In October 2012, for the first time in the history of the app industry, the United States was no longer the leading revenue-generating country on Google Play. It was surpassed by Japan, a country whose app economy experienced tremendous change in 2012 and remains poised to continue evolving into a global app powerhouse. Investors, developers and app industry players now know they cannot overlook the growing importance of Japan in the international app economy. By combining app store market data from App Annie Intelligence, industry news and our own analysis, we can provide you a comprehensive understanding of Japan’s app industry as it stands in today. We start with a big-picture view of the Japanese mobile industry, providing you with the context needed to understand this complex market. An exploration of the iOS and Google Play stores will follow. We’ll then dive into the companies, categories and apps that dominate Japanese app mindshare today.
1. The Japanese Mobile Landscape
Historically dominated by feature phones, Japan’s mobile culture is being redefined by smartphones
The word “feature phone” carries a negative connotation in the West, typically referring to a phone that is so primitive that it is good for making calls and sending text messages but not much else. The way the Japanese distinguish feature phones is slightly different and involves looking at both hardware and software. A phone can have a fantastic camera, GPS, internet connectivity and multimedia capability but still be regarded as a feature phone. A simple rule of thumb is that if it’s an iPhone or runs Android, it’s considered a smartphone. Furthermore, smartphones access content - such as apps, movies and music - through markets like the iOS App Store and Google Play. On the other hand, access to content on feature phones is restricted by carriers. This distinction between feature phone and smartphone is important to keep in mind as we discuss Japan’s mobile ecosystem. Despite the ubiquity of smartphones worldwide, feature phones remain widely used in Japan.At the end of 2011, only 23% of handsets being used in Japan were smartphones. The prevalence of feature phones in the country is no surprise. By restricting access to content and having the leverage to influence device manufacturers, carriers enjoy an incredible amount of control over the mobile industry. Today, Japan’s mobile environment is rapidly evolving. Smartphones are dramatically reshaping the country’s mobile landscape. In fact, industry experts believe that feature phones will become extinct in Japan over the next five yearsas consumers switch over to iPhones and Android smartphones. Apple and Google are making deep inroads into Japan and are forcing carriers to scramble for a strategy to maintain their power.
Japan’s Carriers: Gatekeepers with an Increasingly Tenuous Grip on the Market
The iOS app store ecosystem is disruptingthe Japanese mobile industry, as it removes the ability for carriers to control content and weakens their ability to influence phone manufacturers. This is unwelcome news to carriers, particularly to NTT DoCoMo - Japan’s largest carrier - as it challenges long-held, comfortable and profitable strategies. Since they cannot control the manufacture and sale of the iPhone, nor can they control the iTunes store, DoCoMo does not partner with Apple. For new devices, they instead focus on Android. This way, they can still influence domestic phone manufacturers while keeping the ability to distribute content through their own platforms. On the other hand, KDDI and Softbank - the second and third largest carriers - offer the iPhone, meaning they are happy for Japanese consumers to consume content through the iOS app store instead of the carrier platforms. KDDI and Softbank are giving more power to Apple in the hopes that iPhones will lift them to first place.
Apple and Google are changing the balance of power as content control moves into the hands of app storesAs app stores quickly transform the way consumers access content, carriers are deprived of a once key revenue stream. Carriers must now rely more on device sales to boost revenues, so domestic phone makers such as Sharp, Panasonic, Fujitsu, and Sony Ericsson are working to produce quality Android devices in an effort to defeat the iPhone.
This fight for content control will continue to define Japan’s app industry and it will certainly be interesting to see how DoCoMo’s Android phone strategy will play out in the coming years. DoCoMo is now losing more subscribers than KDDI, as their churn rate surpassed KDDI. Softbank has experienced the highest net addition of mobile subscribersover the past year. Clearly, Japanese consumers have developed a taste for iPhones.
As app stores transform the industry’s power dynamics, the leading carrier creates its own store in a bid to stay relevant
To continue to maintain control over its own content, DoCoMo launched two new services specifically aimed for smartphonesdubbed “dmenu,” a portal for accessing internet-based content, and “dmarket,” Docomo’s own internet market offering videos, music, books, and apps. DoCoMo is betting that carrier control of devices and content is the key to winning Japanese consumers. Japan is a complex market with many nuances, so app market observers are watching with anticipation to see how DoCoMo’s wager will turn out. A poor result for DoCoMo could drive even more users to KDDI and Softbank and put their status as the leading carrier at risk. As carriers make their bets on content distribution, we now take a deeper look at the rise of the app stores in Japan.
