Puzzle & Dragon Maker Goes on the Hunt for Deals Overseas

GungHo Online Entertainment Inc. (3765) has worked out its strategy for following up on the success of Puzzle & Dragons, the most popular mobile game in Japan: It’s looking for deals overseas.

The company is seeking to invest in developers around the world to help them come up with new hit games and boost GungHo’s sales outside Japan to more than half its total. The strategy is to diversify and tap into markets from the U.S. to China, said Chief Executive Officer Kazuki Morishita.

GungHo, which collected about 149 billion yen ($1.4 billion) from Puzzle & Dragons last year, is trying to avoid the fate of other mobile game developers who have stumbled after one big hit. Morishita wants to keep building its primary title into a broad brand similar to Angry Birds at the same time the company comes out with new games through acquisitions, minority investments and internal development.

“Instead of recklessly making new games, strategic partnerships overseas are also important,” Morishita said in an interview yesterday at the company’s Tokyo headquarters. “It’s very important to create a game that users can play for a long time.”

Shares of GungHo rose 5.1 percent to 699 yen, the highest close since Jan. 22, in Tokyo trading. The benchmark Topix index added 0.4 percent.

Photographer: Kiyoshi Ota/Bloomberg

Kazuki Morishita, president and chief executive officer of GungHo Online Entertainment Inc. Close

Kazuki Morishita, president and chief executive officer of GungHo Online Entertainment Inc.

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Photographer: Kiyoshi Ota/Bloomberg

Kazuki Morishita, president and chief executive officer of GungHo Online Entertainment Inc.

GungHo will study deals on a case-by-case basis and isn’t setting limits on investments, Morishita said. The company isn’t considering raising funds by selling shares to the public, he said.

Overseas Expansion

The game maker partnered with its biggest shareholder, SoftBank Corp., last year to buy a controlling stake in Supercell Oy, developer of games Clash of Clans and Hay Day. GungHo paid 20 percent of the $1.53 billion price.

The company had 48.6 billion yen of cash and near cash items as of March 31, according to data compiled by Bloomberg.

Puzzle & Dragons and related products generated 91 percent of GungHo’s total sales in year ended December, according to a regulatory filing, which listed its dependence on the game as a risk to its operations.

Morishita wants to develop Puzzle & Dragons into a brand rather than just a smartphone game so that it can be played for years by many people overseas and on multiple platforms. Developing a game is like “giving birth to a child,” Morishita said. “The next question is how to grow it so it can last long.”

GungHo is “fine-tuning” Puzzle & Dragons for the Chinese market and plans to release it this year, the CEO said.

Photographer: Kiyoshi Ota/Bloomberg

Kazuki Morishita, president and chief executive officer of GungHo Online Entertainment Inc. Close

Kazuki Morishita, president and chief executive officer of GungHo Online Entertainment Inc.

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Photographer: Kiyoshi Ota/Bloomberg

Kazuki Morishita, president and chief executive officer of GungHo Online Entertainment Inc.

Europe Expansion

GungHo began sales of Puzzle & Dragons in the U.K. in October and six other European countries in December before adding Hong Kong and Taiwan in January if this year. The game is distributed in 13 countries and regions, according to its website.

“Users will gradually get tired of the game in the end,” Tomoaki Kawasaki, analyst at Iwai Cosmo Securities Co., said by phone before the interview. “GungHo needs to find new sources of income when Puzzle & Dragons is still doing well.”

GungHo spokesman Hiroyuki Hashimoto said the majority of the company’s sales are generated in Japan, and declined to give details.

Puzzle & Dragons, which is offered for free and generates profit by selling characters and in-game items, was the top grossing game in Apple Inc.’s iOS application store and Google Inc.’s Play in Japan as of June 2, according to App Annie Ltd. The game is also available for Nintendo Co.’s 3DS handheld device.

“It is important to develop titles not just for smartphones, but for multiple platforms,” said Morishita, who also leads the company’s game development team. “Who knows if smartphones will still exist in another five years?”

Puzzle-Solving

An updated version of Puzzle & Dragons, which will feature a new mode that strips out the role-playing element and focuses on puzzle-solving, will be released July 17, according to the company’s website.

Japan’s app revenue more than tripled from a year earlier, surpassing the U.S. as the top-grossing market for apps in October, according to a Dec. 11 report by App Annie.

Taizo Son, brother of SoftBank founder Masayoshi Son, is the chairman of GungHo. SoftBank owns about 40 percent of the Japanese game developer, according to data compiled by Bloomberg.

In the past GungHo has made a few small investments in game developers. Those include a 4 billion yen stake in Gravity Co. in 2008 and a 772 million yen investment in Digital Adventure Inc., according to data compiled by Bloomberg.

Puzzle & Dragons was the top game by sales in 2013 for mobile devices using iOS and Google Play, followed by King Digital Entertainment Plc (KING)’s Candy Crush Saga and Supercell’s Clash of Clans and Hay Day, according to App Annie.

To contact the reporters on this story: Marco Lui in Tokyo at mlui11@bloomberg.net; Takashi Amano in Tokyo at tamano6@bloomberg.net

To contact the editors responsible for this story: Michael Tighe at mtighe4@bloomberg.net Aaron Clark, Robert Fenner

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