Stock Ticker: DeNA vs Gree
Tracking the performance and prospects for Japan's mobile gaming giants
Unless you've kept a very close eye on global developments in the mobile gaming market, there's a good chance that 2011 was the year in which you first heard of either DeNA or Gree - a pair of Japanese mobile gaming giants who made their first major overseas headlines with high-profile western acquisitions in the past 12 months or so. Back in October of last year, DeNA acquired top mobile developer ngmoco in a deal valued at around $400 million; domestic rival GREE followed suit in April of this year with a $100 million acquisition of mobile social gaming network OpenFeint.
Since then, both companies have flitted in and out of the news in the west - with DeNA in particular attracting coverage thanks to building relationships with a host of high-profile developers, with just a quick glance at the firm's recent corporate announcements revealing tie-ups with Level 5, Namco Bandai, Grasshopper Manufacture and MapleStory operators Nexon (whose own recently mooted IPO has seen them described as the "Zynga of the East" in some quarters). Less favourable coverage has stemmed from a new lawsuit in Japan, in which Gree filed suit against DeNA, accusing it of anticompetitive practices.
But what do these two companies actually do? The answer isn't actually immediately apparent, and it's impossible to characterise either firm by creating a comparison with a western equivalent. They are very much a product of the unique Japanese mobile phone market, which until recently developed largely in isolation from the rest of the world's telecoms markets, and continues to have many characteristics that are quite different from what we're used to in Europe or the USA.
Gree and DeNA are coming from a very different social and technological background to the western companies with whom they are now merging, and competing
Let's talk first about DeNA. Initially founded as a mobile auction site back in 1999, the company didn't actually launch its gaming platform, Mobage (a contraction of "mobile game" and pronounced accordingly) until 2006. As a service, Mobage is effectively a hybrid of a gaming platform and a mobile social network. It's important to bear in mind that we're not originally talking about a smartphone platform here, nor are smartphones the key platform for Mobage at present. Japan's "featurephones", long envied for their advanced functionality by western gadget geeks before the rise of iPhone and Android effectively leapfrogged them, are Mobage's home platform, and indeed many Japanese featurephones are equipped to access the platform out of the box.
This is a point that's crucial to understanding not only DeNA but also Gree, and the challenges both companies face. They're coming from a very different social and technological background to the western companies with whom they are now merging, and competing. Facebook, for example, has been almost entirely irrelevant in Japan up to this point, while it's been at the heart of the rise of social gaming in the west. Social networking, like many other internet activities, has traditionally been seen as something you do on a mobile phone by Japanese consumers, where western consumers have tended to see it as something you do while sat at a computer. As such, platforms like Mobage have grown up in isolation from the likes of Facebook, a fact that has almost certainly helped them to thrive.
Yet a look at DeNA's numbers this year reveals that thriving isn't necessarily the right word. They're far from being awful - as we'll see shortly, the company is still just about outperforming the Nikkei index - but there have been a series of falls since August, when the company announced financial results which failed to meet expectations and, worse, suggested that growth may have flattened out somewhat, at least temporarily. Despite the ngmoco acquisition and its high-profile signings, there's evidence that DeNA may be struggling a little with the transition from featurephones to smartphones, and from being a local to a global player.
No such growing pains, apparently, for Gree. The company's background is rather different to DeNA's story - in fact, it commonly draws comparisons with Facebook's background, largely due to founder Yoshikazu Tanaka, one of the world's youngest self-made billionaires, who developed the initial Gree social network as a hobby and launched it in beta in 2004. Like DeNA, Gree is very much a product of the Japanese mobile market, with much of its growth being provided through deals with network operators for inclusion on their featurephones. It, too, faces the challenge of moving from featurephones - a safe and semi-closed environment - to smartphones, which have an entirely different business model and introduce aggressive new competitors from overseas.
Attempting to dig through the figures from both companies to establish which of them is actually operating the more popular service is a fruitless task. Both can certainly boast usership figures in 20 to 30 million range, and given the obfuscation of the actual figures, it seems likely that the crown for being Japan's biggest social gaming service (and perhaps by extension its biggest social networking service) passes between them. What's important, though, isn't that absolute figure. Rather, it's what's happening to the revenues of the companies - and what the markets make of their future prospects. From the graphs above, it's pretty clear that Gree's growth is seen as rather more assured than DeNA's. But why?
Context is vital, so here's a useful graph - the yellow line on the bottom is the performance of the Nikkei 225, the index of Japan's most valuable companies. It's not been an easy year for Japanese industry, which has never fully recovered from the Great Touhoku Earthquake in early March (the dip is clearly visible on the graph even on this scale), and has suffered from a one-two punch of fiscal and political instability on top of a vastly overvalued currency ever since then. In the face of that, it's important to note that DeNA is doing fairly well - the past few months have been rough, but it's consistently outperformed the market this year, despite starting this 12 month sample in a fairly strong position already.
