On Wednesday, leading Japanese social gaming companies announced they will phase out controversial “complete gacha” game play that regulators suggested was thinly disguised real money gambling. The virtual card games were the chief economic engines behind the stellar profits recently posted by social gamers Gree and DeNA, and analysts are questioning how the companies will fare in their absence. Since the Daily Yomiuri first broke news this week that regulators were taking a closer look at the games, shares in Gree lost almost a third of their value, while DeNA fell almost a quarter. According to Bloomberg’s calculations, Gree CEO Yoshikazu Tanaka has personally lost a paper fortune of $704m in the past two days.
After initially responding to the crisis with plans to craft industry guidelines to reduce the potential for gacha abuse, six Japanese social game companies have now decided to end the practice entirely. DeNA CEO Isao Moriyasu told reporters that his company would voluntarily phase out the games by May 31, but declined comment on how DeNA might replace the income stream. Tokyo-based consultant Serkan Toto told Reuters the announcement represented “an earthquake” for the firms. “These companies, especially Gree, are incredibly dependent on ‘complete gacha’ … in other words, this super lucrative game mechanism that these companies have enjoyed is now dead.” Macquarie Securities’ David Gibson estimated the result of the phase-out would be an 18% net income hit for Gree, and 6% for DeNA.
But the companies’ decision to proactively derail their own gravy train alleviated some concerns that regulators might step in with sweeping curbs that could hobble the overall social gaming industry, causing shares in both Gree and DeNA to stage a minor rally. Credit Suisse analyst Yuki Nakayasu stated that the announcement “resolves the market’s major concerns at present, so we expect a sense of reassurance.” Japan’s Consumer Affairs Agency has promised to issue an opinion on the gacha phenomenon as early as next week. In January, Yano Research Institute Ltd. predicted Japan’s social gaming market could grow 33% to about 343b yen ($4.3b) in 2012, 70x the market’s value just four years ago.