DeNA seeks to evolve beyond games

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Not long ago DeNA held the Japanese mobile game sector in the palms of their hands. Its browser based mobile platform, ‘Mobage’, provided gamers with more than a thousand choices of games to play.

While still a dominant player, DeNA’s market power is waning as its core business comes under assault. Independent producers known as ‘indies’ that were once captive to DeNA (and its competitor, GREE) increasingly distribute their games as apps through the Apple Store and Google Play. The apps run on Smartphones which offer users a superior play experience. As competition from indies grows, DeNA must evolve beyond games.

The firm began life as an online e-commerce company in 1999. It expanded into mobile services in 2004. Sales grew exponentially on the back of social games that were introduced in 2009. By 2013, DeNA’s sales had soared to almost $2 billion.

Tomoko Namba, the firm’s effervescent founder and former McKinsey & Co. partner, attributed year-on-year growth in large part to the “setting of unreasonably high goals.”

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DeNA has diversified as it aims to become the No. 1 global mobile Internet company. However, the firm remains dependent on its core social media business – mostly mobile games that are sold in Japan and which accounts for 86% of company turnover. Less than 20% of DeNA’s sales are generated overseas.

An attempt in 2010 to reproduce Mobage’s domestic success elsewhere did not go well. Then, DeNA bought US mobile game company, ngmoco, for $400 million. Almost five years later DeNA’s international business remains loss making.

Last year competition from indies caused total firm sales and profits to fall by 10.4% and 30.5% respectively. Isao Moriyasu, President and CEO of DeNA said, “We will exert an all-out effort to revitalize our game business and build additional new businesses with structural advantages for medium- to long-term growth.”

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It has the means to do so. DeNA can tap about $600 million of cash from past earnings. To this arsenal it adds 300 – $500 million of net profits yearly.

Last year DeNA bought two online content aggregation platforms, Iemo and Mery, for a combined $50 million as part of its expansion plans. In addition, it expanded into the healthcare sector with the launch of Mycode, a DNA testing service.

DeNA also makes venture capital investments in innovative startups through a ‘Strategic Investment Office’. The VC unit has invested in about 30 startups since it was founded last year. Most are seed investments of 100 – $500k each. Promising investees receive further funding rounds of 1 – $3 million. Healthcare and Hollywood 2.0 are among the sectors being targeted for future investment.

Hollywood 2.0 refers to the evolving movie and television industries. In the past, big studios created the stars. Today anyone with talent can become a celebrity. Over 7 million fans subscribe to Michelle Phan’s YouTube channel, for example. A video blogger, Ms. Phan produces cosmetic tutorials. The 27-year-old self-made celebrity is on course to earning $84 million this year through her related cosmetic sampling service, ipsy.

Last year DeNA invested in Hollywood 2.0 company FameBit, a self-serve marketplace that matches brands with up-and-coming YouTube celebrities. Through Famebit’s online platform, brand owners review celebrity profiles before hiring them. DeNA also invested in Kamcord, a service that allows gamers to stream their mobile video game play for others to watch. Over a million mobile gamers now partake in the streaming service.

As DeNA expands, it must learn to compete outside of its domestic market with global competitors much larger than itself. Kamcord, for instance, competes globally with Twitch, a similar service recently bought by Amazon for almost $1 billion that live-streams PC, console and mobile game play.

Amazon, which began life as an online US book retailer five years before DeNA was founded, has grown to become a global competitor 40 times DeNA’s size. To successfully compete against such global Internet behemoths in the future, DeNA must not only set unreasonably high goals, it must surpass them time and time again.

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