December 28, 2012 3:46 pm

Start-ups win game in land of giants

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This month, Americans who enjoy slaying monsters in their coffee breaks will have a new chance to do so in Final Fantasy: Airborne Brigade, the latest instalment in a long-running video game series, which is to be offered for free on mobile phones.

Square Enix, the veteran Japanese developer behind the game, launched its first Final Fantasy title in 1987, years before most people used mobiles for talking let alone for rescuing virtual worlds from evil.

For Airborne Brigade, it has joined forces with a relative upstart, DeNA, a Tokyo-based specialist in mobile social gaming with a web-based service that is hugely popular in Japan. DeNA – its name is pronounced like the genetic code – has already drawn 3m registered users for Airborne Brigade in its home market since January, and now hopes to build on that success to accelerate its foreign expansion further.

In both Japan and neighbouring South Korea, companies such as DeNA are part of a rising generation of software start-ups that are mostly run by independent entrepreneurs. They are unusual in these economies, which are dominated by big, bureaucratic conglomerates where hardware manufacturing has long had pride of place over software and services.

DeNA is also unusual in Japan because its founder, Tomoko Namba, is one of the few women in the top ranks of Japanese business, though the former McKinsey partner stepped down as chief executive last year

“If you’re not producing actual material objects, people treat you as though you’re doing something dodgy,” Yoshikazu Tanaka, founder of Gree, DeNA’s arch-rival in Japan, told the Financial Times ahead of a regulatory clampdown on some forms of in-game sales this year that dented mobile gamers’ profitability.

Aged 35, Mr Tanaka is Asia’s youngest self-made billionaire, and Gree, like DeNA, is pushing aggressively into foreign markets, with a campus in Silicon Valley and a new design studio in east London’s Tech City. Mr Tanaka wants Gree to be “the next Nintendo”, and has set a long-term goal of generating 80 per cent of revenues outside Japan, compared with less than 10 per cent today.

DeNA and Gree are already hugely lucrative, with net profits this fiscal year projected to reach Y80bn ($930m) between them. Their combined market capitalisation of Y770bn is just shy of Sony’s, as the latter struggles to fix uncompetitive divisions such as television manufacturing. The real Nintendo has been flagging too: tied to the declining market for specialised game consoles, it made a net loss for the first time last year.

The newcomers’ success also sets them apart from their better-known US social-gaming rival, Zynga, which has a market value less than half that of either of the Japanese groups and lost $404m in its last financial year. Analysts say DeNA and Gree have been helped by Japan’s early rollout of high-speed mobile networks, but also that they have made adept use of the “freemium” sales model, extracting high revenues from users for add-ons to games that are otherwise free to play.

Masato Araki, an analyst at Mitsubishi UFJ Morgan Stanley, expects revenues for Japanese social games groups to reach Y400bn next year, up nearly fourfold from 2011.

Strangely, both DeNA and Gree moved into gaming almost by accident. DeNA was founded in 1999 as an eBay-style auction site while Gree began as a Facebook-style social network. Both Mr Tanaka and Ms Namba soon realised that distributing simple downloadable games was a more profitable use of their platforms.

Established gaming and internet groups have taken notice. DeNA and Gree have both signed deals to supply games through Yahoo’s Japanese web portal, and Gree is working with Mixi, a Japanese social network that has wilted under assault from Facebook. It is also reportedly in talks over a tie-up with Sega, the former console maker that now specialises in game development.

In South Korea, even more than in Japan, a vibrant internet-related software industry stands out for its independence, being one of the few areas outside the control of the country’s big chaebol conglomerates such as Samsung and Hyundai.

“This is not a business that requires big capital and a huge workforce. You need a creative idea and a well-established database, along with some service experience to be successful,” says Hwang Seung-taek, an analyst at Hana Daetoo Securities.

KakaoTalk, a mobile platform for instant messaging, photo sharing and mobile games launched in March 2010, is now the main means of communication for millions of South Korean smartphone users. Its hit puzzle game Anipang has become almost a national competition, with about 10m people, or one-fifth of the country’s population, playing it daily.

Brian Kim, KakaoTalk’s chairman, wants to expand abroad. Like DeNA and Gree, his company has joined forces with Yahoo Japan, and recently launched three mobile games including Anipang outside Korea. It plans to offer mobile games on its platform in more than 200 countries, starting with Japan and southeast Asia.

Other rising Korean groups include NHN, a search engine whose Line instant messaging service has become a hit in Japan, Taiwan and Thailand; the online game maker Nexon – which is based in Korea but listed in Japan – and NCSoft; and the antivirus software maker Ahnlab, whose founder was briefly a presidential candidate.

Some big South Korean companies have tried to make inroads, but have met with only modest success. SK Communications, a unit of the SK Group, runs a little-used web portal and a more popular social network, called Cyworld, which it acquired in 2003, but its effort to broaden Cyworld beyond its domestic market has not borne fruit.

KT Corp, South Korea’s largest phone and internet company, closed its unpopular web portal after struggling to compete with local big rival NHN, whose mighty Naver search engine has made even global leaders such as Google and Yahoo marginal operators in the country.

Even Samsung has failed to establish a presence online, with its eSamsung venture, run by the group’s heir Lee Jae-yong, suffering heavy losses in the collapse of the dotcom bubble in the early 2000s.

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