent acquisitions of Supercell, the Finnish game developer of the global smash hit Clash of Clans, and Brightstar, a US-based handset wholesaler with a global marketing network with annual handset sales of over 100mn. The Softbank/Sprint/Brightstar combination could well boost the presence of Sony smartphones and tablets in the North American market. ■ Overseas thesis 2 (Tsuchiya) Sony to start fee-based service with PS4: Sony’s PS4 game console differs greatly from the PS3 in two key regards: (1) it will generate increased ARPU via a fee-based online gaming service and (2) it will bring down Sony’s hardware costs. We expect the game business to be Sony’s primary profit growth driver in FY3/15. Once consumer electronics companies get announcements of additional restructuring and downward earnings revisions out of the way, we look for the stock market to begin factoring in PS4-related upside for Sony.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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27 January 2014 Table of contents

Hayakawa: Telecom sector enters latter half of eight-year cycle 3 However, smartphone momentum fading 4 Current rebound in industry ARPU 5 Nakayasu: Mobile game market outlook: Market maturing as smartphone ARPU converges, signs of shift to high end? 6 Game spending up due to device commoditization 6 Mobile game spreading, growth in smartphone games 7 Mobile game market: Smartphone expansion on hold? 7 User numbers and ARPU: Smartphone game ARPU has hit ¥800 8 Casual household-use console ARPU ¥500–700 8 Smartphone game market: tug-of-war between falling ARPU and growing user numbers 9 Mobile game market: low single-digit quarterly growth rate points to maturing market 10 Shift to high end in mobile games? 10 DeNA, Gree: Urgent need to create hit titles to offset decline in feature phones, which account for 30% of coin usage 11 Valuation 12 Impact of mixi game launches on share prices 12 Historical valuations (1): DeNA and Gree have always traded on a P/E of 10–15x 12 Historical valuations (2): Expectations of GungHo likely to increase until valuation peaks; P/E should subsequently fall to around 10x 13 Historical valuations (3): Colopl seeking peak 13 Need to beware of rapidly piqued expectations as new titles climb up the rankings 14 Dual-axis digital content market 15 Online ratio highest for video games 15 Softbank’s global strategy: games and devices 16 Softbank and mobile device makers: how will the relationship change after Brightstar acquisition? 16 Smartphone games: preload Clash of Clans and distribute free gems? 17 Tsuchiya: PS4 could trigger reevaluation of Sony’s game business 18 Market environment to give PS4 a boost 19 Differences from PS3: Lower hardware costs and volume growth likely to result in higher profits 21 Differences from PS3: Monthly fee income taking off; service revenues poised for growth 22 Sony/Xbox online service 24 Software lineup (PS4 vs. PS3) 25 PS4 hardware shipments could match those for PS3 26 Overseas smartphone business 27

Softbank, Sony, KDDI and mobile games 2 27 January 2014 Hayakawa: Telecom sector enters latter half of eight-year cycle We downgrade KDDI from Outperform to NEUTRAL (see KDDI company report released concurrently) and similarly revise our telecom sector stance from Overweight to MARKET WEIGHT. Our “eight-year mobile telecom cycle” has provided the rationale behind our bullish stance on the sector to date, but that cycle is now entering its second half.

Figure 1: Japanese smartphone adoption two years behind North America

80% US 70% Japan 60% 66.9% 63.9% 65.3% 50% 61.5% 55.6% 57.9% 50.3% 53.1% 40% 46.3% 46.3% 49.0% 43.3% 39.8% 41.1% 30% 36.2% 36.8% 32.4% 20% 27.5% 23.5% 10% 18.8% 14.3% 0% 10.6% 5.7% 8.4% 10-12/10 1-3/11 4-6/11 7-9/11 10-12/11 1-3/12 4-6/12 7-9/12 10-12/12 1-3/13 4-6/13 7-9/13

Source: Company data, Credit Suisse estimates The eight-year cycle theory we have been advocating consists of five years of expansion followed by three years of tougher times. The recent cycle’s five-year growth phase has seen the proliferation of smartphones and LTE, which has driven growth in wireless carriers’ sales and profits. In the three-year downcycle, the penetration rate of the new technologies and products reaches a relatively high level, and one of the telecom providers starts a price war to gain more market share, which is usually a sign that the industry is entering a period of sales and profit contraction.

Figure 2: Previous eight-year cycle (2G --> 3G) (JPY bn) 3G launch phase 3G expansion phase Lack of technological drivers (Price competition) 100% 2,600 90% 80% 76.1% 2,500 70% 2,400 60% 50% 2,300 40% 30% 2,200 20% 2,100 10% 0% 2,000 1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q FY3/04 FY3/05 FY3/06 FY3/07 FY3/08 FY3/09 FY3/10 FY3/11 Penetration rate of 3G and Smartphone (LHS) Total mobile revenue at 3 major telecoms (RHS)

Source: Company data, Credit Suisse

Softbank, Sony, KDDI and mobile games 3 27 January 2014

Figure 3: Current eight-year cycle (3G --> smartphones/LTE) LTE era Smartphone launch phase (JPY bn) Smartphone expansion phase 100% 2,600 90% 80% 2,500 70% 2,400 60% 50% 2,300 40% 30% 2,200 20% 2,100 10% 0% 2,000 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q FY3/11 FY3/12 FY3/13 FY3/14 Penetration rate of 3G and Smartphone (LHS) Total mobile revenue at 3 major telecoms (RHS)

Source: Company data, Credit Suisse

Figure 4: Telecoms outperforming TOPIX by 24.5% since start of Abenomics effect 200% 182.6% Share price performance Relative performance to TOPIX 150% 128.8% 101.2% 100% 78.3% 53.7% 35.2% 37.4% 47.5% 50% 24.5% 0.0% 0% -16.3% -50% -18.6% NTT NTT DoCoMo KDDI Softbank TOPIX 4 co total

Source: Thomson Reuters, Credit Suisse Many market participants thought that the shift to smartphones and LTE supported a bright outlook for industry profits over the near term. Indeed, telecom sector stocks have seen an upward revision to their valuations in 2013. Although profits were also on the upswing, we think this predominant investor view is the main reason that sector stocks have outperformed during the Abenomics-induced market rally. The rates offered by Japan’s three leading wireless carriers have reached an equilibrium condition that is likely to continue. Because LTE-based smartphones and service are more expensive than 3G phones and service, industrywide sales will expand until smartphones’ penetration rate has reached a critical point and providers lower rates to win more users. However, smartphone momentum fading We expect adoption of smartphones in Japan to continue now that NTT DoCoMo has chosen to sell the iPhone. However, based on our recent interviews, we think the customer shift toward smartphones has not picked up to the degree that would normally be expected. In fact, mobile phone companies appear to be spending more than expected to persuade their customers to switch to smartphones—a tough challenge. But why? We attribute this to the shift from the initial phase, in which people start to own smartphones, to a proliferation phase, in which everybody owns one. In Everett Rogers’ “diffusions of innovations” theory on market penetration by new products and services, 50% market penetration is the dividing line between the “early majority” and “late majority” phases of adoption. Smartphones in Japan seem to have entered the late majority phase.

Softbank, Sony, KDDI and mobile games 4 27 January 2014

Current rebound in industry ARPU Mobile digital content seems to be in a phase of full-fledged growth amid an eight-year cycle. Industry ARPU (total of communications charges, plus hardware and digital content fees) has turned upward after bottoming at ¥8,116 in FY3/12. The ratio of such spending to expendable income has also been increasing, reaching 4.6% in March 2013, indicating that consumers are spending more time and money on the mobile internet.

