Two Japanese firms are challenging the world to a new kind of video game

Freemium mobile gaming has been a huge boom in Japan because the two major firms DeNA and GREE have agressively expanded its business. The main revenue sources are micropayments of items used in the game. This business model has created a succeful 500 billion JPY (6.25 billion USD) market in Japan. Now both companies are trying to expand to the global market.

Will their current business model of:
- Making shorter, punchier games
- Closed privacy social gaming platform
- Opening incomplete games into the market in order to gain user insights as well as user relenvancy
work in a global environment?

The sum of DeNA and GREE's revenue and profit exceed those of Facebook's.
It will be interesting to see whether their momentum will carry out in the global environment.

Economist Nov 17th 2012 | TOKYO | from the print edition

ONE of the latest hits from DeNA, a Japanese mobile-gaming company, is called “Blood Brothers”. The hero is a vampire who unites his allies against his enemies in a pact of blood. But that’s not the scary part.

On Google Play, a social-gaming site where “Blood Brothers” is the current top-grossing American game, the fans’ reactions include: “very addictive”, “very fun and addictive” and “so addictive”. Could it be that, after years of waning popularity, the world is once again falling in love with Japanese video games? And although reviewers have been jovially describing good games as “addictive” for years, might the fun be wearing thin? Are some of these new products so compulsive that people should worry about them?

In Japan, DeNA and GREE, its local rival, have become household names in the past few years. Already, they challenge Nintendo and Sony. Their business model is based on “freemium” social games that cost nothing to download to a mobile phone or tablet, but charge small fees—say, ¥100 ($1.25)—for add-ons that bolster the chance of winning.

DeNA, which claims 45m users for its Mobage (pronounced “Mobagé”) platform in Japan, made an operating profit of ¥20.4 billion in the quarter that ended on September 30th. That is more in three months than Nintendo hopes to make for this whole year—even with the launch of its new Wii U console this month. On November 14th GREE said its operating profits were ¥15.75 billion, 5% lower than the same quarter last year.

Neither company wants to focus only on Japan. Both are paying fortunes to buy games developers in order to expand in America, Europe, China and South Korea. Isao Moriyasu, DeNA’s boss, takes his cue from console manufacturers, which he says sell seven times more goods outside Japan than inside. He thinks Japan’s ¥500 billion social-mobile games market could expand as much globally.

Yoshikazu Tanaka, the 35-year-old founder of GREE (and Asia’s youngest self-made billionaire), believes that if you add in emerging markets the growth potential soars. The rich world, he says, grew up playing costly games on consoles. The developing world is being introduced to free games via smartphones. There may be ten times as many smartphone gamers as console users, Mr Tanaka reckons.

That means nothing if you cannot make money, but DeNA and GREE insist they can. Their combined revenues and profits last year exceeded those of Facebook, the billion-strong social network. In contrast, Zynga, the biggest global games provider on Facebook—and until recently a darling of the casual-gaming business—lost $400m.

The secret of their success, they say, is their head start in Japan thanks to fast mobile-phone networks that made it easy to play games while commuting, or during spare moments. By studying their customers, they learned a lot. DeNA, for example, found that the average user played for seven minutes, five times a day. So casual gamers need shorter, punchier games than do hard-core gamers who goggle at big screens for hours at a time.

As the power and popularity of smartphones has grown (see chart), games have become more sophisticated. As platforms for gaming, phones and web browsers have advantages over consoles: DeNA first puts out its games on browsers rather than applications, which allows for “tweaking and tuning” in real time, says Mr Moriyasu. A Japanese game may be only 20% completed when it is made available to gamers. Its developers believe this enables them to finesse it, so that it stays popular for longer. For example, Mobage’s “Rage of Bahamut” has been all the rage since April.

Critics, however, argue that such fiddling is used to hook the customer at his weakest point and to extract huge sums of money in add-ons. They note that neither company gives a full breakdown of revenues per user, so it is hard to know how much is generated from the most obsessive gamers. This poses a regulatory risk. In May Japan’s Consumer Affairs Agency cracked down on an aggressive sales technique called “complete gatcha”, in which users collected randomly generated tokens that the regulator likened to a slot machine. Some children were forking out tens of thousands of yen on their parents’ accounts, it claimed.

GREE and DeNA say they have since stopped the practice. This month they set up a self-regulatory body in Japan to offer guidance to youngsters. “We don’t want our users to spend too much. It’s very important to become a sustainable business model,” says Ryotaro Shima, head of GREE’s European arm.

Still, both firms are ambitious: they say they want to become the “Facebook of social gaming”. And why not? Japan has shown the way in video games, from Space Invaders to Nintendo’s Super Mario. If DeNA and GREE fulfil their ambitions they would become one of the first internet platforms outside Silicon Valley to become truly global. That’s a goal that both of them think is worth fighting for.