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Business

Slowing smartphone game sales signal sea change

GungHo's "Puzzle & Dragons" has been a monster hit in Japan.

TOKYO -- Tumbling earnings at a leading smartphone game developer show that market growth may have peaked, indicating a shift in focus from blockbusters to repeated successes as competition heats up.

     GungHo Online Entertainment's consolidated net profit slid 30% to 43.4 billion yen ($360 million) for 2015, with sales falling 11% to 154.3 billion yen, the company announced Tuesday. Revenue has been sliding since peaking in the January-March quarter of 2015. GungHo's "Puzzle & Dragons" has been downloaded more than 40 million times in Japan, putting it on around half of all smartphones here. The potential for further growth is shrinking.

Dawn of an industry

"Puzzle & Dragons" cracked the then-undeveloped market for smartphone-based games wide open upon its February 2012 release. Social networking service operator Mixi's "Monster Strike" and a fantasy-themed role-playing game from Colopl soon followed, settling the new frontier. The mobile gaming market is now thought to be worth more than 700 billion yen, compensating for stagnant sales of console titles to keep the video game sector at more than 1 trillion yen overall.

     Mobile games are defined by their ability to rapidly take off and surge through the market, providing enormous return on investment in the case of a major hit. "Puzzle & Dragons" is thought to have cost only 100 million yen to 200 million yen to develop. But sales tied to the game in the four years since its debut amount to around 450 billion yen.

     Established console game developers like Square Enix have a solid presence in the industry. Such outsiders as search engine operator Yahoo! have jumped in as well. Mixi turned to mobile gaming to rebound from a severe operational crunch, ratcheting up competition in the sector.

Changing the rules

Sales of "Puzzle & Dragons" surged with the spread of the smartphone itself. That they have passed their peak could signal that growth in the mobile game market as a whole is close to topping out. An end to expansion would mean a dramatic shift in how market players interact.

     Many see competition for market share among 10 or so leading developers shaping the business going forward. Companies native to the smartphone platform, such as Mixi and Colopl, and established names, including Square Enix and Bandai Namco Entertainment, will both likely be prominent players.

     The cost of developing a mobile game has already climbed to between 300 million yen and 400 million yen, on a par with the console titles of a few years ago, creating an environment where startups struggle to compete. Some companies have "trimmed down their smartphone offerings and stepped up development of console games," exiting a field of many misses for one where sales can be estimated more reliably, an industry insider said.

     "It's become harder to hit a home run in this market," GungHo President Kazuki Morishita said. Success now rests on a series of hits, leaving the true champion of mobile gaming yet to be crowned.

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