Figure 5: Ratio of industry ARPU to expendable income rising (%) (JPY) 5.0% 4.9% 9,500 4.8% 4.8% 4.7% 9,000 4.5% 4.5% 4.6% 4.6% 4.4% 4.4% 4.4% 8,500 4.4% 4.2% JPY8,479 8,000 4.2% JPY8,116

4.0% 7,500 3/04 3/05 3/06 3/07 3/08 3/09 3/10 3/11 3/12 3/13 % of ARPU in disposable income (LHS) ARPU (JPY/month, RHS) Source: Cabinet Office, Government of Japan, Credit Suisse We think that consumers switching to smartphones in the late majority phase may feel that the trade-off between increased cost and greater convenience has worsened when they consider replacing their feature phones with smartphones. Experience generally shows that companies will need to leverage all their resources to overcome this situation. Methods to do so include cash-back schemes, higher sales commissions, and reduced user fees. In addition to winning new customers from competitors, carriers need to persuade feature phone users (the late majority category) to switch to LTE smartphones. Doing both is likely to result in higher costs. Furthermore, if carriers cut user fees, industry earnings growth would likely hit a ceiling and begin to fall. A look at the eight-year cycle in Figures 2–3 suggests that one carrier will take the initiative and trigger a price-cutting war that leads to the three-year slump seen from the peak in 4Q FY3/08 until 4Q FY3/11. Tablets and other devices doubtlessly have room for further growth. However, carriers are already bundling smartphones and tablets and selling them at large discounts. In other words, carriers have begun to cut fees to persuade users to have not only a main internet connection/phone line, but a secondary one also. Therefore, while we admit that tapping late majority demand will be essential for shoring up the overall telecoms industry, we also envisage a battle of strength based on which company can withstand cost increases and fee cuts. This would be following a fairly universal, much-repeated pattern.

Softbank, Sony, KDDI and mobile games 5 27 January 2014 Nakayasu: Mobile game market outlook: Market maturing as smartphone ARPU converges, signs of shift to high end? Game spending up due to device commoditization Spending on games has generally peaked and bottomed in tandem with the video game console cycle. The game market peaked in 2007 driven by the Nintendo DS and Wii consoles, while the amount spent on equipment not used exclusively for games has steadily increased since then. We estimate that the game market exceeded ¥1.2tn in 2013. Among devices used for other functions in addition to gaming, the proliferation of smartphones is driving a shift from feature phone games, which consisted mainly of web browser-based games, toward smartphone games centered on native applications.

Figure 6: Game market in Japan: exceeding the historical peak, driven by mobile devices 1,400 (¥bn) Video game hardware Video game software

1,200 PC Online game Mobile game

1,000

800

600

400

200

0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

2013E Source: Company data, Dengeki, Credit Suisse estimates

Softbank, Sony, KDDI and mobile games 6 27 January 2014

Mobile gaming spreads, growth in smartphone games The number of feature phones in use in Japan has fallen from 110mn in 2011 to around 80mn. In contrast, the number of smartphones in use in Japan now exceeds 55mn. We expect the figure to reach 100mn over the next 2–3 years.

Figure 7: Mobile phone operating units: smartphones replacing feature phones 160 (mn) Total mobile phone operating unit 140 Smartphone operating unit Feature phone operating unit 120

100

80

60

40

20

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1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q

CY08 CY09 CY10 CY11 CY12 CY13

Source: TCA, Company data Mobile game market: Smartphone expansion on hold? Feature phone spending in the mobile game market has been declining QoQ by more than 10% (¥60bn). It goes without saying that this is depressing Gree and DeNA’s earnings. Meanwhile, the smartphone game market has expanded rapidly, especially Puzzle & Dragons, developed by GungHo Online Entertainment, the LINE instant messaging application, and location-based games developed by Colopl. Quarterly spending on mobile games has exceeded ¥120bn. However, the smartphone market's QoQ growth rate has slowed to the mid-single-digit range as Puzzle & Dragons' growth has leveled off.

Figure 8: Mobile game market: flat QoQ in coming quarter, smartphones compose 75% 200 (80%) (Y bn) (71%) (75%) (Y bn) (68%) 180 Smartphone game market (70%) (60%) 160 Feature phone game market (60%) 140 (51%) Smartphone % of total (RHS) (50%) 120 (42%)

100 (33%) (40%)

80 (30%) (22%) 60 (13%) (20%) 40 (7%) (3%)(5%) (10%) 20 (0%)(0%)(0%)(0%)(0%)(1%)

0 (0%)

4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QE CY08 CY09 CY10 CY11 CY12 CY13 Source: Company data, Credit Suisse estimates

Softbank, Sony, KDDI and mobile games 7 27 January 2014

User numbers and ARPU: Smartphone game ARPU has hit ¥800 We can break down game spending into number of users and average revenue per user (ARPU). Various figures can be employed for the number of users, such as number of units of hardware in use (which is the overall parameter), the number of game downloads, the number of active users, and the number of paying users. However, we estimate the market size by multiplying the number of hardware units in use by ARPU owing to the absence of contiguous accurate data for other user categories. Monthly feature phone game ARPU has declined to around ¥200 since its Jan–Mar 2012 peak. Monthly smartphone game ARPU, however, has picked up sharply since 2010, surpassing ¥800 in Apr–Jun 2013 before trending down for the first time ever in Jul–Sep.

Figure 9: Monthly ARPU for mobile games: smartphone ARPU reached to ¥800 ¥900 Total ARPU ¥815 ¥794 ¥800 Smartphone ARPU ¥768 Feature phone ARPU ¥668 ¥700 Monthly ARPU for Game user of Nintendo DS ¥600 ¥548 finally reached to JPY 500 - 700 ¥502 ¥500 ¥383 ¥400

¥300 ¥253

¥200 ¥144 ¥98 ¥69 ¥100 ¥23 ¥0

¥0

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q

CY08 CY09 CY10 CY11 CY12 CY13 Source: Company data, Credit Suisse estimates Casual household-use console ARPU ¥500–700 We estimate stable ARPU in the mobile game market referencing the Nintendo DS, previously the game console most popular among casual users to date. In a new gaming platform's initial stage, its market predominantly consists of heavy users due to the nature of gaming. ARPU is consequently high during the market's early stages and subsequently decreases as casual gamers enter the market. At the height of Nintendo DS's popularity among casual gamers (five years after its release), monthly ARPU was ¥500–700. We hypothesize that the mobile game market's healthy and sustainable ARPU level is in the same range.

Softbank, Sony, KDDI and mobile games 8 27 January 2014

Figure 10: Monthly ARPU for Nintendo DS, most casual game handheld: dropping to ¥500–700 in the final and saturated stage

Source: Dengeki, Company data, Credit Suisse estimates Smartphone game market: tug-of-war between falling ARPU and growing user numbers If our hypothesis is accurate, mobile game market ARPU is currently slightly higher than the healthy, stable level. As such, we believe ARPU will likely decline gradually with smartphones’ further proliferation. We estimate that the smartphone game market will be 44–102% larger than it is today when smartphone market penetration reaches 100% (120mn units).

Figure 11: Smartphone game market: likely to increase by 44–102% due to falling ARPU and user expansion

ARPU +44%～+102%

Y 794

Y 500~700

Smartphone Penetration

44% 100%

Source: Company data, Credit Suisse estimates

Softbank, Sony, KDDI and mobile games 9 27 January 2014

Mobile game market: Low single-digit quarterly growth rate points to maturing market We estimate that the overall mobile game market will only be 3–44% larger owing to the disappearance of the feature phone market. Assuming smartphone market penetration reaches 100% in 3–4 years, the mobile game market would grow at a CAGR of 1–11%, which means quarterly growth of 0–3%.

Figure 12: Mobile game market: likely to increase by 3–44% in 3–4 years, which means game market will only increase 0–3% QoQ 300 (Y bn) Smartphone game market 250 Feature phone game market +3%~+44% 200

150

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3Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

4QE Best Worst

CY08 CY09 CY10 CY11 CY12 CY13 in 3- 4years Source: Company data, Credit Suisse estimates

Shift to high end in mobile games? On 23 January, Square Enix announced the release of Dragon Quest Monsters Super Light as a free-to-play game. The release topped the free download rankings on Apple Store on the first day and was 11th in sales (as of 4:00 p.m. JST, Google Play rankings were not available as of 8:00 a.m. JST). Looking forward, we expect a string of releases from major third-party developers that are tailored to smart devices, potentially including the Final Fantasy Agito RPG from Square Enix, the Monster Hunter Smart action RPG from Capcom, and a Dragon Collection RPG title from Konami. If these titles do well and the trends toward 1) richer content and 2) multiple genres continue, we could see greater differentiation among successful and unsuccessful developers based on their capabilities, as we predicted about a year ago (for details, please refer to our Impact of higher-spec social network games? report of November 2012).

