Asia, Where Mobile Games Flowered, Extends Its Reach

October 21, 2013

Asia, Where Mobile Games Flowered, Extends Its Reach

By ERIC PFANNER

TOKYO — When SoftBank, the Japanese telecommunications provider, announced last week that it had agreed to buy a 51 percent stake in a Finnish mobile game company for $1.5 billion, many people in both industries reacted with disbelief. Suddenly Supercell, a three-year-old game developer in Helsinki with only 100 or so employees and two successful games, was worth $3 billion. The investment in Supercell, the developer of Hay Day and Clash of Clans, reflects the growing global ambitions of Asian companies like SoftBank in mobile gaming, the fastest-growing part of the game business.Japanese companies like Sony, Sega and Nintendo dominated the early days of the console era of video games. American companies like Electronic Arts were the driving force in the extension of console gaming to the PC. Now, even as Sony and its main console rival, Microsoft, prepare to sell their newest devices, the PlayStation 4 and the Xbox1, other companies in Japan and across Asia are positioning themselves to take a leading role in mobile games.

“Who has $1.5 billion to invest in a company like Supercell?” said Bertrand Schmitt, chief executive of App Annie, a mobile analytics firm based in Beijing. “There are not so many players in the West who could do this.”

Eight of the 10 biggest merger-and-acquisition transactions involving game companies this year have been initiated by buyers based in Asia, according to Digi-Capital, an investment bank that specializes in games. These include the Supercell deal, in which SoftBank was joined by a subsidiary, the Japanese game company GungHo. The list does not include the management buyout of Activision Blizzard, the world’s biggest video game publisher, in which a Chinese Internet company, Tencent, took part.

The growth of mobile gaming is upending the longstanding business model of the business, which was based on the sale of games — and the devices to play them. The new approach is to give away games away for smartphones and then to earn revenue from in-game purchases, advertising and other add-ons. While the so-called free-to-play model has spread to much of the rest of the world, it was mostly pioneered in Asia.

“If the U.S. and Europe are great conceptually, the leading Asian markets are masters of the science of making money from mobile,” said Tim Merel, founder of Digi-Capital.

In September, two Asian countries, Japan and South Korea, together accounted for a whopping 62 percent of worldwide revenue from games on the Google Play mobile app store, according to App Annie. The United States represented 15 percent of sales.

Over all, Asia accounts for half of the revenue in the mobile game business, and this will grow to two-thirds in 2016, according to Digi-Capital.

Asia’s leadership in free mobile games is explained by a variety of factors. In 2000, China banned the sale of consoles, because violent video games were considered a corrupting influence on youth. Though the government recently moved to ease restrictions, many Chinese players have gotten used to alternative kinds of games.

In Tokyo and other crowded Asian cities, mobile games make a convenient distraction during subway journeys. In Japan, rudimentary mobile games, offered by wireless operators like NTT DoCoMo, were already popular before smartphones and app stores arrived on the scene.

So, while it is hard to imagine a mobile network operator in the United States or Europe following SoftBank’s move, analysts said the investment might have made sense for that company, which also recently bought the United States cellphone operator Sprint for $21.6 billion.

“There’s no way a Deutsche Telekom or a Verizon could spend $1.5 billion for half of a small game company in Finland,” said Serkan Toto, an independent technology analyst in Tokyo. “Their shareholders would absolutely slaughter them.”

SoftBank shareholders did not. In fact, the stock price barely budged. But the dynamics of the mobile business are different in Japan.

Though many of the recent mergers and acquisitions initiated by Asian buyers involve Asia-based targets, SoftBank’s purchase of a controlling stake in Supercell is not the first deal for a Western mobile game company. In 2010, DeNA of Japan acquired Ngmoco, based in San Francisco. In 2012, Tencent took a sizable minority stake in Epic Games, based in North Carolina.

“All of the Asian players are trying to crack the Western market,” said Will Luton, author of the book “Free 2 Play: Making Money From Games You Give Away” (New Riders, 2013), and a consultant based in Bristol, England.

Not all of these deals worked out well. Last year, a Japanese social networking and gaming company, Gree, shut down OpenFeint, a mobile game platform, only a little more than a year after it had spent $104 million to buy it.

Mr. Luton and others say Supercell and SoftBank might be a better fit. Supercell and GungHo — which was founded by Taizo Son, brother of the SoftBank founder, Masayoshi Son — will be able use each other’s games to market their own creations in places where they have not had a strong presence. GungHo’s biggest hit, Puzzle & Dragons, for example, is hugely popular in Asia but not as widely played in Europe. The companies, which have cooperated on promotions in the past, will now be able to deepen their ties.

Even though the United States is a smaller mobile gaming market, adding Supercell could help SoftBank flesh out the appeal of Sprint, said Thomas Husson, an analyst at Forrester Research.

“The value of the acquisition goes beyond potential revenues in the mobile gaming sector,” he said. “I think the rationale for SoftBank is that powerful gaming content will fuel its overall mobile Internet and app strategy and enable them to globalize some of their initiatives in the light of the Sprint acquisition.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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