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Consolidation Accelerates In Japan's Mobile Gaming Market

Japan's mobile gaming industry, at US$7.5 billion the world's biggest according to Deutsche Bank , is undergoing a radical shift. The consolidation the sector is seeing right now can be interpreted as a sign of things to come in other mature markets.

Shortly after DeNA (2432) and GREE (3632) pioneered the concept of mobile gaming as the world knows it today (free-to-play business model, bite-sized content embedded in social networks to increase stickiness, data analysis to improve monetization, etc.) in 2006/2007 on feature phones, a flood of new developers entered the Japanese market.

The acceptance of local users to consume and pay for games on their mobile devices, a gaming culture deeply rooted in Japanese society, and other specific factors led to the birth of a whole new industry about nine years ago.

Today, Japan's mobile gaming market is not only the biggest globally by revenue but also the oldest, most mature - and extremely competitive (the largest number of listed mobile game developers worldwide, hundreds of private ones, increased influx of foreign game makers, focus on the limited local demand side, etc.).

Gone are the days when developers could make millions of dollars off a feature phone card battler developed in 5 months with 5 people.

Sega Networks COO Minoru Iwaki estimates publicly that today the costs for developing a mobile game, operating it for a year and marketing it properly amount to about US$13 million. He says that adding TV promotion (which is very common in Japan for mobile apps) can cost another US$4 million.

What's My Point? The Industry Is Consolidating.

Add to this the aforementioned competition on the supply side and a demand side that is shrinking and aging (25% of Japan's population is 65 or older, falling out of the typical demographic for mobile gaming), and the result is: consolidation.

To my surprise, and this may be due to the fact that the extremely high spending ratio in Japan can keep games with relatively low user numbers afloat, consolidation has been relatively mild in this country's mobile game sector so far. Sure, the bubble popped for companies like GREE, DeNA, gumi (3903), or GungHo (3765), but the industry hasn't imploded.

It is next to impossible to "prove" and quantify such a claim, but there are signs that consolidation is picking up steam in recent months.

Here are just a few examples of what has been going on just recently:

  • in October 2015, it was made public that Japanese web behemoth GMO (9449) closed a total of five smartphone game subsidiaries at the same time (TinMachine, Mallow Entertainment, Gamelores, Ambai, and Claymore)
  • in early January 2016, smartphone game makers KLab (3656) and Broccoli (2706) announced a business alliance under which the two partners will develop apps together
  • on January 5, Tokyo- and Singapore-based mobile game developer Nubee closed all operations
  • on the same day, developer Kaga Create said it also closed operations and stopped supporting its five mobile games
  • on January 26, Capcom (9697) said it will roll its US- and Japan-based mobile gaming services into one (Beeline and Capcom proper's mobile business will be led by a single CEO starting April 1)
  • on the same day, Crooz (2138) announced it will disband subsidiary weber (established just in March 2015 to develop IP-based games) on April 1
  • etc. etc.

Apart from these concrete, "operational" indicators (the list could go on), there is also a range of strategic ones that all point to a further consolidating Japanese mobile game industry.

The Industry Is Also Changing Structurally

First and foremost, the number of new startups founded in this space in the last 2-3 years can be counted with two hands - which is no surprise, given that VCs in Japan, too, don't invest in such companies anymore.

Secondly, Japan's big developers have all been trimming down their international operations in recent years. Powerhouse CyberAgent (4751), for example, completely shut down its office in San Francisco and is only present through subsidiary CyberZ in the US now.

GREE made headlines last year when it laid off 1/3 of its American workforce in one swoop. Multiple other Japanese companies silently closed offices in Asia and other places to refocus on the local market and cut costs. There are counter-examples, such as Mixi (2121) or Colopl (3668, a relatively new contender in the US), but the overall trend is clear.

As a third "strategic" indicator, my personal observation is that Japanese developers don't refrain from simply shutting down games whose KPI don't work anymore. While sunsetting non-performing titles is standard procedure since the start of the industry, such cases are getting more frequent.

This month alone, major companies such as Bandai Namco (7832), Sony subsidiary Aniplex, Koei Tecmo (3635), Sega (6460), Mobcast (3664), Taito, CyberAgent, or Marvelous (7844) said they will stop supporting one or even several apps in the next few weeks.

And as one final such indicator, it has has become common in the last 1-3 years to reduce the number of prototypes that are turned into actual games. The move away from a "shotgun" approach to focus isn't surprising, given the competitive landscape, increasingly demanding users, and the aforementioned increase in production, operational and marketing costs for mobile games in Japan.

There can be no doubt that the industry will see even more consolidation in the months and years to come.


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