Gree, however, is doing marvellously. The big bump for Gree, obviously, comes in August - shortly after the firm announced solid results, plans for a dividend payment (always a boost to share price) and, perhaps most importantly, a tie-up with SK Telecom, South Korea's leading mobile network. That deal underlined Gree's strategy, and perhaps gave some much needed context to the OpenFeint acquisition back in April - an acquisition which many commentators (myself included) have been apt to question or to put down to a quick "me too!" overseas acquisition in the wake of DeNA's ngmoco deal.
The markets, perhaps wary of Japanese companies whose growth plans rely too heavily on the unsteady domestic economy, don't seem impressed with DeNA
Gree is very, very focused on international growth, and that's been very clear throughout 2011. On top of its tie-up with SK Telecom, it's also deeply involved with Tencent, a major player in the Chinese market, and then there's OpenFeint itself - a mobile social gaming platform which enjoys a leading position on Android and has even maintained something of a lead on iOS despite the launch of Apple's own integrated service, GameCenter. It's not entirely clear how OpenFeint is going to move forward, or how Gree is going to integrate it into its business, but what is clear is that the potential exists for the acquisition to give the company a leg-up both in the western market and in the domestic smartphone market.
DeNA, on the other hand, seems to be peculiarly inward-focused in its near-term ambitions. Certainly, the company's ngmoco acquisition gives it a developer with a good track record in the western smartphone market, but a single developer doesn't make a platform. Mobage on smartphone is making headway in Japan, but it's barely made any impact internationally yet - not helped by only having an Android version so far, and thus losing out on the cross-platform potential with iOS which OpenFeint can exploit.
Instead, DeNA's big move this year - developer signings aside - has been the acquisition of a baseball team, the Yokohama Baystars. Something of a bottom-feeder in the series of late, the Baystars (who are now the DeNA Yokohama Baystars) are seen as a way for DeNA to build its profile in the potential growth market of the 30+ age bracket. It's a strategy that may well work, especially if investment can boost the team's fortunes, but while baseball may effectively be Japan's national sport, Japanese baseball has no overseas resonance - it's an entirely locally-focused strategy. The markets, perhaps wary of Japanese companies whose growth plans rely too heavily on the unsteady domestic economy, don't seem impressed.
Here's the net result - this chart shows what's happened to the valuations, rather than the share prices, of the two companies over the past year. DeNA starts out as comfortably the larger company, but right now, Japan's stock market values Gree more highly.
Of course, we need to recognise that what the stock market wants to hear isn't necessarily what will actually work in the marketplace. Gree's investment in OpenFeint and its consequent focus on overseas engagement is music to the ears of traders, but it's not a strategy without risk - especially since OpenFeint itself is a platform whose existence could become very precarious very quickly indeed. Right now, its success on iOS seems to be largely a consequence of some extremely poor design decisions and atypical lack of focus on Apple's part, with the GameCenter service being unappealing to consumers and developers alike. On Android, OpenFeint's position is more secure, but that market is also wide open for competitors - and it's interesting in that context to wonder where Sony sees PlayStation Suite being positioned in future.
DeNA's position, meanwhile, has upsides that aren't immediately apparent - but which the market clearly understands, given that it is still (just about) outperforming the Nikkei 225. The company's local focus plays to its strengths, and its engagement with developers with global reputations may allow it to enter the western market in a manner that's spearheaded by high-profile game titles rather than a service brand. It's worth noting that gaming SNS brands are a fairly abstract thing from a western gamer's perspective anyway; smartphone users almost inevitably have social networks like Facebook and Twitter on their devices already, and few will be remotely interested in the potential to add to that haul with a gaming-specific service. Piggybacking on popular games may be a better business, in the long run, than trying to promote a gaming SNS.
As a final piece of data to throw into the mix, the following graph gives a few interesting contrasts. DeNA and Gree are both fascinating products of a mobile market that's very different from its western equivalents; having grown in this enclosed hothouse environment, they're arguably the biggest and best examples we have of the purely mobile-based gaming company. As such, I thought it would be interesting to give comparison points with the leader in "traditional" handheld gaming, Nintendo, and the market pioneer in smartphones, Apple.
One thing that's not immediately clear from this graph, though, is the scale of the companies involved. Either Apple or Nintendo could handily swallow one of the other firms here whole - and that in itself raises interesting questions. Apple's GameCenter service is neglected and unloved, while OpenFeint's operator has been a market darling even in the toughest of economic conditions. Nintendo, meanwhile, is constantly told that it needs to engage with mobile gaming to survive (an idea I don't really believe, I should add), and here's a platform operator and globally recognised developer of mobile software on its doorstep.
This is purely speculative, of course, not least since neither Apple nor Nintendo are traditionally acquisitive companies, preferring to pick up small firms with interesting technology or to develop their own systems in-house. Equally, I don't think that acquisition is an exit strategy for either Gree or DeNA. I do, however, think that the new year is going to be extremely important for both companies. Gree's performance has clearly outpaced DeNA in 2011, but next year will have to bring concrete figures rather than high anticipation - from both parties.
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