Visiting Tokyo is like stepping off a subway station into a parallel universe of strange technologies, animated characters and perfectly wrapped pieces of fruit. Long before the iPhone existed, Japan led the world in smartphone technology and gaming. To this day, it remains a primordial soup of emerging consumer trends and digital innovations. One of my key contacts for trends in Tokyo is Serkan Toto. German by birth, he has been based in Japan since 2004 and runs a game industry consultancy called Kantan Games. I’m not the only one to enjoy talking to Serkan - he has been quoted everywhere from the New York Times to Techcrunch. In our conversation we talked about the future of mobile games, the curious persistence of flip phones in Japan, and why a Korean communications company decided to incubate the global messaging hit, LINE, in the country that asked the world to say Hello Kitty.
Mike Walsh: It's been about seven years since I was last in Japan and we caught up for coffee.
Serkan Toto: Right. That was in the stone age, technology wise.
Mike Walsh: I remember back then, you were telling me about mobile games and how their evolution came from the unique challenge of designing something that you could play with a single finger while riding the subway.
Serkan Toto: Those were the feature phone times in Japan, where you didn't have so much flexibility as a mobile game maker in terms of controlling the games. You essentially had to use the keypad. For that, you had to figure out ways on how to make Japanese people play games with just one finger, with your thumb, essentially. That was seven years ago and things have changed a lot since then.
Mike Walsh: What drew you into the world of mobile games?
Serkan Toto: I'm actually a gamer by heart. I have been playing games for over 30 years now and I've always been interested in the gaming industry. I love games as a player but also from the business side. I'm very interested in the business of games.
Mike Walsh: You actually play these games?
Serkan Toto: I play them.
Mike Walsh: But you draw the line on dressing up in costume?
Serkan Toto: That's correct. I'm not doing that. I've never done that. Let's say, the major mobile games, I play a lot. To play every game even if I just focus on the Japanese market, that's essentially impossible. There's just too much content coming out everyday that's tailor-made for Japanese audiences.
Mike Walsh: On that subject, the big announcement between Nintendo and DeNA. Can you talk us through a little bit about what's happening and why that's really so monumental?
Serkan Toto: Basically, in one sentence, Nintendo has decided to make mobile games. The big bullet point here is that Nintendo, for roughly five or six years, have been looking down at mobile games as a market. Their view was that was just shallow content, and that mobile game makers were just there to skim people and cheat kids and young adults out of their money with a free-to-play business model.
Mike Walsh: They were concerned about their intellectual property and brand name?
Serkan Toto: They were concerned about maintaining the Nintendo experience over a large array of tablets and smart phones in different geographies of the world. All of those pieces of hardware are different, and they were afraid of losing the stack - a hardware and software stack that is, right now, completely controlled by Nintendo. They will have to give away a lot of that control when they do mobile games. They have been resisting for such a long time against going mobile. So that decision seemed to come out of nowhere. All of that led to that eruption in the news - and not only in gaming but also beyond - because Nintendo is such a big brand.
Mike Walsh: Why DeNA?
Serkan Toto: Back in the feature phone times, DeNA were forming a duopoly with their arch enemy, Gree. They were basically content provider and platform provider, at the same time. They were one of these classic hybrid companies that were controlling the entire market together with the big competitor. However, they got disrupted by the smart phone revolution. The iPhone was a big success in Japan. Then Android came. Now Google is becoming more and more powerful. In 2008, Apple introduced the app store and then, later, the Android market came with Google Play. DeNA started to lose their platform business. They're still making good money with it but it's a declining business. They had to go for a big bang deal because DeNA has trouble pushing out hit releases on the app store. They tried, all of the games failed. Basically, you have here two companies that were in deeper structural problems but they are now trying to overcome their problems by combining their strengths and competing on the marketplace together.
Mike Walsh: When you look at it - Japan has influenced so much about the design of video games, mobile and youth culture.
Serkan Toto: Correct.
Mike Walsh: So, do you think there's going to be new ideas now coming from Japan again? Especially with augmented reality or virtual reality?
Serkan Toto: I think that if you look at Nintendo right now - and you look at the seven, eight, nine-year-old kids, especially in the US and in Europe, they don't really know Nintendo anymore. They don't go to their parents and ask for a Game Boy anymore. They ask for an iPad, the iPhone or something like that.
Mike Walsh: Or some iTunes credit to buy one of the latest games..
