Even though they just bought a baseball team, The Yokohama Baystars, and have gleaming new offices in a skyscraper peering down on Tokyo’s famous Shibuya Crossing, DeNA still feels like it has so much to prove outside of Japan.
The $4.4 billion company and its Japanese arch-rival GREE have spent close to $1 billion on acquisitions, hiring and marketing in the U.S. over the last two years to grow outside of their home market.
“What will it take for DeNA to change perceptions, so that people will see us as able to succeed globally?” CEO Isao Moriyasu asks me near the end of an hour-long interview.
For the first time, DeNA finally revealed some financial numbers behind how its overseas operations are performing this month. The company said it saw $30 million in Moba-coin consumption outside of Japan last quarter and is predicting double that this quarter, thanks to hits like the card-trading game Rage of Bahamut and a newer RPG called Blood Brothers that was developed in-house. That’s still a small share of the 50.3 billion yen ($619.8 million) the company pulled in during the most recent quarter and far from the company’s 2014 goal of having revenues evenly split between domestic and international markets.
“It’s not like we are completely happy with overseas operations, but we are seeing accelerated growth earlier than we expected,” he said.
In the earnings call last week, the company said it probably needed between $100 and 200 million in Moba-coin consumption per quarter to make its overseas operations profitable.
“The plan is to be profitable in the fourth fiscal quarter,” Moriyasu said. “There’s great potential not only in Western markets, but also in Korea and China. The question is who is going to be the market leader?”
Like many other Japanese game developers, DeNA is betting that gaming and virtual goods consumption habits abroad will mirror or at least come close to averages seen in Japan. DeNA’s $30 million milestone for international Moba-coin consumption this past quarter comes two years after the company spent up to $403 million to acquire U.S. mobile developer Ngmoco to create a Western mobile gaming platform and social network.
At the time, the deal turned heads. What were Japanese companies doing spending hundreds of millions of dollars on U.S. gaming startups? There was initially a sense of skepticism.
Plus, the turnover that followed at both of DeNA and GREE’s prize acquisitions didn’t help. Two of the founders at Gameview studios, an early developer that DeNA acquired, left earlier this year. There were a few rounds of layoffs at Ngmoco. More recently, Neil Young, Ngmoco’s co-founder and CEO, recently stepped down from the role, although he retains his position on DeNA’s board of directors.
“I don’t think it’s that important for the founders that we have acquired to stay for a long time,” Moriyasu said. “Sometimes, founders can leave at the time of an acquisition and it turns out to be successful. And sometimes, founders stay and then both good and bad things happen. The important thing is to make sure the business is successful.”
Even in spite of these departures and early setbacks, DeNA has found a couple of hits in the West. They’ve also signed deals to bring several well-known developers like Colorado’s Backflip Studios and indie daring NimbleBit to the Mobage platform. Rage of Bahamut, which is developed by Cygames, has been a consistent top-grosser on Android and iOS. It’s been so successful, that DeNA recently took a 20 percent stake in the company for $92 million, valuing the company at around $450 million.
There’s been a landgrab as of late in Japan with several bigger developers being snapped up by the biggest Asian gaming giants. One of the biggest developers on DeNA’s platform, Gloops went to Korean competitor Nexon for $486 million while Pokelabo went to rival GREE for $173 million. Ironically, DeNA indirectly held a stake in Pokelabo through another investment vehicle.
Moriyasu brushed off the complicated politics of both deals.
“Now that Nexon has acquired Gloops, we do believe we should be able to retain a very good relationship with Gloops and Nexon,” he said. He added, “We had actually been talking about doing a lot of engagement together.” He didn’t offer specifics.
As for Pokelabo, he said, “We had been injecting funds into the company and weren’t able to receive financial returns from that venture, so it wasn’t a bad thing.”
DeNA has been cutting other deals too. It sprung for a majority stake in the Yokohama Baystars late last year for 6.5 billion Japanese yen or about $80 million to get brand awareness. To someone from the U.S., this might seem strange. But unlike the U.S. where there are many popular primetime sports like basketball and football, Japan primarily has baseball. The Yokohama Baystars — now called the Yokohama DeNA Baystars — are a way to reach the kinds of consumers who have discretionary income to spend on midcore games.
In spite of these flashy deals and hit games, DeNA has yet to prove that it can build a real, legitimate platform, instead of being just a larger publisher or developer on Apple’s and Google’s platforms. DeNA gets the valuations and the margins it does because it has so much market power in Japan. The company is essentially one-half of a duopoly on freemium mobile gaming.
But freemium mobile gaming on iOS and Android globally remains highly fragmented, without any overwhelmingly dominant leaders. And no American or Western company has been able to get there yet either.
At the same time, the domestic market has become complicated. Not only is it more saturated, there’s more regulatory scrutiny around certain game mechanics, like kompu gacha, a “wishing well” like mechanic that randomly awards objects to players. For “kompu gacha” or complete gacha, players try to collect all of the objects in a set, which raised concerns that this resembled a form of gambling. The Japanese consumer affairs agency started cracking down on this earlier this year, and both DeNA and GREE had to change their tactics. A new kind of gacha called “box” or “package” gacha has become popular instead, and it’s uncertain how long these practices will escape the eyes of regulators.
DeNA has fared better than its rival in this new regulatory environment. Revenues are up 45 percent from a year ago while profits are up by 70 percent to $144.2 million. Operating margins are roughly the same at 40.6 percent from 42.5 percent a year earlier. GREE, in contrast, actually saw net profit decline slightly in the same time period to $111.7 million, thanks to the gacha crackdown plus operational expenses abroad.
“The regulations had some impact, in terms of making growth a bit slower,” Moriyasu said. “But it’s hard to say what this impact was.”