Japan to Europe: Game on ! (act 2)

Oct 20, 2013
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Fasten your seatbelts, because the softbankEuropean mobile games market is about to become a lot more interesting.

Not that the market has been dormant. I can’t think of a recent ride on the Paris metro or London tube without witnessing someone playing Candy Crush or Clash of Clans. And now Candy Crush maker King.com is rumoured to be preparing its IPO.

I know I say this a lot, but I still believe that Europe’s mobile game sector is still in its infancy, and that its potential is tremendous. And I submit that Europeans are more reasonable when it comes to free-to-play conversion that Americans. An investment banker might state this as better monetization and ARPU potential in Europe than in the U.S., though since the value proposition goes both ways, I prefer to think of it in a cultural context. History in Europe has fostered a sensitivity to limited resources and hence an appreciation of their value, whereas the American consumer is notorious for expecting a lot for free (look at the prevalence of timers on lights to cite one example).

Now, many successful mobile game developers apply the resource scarcity concept to their games’ monetization mechanics (e.g. pay extra for a rare monster, an extra life, etc.). Indisputably the current champion of these techniques is, GungHo, the maker of Puzzles & Dragons.

If you haven’t played Puzzles & Dragons yet, or are not much of a gamer, you absolutely must try it, if only to experience the biggest hit to date in mobile game history. Puzzles & Dragons (Pazudora in Romaji) counts 20 million active users in Japan, and the freemium game rakes in over $4 million every day.

As was widely reported last week, GungHo and Softbank jointly acquired 51% of Finland’s Supercell for a jaw-dropping $1.5 billion.

I happened to be in Tokyo the day this deal was announced, and it caught a lot of people off guard.

Not for the teaming up of mobile carrier Softbank and game developer GungHo, with whom the cozy relationship is well-known in Japan (Softbank is one of the original investors in GungHo, and earlier this year increased its minority stake to ~58%. And GungHo’s Chairman, Taizo Son, is the brother of SoftBank Founder/CEO Masayoshi Son).

Not really for the valuation either. Granted, a $3 billion enterprise valuation is stratospheric; it makes the previous nine-figure acquisitions in the sector look like peanuts. However, Supercell reportedly had a run rate of $1 billion in revenues and $750 million profit. When superimposing the metrics of Japan’s numerous publicly-listed mobile game companies onto those figures, a boardroom justification can be whiteboarded with a straight face (I personally suspect that the Japanese public market comparables are out of whack, but that’s another story). Moreover, Masayoshi Son has a reputation of often being savvy in his big bets.

The deal was surprising mainly because Supercell was not well known in Japan except to industry insiders. Perhaps the signals were there a few months ago when Supercell and GungHo began cross-promoting their games, but regardless, the relationship appears to be relatively recent.

According to my sources, the rumor is that Supercell sought out Softbank/GungHo, and not the other way around as was widely suggested in the media. This makes sense, as Supercell’s investors would inevitably need a path to liquidity, and the public markets can be a harsh environment for a primarily hits-driven business.

Time will tell if the Supercell valuation proves justified. That question notwithstanding, I think Europe represents compelling potential for a select group of Japanese firms. European startups with game studios and certain types of content have some incredible opportunities in front of them but need to set their positioning now. The red sun is rising fast.