Figure 13: Mobile game market - scenario analysis for leading stocks High-spec Market High-spec Market Low-spec Market No expansion Probable expansion Probable expansion

Positive 3rd party 3rd party, some SAPs GREE/DeNA, SAP

Neutral Nintendo, SAP GREE/DeNA Nintendo

Negative GREE/DeNA Nintendo, SAP 3rd party

Source: Credit Suisse Note: 3rd party' includes Konami, Square Enix, Capcom, Namco Bandai, etc. SAP refers to GungHo Online Entertainment, Colopl, Klab, Ateam, Drecom, Crooz, etc.

Softbank, Sony, KDDI and mobile games 10 27 January 2014

DeNA, Gree: Urgent need to create hit titles to offset decline in feature phones, which account for 30% of coin usage DeNA and Gree, which drove the feature phone game market, successfully migrated to smartphones and developed new games for the platform by 2012, but their subsequent smartphone games have performed poorly and have failed to make up for the decline in feature phone games. Smartphone games now account for 70% of game coin usage, but the remaining 30% continues to be a declining market segment. We believe DeNA and Gree need to urgently create several hit titles to achieve a turnaround. To compensate for the ¥8bn or so shrinkage of the feature phone game market each quarter, the two companies combined need to place more than five game titles among the top 10 gross sellers on the App Store and Google Play, with each of those titles generating ¥500mn in monthly sales.

Figure 14: Coin consumption of DeNA and Gree, and smartphone composition 140 80% Smartphone game market 73% (Y bn) 67% 120 Feature phone game market 62% 70% 57% Smartphone % of total (RHS) 60% 100 50% 44% 50% 80 36% 40% 60 23% 30% 40 14% 20%

20 7% 2% 3% 10% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 1%

0 0%

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QE

CY08 CY09 CY10 CY11 CY12 CY13 Source: Company data, Credit Suisse estimates

Softbank, Sony, KDDI and mobile games 11 27 January 2014 Valuation Impact of mixi game launches on share prices Mixi began distributing Monster Strike, a native game for the App Store, at end-September 2013. The game is basically free, with players paying for items used in the game. The game has moved steadily up the domestic App Store sales ranking, passing 100th position on 25 October and 50th on 21 November. The company's share price started to rise rapidly around the same time, passing through a succession of maximum allowable one-day gains to reach ¥9,060 on 10 December. It subsequently fell to ¥4,130. However, on 17 December the company started distributing the game via Google Play. The share price rebounded after the game passed 20 in the sales ranking, reaching ¥7,700 at end-December. So far in January, the game has been ranked above 10th in the App Store and 20–25th on Google Play.

Figure 15: Mixi's Monster Strike: Sales ranking and share price (Ranking) 1 ¥10,000 Monster Strike (AppStore) 11 ¥9,000 Monster Strike (GooglePlay) 21 ¥8,000 mixi(2121) Share price (RHS) 31 ¥7,000

41 ¥6,000

51 ¥5,000

61 ¥4,000

71 ¥3,000

81 ¥2,000

91 ¥1,000

101 ¥0 2013/10/25 2013/11/15 2013/12/06 2013/12/27 2014/01/17 Source: AppAnnie, Thomson Reuters

Historical valuations (1): DeNA and Gree have always traded on a P/E of 10–15x Feature phone–era heroes DeNA and Gree's valuations did not rise all that sharply over the three years from 2009 to 2012. Their share prices rose to 6x, while their profit increased to 4x and 10x, respectively. These companies' valuations peaked at 12–15x and did not change all that much subsequently as their share prices tracked profits with a one- to-two-quarter lag. The stocks are currently trading on P/Es of around 10–15x.

Softbank, Sony, KDDI and mobile games 12 27 January 2014

Figure 16: DeNA (2432) – market value and annualized net Figure 17: Gree (3632) – market value and annualized net income income 700 (Y bn) Market Value (Y bn) 70 700 (Y bn) (Y bn) 70 Market Value Annualized NP (RHS) 600 60 600 60 Annualized NP (RHS)

500 50 500 50

400 40 400 40

300 30 300 30

200 20 200 20

100 x 10-15 10 100 10 x 12-25

0 0 0 0

2009 2010 2011 2012 2013 2014

2005 2010 2007 2008 2009 2011 2012 2013 2014 2006 Source: Company data, I/B/E/S, Thomson Reuters Source: Company data, I/B/E/S, Thomson Reuters Historical valuations (2): Expectations of GungHo likely to increase until valuation peaks; P/E should subsequently fall to around 10x Profits at GungHo, which scored a hit with Puzzle & Dragons in 2012, rose to 100x over 15 months from Jan–Mar 2012 through the current peak (Apr–Jun 2013), while the share price rose to 70x. The valuation peaked at 30x. The share price subsequently reflected profits and has now settled at around 15x EPS. In the past we have seen the stock’s valuation tend to rise until the market concludes that a peak will likely occur a few quarters ahead; then, when the market sees the earnings peak, the stock immediately reflects profit levels and valuation tended to fall to mid-10x level. Historical valuations (3): Colopl seeking peak Colopl, which has a number of highly ranked titles by sales in the App Store and on Google Play, such as Quiz RPG: The World of Mystic Wiz, saw its share price rise to 7x over around six months. We cannot calculate the most recent peak valuation as profits have yet to peak. However, applying GungHo's peak valuation (30x) yields quarterly OP of ¥5bn, while applying DeNA and Gree's peak valuation (12–15x) gives ¥10.0–12.5bn.

Softbank, Sony, KDDI and mobile games 13 27 January 2014

Figure 18: GungHo (3765) – market value and annualized Figure 19: Colopl (3668) – market value and annualized net income net income 2,000 (Y bn) Market Value (Y bn) 200 400 (Y bn) Market Value (Y bn) 40 1,800 180 Annualized NP (RHS) 350 Annualized NP (RHS) 35 1,600 160 300 30 1,400 140 250 25 1,200 120

1,000 100 200 x 10-70 20 x 2-30 800 80 150 15 600 60 100 10 400 40 50 5 200 20

0 0 0 0

2014 2012 2013

2013 2014 2012 Source: Company data, I/B/E/S, Thomson Reuters Source: Company data, I/B/E/S, Thomson Reuters Need to beware of rapidly piqued expectations as new titles climb up the rankings Returning to our discussion on mixi, we estimate monthly turnover at ¥100–200mn for stores in the top 20 ranked by sales, ¥200–300mn for stores in the top 10 and around ¥500mn for stores in the top five. The operating margin excluding store settlement charges and operating costs is around 50%. Monster Strike is currently ranked about 10th by sales on the App Store and 20–25th on Google Play. If the game remains at these levels, we look for OP of around ¥150mn on monthly turnover of around ¥300mn. Applying GungHO's peak valuation (30x) to the share price at end-2013 (¥7,700, market cap ¥120bn) yields quarterly OP of ¥1.7bn, while applying DeNA and Gree's peak valuation (12–15x) gives ¥3.5–4.0bn. However, as we still unsure of the peak's timing and level, as with Colopl, we expect the share price to rise on expectations.

Figure 20: Mixi (2121) – market value and annualized net income 350 (Y bn) Market Value (Y bn)35

300 Annualized NP (RHS) 30

250 25

200 20

150 15

100 10 x 50-130 50 5

0 0

2012 2006 2007 2008 2009 2010 2011 2013 2014 2005 Source: Company data, I/B/E/S, Thomson Reuters

Softbank, Sony, KDDI and mobile games 14 27 January 2014

Dual-axis digital content market The digital content market contains two core axes. All digital content can be characterized by their data volume and delivery channels. Data volume becomes progressively larger and heavier across the content gamut of text, audio, single-direction video, and dual- direction video (i.e., video games). The content distribution channels include content packaging, broadcasting, on-site services, and online (PC/mobile) services.

Figure 21: Digital Content market: Two axes – distribution channel and packet & load Channel

Internet Package Broadcast Hub services PC Mobile Book, E-book / E-book / Newspaper, Library Official & Public Text Website Magazine Website

Karaoke / CD / Tape Radio Music streaming Music streaming Voice Concert Packet&Load increase Image (one way) DVD / BD TV Movies Video streaming Video streaming

Image (interactive) Online, NW game Online, NW game Game software Arcade (including SNS) (including SNS) Game Source: Credit Suisse Online ratio highest for video games Japan’s digital content market has not grown at all since we entered the 21st Century. Digital content sales in 2012 totaled ¥8.1tn, slightly lower than the ¥8.2tn recorded in 2000. Video games, the content with the largest data volume, are increasingly distributed via the online channel, with market growth being driven by DeNA and Gree, which have established their dominant position as official platforms on the mobile carriers. Meanwhile, e-books (including magazines), which represent the light end of the content data volume spectrum, have a low online distribution ratio, as platform development has been delayed by a number of hurdles, including copyright issues and the high cost of going digital.

