How Japan’s social game regulations will impact GREE, DeNA and the U.S.

Update: As of May 9, GREE, DeNA, Mixi, CyberAgent, Dwango and NHN Japan have announced they are removing kompu gacha from all their games by the end of May according to industry watcher Dr. Serkan Toto. Developers using the mechanic in their games include Konami, Zynga, GREE, Klab, Namco Bandai and Sega.

Shares in GREE, DeNA and other Japanese game developers plummeted this weekend on the news that kompu gacha, an extremely lucrative mechanic found in Japan’s highest grossing mobile-social games, violates Japanese law.

With Japanese news outlets reporting the Japanese Consumer Affairs Agency will soon ban the practice, analysts predict Japanese social gaming companies will see a dramatic impact on their revenues. While that alone could affect earnings of Japan’s mobile-social game companies, it could also pave the way for similar regulations in North America.

How the government got involved

One of the reasons Japan’s mobile-social games are so lucrative that is the games have something in them called gacha — a game mechanic where players can pay a small amount of money to get an in-game item at random. Some Japanese developers see half of their sales coming from gacha, and the Japanese game companies setting up shop in the U.S. are bringing gacha with them. Both GREE’s Zombie Jombie and DeNA’s top-grossing Android hit Rage of Bahamut make use of the mechanic.

The Yomiuri Shimbun’s explanation of kompu gacha.

Kompu gacha, or “complete” gacha in English, further incentivizes the practice — instead of just acting as a way to get extra items or goods, kompu gacha offers grand prizes to players that can amass a complete set of specific and usually rare items. According to a report in the Yomiuri Shimbun, collecting a complete set can take hundred of tries and hundreds of thousands of yen. Although it seems like a fairly benign motivation scheme, as Japan’s social game companies have focused more and more on kompu gacha to increase revenues, the Consumer Affairs Agency has seen the number of complaints about the tactic increase dramatically.

Between April 2011 and March 2012, parents submitted 688 complaints to the agency about children and gacha. In one case, a boy in middle school racked up more than $5,000 (400,000 yen) in charges in a single month. Another boy in elementary school was able to make $1,500 (120,000 yen) in purchases in just three days. Reports like these have turned press scrutiny against the Japanese social games industry.

In March, industry watcher Dr. Serkan Toto reported GREE, DeNA, Mixi, CyberAgent, NHN Japan and Dwango had formed a self-regulation council specifically to regulate monetization. Although both GREE and DeNA now restrict the amount of money minors can spend on their platforms, the way kompu gacha encourages players to pay lots of real money for random prizes still seems to be too close to gambling for the comfort of Japan’s regulators.

Although the Consumer Affairs Agency hasn’t released its official report yet, according to the Yomiuri Shimbun, the agency plans to ban the practice and impose fines on companies that continue to include kompu gacha in their games. According to Tech in Asia, the ruling will be based on the Japanese law that covers “unjustifiable premiums.” At this point regulation seems to be a question of when, not if.

Small regulation, big impact

Japan’s mobile-social game business routinely turns in profits that dwarf what North American developers earn. In its most recent earnings call, GREE reported third quarter net sales of $577.3 million (46.1 billion yen), and a net income of $167.8 million (13.4 billion yen). DeNA reported $1.7 billion in net sales in 2011. For both companies, tactics like kompu gacha that encourage users to buy lots and lots of virtual goods are a key profit generator.