GungHo's full-year results suggest larger problems for mobile majors

Attempts to expand Puzzle & Dragons audience will yield diminishing returns, so where do the market leaders go now?

GungHo's full-year results indicated that it has not yet found a solution to the slowing growth of its most popular and lucrative game, Puzzle & Dragons.

For the year ended December 31, 2014, the Japanese mobile company earned ¥173 billion ($1.45 billion) in revenue and ¥94.3 billion ($792 million) in operating profit - hardly insignificant numbers, but at just 6 per cent and 3.3 per cent growth respectively, it's light years away from the sort of momentum the company experienced at its peak.

That its peak has passed shouldn't be a surprise, given that Puzzle & Dragons was launched three years ago this month. However, any company that relies so heavily on a single product for growth cannot afford to sit on its reputation. Certainly, its subsequent mobile products haven't come close to matching the success of Puzzle & Dragons, in either downloads or revenues.

"GungHo has impossibly far to fall. Investors, though, are a different breed, with different expectations of what a successful business looks like"

One aspect of the issue for GungHo is the spread of its audience. Puzzle & Dragons has been downloaded more than 33 million times in its native Japan, but only 10 million times beyond its borders. Attempts to build the game's presence elsewhere in the world through partnership deals - most prominently with Supercell - haven't yielded the sort of results many expected.

And yet this continues to be GungHo's most loudly trumpeted strategy for growth. In its investor presentation, a slide titled "2015. P&D will grow furthermore" had only this to offer: "Strengthen overseas expansion by new game and business alliance with leading publisher in each area." With this in mind, the recent announcement of a Mario-themed Puzzle & Dragons (the global release of which is scheduled to start this April) seems likely to benefit GungHo far more than Nintendo.

And yet one simply cannot ignore the size of Puzzle & Dragons' audience in Japan. According to data released with GungHo's investor presentation, Puzzle & Dragons was the seventh most popular keyword search for Google Japan last year - sandwiched between "Amazon" in sixth, and "News" in eighth. In addition, a survey conducted in November 2014 found GungHo/Puzzle & Dragons to be the second most favourable brand advertised on Japanese television, and a unanimous first among boys and girls under the age of 12.

The simple fact is that, regardless of the size of its year-on-year growth, GungHo has impossibly far to fall. Investors, though, are a different breed, with different expectations of what a successful business looks like. GungHo is still undoubtedly that, but its share value has nevertheless plummeted from a high of ¥766 in June 2014 to a current price of ¥417 - that's a 45 per cent drop in substantially less than a year, and not to be ignored.

"It remains to be seen whether brand loyalty on mobile extends beyond individual IP and to the companies that actually create them"

Another remedy for stimulating growth GungHo offered to its investors was mergers and acquisition, capping its presentation with a slide suggesting, "Establishment of business base by M&A," will be a key objective for the year ahead. Indeed, it is already engaged in doing just that, acquiring or investing in Playphone, Kamcord and Chukong Holdings in 2014.

But the reality is that, in a mobile market where the cost of acquiring users and installs is outpacing the revenue that those installs and users return, perhaps the only truly solid strategy for growth is to create a new IP that emulates the success of its predecessor.

In that regard, few of the big earners in mobile have managed to do so, and there's a strong argument that, actually, none of them have really come close. Rovio continues to find new ways to mine Angry Birds, King has simply added a little Soda to Candy Crush, and Supercell could only lay claim to that achievement if you treat Clash of Clans as a follow-up to the considerably less successful Hay Day.

It remains to be seen whether brand loyalty on mobile extends beyond individual IP and to the companies that actually create them. GungHo's investors will be hoping that's the case.

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Latest comments (5)

Paul Johnson Managing Director / Lead code monkey, Rubicon Development5 years ago
I do sympathise. When you're only making one and a half billion dollars from one mobile game, it must be a real bastard where you go from there.

Edited 1 times. Last edit by Paul Johnson on 10th February 2015 7:57pm

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Greg Wilcox Creator, Destroy All Fanboys! 5 years ago
Well, getting versions of the game onto other platforms may be one solution. Take the time to get demos made for Steam, 3DS/Wii U, PSN, Xbox Live and maybe see what happens. Expanding the audience to those who don't yet play it on mobile is worth consideration (mostly because these users will pay more for a game with all content included over piecemeal transactions over time. Still, offering both ways to play may work for a game like this)...
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John Kauderer Associate Creative Director, Atari5 years ago
Hayday is still in the top 10 grossing games on the AppStore. Not bad for what is largely a Farmville clone with questionable art direction.

Boom Beach has been doing well and that has some similarities with Clash of Clans. Weird they didn't mention Boom Beach in the article but perhaps that destroys the "none of them have come close" line. I'd say Supercell was pretty successful at repeating success. Boom Beach is in a lot of ways incomplete. As they add features I could see it getting close to the popularity of Clash of Clans.
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David Phan Producer, Relic Entertainment5 years ago
Similar to how North American games need to be significantly modified to be successful in foreign markets (ex China), games from JP should be significantly modified for the North American market for the best chance of success. In the case of P&D, the UI was not simplified at all for the NA market. Even as a "hardcore" freemium gamer, I found the UI/UX overly complicated and not easy to navigate through.

Also, P&D's success in Japan relied heavily on it's local co-op play via bluetooth. North Americans simply don't play games this way.
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Paul Johnson Managing Director / Lead code monkey, Rubicon Development5 years ago
I just made a blog post that explains how any mobile developer can increase their income levels substantially without spending a penny, using a case study in actual practice. Might be relevant and help them out.
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