Figure 22: Digital content market: Online penetration proceeds in game, but not in the text and voice and movie market

2000 (¥ 8,200bn) 2012 (¥ 8,100bn)

(42 bn) Texts News paper, book, magazines (News paper, News paper, book, magazines (2,900 bn) book, (3,900 bn) (32 bn) magazines)

CD News paper, book, magazines (76 bn) (460 bn) (550 bn)

Audios CD Karaoke, Concert (Music, Radio) (830 bn) (710 bn)

DVD Pay-TV Theater (500 bn) (1,600 bn) (290 bn) Images DVD Pay-TV Theater (83 bn) (DVD, TV) (460 bn) (1,100 bn) (250 bn)

Games Game software Game center Game software Game center (Package, (270 bn) (400 bn) (130 bn) (520 bn) (470 bn) (500 bn) Browser)

PC Media Mobile Media (including smart phone)

Source: Company data, Credit Suisse estimates

Softbank, Sony, KDDI and mobile games 15 27 January 2014 Softbank’s global strategy: games and devices On 18 October 2013, Softbank announced that Brightstar Corporation would become a subsidiary. Brightstar is the world’s largest distributor of mobile devices by sales. It has offices in over 50 countries and provides services in more than 125. The company handles around 100mn mobile phones each year. The acquisition, which gives Softbank control of the world’s largest mobile phone sales channel, means Softbank will probably have some say over the future of Sony and other Japanese mobile phone makers. Softbank also acquired Finland’s Supercell, developer of the global hit game Clash of Clans. This move is likely to further enhance Softbank’s position in the gaming sector after making GungHo a subsidiary. We see a possibility that Softbank would continue acquiring companies in a range of different business layers.

Figure 23: Softbank is expanding its operations in four business layers Uppler layer Yahoo, Chinese companies, GungHo, Supercell +α?

Sales network Brightstar, Direct shop in Japan and US, Domestic sales agents

Mobile handset manufacturers Apple, Japanese manufacturers, Sony ?

Mobile telecommunication layer Softbank Mobile, Sprint, eAccess, Wireless City Planning, Willcom +α?

Source: Credit Suisse Softbank's efforts to set itself apart from rivals using TD-LTE are also worth noting. FD- LTE is currently the main LTE smartphone telecommunications technology, but many device makers are poised to start launching handsets with dual FD and TD capability from 2014. Softbank and mobile device makers: How will the relationship change after Brightstar acquisition? Softbank is the world’s only mobile communications company with TD-LTE networks in both the US and Japanese markets. However, some think it too early to factor in this competitive advantage for both countries, as US subsidiary Clearwire still needs to build out its TD-LTE infrastructure. In Japan though, the company already has around 30,000 TD-LTE base stations and dual-standard handsets have appeared on the market. However, TD-LTE technology is still low on the radar of institutional investors, as none of the major manufacturers have launched dual-standard handsets at this point. We think investors should take note, because FD/TD-LTE smartphones are likely to be a key development in 2014. We believe the acquisition of Brightstar has given the Softbank group a much stronger negotiating position over Sony and other mobile device makers. Mobile device makers may wonder whether the Softbank group will increase its orders for single-standard FD- LTE handsets once dual-standard handset deliveries begin. As a result, the Brightstar acquisition could encourage device makers to develop handsets for Softbank ahead of other mobile carriers. We think the acquisition of Supercell and the consolidation of GungHo, combined with the acquisition of Brightstar, has opened a wide range of possibilities for Softbank. For example, Brightstar could start distributing handsets preloaded with free games developed by Supercell and GungHo.

Softbank, Sony, KDDI and mobile games 16 27 January 2014

Smartphone games: preload Clash of Clans and distribute free gems? Users of Clash of Clans can buy gems in the game to help them progress faster. Users can do the same in Gungho’s Puzzle & Dragons if they buy magic gems. Softbank could attract subscribers in a new way by preloading apps and offering say ¥2,000 worth of game items in handsets distributed by Brightstar. However, the company would need to preload major hit games to differentiate its handsets from those of competitors in order to make the strategy work. There is no guarantee that Supercell and GungHo will continue to develop hit titles and it is hard to predict how long Clash of Clans and Puzzle & Dragons will remain popular. Nevertheless, with the exception of handsets, the Softbank Group has built solid positions in all communication layers, from upper-layer services right down to mobile communications. We think this will give the company some key advantages in the global battle for the mobile web. Softbank is currently on our restricted list, so we plan to conduct a quantitative analysis of those advantages at a later date. However, some of these ideas could gain ground in the market, providing support to Softbank’s valuation. We also see strong prospects for another major acquisition by the Softbank Group in any one of its business layers.

Softbank, Sony, KDDI and mobile games 17 27 January 2014 Tsuchiya: PS4 could trigger reevaluation of Sony’s game business The stock market currently appears concerned about further restructuring in the consumer PS4 expectations remain electronics industry and, consequently, downward revisions to company earnings low forecasts. The equity market still seems to have low expectations for dedicated game devices. In North America, PS4 sales' initial run rate set a new all-time record for a game device, but the market apparently remains skeptical. It appears to be pricing in no earnings contribution from PS4, only elimination of the risk of losses in Sony's game business. Non-mobile console games are migrating online in earnest (discussed in detail below) Market environment while maintaining the allegiance of many core PC users. This trend is a tailwind for PS4 providing tailwind for Sony with its high-performance hardware specs. The fact that initial hardware losses will be modest in comparison to PS3 is another positive in our view. Accordingly, even if PS4 sales merely equal sales of PS3, which was by no means a hit, If PS4 sales merely match (1) PS4 would contribute to overall top-line growth (game sales could even recover above PS3 sales, profitability ¥1tn) and (2) service revenues should also lift profits (e.g., by boosting ARPU among core should improve substantially users). In such an event, the market would likely reappraise the game business's value. Sony’s online game business should break even in FY3/14 on sales of 150bn. If sales surpass the breakeven mark in FY3/15, the business will begin to generate marginal profits, leading to a big YoY gain. Additionally, if PS4 proves to be a success, the game business would regain its old Reversion to former cyclicality, in which case the equity market would likely discount peak earnings in FY3/16 cyclicality or thereafter. Such a scenario should be beneficial in terms of valuation. We expect it would have a major positive impact on Sony's share price. Expenditures on games have hitherto peaked and troughed in tandem with the home Game spending: rapid game cycle. Game expenditures have been steadily shifting toward general-purpose growth driven by shift to devices since 2007, when the Nintendo DS and Wii home game machines' popularity general-purpose devices peaked. We estimate that the game market is valued at over ¥1.2tn in 2013. In the general-purpose device space, smartphone games, most of which are native apps, have gained predominance at the expense of feature phone games, which were mostly browser games, in the wake of smartphones' proliferation.

Softbank, Sony, KDDI and mobile games 18 27 January 2014

Figure 24: Game segment sales: prospect of topping ¥1tn Figure 25: Game segment operating income: PS4 for first time since FY3/09 hardware losses much smaller than for PS3; see upside in online service revenues (Y bn) PSN (Y bn) 1,400 125 (232) (124) (58) (57) 57 29 2 (27) 37 65 PS4 1,280 1,300 PS3 75 1,200 Others 1,110 27 1,100 1,050 76 40 46.0 1,020 25 50 0 10 980 30 30 30 1,000 950 28 17 20 560 7 2 30 910 269 (8) (12) (1)0 (28) (21) (22) 900 230 50 (25) (7) 800 225 (50) (40) (45) 800 770 530 60 710 700 152 (75) 590 110 600 (200) 560 PSN (125) 500 470 210 450 650 (260) PS4 400 790 410 720 (175) PS3 300 510 270 Others 200 360 160 (225) 300 270 80 100 190 138 115 111

0 (275)

