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Administrator | 2013-12-15 17:54:31

Japanese mobile carrier Softbank certainly made waves in the mobile gaming industry last week by purchasing a majority of Finnish gaming company Supercell for $1.5 billion.

Aside from being unusually aggressive for a Japanese mobile company to take a majority share in a foreign company at a high valuation, the move is notable in that there has been relatively little cross-industry investment, even outside of Japan and South Korea.

For mobile carriers elsewhere this might seem like an interesting idea, as the mobile gaming market has exploded recently, with Frost and Sullivan projecting that revenues will reach $12.5 billion in 2013.

Mobile operators used to be much more active in the space in the pre-smartphone days when it was much easier to preload games into featurephones, and simple paid games could be delivered via SMS or even GPRS. But the rise of the smartphone and subsequently application stores quashed this market very quickly as operators like Vodafone and Orange closed their application stores last year.

SK Telecom had the most success in the space as its T-Store was able to hold a 50% revenue share of Android application revenues in South Korea. Rival operators tried to keep pace by launching their own Android stores to compete, but the rise of Kakao Talk and smartphone growth have lowered their share to single digits. Japan's NTT DoCoMo even tried to start their own gaming platform in 2012 to directly engage with its 50 million customers with titles from local giants such as NAMCO BANDAI, Konami, SEGA and SQUARE ENIX. Even this initiative failed to gain significant traction in the market.

Therefore given the recent move from SoftBank does it make sense for mobile operators elsewhere to invest in mobile game companies? While an interesting idea I think that the answer is generally no, for the following reasons:

1. Longevity - Mobile gaming is arguably one of the most competitive markets in the world, as major application stores have over a million apps of which the top 25 grossing make up over 40% of revenues. Even companies who make it big have to reinvent themselves every six months as a the popularity of a game fades and although some companies like Rovio have diversified well, this is also a tough thing to do.

2. Synergies - As previously mentioned, it is very difficult to realize syngeries between owning mobile infrastructure and offering games. Initiatives like mobile advertising, e-commerce ad-ins and data mining show great promise but real business models have yet to materialize.

3. Valuations - Mobile gaming is currently one of the hottest segments in the market at the moment and it is very much a seller's market, resulting in very high valuations.

So given my opposition to the concept, does the Softbank deal make sense? Absolutely. The Japanese mobile market is shrinking faster than any other market in terms of service revenues and this is not due only to LINE, dempgraphics or anything else.

It is plain and simple market saturation for voice and data which is approaching all developed markets faster than people think. SoftBank's acquisition is only a small part of a broad strategy to invest in a wide variety of segments, as a few days later they bought out handset distributor Brightstar, to combat service revenue decline.

Operators in other markets should seriously consider following SoftBank's lead by setting up VC funds and start-up incubators to plan ahead for local market saturation conditions.

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