The decline of SIFAS (Part 2): why KLab had to sell off SIFAS

In the last post, I presented data that described Love Live! School Idol Festival ALL STARS’ (SIFAS’) decline in revenue and player numbers and explained why SIFAS is in decline. These declines have happened in the backdrop of KLab’s precarious financial situation which have recorded losses throughout 2021. To recoup these losses, KLab has launched a recovery plan that involves releasing new games, restructuring costs and reviewing its existing games. In reviewing their existing games, KLab has viewed SIFAS as a game that will neither be popular nor profitable in the future, motivating its sell-off to MyNet Games. In this post, I will provide more background on KLab’s financial situation, how KLab has resolved financial losses in the past, and how both are linked to KLab’s decision to move on from SIFAS. 

KLab’s financial situation in 2020-21

Since the 4^th quarter of 2020, KLab suffered losses in each quarter of 2021. Compared to their respective quarters in 2020, quarters in 2021 had lower revenues and expenses. However, revenues declined more quickly than expenses, resulting in KLab recording a loss in each quarter of 2021. Consequently, as of the end of the 3^rd quarter of 2021, KLab has recorded a loss of 1.767 billion Japanese yen in 2021, and was projected to lose around 2.3 billion Japanese yen by the end of 2021.

The big losses incurred by KLab in 2021 are a consequence of two things. The first is declines in revenue from KLab’s existing titles (games released up to 2017) such as Love Live! School Idol Festival (SIF). These declines in revenue are fuelled by reduced promotion towards existing games and increased competition in the mobile gaming market. In particular, the release of big-title games domestically and internationally such as Uma Musume Pretty Derby and Genshin Impact have directed mobile gamers away from KLab’s existing titles. The release of these new games have resulted in reduced revenue towards KLab’s existing games.

The second is new games released by KLab after 2017 not performing as well as expected, not contributing much to KLab’s revenue or profit. This is due to issues in the quality of these new games which have not been improved in a timely manner, leading to low player retention rates. In particular, SIFAS and Tales of Crestoria have come under intense scrutiny, being singled out in KLab’s financial reports for their weak financial performance with their revenues falling well below expectations. The lower-than-expected revenues have led to KLab recording a 1.5 billion Japanese yen impairment loss in the first quarter of 2021 for both games. The impairment losses represent KLab seeing these games as less financially valuable than what was advertised. This indicates that KLab have written off both games, resulting in a loss of confidence and low expectations towards both games even at the start of 2021. 

Currently, KLab is not in immediate financial trouble, as they had 16.6 billion Japanese yen in equities that they can use to absorb their losses in 2021. However, if KLab’s financial situation did not improve soon, KLab would be in deep financial trouble, to the point where they could become insolvent (i.e., unable to meet their financial obligations of readily paying their debts and expenses). Nevertheless, KLab has encountered massive financial losses twice in the past, and in both times they were able to resolve them. Let’s look at KLab’s past financial trends, and how they have resolved their financial losses.

KLab’s actions in resolving past financial losses

KLab has experienced stable net income in most years. However, there were two years where KLab recorded huge financial losses. In 2013, KLab lost a total of 2.6 billion Japanese yen, while in 2016 they lost 814 million Japanese yen. These losses arose from KLab’s preceding actions. Before 2013, KLab released many mobile games that were unpopular and unprofitable, contributing to KLab’s losses. Similarly, in 2016, KLab incurred losses as a result of declining revenues from existing games and the unpopularity of games based on overseas IPs such as Age of Empires: World Domination and Glee Forever!

In both years where they had financial losses, KLab had to take drastic action. In response to the 2013 financial loss, KLab implemented a two-part recovery plan. First, KLab lowered costs by reducing the number of staff and reviewing their game development policies. Second, KLab released two games in Japan (JP) which became popular: Love Live! School Idol Festival, released in April 2013 at the height of μ’s popularity (and a month after the first Love Live! anime season ended), and BLEACH: Brave Souls, released in July 2015 while the manga was still running. These games generated a lot of revenue which restored KLab’s profits.