FY06 FY07 FY08 FY09 FY10 FY11 FY12

FY10 FY11 FY06 FY07 FY08 FY09 FY12

FY13E FY14E FY15E

FY14E FY15E FY13E Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Market environment to give PS4 a boost For the game industry, the shift to cloud computing means the business will no longer rely Transition to cloud on hardware specifications (dedicated game consoles will no longer be needed), and computing; polarization eventually the same content may be playable from all kinds of hardware. However, the continues next few years represent a transition period for the industry, including in terms of communications environments, so for now we anticipate that polarization will continue. On one side there are home consoles and PCs, with an expanding range of online Expanding online services services, particularly in overseas markets. This is a market geared heavily to core users, for home consoles offer and thus offers the potential for ARPU growth. Sony is poised to benefit from the high chance to boost ARPU performance offered by the PS4 as well as its PlayStation Network online service platform. As indicated on the next page, online gaming using various fee structures is expanding, Signs of change on the and users are starting to be more accepting of charges. Due to the substantial barriers to content side as well market entry, the business may be more stable than mobile SNS gaming, which has developed into a red ocean market. We expect to see the further development of content suited to online services for home consoles and PCs. On the other side, we see the integration of gaming with smartphones and tablets. The Shift to open platforms for improving performances of mobile devices (the iPhone 5S uses 64-bit chips) and the mobile gaming changes in the communications environment mean that it is increasingly possible to adapt content designed for today’s home and handheld game consoles for use on smartphones and tablets. In terms of game platforms, one key point is the extent to which the shift to open platforms Freedom of movement in will continue, but Sony is in a relatively advantageous position in our view. Compared to Sony’s game strategies Nintendo, the company is exposed to less risk from competition with its own handheld consoles (the earnings contribution of the PS-VITA is already modest), and unlike the Xbox the PS4 is not tied to an in-house operating system. We think PlayStation Mobile, the cross-platform gaming service aimed at developing services for smartphones and tablets, will be increasingly important. We see no risk of cannibalization from the recently unveiled PS-VITA TV, and in fact regard this product as a further step toward maximization of content value.

Softbank, Sony, KDDI and mobile games 19 27 January 2014

Figure 26: North American game market: Geared toward Figure 27: Domestic game market: Geared toward mobile home console-using core gamers; looks to be bottoming gaming, SNS; outlook likely grim for home consoles $4,000 ($ mn) 180,000 (Y mn) SNS Mainly Consoles. Console games weak Looks to be bottoming Console Mainly mobile $3,500 160,000 Console Portable Portable 140,000 $3,000 SNS SNS 120,000 $2,500

100,000 Console $2,000 80,000

$1,500 Portable 60,000 SNS $1,000 40,000 Console

$500 Portable 20,000

$0 0

4Q04 4Q07 4Q10 4Q13 2Q04 3Q05 2Q11 3Q12 1Q04 2Q04 3Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 1Q04 3Q04 4Q04 1Q05 2Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 3Q11 4Q11 1Q12 2Q12 4Q12 1Q13 2Q13 3Q13 4Q13 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Note: Console and portable figures are totals of software and hardware (quarterly moving averages).

Figure 28: Game industry evolution: In transition toward cloud computing; see polarization continuing for now

Category Previously Now (transition) Future (cloud) (1) PC PC PC PC Online Polarization Cloud

Next-gen PS4 Xbox One Wii-U PS4 Xbox One Wii-U PS4 Xbox One Wii-U Consoles

Current PS3 Xbox360 Wii PS3 Xbox360 Wii PS3 Xbox360 Wii Consoles

Current PS-VITA PSP 3DS PS-VITA PSP 3DS PS-VITA PSP 3DS Mobile games

SNS Smartphone Tablet Smartphone Tablet Smartphone Tablet Mobile (2) Source: Company data, Credit Suisse estimates

Meanwhile, in the home game console area concerns are spreading that online games will Ability to play online games cannibalize sales of packaged software. However, as Figure 28 shows, user ARPU has on home game consoles been rising steadily for the Xbox, one of the first home consoles usable with online games. could boost ARPU In Japan, Namco Bandai (7832) has secured higher ARPU since offering online free-to- play games for home game consoles.

Softbank, Sony, KDDI and mobile games 20 27 January 2014

Figure 29: Xbox users’ spending on content (per unit): Figure 30: Changes on content side: Growth in free-to- Upward trend since start of online gaming in 2006 play games for home consoles (Gundam, Namco Bandai) $90 20,000 (Y million)

$80 18,000 Free to Play for Console Native Appli 1,900 2,800 16,000 SNS Mobile 500 $70 1,000 14,000 Feature Phone Game

$60 12,000

10,000 $50 9,000 10,000 8,000 10,000 14,000 15,500 14,000 $40 6,000 3,200 2,200 1,300 4,000 $30 5,000 2,000 4,200 4,200 4,500 3,400 2,700 $20 0 700 300 200

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13

CY02 CY06 CY04 CY05 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY03 FY11 FY12 FY13 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Differences from PS3: Lower hardware costs and volume growth likely to result in higher profits One of the big differences between the PS4 and the PS3 has been the hardware costs in PS4 hardware losses likely early stages. The costs were significantly reduced for the PS4 due to: (1) the use of to be significantly smaller commoditized chips, (2) the commoditization of Blu-ray components, and (3) the decision than with PS3 not to use backwards compatible chips. Much of the PS4 cost is for the DRAM cache memory (8GB/DDR5), intended to be a point of difference from other hardware. PS4 production started during 2Q, but we understand that the company will not record Possible that combined PS4 valuation losses on hardware inventories as of end-September (substantial per-unit losses hardware and software on PS3 hardware are posted as hardware valuation losses each quarter). It is possible business will turn profitable that combined PS4 hardware and software business will turn profitable in the second year. in second year

Figure 31: Hardware cost comparison: Expect much lower initial hardware losses for PS4 than for PS3 PlayStation 4 (2013) Cost ($) % of Sales % of Cost PlayStation 3 (2006) Cost ($) % of Sales % of Cost

GPU $35 10% 9% GPU $85 18% 13% CPU (AMD Chip) $35 10% 9% CPU (Cell Chip) $100 21% 15% HDD (512GB) $45 13% 11% HDD (80GB) $60 13% 9% Blu-Ray Drive $30 9% 8% Blu-Ray Drive $110 23% 17% Power Supply $10 3% 3% Power Supply $10 2% 2% Cooler Assembly $10 3% 3% Cooler Assembly $15 3% 2% DRAM (8GB) $70 21% 18% DRAM (512MB) $25 5% 4% Bluetooth/ WLAN $5 1% 1% Bluetooth/ WLAN $5 1% 1% Controller/ Sensor Bar Cost $35 10% 9% Controller $35 7% 5% GPU (for PS3) - - - GPU (for PS2) $25 5% 4% CPU (for PS3) - - - CPU (for PS2) $25 5% 4% Others $100 - $125 34% 29% Others $140 - $165 32% 24% BOM cost $375 - $400 116% 100% BOM cost $635 - $660 138% 100% Manufacturing cost $10 3% 3% Manufacturing cost $10 2% 2% Total $385 - $410 119% 103% Total $645 - $670 140% 102% Sony Margin ($50) - ($75) -19% - Sony Margin ($175) - ($200) -40% - Whole Sale Price $335 100% - Whole Sale Price $470 100% - Retailer Margin $64 19% - Retailer Margin $82 17% - Retail Price $399 119% - Retail Price $549 117% - Source: Company data, Credit Suisse estimates

Softbank, Sony, KDDI and mobile games 21 27 January 2014

Figure 32: Home console cache memory comparison (DRAM): PS4 No. 1 for both capacity and specifications; superior picture resolution, faster online playing speeds Cache memory crucial to next-gen consoles; PS4 has 9,000 MB 8,000 MB 8,000 MB (DDR3) (DDR5) the edge

7,500 MB PS4 uses DDR5; XboxOne uses DDR3 PS4 supports faster processing (2x?) 6,000 MB

Major specifications gap between PS4/XboxOne 4,500 MB and Wii-U. Also large differences in online capabilities

3,000 MB 2,000MB

1,500 MB 512MB 256MB 256MB 256MB 16MB 32MB 64MB 88MB 0 MB PS1 N64 GC PS2 Xbox Wii X360 PS3 Wii-U X-One PS4 Source: Company data, Credit Suisse Differences from PS3: Monthly fee income taking off; service revenues poised for growth We think revenues from online services may give Sony’s game business earnings upside. Hardware performance The PS4 will come with high-capacity, high-speed DRAM cache memory. This means not geared to online access only superior picture resolution, but also faster online playing speeds and better parallel processing capabilities. Looking forward, we anticipate the development of cloud-based services using technologies from acquisition Gaikai. The immediate goal is to catch up with the Xbox, which leads the way in terms of service Targeting growth in service revenues. Thanks to its large number of users paying monthly fees, service revenues revenues supported by already account for nearly 40% of total Xbox business revenues. At Sony, on the other monthly fee income hand, online sales account for 10–20% of the total for the game business, but most of this represents sales of downloads, and its monthly fee income is limited.

