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Japan's GungHo slays rivals with dragon game

By Somang Yang

SEOUL (Reuters) - GungHo Online Entertainment Inc was a blip on Japan's gaming scene six months ago.

But the phenomenal success of a single mobile game, Puzzles & Dragons, has sent the company's shares up more than 1,000 percent since October, valuing the company at $4.4 billion - far more than better known rival Zynga's $2.7 billion market value.

The comparison to Zynga Inc, once a market darling whose shares have tumbled 70 percent in the past year, is also a cautionary tale for investors of how quickly a game and its creator can fall from grace.

Others have tried to emulate Puzzles & Dragon's half-puzzle, half-arcade game format, such as Colopl Inc's "Puzzle De Battle" or Adways Inc's "Puzznarok", but they failed to match its runaway success and languished amid hundreds of thousands of other games.

It raises a $4.4 billion dollar question of what turns a mobile game into a star with staying power.

"What makes Puzzles & Dragons a lasting success is its ability to lock in users and make them value their in-game assets as though they were real-life assets," said Rim Ho-won, a game analyst at CIMB Securities.

GungHo said Puzzles & Dragons, which is currently available only in Japan, the United States and South Korea, could appeal to seasoned gamers and beginners alike because its split-screen delivers a monster-destroying arcade game above a Bejeweled-like puzzle on the bottom.

The company posted monthly revenue of 10 billion yen ($101.13 million) in February, up 1,280 percent year-on-year. Serkan Toto, a Tokyo-based game blogger and consultant, estimates that more than half the revenue came from its single hit title.

The game could bring in even more money if it catches on elsewhere. In emailed responses to questions from Reuters, GungHo said it was in discussions with Japanese telecoms giant and major shareholder Softbank Corp for help in expanding into new markets.

Softbank said in March that it planned to raise its stake in GungHo to 58.5 percent from 33.6 percent through a tender, offering 340,276 yen ($3,400) per share. The stock closed at 412,000 yen on Monday.

STAY A WHILE

Social networking features are one way to lock in users, ensuring they not only keep playing games but keep paying for the add-on features.

South Korean games such as Anipang and DragonFlight went viral by piggybacking on the popular mobile messenger KakaoTalk which allowed friends to send in-game items and rank each other by score.

Anipang netted creator SundayToz an average of $351,000 a day in October, while DragonFlight earned $1.05 million a day in September, Rim estimated, just half the $2 million-a-day that Puzzles & Dragons raked in.

One way to spot a future blockbuster is by tracking a game's progress on download rankings. Analytics firm App Annie provides real-time rankings based on downloads or revenue, broken down by country and iOS or GooglePlay. Rim said that number of free downloads are a leading indicator of future revenues.

Some game trackers simply go with their gut.

"If you want to know if a game's going to be a success, download it and see whether it makes you want to spend money," suggested Woo Jung-hoon, a Seoul-based veteran developer at Enssid.

DISCOVERY CHANNEL

The success of Puzzles & Dragons is also a result of its ability to distinguish itself from the hundreds of thousands of other games, including copycats.

"Puzzles & Dragons is a really good game... but aside from the content specific elements, GungHo took the unconventional step of TV advertising to mass-acquire users", said Toto.

GungHo said TV advertising in Japan helped drive "explosive" growth in its number of downloads.

In neighboring South Korea, it is getting harder to attract notice on the KakaoTalk messenger, which now has more than 100 games jostling for its users' attention.

"For now, mobile messengers like LINE and KakaoTalk are great ways to tap into a wide userbase, but as the field gets more crowded, you encounter the discovery problem," said Toto.

A spokesperson for KakaoTalk said the company has no plans to limit the number of games available on the chat app, and that all games that meet its stated criteria will be considered.

Rim at CIMB says that in-game cross-promotion will play an increasingly important role as a low-cost alternative to advertising campaigns. His top picks are Gamevil Inc and COM2US Corp, companies that have cross-promotion savvy, with a pipeline of popular games on and off the chat apps.

As for GungHo, Toto said it earned a few more months at the top, partly thanks to a new blitz of TV advertising. All the same, the pressure for a second hit is mounting.

"Have you heard of a game named The Croods?" asked Toto. "Neither have most other people. It's Rovio's follow-up to Angry Birds."

(Additional reporting by Mari Saito in Tokyo; Editing by Emily Kaiser)

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