Japanese social mobile games

The social games business is still very young, meaning there are a lot of things still to be worked out as certain Japanese companies are finding out right now. A highly profitable sales tactic employed heavily by companies like GREE and DeNA may soon be deemed illegal in Japan, a move which would certainly put a damper on what is a rapidly-expanding portion of the industry in that country.

The issue involves complete gacha, also referred to as compugacha or konpu gacha in Japan. Gacha on its own involves money being handed over in exchange for a random item; this is acceptable in a legal sense. Where complete gacha becomes problematic is in the way it rewards players with a special item for completing a set of items which are obtained randomly. This can, as you might imagine, become an expensive proposition as attempting to collect all the parts of a set can require countless transactions. Comparisons have been drawn between it and gambling, which is largely illegal in Japan.

Over the weekend The Daily Yomiuri reported (via Wired) that sources had indicated Japan’s Consumer Affairs Agency reached the conclusion that complete gacha is in violation of the law. The issue was raised after an increasing number of complaints were received from players who were subjected to high charges or, in some cases, from parents complaining about their children becoming addicted and spending enormous amounts of money. Five such complaints were filed in the 2010 fiscal year, but that number jumped up to 58 in fiscal 2011 as the practice became far more commonplace. The sources indicated social game companies would be told to stop using these sales methods or face punishment of some sort.

The CAA confirmed an investigation was taking place, Nikkei reported yesterday, although the agency claimed it had not yet rendered a decision.

Yomiuri recounted the stories of two young boys, one who spent 400,000 yen (approximately $5,012) in one month, and another who spent 120,000 yen ($1,504) in only three days on games containing complete gacha. Bloomberg also mentioned one user who managed to rack up a whopping 4 million yen ($50,107) in charges over a two-month span. The games themselves are often free to play, although the charges players can accrue are anything but.

These are extreme examples, to be sure, yet it’s important to note that complete gacha is an important aspect of these companies’ bottom lines. The stock for both GREE (owner of the mobile-focused social networking service of the same name) and DeNA (owner of the Mobage cell phone social gaming network) have taken a significant hit, with each falling the maximum 500 yen on Monday before rebounding a small amount today. Those declines represented a 20 percent drop for DeNA and 23 percent for GREE; the latter resulted in founder Yoshikazu Tanaka, Japan’s youngest billionaire, losing $704 million according to Bloomberg.

kompu gacha example

The two, and mobile/social games in Japan as a whole, have been massively successful as of late — a rare bright spot for the Japanese gaming industry, and in fact its entire technology industry. Following their rise to prominence in Japan, overseas expansion has been targeted: GREE recently purchased U.S. developer Funzio, while DeNA obtained U.S. developer ngmoco and its Plus+ social gaming network in 2010 before signing a deal with Disney to develop mobile games earlier this year. But if the companies suddenly find themselves losing out on a significant revenue stream, that could put a real damper on their plans to grow internationally.

GREE and DeNA each instituted a limit on spending for teenagers last month so that, depending upon a player’s age, he or she could spend no more than 5,000-10,000 yen ($63-$126) per month. That may not be enough to save the companies from having the Japanese government intervene, which seems like a strong possibility, and analysts do not paint an optimistic picture if the CAA does indeed decide to ban complete gacha.

“This raises questions about whether the sector’s growth in Japan is sustainable,” analyst Yusuke Tsunoda told Nikkei. Another analyst, Mitsuo Shimizu, told Bloomberg, “The situation remains severe,” also adding, “Their profitability is at risk, depending on the government’s decision.” Makoto Sengoku agreed, stating, “The market for social games may shrink if the warning is issued.”

While DeNA would not comment on the matter, GREE expectedly attempted to downplay the impact of a complete gacha ban. “Even if the ‘complete gacha’ is abandoned, it won’t rock the foundation of GREE,” said Ryutaro Shima. “We will consider introducing new services to spur sales.”

Upheaval in the social/mobile games market would not be shocking in the slightest given its relatively young age. Just last year, concerns were raised about free-to-play game players in the U.S. spending large sums of money on microtransactions/in-app purchases, some of which can cost as much as $100. Complaints about this led to an investigation by the Federal Trade Commission.

With the Japanese games business hardly at its peak, this could prove to be a major setback for one avenue that it was doing exceptionally well in. And it’s not only companies focused on this market that will be impacted — Konami and Capcom are among more traditional game makers with intentions of exploring the space, and so they too would be losing out with a ban on complete gacha (which was reflected when their respective stock prices took a hit yesterday). This might please gamers who don’t wish to see these companies spending any resources on what they don’t consider to be “real” games, although publishers will no doubt look to find other revenues streams beyond complete gacha if that is no longer an option for social/mobile games. Whether they’re able to do so as effectively as they can now, however, is something we’ll have to wait to see.

[Complete gacha example image courtesy of The Daily Yomiuri.]

By Chris Pereira