Figure 33: Xbox sales breakdown: Service weighting has Figure 34: Xbox Live user numbers: High percentage of increased users paying subscription fees 0% 20% 40% 60% 80% 100% (mn users) (Penetration%) 50.0 50% CY03 3.0 78.0 118.0 Xbox Live Subscribers 45.0 45% CY04 6.0 132.0 110.0 % of Xbox Users 40.0 40% CY05 11.0 84.0 120.0 35.0 35%

CY06 20.0 98.0 439.0 30.0 30%

CY07 39.0 213.0 320.0 25.0 25%

CY08 68.0 181.0 320.0 20.0 20% 15.0 15% CY09 96.0 130.0 265.0 10.0 10% CY10 125.0 167.0 318.0 5.0 5%

CY11 184.0 113.0 394.0 0.0 0%

CY12 239.0 67.0 235.0

3Q10 4Q11 1Q13 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 4Q10 1Q11 2Q11 3Q11 1Q12 2Q12 3Q12 4Q12 2Q13 (Y billion) CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12CY13 Service Software Hardware Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Softbank, Sony, KDDI and mobile games 22 27 January 2014

Figure 35: Sales breakdown at Sony’s game business: Figure 36: Content vendors’ royalty rates: PSN structured PS4 could boost service revenues, albeit behind Xbox such that profit should increase in tandem with scale (Royalty Payment%) 0% 20% 40% 60% 80% 100% 45% 40% FY05 326.0 633.0 40%

FY06 317.0 700.0 35%

FY07 30% 30% 349.0 935.0 30% FY08 249.0 795.0 25% 25% FY09 208.0 737.0 20% FY10 50.0 242.0 615.0 15% FY11 59.0 231.0 515.0 10% FY12 105.0 161.0 441.0 5% FY13E 150.0 142.0 476.0 0% FY14E 221.0 150.0 579.0 App Store Google Play Package Game Online Game Service Software Hardware (Y billion) (PSN)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse However, as noted above, the shift to online gaming is continuing not only on the hardware side (platform side) but on the content side as well. We think PlayStation Network has the potential to generate service revenues in line with those produced by Xbox. Assuming Sony could achieve a fee rate on par with Xbox, it could conceivably boost FY3/16 OP by ¥20–30bn from monthly fee income (PS Plus + services) alone. The impact on Sony’s overall earnings would be substantial. Furthermore, growth in the number of fee-paying PlayStation Network users would likely have a positive impact on all Sony content platforms, including motion pictures and music as well as games. Game content is one of the few factors setting Sony apart from its competition, so we will be watching to see how the company makes the most of this.

Figure 37: Simulation of operating profit contribution from monthly fee income (PS Plus Service revenues on par + services) (¥bn) with leader Xbox would ARPU /month PS4 Hardware Peak Unit ('000) greatly impact OP $5.0 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000 5% 3,000 3,000 3,000 4,000 4,000 4,000 4,000 4,000 10% 6,000 7,000 7,000 7,000 7,000 8,000 8,000 8,000 15% 9,000 10,000 10,000 11,000 11,000 11,000 12,000 12,000 (1) 20% 13,000 13,000 14,000 14,000 15,000 15,000 16,000 16,000 25% 16,000 16,000 17,000 18,000 18,000 19,000 20,000 20,000 30% 19,000 20,000 20,000 21,000 22,000 23,000 23,000 24,000 35% 22,000 23,000 24,000 25,000 26,000 26,000 27,000 28,000 (2) 40% 25,000 26,000 27,000 28,000 29,000 30,000 31,000 32,000 45% 28,000 29,000 31,000 32,000 33,000 34,000 35,000 36,000

PS PS Plus+Subscriber (x) 50% 32,000 33,000 34,000 35,000 37,000 38,000 39,000 40,000 55% 35,000 36,000 37,000 39,000 40,000 42,000 43,000 44,000

Note: (1) shows current level, (2) assumes fee rate on par with Xbox. Source: Company data, Credit Suisse estimates

Softbank, Sony, KDDI and mobile games 23 27 January 2014

Sony/Xbox online service

Figure 38: Sony’s online services: Expect focus going forward on PS Plus, cloud services Service Notes Fee structure

Online games Competitive and coop gaming, multiplayer pairing Basic Service Free Friend functions Account holders can become friends. Full range of chat and other functions.

PS Store Software downloads Download games and additional content. Fee (partly free)

Free play Play older games for free (more than 55/year) Discounts Some games provided at discounted prices Monthly fees Game trials Download and play trial versions of games (1 month ¥500) PS Plus Advance trials Advance access to trial versions, early purchasing of content PS Network (3 months ¥1,300) Demo movies Demos, trailers, etc (12 months ¥5,000) Additional content, etc Downloads of additional maps, etc System service Auto updates, backups of saved data, etc

Cloud Gaming Cloud gaming service Due to develop on PS4/PS3/PS-VITA/PS-VITA TV using technology from acquisition Fee Gaikai. Expected to leverage content

PS Home Social games Games simulating everyday life. Create avatars, purchase items, etc Usually free

Video Unlimited Video service Purchase content, such as movies, TV shows Fee

Music Unlimited Music streaming service Unlimited access to 15mn songs for fixed fee Fixed (¥980/mo)

Play Memories Cloud video service Unlimited/free uploads of smartphone/PC photos Basically free Automatically organizes uploaded photos. Share with friends.

Source: Company data, Credit Suisse

Figure 39: Xbox online services: Even higher weighting of fee-based services than Sony Type Service Notes Fee structure

Online competition/cooperative play Player skill-based multiplayer pairing Gold only Members discount Discounts on purchases of downloaded content Gold only Priority receipt of content Demos supplied earlier Gold only Xbox Live arcade Download existing games Fee Game Games on demand Full downloads of Xbox, Xbox360 content Fee Additional game content Downloadable content such as additonal maps Fee (partly free) Theme and gamer icons Downloadable icons and other content Fee (partly free) Demos and beta versions Demos, etc Free Latest game video Download demo video clips, etc Free

Xbox Video Proprietary video streaming service Fee Hulu External fee-based video streaming service Gold only Rakuten ShowTime External fee-based video streaming service Gold only Machinima Image content created from games Gold only Gold Entertaiment Game Trailers Video service, centered on trailers Gold only membership YouTube Affiliated with largest video sharing site Gold only (1 month:$7.99) WSJ Live Video streaming service Gold only (3 months:$19.99) MLB.TV Sports video streaming service Gold only (12 months:$49.99) NBA Game Time Sports video streaming service Gold only

Beacon Indicate status through affiliation with Facebook, etc Free Bing Search Free Chat function 1 Text/voice chat Free Chat function 2 Video chat, etc Gold only Social Cloud storage Save data and access friend lists Gold only Sky Drive Cloud storage service for video Gold only Let's connect via Kinect Video chat, etc Free Avatar Avatar creation Free

SmartGlass Allows mobile devices to act as second screens Free Portable Shared services for various devices Shared with Windows 8, smartphones, etc Free

Source: Company data, Credit Suisse

Softbank, Sony, KDDI and mobile games 24 27 January 2014

Software lineup (PS4 vs. PS3) The strong software launch lineup for the PS4 is probably one reason for the healthy level North America: strong lineup of preorders. Overseas developers are offering a stronger range of major titles for the PS4 of major titles from overseas launch in North America than they did with the PS3. Many more games are also developers, greater online compatible with online content, suggesting users will access Sony’s online services. gameplay compatibility