Similarly, in response to the 2016 financial loss, KLab also underwent a recovery plan. First, KLab restructured their company by shutting down their overseas bases in the Philippines, US and Singapore, concentrating most of their operations in Japan and China. Second, KLab revised its game development processes, pivoting away from global IPs (such as Glee!) and focusing on developing games based on Japanese IPs (such as Love Live!). Lastly, they released BLEACH: Brave Souls globally in 2016 and Captain Tsubasa: Dream Team in Japan and worldwide in 2017. Together, the recovery plan restored and diversified KLab’s income sources. 

From what KLab has done in the past, we learn that two things are required for KLab to bounce back from financial losses:

1. Some form of company restructuring: in order to reduce costs, KLab had to undergo some company restructuring (such as closing its overseas businesses and laying off its workers) and revise their game development processes (such as pivoting away from global IPs towards Japanese IPs).
2. A killer game: in order to restore profits, KLab also needs to release a mobile game that is based on a popular Japanese IP and is appealing enough to attract and retain players. With some players paying for the mobile game, the killer game can contribute a lot to KLab’s revenues, restoring the company’s profits. 

What is KLab’s recovery plan from its 2021 financial loss?

Similar to what has happened in the past, in response to the huge financial loss in 2021, KLab has launched a recovery plan. The aim of the recovery plan is to generate 50 billion yen of revenue, resulting in an operating income of 10 billion yen, by the end of 2023. The recovery plan consists of two parts:

New title hits

KLab will develop and release three new games in the near future: 

• Lapis Re:Lights, an action RPG based on a mixed media franchise; 
• A sports simulation game based on the EA Sports brand; and 
• A game based on DanMachi (I s It Wrong to Try to Pick Up Girls in a Dungeon?). 

These new games are being developed based on KLab’s desire to work on specific genres where they have a lot of knowledge and experience (action RPG, sports simulation and rhythm action), using game systems that are proven to work. 

KLab is also distributing new mobile games by collaborating with other companies. KLab will collaborate with overseas developers to develop games based on Japanese IPs such as Kumamon, JoJo’s Bizarre Adventure and Touhou Project. KLab will project manage and supervise these games, while the overseas developers will develop and distribute the games. KLab will also release casual games in Japan and worldwide in collaboration with GlobalGear Co. Ltd., a company that KLab acquired in April 2021.

These different games will gradually contribute to the restoration and increase in KLab’s revenues and income. It should be noted that in the above visual, Lapis Re:Lights is positioned as KLab’s killer game that will drive most of the initial increases in KLab’s revenues. This explains why KLab is dedicating a lot of resources behind the game. 

Additionally, it should be noted that KLab is reviewing its game development system. In collaboration with other companies, KLab will tighten the selection criteria on games that will proceed to development and improve game development and maintenance systems for new games.

Cost reductions

Similar to what has happened in the past, KLab is also restructuring the company and reviewing its existing games to reduce costs. Actions taken in KLab’s company restructure include: 

• Reviewing and rearranging their operational and personnel structures (for example,  reallocating managers and employees to new games); 
• Reducing outsourcing and subcontracting costs; 
• Selling off office space; and 
• Postponing or suspending measures that do not directly contribute to KLab’s revenues. 

KLab is also reviewing each game based on their profitability. Games that are not expected to improve in profitability will either have their operations reduced, transferred or terminated. Conversely, games that are profitable will be closely reviewed to come up with ways to improve profitability. It is under this backdrop that every existing KLab game was reviewed. 

So, why did KLab sell off SIFAS?

With a lot of background information provided on KLab’s situation, we can start to piece together why KLab had to sell off SIFAS to another developer. Unlike Tales of Crestoria which was shut down on 7^th February 2022 due to the game’s low quality and its persistent low revenues, the reasons for KLab selling off SIFAS to MyNet Games are more complicated. Nevertheless, I believe there were four key reasons why KLab had to sell off SIFAS to another developer. 

