GREE’s Falling Profits Raise Doubts About Japanese Gaming Giant’s Global Expansion

Mobile social gaming giant GREE (TYO:3632) posted its second-quarter earnings report on Tuesday, and the news was less than assuring for the Japanese firm, which has been aggressively expanding into American and European markets in recent months.

The Tokyo-based company reported 39,407 million yen ($418.55 million) in sales over the second quarter, a 5 percent decrease from the previous fiscal year’s second quarter. Operating profit, meanwhile, fell by 37 percent year-over-year through the second quarter to 14,258 million yen. GREE’s growing operating costs from overseas expansion could mean more for its future in the coming quarters.

In its earnings report, GREE admitted it had suffered heavy costs from its international growth scheme as well as tightened regulations against online gambling in Japan. But while that country’s prohibition against a controversial game mechanic known as “kompu gacha” -- a sort of casino-like technique that asks players to buy virtual items on the chance that they’ll be rewarded with even fancier items later -- did hurt one of the company’s key sources of in-game monetization.

GREE lowered its estimates for the current fiscal year accordingly. It cut its full-year sales forecast by 17 percent to a minimum 160 billion yen from a prior minimum of 195 billion yen, citing slower-than-expected overseas sales. Estimated operating profit was cut as much as 32 percent to 50,000 yen.

The company snatched up a batch of small game developers across the U.S. throughout 2012 and even launched its own game development program ironically called “GREE Loves Indies” in an effort to create regionally specific games that would appeal more to Western audiences. Just last week, it launched a new $10 million partners fund to attract even more prospective mobile game developers into its stable.

All of these acquisitions are betting big on the future of mobile and casual gaming as a cornerstone of the industry. But these acquisitions have not immediately translated into revenue to meet their added cost. As Anil Dharni, GREE’s senior vice president of studio operations, admitted in an interview with TechCrunch last weekend, two of the company’s most high-profile American acquisitions -- OpenFeint, which was purchased in 2011 for $109 million, and Funzio, which GREE purchased in 2012 for $210 million -- were hit by dramatic layoffs following their buyouts, the former business being moved to Japan entirely.

Still, Dharni was optimistic about the company’s future prospects for mobile, saying that iOS alone is “4X and beyond in terms of revenue” compared to what game developers were making just a year earlier.

As U.S.-based social game companies like Zynga (NASDAQ: ZNGA) struggled to remain financially solvent throughout 2012, the unprecedented growth of Japanese mobile and social game companies GREE and its close rival DeNA (TYO: 2432) offered a glimmer of hope for an insecure segment of the industry. But if the company is struggling to establish a firm foothold in the Western mobile social gaming market, its rapid-fire acquisitions of American game developers may not be enough to turn American gamers on to this novel form of entertainment in the first place.

GREE said in its earnings report Tuesday that it aims “to create hit titles using efficient marketing that strikes a balance between LTV [lifetime value] and CPI [cost per installation]” in North American and Europe as part of it “global initiatives.”