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Can Japan’s KLab prove it is capable of competing with DeNA and Gree?

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Tetsuya Sanada (projected) is asked a question during a GMIC Tokyo panel

When the market for a particular product reaches maturity, the mid-range suppliers feel the tightest pinch. In terms of mobile gaming in Japan, heavyweights like DeNA (TYO:2432) and Gree (TYO:3632) saw their net incomes drop by US$139.2 million and US$254.6 million, respectively, from 2012 to 2013. The losses are significant but the companies still finished with net incomes of US$316.6 million (DeNA) and US$225.1 million (Gree).

A firm like KLab, Inc. (TYO:3656) has much less room for error. The 2013 social gaming slump turned its 2012 profit of US$16.2 million into a loss of US$19.2 million. To learn how KLab plans to reverse its fortunes, Tech in Asia caught up with KLab CEO Tetsuya Sanada on the sidelines of GMIC Tokyo to hear his thoughts on building the company, the state of the gaming industry, and the firm’s future strategies.

It’s not about the odds

Sanada became an entrepreneur 30 years ago when he created his first company – a training center for getting a drivers license – while he was still a college student. Many Japanese CEOs will say that they had not seriously entertained the notion of being an entrepreneur until much later in life. Sanada, however, never had much of a taste for playing it safe as a salaryman. He attributes this to being descended from Yukimura Sanada, a 17th century warlord. The elder Sanada, also known as the “Crimson Demon of War,” once defended his territory with 2,000 soldiers against an opposing horde of 40,000. The younger Sanada always felt that he owed it to his namesake to show the same courage in his approaching his career. “[What he did was] venture! […] I thought that I could do something similar if I founded even a small company,” he told Tech in Asia.

After starting out as an entrepreneur, Sanada reached a turning point in 1997, when he was 33 years old. Sensing the coming internet explosion and feeling that his own technical skills were not adequate, he sacrificed his independence in exchange for a practical technical education at Access, a software company specializing in connected devices.

The gamble worked and a year later he founded the company that would become KLab. For the first few years, the company concentrated on security software but, in 2004 it turned its eye to social games. Well-known investor Taizo Son was an early advisor, an added perk of having Softbank Investment (now called SBI) as a major shareholder. Son’s knowledge of international markets and his connections there would prove essential in allowing KLab to push overseas. Though not a powerhouse, the company counts China (where Qihoo provides publishing assistance), South Korea, and the United States as its top international markets.

See: Japan’s smartphone game market now worth $5.4 billion, half of total gaming industry

Searching for the comeback trail

KLab pinned a lot of its hopes for 2013 on three titles: Professional Baseball Grand Slam, Rise to the Throne, and Lord of Dragons. None of them caught on and the company was caught flat-footed. Sanada immediately set into motion a major initiative to prevent another strikeout.

He switched the company’s game development method from Waterfall to Agile. Under the former, once a game idea was selected, it would be fully developed no matter what. Now, the company makes a basic prototype, sees what the response is like and, if positive, will continue to tinker on it and test it to see if it can be made into a truly viable product. So far the approach has already paid dividends. 2014’s first quarter already shows a nearly US$14 million swing in net income, bringing the company back into the black with approximately US$510,000 in net profit.

Positive signs?

Sanada does not shy away from the fact that 2013 was a tough year for his company. He maintains that it is not the beginning of the end but acknowledges that the volatility of the gaming industry can be trying. Sanada hinted that the ecommerce or finance industries bear consideration. He also commented that the company would soon announce that it had won the license to develop a game based on an immensely popular American television program that is still running. A quick look at the longest-running television series, suggests that KLab may have snagged The Simpsons or Family Guy.

The future of KLab is decidedly cloudy. Sanada, however, has shown a knack (and a fearlessness) for recreating himself. The only question is if he can recreate his company if need be. Though Sanada draws strength from his ancestor, history offers a cautionary note. The elder Sanada threw off the first incursion of 40,000, but the opposing forces regrouped, overwhelmed his army, and he was forced into exile.

Correction: This article has been changed to reflect the latest financial figures available from KLabs for its first financial quarter of 2014. Editing by Paul Bischoff and Josh Horwitz

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