2. The State of the Platform Wars in Japan
iOS dominates revenues and downloads, but Google Play’s astounding growth is one to watch
Despite two-thirds of the Japanese smartphone population on Android and only one-third on iPhone, iOS revenue in Japan handily bests that of Google Play. But Google Play is closing the gap, as seen in the chart below.
Google Play’s revenues are catching up to Apple’s early lead
Though still well behind iOS revenues, the increasing ability for Google Play apps to monetize will further incentivize development for its platform. This growth was especially significant in October 2012, as Japan became the top grossing country on Google Play. We explored this issue in our first issue of the App Annie Index.
iOS and Google Play fight for market share while carriers watch from the sidelines
KDDI and Softbank are invested in Apple devices, so their strategies are tied to the success of iOS. They are hoping for continued customer demand for iPhones and iPads - these carriers will cede content control to Apple in exchange for subscriber market share. DoCoMo’s situation is more complex. It wants the Android platform to win, but doesn’t necessarily want consumers to get used to the Google Play ecosystem. They want consumers to choose Android phones then choose DoCoMo-operated stores to get apps and content. Who wins the platform wars in Japan is greatly dependent on how these alliances play out. All are hoping that their bets will align with consumers’ evolving tastes for apps.
3. The Companies That Define the Japanese App Economy
Gaming companies lead the way in a top-heavy app economy
When analyzing the Japanese iOS store for the 9-month period ending September 2012, we find that eighteen of the top 20 publishers are gaming companies. These top 20 publishers represent more than half of the total value of all grossing content. The Japanese market is top-heavy, with the top five publishers representing nearly one-third of all revenues.
NHN, Gameloft and Apple stand out in a field of Japanese competitors
Western publishers are perpetually on the outside looking in — unless they have local connections
Looking at the top publishers in Japan, it’s clear that Western developers looking to penetrate the games market in Japan are facing overwhelming competition. In addition to cultural barriers, foreign brands have to compete with a market full of established local players with formidable resources. Familiar gaming heavyweights Electronic Arts, Zynga and Rovio don't appear in this list, despite having the resources to build a stronger Japanese presence. NHN stands out as the lone South Korean brand, but it should be noted that they operate a successful Japanese subsidiary - NHN Japan - that operates the wildly popular social networking app LINE. Overwhelming market entrenchment makes it difficult, if not nearly impossible for Western companies to enter the lucrative Japanese gaming market. Many publishers in the chart above are publically traded companies that have the scale and cash needed for vast amounts of advertising spend. Western companies that look to gain a foothold in Japan must be ready to invest or have a breakout hit. Another possible avenue for foreign publishers is to partner with domestic social game platforms like GREE, Mobage (DeNA) and LINE which can give developers access to millions of users. These social game platforms hold tremendous power in Japan, as they foster distribution through friend invites and gamer communities. Electronic Arts partnered with gumi and GREE to develop and distribute their hit game FIFA World Class Soccer. These partnerships drastically expanded EA’s brand’s presence and discoverability in Japan. Now that we know which publishers are enjoying success in Japan, we now explore the app categories that are dominating mindshare.
4. App Categories to watch: Gaming and Social
Japan is a gaming nation with a growing appetite for social apps; the confluence of both may reshape the industry.
Games dominate the Japanese iPhone app store landscape
As the spiritual home of modern console gaming and birthplace of some of the world’s largest game publishers, Japan is a country crazy about games. This love for gaming naturally translates to app revenues as well. Over the nine-month period ending September 2012, the games category in the Japanese iOS store represented about 77% of total revenues across all categories. In contrast, the games category in the US iOS store represents nearly 59% of the total revenues in the same time period.
App developers excitedly usher in a new era of gaming as smartphone adoption reaches toward critical mass
Smartphone penetration is on the rise, but for now, many Japanese are still gaming on feature phones. Typically accessed through web browsers, feature phone games are much simpler to ensure compatibility with a wide variety of devices. Currently, many smartphone games are merely ports of feature phone games, resulting in games that are playable but do not take full advantage of smartphones’ hardware capabilities. The most exciting growth area in the games category today is a shift towards native app development for smartphones. GungHo Online’s Puzzles & Dragonsis part of a trend that games made specifically for smartphones are becoming increasingly popular. Native app games can take full advantage of a smartphone’s computing power, increasing the sophistication of gameplay.
