As Social Gaming Takes a Serious Hit in Japan, Zynga Must Be Kind of Concerned
Zynga may be sweating a little in light of news that Japan’s Consumer Affairs Agency is investigating the gaming industry’s sales techniques. In response to national concern about the amount of time and money some young people are spending on games, the agency is looking to target the in-game sale of digital items known as “kompu gacha."
The lucrative business model, which is close to Zynga’s free-to-play approach, exploits players who buy a certain number of virtual items in order to win an unspecified “grand prize,” amounting to a lottery effect. According to the Daily Yomiuri, the agency began investigating after people complained about the excessive prices of such items. The agency plans to ask social gaming companies such as Gree and DeNA to stop using the sales method, with potential penalties for infringers.
News of the investigation sent Gree and DeNA share prices tumbling by more than 20 percent yesterday. Korean gaming giant Nexon, whose CEO was recently interviewed by our own Sarah Lacy, and which is a heavy hitter in Japan’s gaming market, was largely unaffected by the news, because it charges users money up front to play its games.
Zynga, which recently launched its Pokemon-like role-playing game Montopia in Japan using the gacha model, will be watching closely. Not only does this directly threaten the company’s business in Japan, but there will be at least some worry that the US federal government might one day show equal interest in the gaming sales model and how it could be linked to gaming addiction.
For DeNA and Gree, the effects are more immediate and higher stakes. DeNA last year enjoyed annual revenue of $1.4 billion, while Gree pulled in $800 million. That compares favorably to Zynga’s 2011 revenue of $1.1 billion. One Credit Suisse analyst estimates that Gree’s operating profit could drop by as much as 50 percent if the regulations come to pass, according to the Wall Street Journal. DeNA faces a loss of more than 30 percent.
This seems a significant setback in particular for Gree, which just last week agreed to acquire game developer Funzio for $200 million in a bid to extend its reach in Western markets. It may also jeopardize the company’s plans to double its US headcount over the course of this year.