Mobile Gaming: Is it Gotcha time for Gacha?

Mobile Gaming: Is it Gotcha time for Gacha?

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This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.” He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here.


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CC BY-SA 2.0: Via Flickr by Danny Choo

Four years ago almost exactly to the day, I mused about this period of disruption and renewal signified by sakura (cherry blossoms). The blooming of the sakura in Japan marks the arrival of spring, representing not only a renewal of the seasons but also a rebirth of many facets of life: the start of a new school year, a recalibration of personal goals, and a reassessment of business objectives.

Now, like then, we are also witnessing companies experiencing disruption in many forms, be it via innovation from new business models (transportation), new technologies (cable TV), or even new regulations (financial trading).

Last time, I wrote about the disruption and renewal manifesting itself in the mobile gaming sector. We are facing now a new instance of disruption in this sector in Japan that seems to be receiving little attention in the markets: newly self-imposed regulation by the Japan Online Game Association came into effect at the start of this month.

Gotcha, gacha!

The new rules govern the gacha mechanic in mobile games. Gacha is a monetization technique prevalent in Japan whilst remaining relatively unheard of until recently in the West.

The gacha mechanic derived from the original gashapon (ガシャポン) popular in Japan, in which vending machines would dispense capsule toys at random. The randomness of the distribution adds an element of chance which draws the obvious comparison of gacha to gambling. In mobile games, the gacha prize could be a special character, weapon, power, event-driven offer, or other rare item.

As I once discovered during a conversation with games expert Dr. Serkan Toto, game designers employ several different incarnations of gacha techniques, though all stem from the same lottery-like principles (see a more thorough explanation of the various gacha mechanisms from Serkan).

Whales make the business model

whales

With gacha techniques, mobile game makers target big-spending “whales.” The dependency of certain mobile games’ business model on whales cannot be understated. According to a new analysis conducted by marketing firm Swrve, the top 10% of players contribute to nearly half of all mobile game revenues, and 48% of revenues come from a mere 0.19% of all players.

On December 31st, a Japanese “whale” spent over $6,000 during a single evening in an effort to obtain a rare character on Cygames-produced Granblue Fantasy offered through a gacha technique.

A few European game studios have begun deploying gacha mechanics in their games, though the technique remains somewhat limited in Europe even today. Part of the explanation I believe comes from the slightly different process of mobile game development between Europe and Japan (see graphic in the bottom).

Anyway, undoubtedly in an effort to stave off more draconian government measures, the Japan Online Game Association imposed a new regulation that establishes two significant constraints on mobile games: a minimum 1% payout ratio, and a maximum 50,000 JPY billed per player. Technically, these industry “guidelines” are not law; however, game companies have understood that failing to adhere to them may trigger stricter government intervention.

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Has the stock market accounted for this yet?

I have a policy of not making stock recommendations so I will not name names, but if you take a look at the stock prices of many of the listed mobile gaming companies in Japan, there is a fairly consistent rise since the correction in mid-February. That’s when Cygames began voluntarily issuing refunds to players of Granblue Fantasy. The new self-imposed regulation dictated by the Japan Online Game Association came into effect on April 1, and hadn’t even been finalized until March.

Whatever your moral views are on the gacha mechanic, I suspect that these new self-imposed constraints — imposing a significant minimum gacha payout ratio and capping the pricing — will take its toll on the earnings this quarter. And I cannot figure out why the stock market has not adjusted further for this.

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