Social Networking in Japan is experiencing transformative growth
The rise of the social networking category is a vital part of the story of Japan’s app ecosystem today. Social networking revenues grew an astounding 383% on iOS when comparing January 2012 against September 2012. In September, LINE continued its hot streak with free downloads far surpassing both Facebook and Twitter.
LINE holds a strong lead against international giants Facebook, Twitter and Skype
5. Apps That Are Making Headlines in Japan
LINE looks to expand beyond social networking, while Puzzle & Dragons becomes a top app on its own
The growth attributed to the social networking category is almost entirely due to LINE by NHN. Launching in June of 2011, the app has amassed over 100 million users worldwide and has ranked #1 in the free iOS app category in over 32 countries.
LINE’s dominance in the social networking category makes it a launchpad for social games distribution, moving it into the market territory of GREE, Mobage, and Mixi
As LINE grows, NHN is showing that it has distribution muscle, posing a challenge to social game networks GREE, Mobage and Mixi. LINE has been proving that it can quickly distribute games within its network. The launch of puzzle game LINE POP attained 3 million downloads in just 24 hours after its release and racked up 10 million downloads in 12 days. LINE Birzzle has attained 10 million downloads 97 days after release. With the announcement of LINE Channel, NHN wants to be a distribution platform for all content, not just games. This will blur the lines between category boundaries and will certainly be an important story to watch.
King without a kingmaker: Puzzle & Dragons becomes a hit without the help of a social gaming platform
Puzzle & Dragons is notable because it does not rely upon a social game network like GREE, Mobage or Mixi for distribution. Despite this, it has maintained the top grossing position on iOS for nine months. Puzzle & Dragons is lauded for its excellent game design and high production values. At its heart, it’s simply a great game that people really enjoy.Japan: A potential app economy powerhouse, but many questions remainThe game also stands out because it takes advantage of smartphone capabilities to create gameplay mechanics typically not seen in most Japanese games. Its use of the touchscreen for its match-3 puzzle mechanic is unique in Japanese gaming. A lot of top games in Japanese app stores are card games that are merely visual upgrades of their feature phone counterparts. Rarely do games take the extra step to push the envelope and really use smartphone hardware to its fullest potential.
Japan: A potential app economy powerhouse, but many questions remainThe game also stands out because it takes advantage of smartphone capabilities to create gameplay mechanics typically not seen in most Japanese games. Its use of the touchscreen for its match-3 puzzle mechanic is unique in Japanese gaming. A lot of top games in Japanese app stores are card games that are merely visual upgrades of their feature phone counterparts. Rarely do games take the extra step to push the envelope and really use smartphone hardware to its fullest potential.
As Japan finds its footing in the global app industry, there are many stories to watch in the near future. The top 3 carriers have made their bets with very different app store strategies. How these bets play out will affect the platform wars between iOS and Google Play. In the foreground, there are several companies vying to be the kingmaker - a primary distribution channel necessary to succeeding in the Japanese market. While this is happening, we may see apps that try to buck the trend, realizing that they can thrive on their own as long as they innovate and stay in touch with consumers’ ever-evolving tastes.
Looking to the future: how HTML5 could disrupt the Japanese app store economy
Because of Japan’s browser-centric culture and Japanese publishers’ loathe for app store taxes, the development of HTML5 as a gaming vehicle will be an important theme in the coming years. Even though still in its infancy, both GREE and NHN have acknowledged the existence of platforms that will use HTML5. If these publishers find a sustainable way to distribute apps without stores and get consumers to adapt to this model, Japanese app store growth would grind to a halt. With stronger adoption of smartphones and a fading out of feature phones, the Japanese app market will become increasingly attractive for app development. With an already large, mature, and lucrative mobile app market currently boasting some of the most exciting app store growth rates in the world, Japan continues to advance its app ecosystem and is quickly becoming a market that app industry players cannot ignore.
World Series of Apps Reports
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January 29, 2013Market Data