Serkan Toto: Exactly. They are not really in that Nintendo camp anymore. Nintendo has lost that generation. They will have to come up with some sort of innovative idea for winning back or recapturing that lost generation of video gamers. They also now have to compete with companies that have been doing mobile games for six or seven years. If they just re-use some of their old ideas from the console world, this is not going to work.
Mike Walsh: Like putting Super Mario on phones?
Serkan Toto: That will not work. For example, I think they will have to announce a new video game device. That in my view, is not going to be a traditional home console anymore. It's probably going to be hybrid between tablet and a portable game console that you can also connect to the television. This is my personal assumption.
Mike Walsh: So you are not putting bets on the Virtual Boy coming back?
Serkan Toto: No. The virtual boy is probably not coming back. I think that Nintendo is waiting for the virtual reality revolution to really happen. It's essentially the only big company left that has not done a big announcement in the field of augmented reality and virtual reality. Microsoft did it, Sony did it, Facebook through Oculus did it, even HTC did it.
Mike Walsh: Years ago, I actually went to visit their head offices in..
Serkan Toto: Kyoto.
Mike Walsh: Kyoto. Yes, Kyoto.
Serkan Toto: Yeah.
Mike Walsh: It was a bit like going to Disney. I realized that this actually wasn't a technology company at all. It was a character driven company.
Serkan Toto: Right. In general, Japanese companies and even the Japanese Government, they are crazy about characters. Japan is a character country. Even the Japan defence force, that is the Japanese army that is active in Afghanistan and Iraq - even these guys have a mascot! Not on their weapons, but on their vehicles and on their materials. Japanese people love characters.
Mike Walsh: Where does that obsession with characters come from? Is it something that comes out of Shinto or some kind of animism?
Serkan Toto: That's a good question. My personal view is that Japanese people, in their everyday lives, in school, university, and in companies and in their workplaces, are confronted with so many figures that represent authority. These characters, I think, are a little bit of an escape for them. If they see a friendly face that's not threatening and that they can have fun with, I think it's like an antidote to the everyday authority that they see of when they look at and interact with other people. Japanese society is very rigid.
Mike Walsh: The characters allow them to play out the fantasies that they would like to do if they could?
Serkan Toto: I absolutely think so.
Mike Walsh: So, do you think that focus on characters is why Japan has been so successful in video gaming?
Serkan Toto: If you think about video games and the iconic brands nowadays, it's all character driven. You need to have some sort of reference point inside a game that you can identify with. And you need to have some kind of character that people can associate your brand with. Nintendo, I think, is the best company by far in that regard. And you are right - the other big company that comes to my mind right now, which does that very well is Disney. In the world of games, I think that nobody beats Nintendo. When they go to the mobile world, I think they have this big advantage that on the mobile side, no other company has what Nintendo has achieved on the videogame side. This is why I'm personally very bullish on Nintendo going mobile.
Mike Walsh: As we were talking about before, one of the unusual things that happened in the last five or six years has been the assault on feature phones by smart phones. A lot of people said that Apple would never really make a headway here because the Japanese were so set in their ways…
Serkan Toto: Right.
Mike Walsh: There is an expression for flip phones here. They call them gara-kei…which literally means phones from Galapagos Island.
Serkan Toto: Basically, that refers to that fact that the Japanese phone ecosystem since it's inception in around 1999 when the first web-enabled cell phone was mass commercialized. Since then, the Japanese phone industry grew and developed itself into a big market untouched by foreign companies. It used to be a very unique phone market between 1999 and 2008. 2008 was the year when the iPhone came.The entire feature phone industry from hardware makers, software makers, middleware makers, service providers - was disrupted when the iPhone came in. For nine years, the Japanese phone industry was basically Galapagos.
Mike Walsh: These technologies continue to persist, however. And not just flip phones. This is one of the last places on earth that people still buy CDs and in fact, rent CDs, movies and DVDs.
Serkan Toto: Yes. That's correct.
Mike Walsh: Why is it that Japan is so sophisticated in some technologies but other dying mediums seem to persist longer here than everywhere else?
Serkan Toto: I have been living in Japan for 11 years now. I'm a big fan of the country and the people. At the same time, Japan is very conservative. It's very slow moving. In the world of media, I think that this is especially true.
If you look at the music world, for example, streaming services have never taken off in Japan. We're talking about 2015. This is where we are right now. Spotify, for example, exists but they have trouble securing content. Netflix is about to launch in six months time. Hulu Japan essentially flopped. These media providers have a lot of trouble getting their new technologies to the people.
Mike Walsh: And yet this was one of the first places in the world where you could buy music on your mobile phone or your old feature phone. But this wasn't a streaming model, was it?
