Will Japan’s Social Gaming Industry Get Regulated? My Perspective [Social Games]

Edit (May 5, 2012):
It happened, the Japanese government is reported to be ready to crack down on social games. See here.

Japan’s social gaming industry in general, and its current 800-pound gorilla GREE in particular, are getting a lot of bad press at the moment. Social games were never viewed in a positive light to begin with in this country, but things started to get really ugly a few months ago.

I personally see three reasons for this development:
a) the fact that both GREE and DeNA have been making a lot of money as of late
b) the emergence of real money-based, off-platform trading of virtual items
c) the gacha mechanism used in many social games in Japan

Regarding a), my personal view is that conservative media in particular view the meteoric rise of DeNA and GREE as a suspicious development. The problem for them isn’t that these companies are making a lot of money (the Japanese telcos and countless other web/mobile firms do, too): it’s that they are too young and making too much money too quickly. So there must be fishy, maybe even criminal activities in progress, the reasoning goes.

More information on this point:
GREE’s latest financials
DeNA’s latest financials

Regarding b), off-platform trading of virtual items isn’t as big a problem as recent Japanese press reports suggest they are. The way it works is that a seller auctions off a rare item they possess to a buyer in need of that item – outside GREE or Mobage (i.e. on Yahoo Japan’s auction platform), and in exchange for real money. After the payment is done, the seller and buyer “meet” in the game in question and execute the deal (exchange items).

Sounds dramatic, but this “shadow economy” is in no way comparable to the multi-million dollar item trading and auctioning economy some online games like World Of Warcraft have created in recent years.

But regulators could force DeNA and GREE to limit or scratch in-game trading of items. There are various ways to do this, and a substantial social element of many games would be lost in that case.

Regarding c), regulating gacha would hurt platform and game providers dramatically, at least in the short term: as I mentioned before, some companies in this industry are generating 50%+ of sales with this function alone. Regulators could ask gacha to be removed entirely or limit the “luck factor” in order to push down the element of gambling this mechanism has.

Role of the government:
Points b) and c) would be the targets of regulation by the Japanese government, most likely the National Consumer Affairs Agency. It is this agency that deals with phenomena like those: last year, for example, the agency publicly warned Groupon Japan and looked into some business practices of the company.

This is why regulation might not be coming:
Most of the negative press reports were published before GREE and other companies introduced a number of counter-measures to combat real-money trading and practically self-regulate monetization in social games (see here, here, and here).

In addition, the number of complaints the National Consumer Affairs Agency received regarding high bills coming from fees in online games (social and non-social games combined) is in the hundreds – in the entire last 12 months, in a country with tens of millions of registered social game users.

As mentioned above, the real-money trading of virtual items is, in the big picture, a small phenomenon (and one that can be controlled).

This is why regulation might come regardless:
The enormous focus on gacha by game providers in the design of a lot of titles (almost all social games in Japan feature a gacha function nowadays) and the undeniable gambling element the mechanism contains might become a problem in the near future (some media suggest regulation could hit this or next month).

I personally have the feeling that the campaign against the social gaming industry won’t go past the Japanese government: there are just too many, too negative reports floating around out there, both in online and printed media (including “influential” magazines).

My view is that the pressure just got too high for the government, which so far has been very friendly with the industry. In Japan, nails that stick out (young companies that make too much money too quickly) usually get hammered down sooner or later.

I could go on and on about the possibility of regulation (the above is just a snippet), but the short answer to the question if the industry will see regulation in one way or the other soon is (in my view): yes, it’s very likely.

Edit (May 5, 2012):
It happened, the Japanese government is reported to be ready to crack down on social games. See here.

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