Looking East to Predict the Next Billion-Dollar Mobile Company

photo: NASA

As a U.S.-based VC working for SoftBank, one of Japan’s leading Internet companies, I’ve recently been noticing the recurrence of mobile trends moving from East to West. A few years ago, it was the concept of mobile gaming that exploded in Japan and trickled westward to the U.S. Now, there is a clear rise in mobile social networks in the United States, stemming from ideas that first sprouted from the mobile social companies of the East.

Instagram’s billion-dollar sale astounded many in the U.S., but the fact of the matter is that Japan has already seen multiple billion-dollar companies emerge from the mobile sector, including Gree and Dena. Japan is an obvious leader in the mobile market, with 75 percent of its population consuming mobile media, and networks approaching speeds of 110mbps.

Japan has set numerous precedents in the mobile market, consistently staying ahead of the curve and leading many American companies to look to Eastern trends to see what users want, especially when it comes to social gaming and mobile social networks. The next U.S.-based billion-dollar mobile company will be one that can build on a successful Eastern concept by putting a Western spin on it.

Mobile Gaming
The past few years have seen a massive boom in mobile gaming across the globe. Mobile start-ups such as Omgpop and Rovio have burst onto the scene and companies like Zynga have transitioned into the mobile market, while console-first companies like EA have released mobile products — all of this signifies a huge expansion in the mobile gaming ecosystem. The success of these gaming companies today is, in many ways, the long tail of monetization and delivery strategies created in Asia.

Anyone releasing a game in 2012 knows that, in terms of user acquisition, the freemium model is king. This model keeps moderate users engaged with free features, while also allowing hardcore gamers to customize the gaming experience — fulfilling user needs on both sides of the spectrum while still generating revenue.

Asian gaming companies such as Tencent in China, Gree and Dena in Japan, and Cyworld in Korea are the true trailblazers in monetizing virtual goods and avatars, setting the stage for the rest of the world. Japan’s Gree and Dena, in particular, have revolutionized the way people game, making mobile games not just about killing time, but also about connecting with other like-minded players. Despite Dena and Gree recently moving to end their “gacha” “complete gacha” revenue model, they are still leaders in connecting gaming communities and monetizing users.

After witnessing the success in Japan, start-ups like OpenFeint and Second Life brought the idea of deep social integration to the American gaming world, although with varying degrees of success. Second Life is struggling to maintain its initial momentum, and OpenFeint sold for $104M to Gree after recognizing the huge opportunity in making mobile games social.

Social Networking
Mobile social gaming platforms like Gree and Dena may focus primarily on gaming, but the prevalence of virtual personas and social interaction in the games allow these platforms to double as social networks. Eastern cultures such as Japan have a natural tendency toward introversion, driving the emphasis on the virtual self. Although the West has an inclination toward the real over the virtual self, the interaction between users on these networks still has the same social root.

Another critical component to social networking in the East is mobile structure. Japan showed early on that the future of social networking was mobile, with popular networks like Mixi becoming predominantly mobile back in 2009. Only recently, as Facebook started to shift toward a mobile first strategy, did it finally start to take off with Japanese users.

In the U.S., more mobile-first start-ups are becoming key players in the social space, with companies like Instagram, Path, SocialCam and Viddy drawing substantial attention from users and investors alike. As these new forms of social expression emerge in the mobile market, they bring with them another huge trend of Eastern origin, the virtual persona.

In the early days of the Web, social interaction was primarily anonymous in the U.S.; users selected forum and chat handles that represented what they wanted to share with the outside world. However, as Facebook has become the dominant social graph, some of this anonymity has vanished. Anonymity in Japan’s social networks however, is still extremely prevalent. Studies have shown that 90 percent of social network members use pseudonyms over real names, and only 25 percent of their friends on the networks are close friends offline.

While most Americans do not want a completely virtual persona, many do like having the option to explore connections and express themselves outside the restrictive realm of friends and family in their social graph. Badoo, a European social network that has steadily been increasing its presence in the U.S., just reached 150 million global users by making it easy to meet new people around you. This is also evidenced by the success of dating services like Skout and Grindr that combine location and interests for social discovery.

Examining more traditional social networks, Facebook still leads the engagement race, with users spending six to seven hours a month on the service. But even though Facebook is still at the forefront of user engagement numbers, other social networks that operate on shared interests rather than real life connections are on the rise. Opinion-sharing mobile app Thumb is seeing its users spend 3 hours and 50 minutes a month connecting with others. Similarly, Pinterest is seeing users engage for about an hour and 40 minutes a month on their Web-based virtual pin boards, sharing their interests with other pinners. This type of user engagement is a significant indicator that interest-based interaction is on the rise in the U.S.

Instagram has also shown that mobile apps operating outside the traditional social graph are becoming serious business. By connecting users based on shared interests rather than real-life connections, start-ups like Instagram, Pinterest and Thumb have garnered massive user adoption and engagement.

Instagram is just the first of a new school of billion-dollar mobile companies here in the U.S. By looking to Japan as a model for mobile success, we can expect the next billion-dollar exit to come from the company that creates a mobile experience that allows users to branch outside the confines of their current social graphs, like work, school and neighborhood community, and connect based on the ideas that really matter to them.

Correction: DeNA PR alerted us to the fact that the article originally used the word “gacha” to mean “complete gacha” (aka “kompu gacha”). What does that mean? Joe Medved clarifies: “Gacha is a game mechanic where gamers pay to unlock randomly generated items. Complete gacha is when gamers are spending money in an attempt to collect a set of randomly generated items in order to unlock an even more rare virtual good. The controversy this caused is that many users were spending inordinate amounts of money on many virtual items in an attempt to unlock the rarest items.” Says DeNA’s Tomoyuki Akiyama, “There is a crucial difference between the two… We have no plan to phase out the non-complete gacha mechanic, although we will no longer have the complete gacha mechanic on the Mobage platform as of July 1.”

Joe Medved, a partner at SoftBank Capital, focuses on early-stage consumer and enterprise mobile, social marketing, gaming, and commerce investments. He serves on the boards of BestVendor, CrowdTwist, Jump Ramp Games and Thumb. SoftBank Capital’s other investments include BuzzFeed, Buddy Media, The Huffington Post and Omgpop. You can follow Joe on Twitter @joevc or read his blog at www.joemedved.com.

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