1) No prospects for future growth

As I explained in the previous post, revenues and player numbers in SIFAS have generally decreased, with no prospects for either of them increasing. These have been driven by KLab’s actions that have harmed the game, including the controversial season 2 story, stagnant gameplay and no action taken to attract new players to the game or help them. Compared with some of KLab’s other games, SIFAS’ decline in revenue has been alarming. 

In the graph above, SIFAS (in red), a rhythm action RPG, experienced a gradual decline in revenues. In contrast, Captain Tsubasa: Dream Team (gold), a sport simulation game, experienced stable revenues in Japan, with huge bumps in the middle of 2020 and 2021 due to anniversary celebrations. Additionally, SIF (green), a rhythm game, and BLEACH: Brave Souls (grey), an action RPG game, experienced slight declines in revenue throughout 2020-2021, though not as steeply as SIFAS. This graph informs us on some of the thinking behind KLab’s decisions when they were reviewing existing games in their game lineup in 2021:

1. First, KLab would keep Captain Tsubasa: Dream Team as it is able to generate consistent revenue throughout the year, with big bumps in revenue during anniversary periods. This game would provide a steady stream of income for KLab which would help prop up the company while it implements its recovery plan.
2. KLab would also keep SIF and BLEACH: Brave Souls as it would like to maintain its links with popular Japanese IPs, both of which are getting anime adaptations this year. This would allow KLab to run anime-related promotional events in both games which would most likely generate further revenue.
3. Keeping the above three games would allow KLab to maintain its presence across the sport simulation, rhythm action and action RPG genres, something that it desires in its recovery plan. 
4. In contrast, KLab would sell off SIFAS to MyNet Games due to its rapid decline in revenues for a new game. This decision would be reinforced by the absence of a bump in revenue during SIFAS’ 2^nd year anniversary, unlike other KLab-developed games. This would have informed KLab of the futility of continuing on with SIFAS and motivated its sell-off to another developer.

2) Intense competition and overlap in SIFAS’ genres

This is something I have touched on in the previous post, so I will only summarise what I have said in that post. To summarise, SIFAS does not excel in either the rhythm game or RPG genres. Consequently, other games such as Uma Musume Pretty Master and the Idolm@ster mobile games which excel in one genre are able to outcompete SIFAS in either the rhythm game or RPG genres. This contributes to SIFAS’ low market share. Combined with declining revenues which indicate low growth, SIFAS is positioned as a ‘pet’ in KLab’s growth share matrix, motivating KLab to sell the game off to another developer.

Furthermore, SIFAS overlaps too much with other KLab-developed games. In the rhythm game front, SIFAS already competes with KLab’s other rhythm games such as SIF and Uta no Prince-sama Shining Live. In the RPG front, SIFAS overlaps with BLEACH: Brave Souls and Lapis Re:Lights. The failure of SIFAS to excel in either genre would indicate to KLab that mixing the two genres together is a bad approach and that it should develop games that only focus on a single genre. Hence, KLab sold off SIFAS in favour of other games that focus on either the rhythm game or RPG genres.

3) Cost inefficiency

Although we do not have exact figures of producing or maintaining each KLab-developed game, some information is available to infer why it was inefficient for KLab to keep SIFAS. 

Before the transfer, KLab was responsible for developing, publishing and operating SIFAS. KLab took two years to develop SIFAS in-house, at a cost of 2 billion Japanese yen. This cost is higher than other KLab-developed games due to the implementation of 3D graphics. KLab also had to bear responsibility for keeping the content updated which included adding new 3D assets, implementing character and story events, maintaining servers and fixing any game bugs or issues. These tasks would involve many KLab staff to keep SIFAS running, resulting in high monthly operating costs. This meant that KLab needed to generate a high monthly revenue to pay off SIFAS’ initial development and monthly operating costs. In contrast, KLab’s 2D games such as SIF are well-established, having paid off their initial development costs, and simpler to maintain due to less work being required to create content and update the game. Hence, less staff and resources are required to maintain these 2D games, lowering the costs. This increases the threshold of revenue that KLab is willing to accept to keep these games running.

