An overview of mobile gaming in Asia, Part 3: Japan, with Dr. Serkan Toto

Posted on April 3, 2013 by Eric Benjamin Seufert

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The last country covered in the three-part overview of mobile gaming in Asia is Japan, which is fitting given the recent buzz around GungHo Entertainment, the Tokyo-based developer behind Puzzle & Dragons: last week it was reported that Japanese telecommunications firm SoftBank purchased a 58.5% stake in GungHo for $265 million. GungHo’s nearly half a billion dollar valuation was largely the result of the massive revenues generated by its hit game Puzzle & Dragons, which is estimated to have delivered up to $86 million for the developer in January alone.

Independent of Puzzle & Dragons, the Japanese mobile gaming market has traditionally been one of the most active in the world, and 2012 saw a dizzying barrage of activity in Western markets from Japanese gaming powerhouses such as GREE and DeNA. GREE in 2012 was forced to confront its previous strategic overzealousness in the US, laying off a large number of staff last December and closing OpenFeint, the company it purchased for more than $100 million in 2011. DeNA fared better in 2012, with 3rd-quarter revenues up 52% from a year earlier as a result of several hit games, such as Rage of Bahamut and Marvel: War of Heroes, performing well outside of Japan, along with consumption of its virtual currency, Moba-coins.

But unlike with the Chinese and South Korean mobile gaming markets, I was met with a dearth of English-language information about the Japanese market in my search, especially M&A activity and projections for 2013. And where I did find English-language information, the source was invariably one man: Dr. Serkan Toto, the universally-recognized pre-eminent expert on mobile gaming in Japan. Dr. Toto’s blog contains a wealth of analysis about the Japanese gaming market and is a must-read for anyone interested in the region.

Rather than offer a meager and surely unsatisfactory summary of this fascinating if not cryptic market, then, I decided to query the foremost analyst on the region. What follows is an interview I conducted with Dr. Serkan Toto about mobile gaming in Japan.

Speaking first to SoftBank’s recent purchase of 58.5% of GungHo, the developer behind Puzzle & Dragons, for US $265 million — do you consider this a trend that will likely persist into the future?

Serkan Toto: I believe that we will see occasional acquisitions of similar scale, but the usual exit for private mobile gaming companies in Japan will continue to be going IPO. The market caps of listed mobile gaming companies currently range from just US$15-20 million up to hundreds of millions of US dollars, meaning stock markets in Japan can “absorb” gaming companies of different sizes at any given time.

In March, Nomura purchased Sony’s stake in DeNA for US $437 million. Do you think Nomura plans to hold onto this ownership stake for the medium to long term?

ST: That is very hard to say, but my feeling is that Nomura is in DeNA for the long term.

You recently published some very interesting demographic and behavioral data points relating to Japanese gamers. Japanese players seem to match the profiles of players in Europe and North America in terms of occupation (houswives, office workers), the only significant difference being age, with only 18% of Japanese players being younger than 20. To what do you attribute the higher monetization of Japanese players, then?

ST: It is exactly that: one major factor for the higher monetization rate is that players in Japan are older and simply have more disposable income that can be spent on games. Both DeNA and GREE did a great job in the last few years in shifting their user base from teens to 30-40 year olds.

Content providers are reacting, too, i.e. by using IP (anime, manga, etc.) from the 1970s and 1980s. Crooz (a publicly traded company), for example, openly says that their portfolio mainly consists of mobile games targeting men in their 30s and older – because these users have limited time but more money to spend on virtual items.

You state that DeNA and GREE’s platform businesses outside of the US failed and that they’ll be moving into content creation and publishing roles in Japan. Do you think this speaks to a broader market mismatch of platform-within-a-platform in the US?

ST: I think that the platform-within-a-platform paradigm is flawed, as it makes it difficult to align the interests of developers and platform providers.

In the case of these two companies, you also have the problem – as a developer – that they double as platform and game providers. In other words, they will compete with you. They see what works and what doesn’t early – on a higher level and maybe earlier than you. They set the rules, i.e. with regards to promoting games inside their platforms or imposing technical guidelines. If you’re small, they can even “own” you: most agreements (in Japan) are exclusive, meaning games can’t be ported to other platforms.

People often cite the success of KakaoTalk in Korea or LINE in Japan as an exception and suggest WhatsApp could do the same in the US. But first, Korea doesn’t have a GREE or Mobage, destinations dedicated solely to gaming with millions of users. And second, the number of titles is extremely limited so far. LINE, for example, offers 20 games to its 110+ million users at the moment – so even the weak titles get tons and tons of downloads “automatically”.

This doesn’t solve the discovery problem, except for the selected few companies that KakaoTalk or LINE currently accept as partners. And once more games reach these platforms, getting discovered will become a problem: this is exactly what happened to third-party developers on GREE and Mobage in Japan a few years ago (both platforms began at zero, too, and now have 1,500+ games each).

Do you think the success of OTT messaging services in Japan and Asia as a whole can be replicated in the US?

ST: Yes, I think that these services will continue to grow everywhere, including the US. I can’t really imagine a lot of 20-year old males in the US exchanging those cute stickers and icons in LINE or KakaoTalk, but just look at the success of WhatsApp in the US and Europe: the core value is the same in all of these services.

Puzzle & Dragons performed extremely well in Japan but only recently broke into the Top 50 grossing chart for games in the US (at the time of this writing, it is at #42). Rage of Bahamut, however, held a comfortable position in the Top 20 grossing chart for games in the US until last week, when it dropped below 20 (it is currently at #24). What does it take for a Japanese game to experience success in the US market? What changes need to be made?