Figure 40: Software lineup at launch (North America): PS4 vs. PS3 PS4 Launch Titles (US) Publishers Media Type PS3 Launch Titles (US) Publishers Media Type 1 PlayRoom SCE Pack-in 1 NBA 2K7 2K Sports Package 2 NBA 2K14 2K Sports Package/ PSN 2 NHL 2K7 2K Sports Package 3 Angry Birds Star Wars Activision Package/ PSN 3 Call of Duty 3 Activision Package 4 Call of Duty: Ghosts Activision Package/ PSN 4 MARVEL: ULTIMATE ALLIANCE Activision Package 5 Skylanders Swap Force Activision Package/ PSN 5 Tony Hawk’s Project 8 Activision Package 6 Battlefield 4 EA Package/ PSN 6 The Elder Scrolls IV: Oblivion Bethesda Softworks Package 7 FIFA 14 EA Package/ PSN 7 EA Sports Fight Night Round 3 EA Package 8 Madden NFL 25 EA Package/ PSN 8 Madden NFL 07 EA Package 9 NBA Live 14 EA Package/ PSN 9 Need For Speed Carbon EA Package 10 Need for Speed: Rivals EA Package/ PSN 10 Tiger Woods PGA Tour 07 EA Package 11 Killzone Shadow Fall SCE Package/ PSN 11 Mobile Suit Gundam: CROSSFIRENAMCO BANDAI Package 12 Knack SCE Package/ PSN 12 RIDGE RACER 7 NAMCO BANDAI Package 13 Assassin's Creed IV Ubisoft Package/ PSN 13 Genji: Days of the Blade SCE Package 14 Just Dance 2014 Ubisoft Package/ PSN 14 NBA 07 SCE Package 15 Injustice Warner Bros Package/ PSN 15 Resistance: Fall of Man SCE Package 16 LEGO Marvel Super Heroes Warner Bros Package/ PSN 16 Full Auto 2: Battlelines SEGA Package 17 Contrast Compulsion Games PSN / PS Plus 17 Sonic the Hedgehog SEGA Package 18 Warframe Digital Extremes PSN / F2P 18 Untold Legends Dark Kingdom Sony Online Entertainment Package 19 Trine 2: The Complete Story Frozenbyte PSN 19 Blazing Angels Squadrons of WWIIUbisoft Package 20 Resogun Housemarque PSN / PS Plus 20 Tom Clancy's Rainbow Six Vegas Ubisoft Package 21 DiveKick One True Game Studios PSN 21 F.E.A.R. Vivendi Universal Games Package 22 Sound Shapes Queasy Games PSN 23 DC Universe Online Sony Online Entertainment PSN / F2P 24 Flower That Game Company PSN 25 Super Motherload XGen Studios PSN 26 Blacklight: Retribution Zombie Studios PSN / F2P Source: Company data, Credit Suisse estimates In Japan, where Sony has delayed the launch of the PS4, the list of launch titles is much Japan: Large increase in stronger than when the PS3 was released. Home video game consoles face a tough titles compared with PS3 environment in Japan due to the popularity of mobile phone and SNS games, but we see launch limited risk of competition with the Xbox. Expectations for the Japanese market are already low, so we see room for upside to sales.

Figure 41: Software lineup at launch (Japan): PS4 vs. PS3 PS4 Launch Titles (Japan) Publishers Media Type PS3 Launch Titles (Japan) Publishers Media Type 1 PlayRoom SCE Pack-in 1 Mobile Suit Gundam: CROSSFIRENAMCO BANDAI Package 2 Call of Duty: Ghosts Activision/ Square Enix Package/ PSN 2 RIDGE RACER 7 NAMCO BANDAI Package 3 Strider Hiryu Capcom Package 3 Genji: Days of the Blade SCE Package 4 Battlefield 4 EA Package/ PSN 4 Resistance: Fall of Man SCE Package 5 FIFA 14 EA Package/ PSN 5 SEGA Golfclub SEGA Package 6 Natural Doctrine Kadokawa Games Package/ PSN 7 Sangoku Muso 7 Koei Tecmo Package/ PSN 8 Drive Club SCE Package/ PSN 9 Killzone Shadow Fall SCE Package/ PSN 10 Knack SCE Package/ PSN 11 Ryu ga gotoku SEGA Package/ PSN 12 Assassin's Creed IV Ubisoft Package/ PSN 13 Watchdogs Ubisoft Package/ PSN 14 E Mah-Jong Arc System Works PSN 15 Dream Club D3 PSN 16 Su-Doku 4 Hamster PSN 17 Diki-Doki Universe SCE PSN 18 Hohokum SCE PSN 19 RESOGUN SCE PSN 20 FF14 Online Square Enix PSN Source: Company data, Credit Suisse estimates

Softbank, Sony, KDDI and mobile games 25 27 January 2014

PS4 hardware shipments could match those for PS3 Our main scenario assumes PS4 shipments of 5mn units in the first year, followed by While market unlikely to 10mn in the second, and peaking at 14mn. Given the continued downward trend in expand, risk of new lows is volumes in Japan, which accounts for 10–20% of the total home game console market, limited overall growth is hard to imagine. However, in overseas markets, (1) we think the bottom of the cycle may be higher than previously seen and (2) there are signs that a bottom is now forming. With a solid base of core users still in place, we think there is little risk that shipments will fall to the lows suggested by market concerns. Meanwhile, we think Sony is poised to increase its market share, particularly overseas. With growth in market With the continuing shift to online gaming via home consoles, we see favorable conditions share, shipments could for a warm welcome for the high-spec PS4. On the other hand, we think Nintendo, with its match PS3 gearing to light users and less impressive hardware performance, is likely to suffer. As for competition with the Xbox One, we think the PS4’s lower hardware price point will give it an advantage in the early stages (the PS4 is priced at $399, not including camera, while the Xbox One is $499 with camera).

Figure 42: Home console global market shares: See Sony, Figure 43: Hardware shipments in first two years: Xbox rising, Nintendo falling 13–15mn possible through early adopters 0 5,000 10,000 15,000 20,000 25,000 30,000 70% 66% PS1 3,500 9,200 12,700 60% PS2 6,400 18,600 25,000

Sony PS3 3,600 9,200 12,800 50% 46% PSP 3,000 14,100 17,100 40% ? 40% 1st year 35% ? Xbox 1,500 6,100 7,600

31% Xbox Xbox360 1,500 8,800 10,300 2nd year 30% 24% 25% ? N64 6,100 9,400 15,500

20% 18% 16% GC 3,800 5,800 9,600 Wii 5,800 18,600 24,400 10% Wii-U 3,500 7,500 11,000

Nintendo GBA1,100 17,100 18,200 0% PS2 PS3 PS4 Xbox X360 XOne GC Wii Wii-U NDS 5,300 11,500 16,800 Sony MSFT Nintendo 3DS 3,600 13,500 17,100 ('000 units)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse

Figure 44: Comparison of peak sales volumes for game consoles: peak of just under 15mn units by no means high 35,000 4 yr 4 yr 5 yr 5 yr 4 yr 4 yr 4 yr 7 yr 6 yr 2 yr 2 yr 3 yr 4 yr 5 yr 2 yr 4 yr (Unit '000) 31,200 30,000 26,000 Win 25,000 22,500 21,600

20,000 17,800 17,600 15,800 14,900 15,000 14,300 14,100 14,000 Normal 10,600 10,000 9,400 7,000 6,300 5,800 5,000 Lose

0 PS1 PS2 PS3 PSP PS4 Ave Xbox Xbox360 Ave N64 GC Wii GBA NDS Wii-U Ave Sony Xbox Nintendo Note: Yellow boxes show year in which sales volume peaked Source: Company data, Credit Suisse

Softbank, Sony, KDDI and mobile games 26 27 January 2014

Overseas smartphone business Room for expansion in North America & Asia; top-line growth is possible Outside of the PS4, one potential driver of top-line growth from FY3/15 is the development Business in N. America and of Sony’s smartphone business, particularly overseas. In the near term, shrinking domestic Asia to pick up from FY3/15 market share due to factors such as NTT DoCoMo’s iPhone launch is a concern. However, with stepped-up efforts in the markets of North America and Asia, we anticipate that Sony’s smartphone growth will continue to outpace the market as a whole for the time being. Anticipating improved profitability in content and peripherals We expect profit growth to accompany higher sales. However, there are signs that high- Emerging competition with end products are peaking out in developed markets. Specifications for products marketed commodity products in developing nations, which are likely to drive volume growth, are still low. Taking the commoditization of smartphones into account, we do not anticipate high levels of profitability in this business. For this reason, revenues from content and services are critical going forward. In particular, successful fee-based services for the PS4 could hold the potential to take fee-paying user numbers into the tens of millions. We also think this will have positive implications for Sony products with close affinity with such content and services (although at this point we have not reflected any such impact in our earnings forecasts). In addition, we see potential for improved profitability in smartphone peripherals. We understand lens-type cameras will be marketed through telecom carriers. These are less susceptible to pricing pressure compared to sales of AV products through large electronics retailers. We also there is room for growth through installment sales and other channels (again, we have not yet factored any impact into our forecasts).

