Faced with a triple threat of domestic problems in light of a declining birth rate, an oversaturated market and rising development costs as technology evolves, Japanese toycos and video game publishers are banding together in an effort to shore up local defenses and focus on building international strength. The past year alone has seen high-profile mergers between Namco and Bandai, Tomy and Takara, and Taito and Square Enix (itself the result of a 2003 coupling).

This movement will come as no surprise to anyone who’s spent time navigating the incredibly fad-driven Japanese market. The toy industry in particular has been experiencing a downward slide, and sales were down by 6.6% last year from around US$7.5 billion in 2001. When this general depression is combined with a lack of hit products and a shift in consumer tastes towards play options offered by new media platforms such as cell phones, mapping out new strategies may well be a necessary move.

The alliances are less about short-term survival and more about strengthening the companies’ positions in the future, says David Cole, founder and president of San Diego-based market research firm DFC Intelligence. ‘The general idea is to build up enough synergy and size to compete on a global basis. If you’re a Japanese company, you’re probably a fairly significant player in Japan, looking for growth overseas.’ To whit, toy exports were up 4.8% last year to US$133 billion, according to the Japanese government, marking the first increase in five years. (The U.S. and Hong Kong accounted for just under half this business.)

For its part, Takara’s international sales have fluctuated between 10% and 20% of its total annual revenues over the past five years (with North America kicking in more than any other territory). A tent-pole component of the company’s post-merger gameplan will be to capitalize on Tomy’s Western distribution strength, particularly in the European preschool market. Takara chairman Keita Satoh adds that new markets like China offer great cause for optimism and are expected to help boost non-domestic sales even more.

‘The toy business overall has become much more challenging, which is why there’s a need for consolidation,’ says John Easum, executive VP of manga publishing giant Viz Media. ‘The direction some of the toy companies in Japan are going in involves being much more present – not as traditional toy companies, but as multimedia game, electronics, entertainment, multi-rights-faceted, international corporations.’

Like the Tomy-Takara alliance, Namco Bandai Holdings, which was established in September, will capitalize on combining toy manufacturer Bandai’s presence in Asia and Europe with game producer Namco’s North American foothold. And while Bandai is no stranger to crossover between entertainment and toys, adding Namco to the mix will let it cross-pollinate its properties in the gaming realm as well, and specific plans are now being drawn up to expand or sharpen the focus of these products. The alliance made Namco Bandai Holdings the third biggest company in Japan’s toy and game market, valued at US$3.9 billion and sitting behind Sega Sammy Holdings (US$4.52 billion) and Nintendo (US$4.51 billion). Its reorganization will include the formation of new subsidiary Namco Bandai Games in April to absorb both companies’ gaming divisions.

The Tomy-Takara joint-venture, which will go by Tomy overseas when it officially launches in March, plans to blend toys with digital media to create and distribute character-based content.

Takara acquired animation studio Tatsunoko Productions earlier this year, and Tomy-Takara partnered with e-commerce and digital content distributor Index Corp. to set up T2i Entertainment, which will ultimately allow users to access its content any time and to pay for products on-line. ‘T2i will be a crucial link in bringing Takara-Tomy’s original content to where young people today are migrating – the mobile and digital worlds,’ says Takara’s Satoh.