ST: The key factor is design in my eyes. Puzzle & Dragons is executed extremely well, uses a range of clever monetization angles, and is simply a much better game than Rage Of Bahamut. But Puzzle & Dragons is too cute and looks “too Japanese” in my view to reach a broad audience in the US.

I hope I will be proven wrong, but look at the Japanese games that are doing well in the US. Legend Of The Cryptids, Dark Summoner, Lord Of The Dragons, Rage Of Bahamut, Marvel War Of Heroes, Reign Of Dragons, etc. have one thing in common: they don’t look “typically Japanese” at all. With Marvel, DeNA (or Cygames, to be more exact) goes all in and uses “super-American” IP.

These titles are specifically designed by their Japanese makers to be global-first games, a big difference to P&D.

Also, in the case of Rage Of Bahamut, I think it’s not a big secret that DeNA dumped a lot of money into promoting that particular game. I would doubt the marketing budget for Puzzle & Dragons came even remotely close, at least up to now.

Before the majority acquisition by SoftBank, GungHo was trading at 50x 2012 earnings, and its stock price increased by 23 times in the 12 months prior to the acquisition. The company is not new, though: it was founded in 1998. How hit-driven is the M&A market in Japan?

ST: It is as hit-driven as the entire mobile gaming market here: one game can mean success or failure for entire companies, especially smaller ones. Absolutely nobody anticipated that GungHo, which was a newcomer in mobile, could land such a hit.

Both DeNA and GREE also had early killer titles that were key driving millions of Japanese people to their platforms (which later opened to third-party developers): Mafia Wars clone Kaito Royal in the case of Mobage, and social fishing sim Fishing Star on GREE.

So this development is not really new and can happen anytime again.

Morgan Stanley’s projections for total Japanese social gaming market size for 2012, made early in that year, turned out largely correct: USD $3.65 billion estimated compared to USD $4.16 billion actual. Is the Japanese market at a mature enough stage where projections can capably be made one year forward?

ST: Yes, I think so. Japan is a special case, as a vibrant mobile gaming market has existed since the early 2000s and as social gaming already began on feature phones, in the pre-iPhone era. In other words, predictions can be made based on more historic data points and experience.

And not to forget, Japan is a relatively easy to define (in terms of supply and demand) and closed social gaming market.

Monthly ARPPU in Japan is very large — nearly $50. Do you think the highest grossing Western market games — Candy Crush Saga, Clash of Clans, Modern War — could achieve this kind of monthly ARPPU if they were localized capably? As of right now, Candy Crush Saga is #64 on the Top Grossing charts for games in Japan; Clash of Clans is #103 and Modern War is unranked.

ST: If you look at the situation (current and “historic”) in the console sector, it’s more than clear that – generally speaking – Japanese users tend to play games made by local companies.

Having said that, there is no “discrimination” at play here, so I think mobile games from outside Japan can theoretically achieve this kind of ARPPU as well.

Of the three, I would not bet any money on Modern War. Games with this art style and game play don’t resonate with Japanese players, at least not the mainstream. I can’t think of any such game on the PC, mobile or console that was a big success in Japan.

Candy Crush was recently featured by Apple Japan (after it was translated), but I think the title wouldn’t be considered really “cute” or particularly exciting here. There are tons of puzzle games on GREE, Mobage, iOS, and Android that have a similar look and feel: those using popular IP, for example, have an extra edge.

Clash Of Clans could have made it much, much bigger in Japan, but there is no way without making it available in Japanese.

If you look at the top grossing charts in Japan, you can see that almost all games in the top 50 on iOS and Android come from Japan (or Korea) – with very, very few exceptions.

The Japanese mobile ecosystem breaks down to about 55% Android, 39% iOS, and the rest split between BlackBerry, Windows Phone and others. Do you think Japan is an Android-first market?

ST: The numbers suggest so, but recent reports, for example from App Annie, indicate that iOS can’t be ignored in Japan. I would say that the iPhone is still positioned as the mobile lifestyle product in Japan and that iOS users still pay more for content than Android users.

Also don’t forget that NTT Docomo, Japan’s biggest mobile carrier with 60 million subscribers, doesn’t offer the iPhone – a big pro for Android currently but also testament for Apple’s power over here. Once this changes, the whole market for games will change as well.

What advice would you give to a mobile gaming developer contemplating an entry into the Japanese market?

ST: Whatever you do, you should consider Japan as a completely different market. Do not make the mistake of applying learnings in your home and other markets, i.e. metrics, to Japan: that is a recipe for disaster.

I think that asking yourself if the art style and general “feel” of a game fits is the initial big bullet point here, apart from factors like translation (a must in the case of Japan, even for simpler games), possibly localization (not necessary in all cases), proper marketing (an absolute must in Japan, as anywhere else), customer support (to be offered in Japanese only), and others.

I have spoken with Western mobile game makers that have dumped hundreds of thousands of US dollars in marketing to bring their successful titles to Japan – without any ROI to speak of. Zynga acquired a successful local company and spent millions of dollars while trying to gain a foothold in Japan – and gave up after 2.5 years.

Please keep in mind that today, there is not even a single foreign mobile/social gaming company that’s really successful in this country. So I would strongly advise to not try to sell to Japan unprepared, even though I understand the the big numbers you hear about sound very sexy to developers.

Many thanks to Dr. Serkan Toto for taking the time to participate in this interview.