Serkan Toto: You downloaded it. It wasn't transferable so it was DRM. The quality was not very high and it was not such a pleasant experience when you compare it with Spotify nowadays. These music download services still all exist. You can download music on your feature phone and then listen to it. If you look at the global music market, it's just backwards.
Mike Walsh: When you look at the next generation of Japanese,they're now using devices very different from the ones their parents used. Have you noticed any unusual points of assimilation? When ideas come to the Japan, they never come through on unscathed. They're always Japan-ified.
Serkan Toto: Yes. That's very true.
Mike Walsh: So, did kids use iPhones and Android devices in a uniquely Japanese way?
Serkan Toto: Yes. There's a lot of things actually. On the hardware side, the iPhone is basically the same everywhere, so there's not much that is exciting to be reported about Japan. Maybe an interesting accessory or something like that, but nothing really ground breaking. On the Android hardware side though, a few of the advanced characteristics of the feature phones were taken over on Android. If you buy a Japanese Android phone nowadays, you can get an electronic commute ticket with it. You have electronic payment. Other models also have 1seg, the digital TV standard from the feature phone times.
They are basically part of the package. You don't have to do a lot of modifications. A lot of the Android phones here from Sharp, Sony or Panasonic - they have the features that I mentioned. This is Japan only. If you take one of these devices outside Japan, these features are not accessible.
Mike Walsh: What about in terms of apps and usage behaviour? There have been a lot of Japan only apps that have evolved here.
Serkan Toto: Yes, especially in the games market. Just like in most other countries in the world, games are the biggest category of apps on the games side. Japan is famous for being the biggest mobile games market in the world and we're just talking about the smart phone.
Mike Walsh: Do you see the next generation of Japanese behaving quite differently? When I was walking around town, I noticed these internet cafes. I was blown away by this because I thought they had gone away years go. Someone told me they weren't actually used to access the internet. They're actually a kind of a third space where kids go to get away from their parents, read comics and watch movies in peace.
Serkan Toto: That's true. Yes. There's also reports that some adults are using it as-
Mike Walsh: …cheap accommodation.
Serkan Toto: Yeah. When you are a salary man, and you are too late for the last train, you don't want to spend 10,000 Yen to take the cab home. So you just spend the night at an internet cafe. They're not accessing the internet. It's just a euphemism for cheap.
Mike Walsh: These places are quite disturbing though. There were all these tiny little booths in a row. It made me think of that phenomenon years ago that they called “hikikomori” - kids who were highly connected but locked themselves in their rooms for six months at a time.
Serkan Toto: It is still happening. There are hundred of thousands of them.
Mike Walsh: This is still a very real issue in Japan, isn't it?
Serkan Toto: Yes, absolutely. I think there are official statistics from the Japanese Government. There are at least half a million of these people
Mike Walsh: What defines their symptoms?
Serkan Toto: I'm not a real expert on that phenomenon, but these are basically, people who lock themselves up in their rooms and don't leave their house or their apartment or in some cases, even their rooms. Apart from taking a shower from time to time and eating. They don't interact with other people except for the internet and their cell phones. They don't have jobs, they don't have training, they don't have education. They just live in their own worlds, all day.
Mike Walsh: And play mobile games…
Serkan Toto: Some of them. The other ones, I think, are playing videogames.
Mike Walsh: Years ago, I use to come to Japan all the time because this was like stepping to the future. Although I stopped for a while, I know feel that since we are moving to a mobile world so strongly, Japan is going to have a big role to play once more in shaping and influencing culture.
What is your feeling about the areas that Japan is going to have the most influence over in terms of innovation and new ideas? So for example, if Steve Jobs could come to Japan again to steal the best ideas and incorporate them into a device, what would he be looking at?
Serkan Toto: He did a lot of that with the iPhone.
Mike Walsh: That's what I'm saying. He did it once enough and arguably, they did it once again more recently, with payments.
Serkan Toto: Right. I was actually watching the Apple press conference when Tim Cook was so proud and showing how Apple Pay works. I laughed because I have been doing this for years in Japan. From Japanese perspective it was laughable because it's just so natural for millions of people in Japan to do that on a daily basis. You can even do that on a vending machine. It's not a big deal at all.
I think though that when the smart phone came, the Japanese mobile phone industry was still in state of shock. If you look at the number of handset makers, I think there were 13; Kyocera, Sharp, Panasonic, Sony, NEC - all of these guys were in the business of making mobile phones for the domestic market. There were Galapagos devices - so there was no foreign influence. They had a cozy relationship with telecommunications companies and all of these things.
