The Japanese social gaming market is substantial, worth $1.4 billion in 2011, and it is dominated by two major players: GREE and DeNA. When rumors began circulating that the “kompu gacha” reward system that GREE and DeNA utilized extensively was going to be made illegal, their stocks were pummeled by over 20% in two days. Now, kompu gacha is illegal in Japan and both companies are swearing up and down that the new regulation will not cripple their businesses. So what is “kompu gacha”? What made is so valuable to the kingpins of the Japanese social gaming space? And why was it made illegal?

Image source: InsideSocialGames

Kompu gacha, or “complete gacha”, is a system that strongly incentivizes the gacha monetization method. Gacha is similar to a prize vending machine at a carnival: you pay a small amount of money to receive an item at random. Kompu gacha expands on this mechanic by offering players an extremely valuable grand prize for completing a set of gacha prizes. Since the gacha prizes are awarded at random, it’s very hard to get these grand prizes. If you do the math, they can be worth hundreds of dollars each on average.

This means big money for Japanese social game companies, whose monetization metrics have long been the envy of their Western counterparts. Kompu gacha and the utilization of random rewards play a big part of GREE and DeNA’s record revenues. The extent of this reliance can vary by game (competitive games rely on it much more than casual games), but the overall ARPU lift is clear to see in the graph above. However, kompu gacha as a monetization method isn’t evil: in fact, it’s one that players overwhelmingly enjoy. Kompu gacha mechanics are incredibly popular among players, who enjoy the thrill of possibly winning that grand prize. The use of these mechanics has often been viewed as a win-win for developers and players. Which begs the question:

Why was kompu gacha made illegal?

Kompu gacha is essentially an extension of the core “gacha” mechanic, which gives the player the ability to pay for a chance at a random reward. Random reward schedules are a powerful driver for freemium game monetization, and this method is not unlike the “mystery box” mechanic commonly used by American social game companies. The reward is virtual, so this is not explicitly gambling, but the virtual items often have a virtual currency value that can be to a real-money amount. This method has escaped regulation in the past because players can never take their money out of the system, so whether they spent the money “gambling” in game or simply purchasing virtual goods was irrelevant.

However, while gacha itself is not being made illegal, kompu gacha compounded the issue because it has a much lower chance of a much higher payout. This made kompu gacha mechanics feel too close to gambling for Japan’s Consumer Affairs Agency, which banned the practice on May 18th. In addition, concerns were raised that the mechanic exposed gambling gameplay to children under the age of 18. There were two extreme, well publicized cases where a middle school boy spent $5,000 in a month, and one younger student spent $1,500 in three days. While GREE and DeNA have specifically enacted their own consumer protection agency to combat these issues, the government still decided to take additional action.

The kompu gacha scandal teaches two key lessons. First, players love real-money betting on both virtual and real rewards. And second, that social game companies should create a safe, self-regulated environment to prevent excess and restrict players under the age of 18.  Many social games’ similarities to real-money gambling mean that it should be given the same care and attention that gambling companies give their games. All reputable gambling companies, including Betable, are required by law to provide self-exclusion features for gambling addicts and vigilantly restrict players under the age of 18. As social casino gaming explodes onto Facebook and iOS, it’s increasingly important that game companies act responsibly, lest they succumb to a similar fate as kompu gacha.