Figure 45: Sony’s smartphone market share (CY12–13): Figure 46: Smartphone market comparison (CY12–13): Focus to date on Japan, Europe; stepping up efforts in Large markets in North America & Asia leave ample scope North America & Asia from FY3/15 for Sony to grow sales volume (Market Share%) (Unit, million)

Latin America 7.2% Latin America 90.0

Eastern Europe 6.8% Eastern Europe 50.0

Middle East and Africa 6.8% Middle East and Africa 90.0

North America 0.4% North America 140.0

Japan 10.0% Japan 40.0

Western Europe 6.0% Western Europe 140.0

Asia Pacific ex. Japan 2.5% Asia Pacific ex. Japan 450.0

0 100 200 300 400 500 0.0% 3.0% 6.0% 9.0% 12.0% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Softbank, Sony, KDDI and mobile games 27 27 January 2014

Companies Mentioned (Price as of 24-Jan-2014) Apple Inc (AAPL.OQ, $546.07) Ateam (3662.T, ¥9,040) Brightstar Corp. (Unlisted) Capcom (9697.T, ¥1,930) Colopl (3668.T, ¥4,110) CyberAgent, Inc (4751.T, ¥5,170) DeNA (2432.T, ¥2,205, NEUTRAL[V], TP ¥2,600) Gree (3632.T, ¥1,180, NEUTRAL[V], TP ¥1,100) GungHo Online (3765.T, ¥683) KDDI (9433.T, ¥6,127, OUTPERFORM, TP ¥6,000) Konami (9766.T, ¥2,367) NTT DoCoMo (9437.T, ¥1,704) Namco Bandai Holdings (7832.T, ¥2,195) Nintendo (7974.T, ¥13,560) Softbank (9984.T, ¥8,242) Softbank Mobile (Unlisted) Sony (6758.T, ¥1,763, OUTPERFORM[V], TP ¥2,600) Sprint Corp (S.N, $8.4) Square Enix Holdings (9684.T, ¥2,081) Supercell (Unlisted) WILLCOM, Inc. (Unlisted) Wireless City Planning (Unlisted) Yahoo Japan (4689.T, ¥615) eAccess (Unlisted) mixi (2121.T, ¥6,880, UNDERPERFORM[V], TP ¥900)

Disclosure Appendix Important Global Disclosures Hitoshi Hayakawa, Shunsuke Tsuchiya and Yuki Nakayasu each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for DeNA (2432.T)

2432.T Closing Price Target Price Date (¥) (¥) Rating 01-Dec-11 2,330 3,000 O * 21-May-12 1,953 2,200 N 10-Dec-12 2,916 2,200 U 17-Jan-13 3,170 2,800 12-Apr-13 2,575 2,800 N 18-Jul-13 2,045 2,200 15-Jan-14 2,349 2,600 * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM NEUTRAL UNDERPERFORM

Softbank, Sony, KDDI and mobile games 28 27 January 2014

3-Year Price and Rating History for Gree (3632.T)

3632.T Closing Price Target Price Date (¥) (¥) Rating 01-Dec-11 2,457 3,500 O * 06-Apr-12 1,982 3,300 22-May-12 1,376 1,400 N 12-Apr-13 1,180 1,200 18-Jul-13 848 800 15-Jan-14 1,133 1,100 * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM NEUTRAL

3-Year Price and Rating History for KDDI (9433.T)

9433.T Closing Price Target Price Date (¥) (¥) Rating 07-Feb-11 2,392 3,250 O 30-May-11 2,855 3,350 27-Sep-11 2,880 2,750 N 29-May-12 2,468 2,850 O 24-Oct-12 3,020 3,900 18-Apr-13 4,150 5,000 06-Sep-13 4,895 6,000 * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM NEUTRAL

3-Year Price and Rating History for Sony (6758.T)

6758.T Closing Price Target Price Date (¥) (¥) Rating 25-Aug-11 1,581 2,400 O 09-Sep-11 1,557 R 13-Oct-11 1,562 2,400 O 13-Jan-12 1,327 1,500 N 20-Feb-12 1,681 1,750 10-Oct-12 897 900 14-Mar-13 1,503 1,600 25-Oct-13 1,851 2,600 O * Asterisk signifies initiation or assumption of coverage. OUTPERFORM REST RICT ED NEUTRAL

Softbank, Sony, KDDI and mobile games 29 27 January 2014

3-Year Price and Rating History for mixi (2121.T)

2121.T Closing Price Target Price Date (¥) (¥) Rating 01-Dec-11 2,765 2,500 N * 06-Apr-12 2,105 2,200 03-Aug-12 1,104 1,200 17-Jan-13 1,918 1,500 U 18-Jul-13 1,447 1,200 01-Oct-13 1,248 900 * Asterisk signifies initiation or assumption of coverage.

NEUTRAL UNDERPERFORM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 43% (54% banking clients) Neutral/Hold* 41% (48% banking clients) Underperform/Sell* 14% (43% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Softbank, Sony, KDDI and mobile games 30 27 January 2014

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for KDDI (9433.T)

Method: Our ¥6,000 TP comes from ¥6,055 using a theoretical P/E of 12x and average of FY3/15-16E EPS of ¥505 (fully-diluted). Our multiple uses the two-year sector average P/E (10.7x) and KDDI's sector-relative P/E plus one standard deviation (10.7 x 1.1 = 12). Risk: Risks to our ¥6,000 target price include intensifying competition in smartphone sales and pricing, and delay in bottom-out of ARPU.

Price Target: (12 months) for mixi (2121.T) Method: We expect share price formation to be guided by BPS until prospects for profitability are clearer. We set our target price at ¥900 by applying a P/B multiple of 1.0x to our end-FY3/14 BPS forecast. Risk: Upside risks to our ¥900 target price for mixi include 1) stepped-up media activity resulting from alliances with other companies or acquisitions or 2) indications of earnings contributions from new applications and services (B2B/B2C).

Price Target: (12 months) for DeNA (2432.T) Method: Our ¥2,600 target price for DeNa is based on a fair-value P/E of 11x, the average for the social network game sector, applied to our adjusted EPS estimate for FY3/15.

Risk: Upside risks to our ¥2,600 target price for DeNa include the development of hit first-party games in Japan and growth in the number of fee-paying users overseas. Downside risks include a faster rate of Mobage user loss in Japan.

Price Target: (12 months) for Gree (3632.T) Method: Our ¥1,100 target price is based on a fair-value P/E of 11x, the average for the social network game sector, applied to our ¥98.3 adjusted EPS estimate for FY6/15.

Risk: Upside risks to our ¥1,100 target price for Gree include (1) growth in the number of fee-paying users overseas and (2) new earnings contributions from areas outside the domestic game business. Downside risks include an accelerating decline in coin consumption by feature phone users.

Price Target: (12 months) for Sony (6758.T) Method: We think the PS4 could drive top-line growth from 4Q, and see the relative P/B rising as it did during the last phase of top-line growth. We base our ¥2,600 target price for Sony on a fair-value P/B of 1.1x (sector averages are 1.3–1.5x), applied to FY3/15E BPS.

Risk: Risks that may cause the share price to diverge from our ¥2,600 target price for Sony include: (Downside risks: (1) poor performance for the PS4 and smartphones; (2) a sharp decline in demand for PCs, TVs, and digital cameras; and (3) a stronger yen.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (6758.T) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided non-investment banking services to the subject company (6758.T) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (9433.T, 2121.T, 2432.T, 3632.T) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (6758.T) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (6758.T).

Softbank, Sony, KDDI and mobile games 31 27 January 2014

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (9433.T, 2121.T, 2432.T, 3632.T, 6758.T) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Japan) Limited ...... Hitoshi Hayakawa ; Shunsuke Tsuchiya ; Yuki Nakayasu

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Softbank, Sony, KDDI and mobile games 32 27 January 2014

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