On Dec. 8, the Tokyo-based Internet company DeNA received an on-site investigation by the Japan Fair Trade Commission (JFTC) due to suspected unfair trade practices. DeNA had allegedly interfered with their third-party game providers’ development of games for DeNA’s competitor, Gree.

DeNA is listed on the Tokyo Stock Market Exchange and the morning the investigation was reported their stock dropped 11 percent.

Just a week before, on Dec. 2, the JFTC was in the news for allowing a search alliance between web giants Yahoo! Japan and Google. Some competitors such as Microsoft and Rakuten had protested against the deal, which gives more than 90 percent of Internet searches in Japan over to Google’s search technology. A similar alliance between Yahoo.com and Google had been rejected in the United States. So do the JFTC think the DeNA/Gree war is a more serious issue? Maybe. And if so, is social gaming really such a big issue? Yes, it is huge.

DeNA was established in 1999 and has mainly been running services on the Japanese mobile web. In 2006 the company released Mobage-town — a mobile, social game-networking service — and their business skyrocketed.

All three of Japan’s major social-networking services, Gree, Mobage-town and Mixi, have, since their inception, been accessed by most users on their mobile phones, which is quite different from social networks in the West, such as Facebook or MySpace, which mainly run on PCs.

On Gree and Mobage-town, many games are developed and offered by the platform vendors themselves. While they do also open their platforms to third-party vendors, from the point of view of both popularity and revenue, the in-house games are much bigger. This is different from networks such as Facebook, which is purely a platform vendor and does not develop many official applications, instead allowing third-parties like Zynga and Playfish to compete with each other to create games. In this way Gree and Mobage-town are kind of like Facebook mixed with Zynga — for use on mobile phones.

Another difference from Western social networks is that Gree and Mobage-town provide a lot of external content inside their networks, including news and fortune telling. Because of this, their users do not need to go outside the networks. Imagine Facebook plus Yahoo! on one site.

These kind of all-encompassing mobile web networks are very profitable, so it’s perhaps not so surprising that the JFTC stuck their noses in. In their 2010 mid-term financial briefing, DeNA claimed that Mobage-town is 30 times more profitable than Facebook. According to the DeNA’s estimation, Mobage-town has sales about half that of Facebook, but their number of users is only one-25th that of Facebook — all in Japan, and all only on mobile phones.

There are countless simple socially- networked games available on mobiles in Japan, and are all free at the beginning. But if you want to advance, and in reality a fair amount of users do, you can purchase extra items to help along your game-play. This is essentially the same business model foreign social games use. So if the basic concept is the same as in the West, why is it so much more profitable in Japan?

One reason is the payment system used on Japanese mobiles. In the easiest example, users can purchase virtual points simply by pressing buttons on their phones, and the charges will be added to their cellphone bill. If users already purchase other things via cellphone, these small game charges are less noticeable on their final bill. And in Japan the mobile phone is a lifeline for many people these days because it can be used for all kinds of payments, from train tickets and vending machines to supermarkets.

In fact it is so easy to charge something to your mobile phone bill that many don’t even think twice about it. However, in the case of Facebook or on iPhone and Android app stores, users purchase things using their credit cards, which must be reconfirmed and gives them more time to think before making a purchase.

Helped by this cellphone payment environment, both Mobage-town and Gree have been enjoying the benefits of the adage “the more users, the more sales.” This has led to something extraordinary happening in Japan: Both companies advertise on TV — something that’s very unusual from an American or European web-business viewpoint.

The web is supposed to be an inexpensive marketing tool. The theory being that, on social networks, web services could grow by simply using viral marketing without spending money on traditional promotion. However, both Gree and Mobage-town seem to have found a better formula, and burning money on costly TV promotion is increasing their profit — so much so that the two companies’ TV ad spending is ranked in the Top-Five, above traditional companies such as Toyota and Kirin.

Mobage-town and its rival Gree have many other common points: Their number of users is almost the same, over 21 million; all or most users are on cellphone; and both companies use free games as their driving force. It is therefore natural that they would try to attract the same users by making a wider, more attractive selection of games. They were bound to eventually clash due to competition and conflicts, and in September 2009, Gree filed a lawsuit claiming that DeNA had copied their flagship fishing game.

Such tight competition has led to social gaming becoming one of few industries in the current bad economy where recruitment is still active. This August, both Gree and DeNA announced their new ¥2 million rewards programs to newly hired engineers, on the very same date.

In the same month, TechCrunch Japan reported that, according to anonymous sources, DeNA threatened their game providers that if they delivered games for Gree, their games on Mobage-town would not be shown or recommended on the network — more than 10 third-party developers contacted by TechCrunch said they had received informal requests from DeNA not to make games for Gree — which backs up last week’s news of the investigation by the JFTC.

And the competition between the two rivals is set to continue beyond their desire to be Japan’s leading social network as both companies are seeking another growth possibility — international markets.

DeNA has already purchased some U.S. smartphone game companies. And Gree, who believe that smartphone adoption is a gate to the world, aims to have 100 million users, which is unlikely if done only in Japan with its population of 130 million.

Collecting large amounts of money from the domestic market and funneling it into international markets is what many other Japanese companies, such as Sony and Toyota, did during their expansion years. Although it is rare for Japanese software companies to have an international success, having already beaten the Facebook-like Mixi means Gree and DeNA may be confident enough to compete with Facebook itself. There is an opportunity here to create a world in which social “gaming” networks are more popular than social “friends” network. Of course, such a plan will be heavily affected by whether the rest of the world will migrate to the mobile-centric web like Japan.

Akky Akimoto writes for Asianjin.com. A Japanese version of this article is available on his blog akimoto.jp. You can follow him @akky on Twitter.

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