When Apple and Android came, that whole system just blew up and at the moment we are now talking about three or four mobile handset makers. I think Sharp is left, Sony is still doing things and maybe one or two more - but that's about it. The market is basically now controlled by Apple and Samsung. Even Dell is selling phones here. Chinese makers are selling phones here.
Mike Walsh: Yeah.
Serkan Toto: During your last visit, if you told me that this would be a scenario in a few years time, I would have laughed at you. Now, it seems very natural. I think that the mobile phone industry here, both on the hardware side and on the software side, is still trying to catch up.
Mike Walsh: Where are the rising stars going to be?
Serkan Toto: I think the rising stars are definitely on the mobile game side. The top 10 publishers in the world, in the year 2014, based on revenue, both on IOS and Android combined - five of them come from Japan. It's a really big market.
Mike Walsh: Then of course, there's the phenomenon that is LINE. Could you talk a little bit about its origins? Because I know that it was originally a Korean company that was then incubated here in Japan.
Serkan Toto: Yes. The company is basically Korean owned but it's a Japanese company. It's registered here in Japan. These guys are paying taxes in Japan. LINE is a messaging platform. It's like WhatsApp, WeChat or KakaoTalk. Basically, the Japanese answer to that you could say. It came about after the earthquake. After the earthquake, there was a lot of talk in the Japanese society about how useful the Internet was.
Again, as I mentioned earlier, Japanese society is very conservative, a lot of people were very weary of social networking and all the bad things that can happen on the Internet but after the earthquake hit and the phone networks were dead, the mobile Internet and the Internet were still working. A lot of people used Twitter and Facebook to say, "Hey, I'm okay" or "Where are you?". Suddenly, the so called dangerous social media was in fact very useful. After that, there was a mindset change by conservative Japanese people who suddenly said, "Okay. Hey, this can actually be useful sometime."
LINE was incubated as a response to that mindset shit. It was design to provide a way to communicate with people who are not that tech savvy. With LINE, you just download the app, you sign in, it pulls all the contacts from your phone book and you're set.
Mike Walsh: Right.
Serkan Toto: This is how LINE works the on-boarding process. After that, it just took off like a rocket. Now, they are at 55 million active users in Japan.
Mike Walsh: Were there any particular cultural values that the Japanese baked into LINE?
Serkan Toto: Yeah. Stickers are what comes to mind almost immediately. LINE is basically like Emoji on steroids. Japanese people, as we talked about earlier, love characters, they love these special ways of communicating. If you look at in the feature phone times, the cell phone mobile culture, they were reading and actually also writing cell phone nobles on features phones. Just mind bugling nowadays but this was an actual phenomenon.
LINE came up with the idea of replacing text and words with stickers that convey emotions much better than when you just type in “hello” or “how are you?” or something like that. These stickers were, of course, character driven. They were very cute, they were very easy to understand, they were very easy to use and this is one of the main reasons why the app took off. Right now, the company that's operating the app is trying to transform it into a platform for everything.
Mike Walsh: Yes. And what makes Line really unique is that it is not just working in Japan this time. It's not a Galapagos island. It's actually global.
Serkan Toto: That's actually a very good point.
Mike Walsh: So, why? Some of the other things that have been incubated here in Japan just don't seem to work anywhere else.
Serkan Toto: Absolutely correct. There have been very few exceptions on the mobile game side, and even many of those also crashed and burned after a while. LINE is the first web/online/mobile service that has ever made a splash outside Japan. Half of the MAU, the monthly active users is in Japan, Thailand and Taiwan and then the rest of the other is spread around many countries primarily, in South East Asia. But still, it's the first internationally successful app that people outside Japan.
Mike Walsh: And with a real business model..
Serkan Toto: With a real business knowledge also. These guys did $750 million in revenue or something like that. It's just going up and up. They will hit a billion with no problem at all this year. It's the first one that broke out of this Galapagos mobile market.
Mike Walsh: It seems this is really could be Japan's moment of rebirth in terms of the new mobile economy.
Serkan Toto: There are some people saying, "Well, it's still largely Japanese phenomenon because in the US text messaging is big, i-message is big and in China WeChat is big and they don't really let other social services enter the country. In Europe, WhatsApp is big. LINE has a lot of work ahead of itself. But if there's one app at the moment that everybody is talking about outside Japan that's not a game, it's certainly that one.
Mike Walsh: Thanks Serkan. It has been great to catch up.