Comparing the costs of maintaining SIFAS against KLab’s other games can inform us of why KLab have decided to sell off SIFAS. Selling off an old KLab game such as SIF does not free up much staff and resources to reallocate to new games. In contrast, selling off SIFAS would free up a lot of staff and resources which can then be reallocated to new games such as Lapis Re:lights. Combined with the negative reception towards SIFAS for a range of reasons, KLab would have seen the futility of keeping SIFAS, motivating its sell-off to another developer. This would then free up a lot of staff that KLab can reallocate to other games.

4) Uncertainty of SIFAS’ future

KLab has decided to sell off SIFAS to another developer. Yet, there is a KLab-developed game that is generating even less revenue than all the games I have mentioned, yet has received neither a game termination nor relocation notice. That game is Yu Yu Hakusho: 100% Maji Battle. 

Yu Yu Hakusho: 100% Maji Battle is a 2D auto-battler that was released by KLab in August 2018. In this game, players collect cards and use their abilities to defeat waves of enemies. The gameplay is very basic, and uses animated 2D sprites. The main feature of the game; though, is that it re-enacts scenes from the Yu Yu Hakusho anime series by showing stills from anime episodes. This attracts existing Yu Yu Hakusho fans who want to relive the story told in the anime as well as new fans who want to learn more about Yu Yu Hakusho.

In contrast to SIFAS which is currently earning upwards of 100 million Japanese yen per month, Yu Yu Hakusho: 100% Maji Battle does not generate much revenue, falling below 50 million Japanese yen throughout all of 2021. These low revenues would have compelled KLab to terminate the game in an effort to reallocate resources to other games. Yet, as of 6^th January 2022, the game has not received a game termination or relocation notice, and KLab is still keeping the game running. Why had KLab decided to keep Yu Yu Hakusho: 100% Maji Battle, but not SIFAS?

In addition to the game being based on a popular shonen IP with a cult following and not much resources required to maintain the game, I believe that KLab saw a future for Yu Yu Hakusho: 100% Maji Battle that was absent in SIFAS. KLab was pursuing a policy of their games being multi-platform, where games are not only available on mobile but also on console, PCs and cloud. This enables seamless play across devices which improves playing experience and increases game revenues. For example, KLab already released BLEACH: Brave Souls on PC in August 2020, and were in the process of preparing the game for distribution on PS4.  

As of the end of August 2021, the developers of the Yu Yu Hakusho game have finished adding all the content from the anime series and movies in the game, and were in the process of adding original content. This indicates that the game is nearing the end of its lifespan. However, I think that, with all the content being added in the game, KLab was developing a PC and console release of Yu Yu Hakusho: 100% Maji Battle. By releasing a non-live version of the game in mobile, PC and console, KLab are able to continue profiting from the game even after the live version of the mobile game is terminated. Hence, there was a future for Yu Yu Hakusho: 100% Maji Battle.

In contrast, a lot of new content is still being added to SIFAS, so the game is not ready for a permanent PC and console game. Hence, there is no future direction for SIFAS to take, and bleak prospects of its future growth. Hence, KLab decided to not take a risk to release SIFAS through multiple platforms, instead selling it off to another mobile game developer to recoup costs. 

Conclusion

The precarious financial situation of KLab motivated them to initiate its recovery plan to recoup their losses and restore its income. KLab had to make a range of decisions and actions to reduce costs and generate new income sources. SIFAS has fallen victim to KLab’s recovery plan, being sold off to MyNet Games as KLab did not see SIFAS’ potential to restore its profitability and its reputation. This would not be too bad if SIFAS was being transferred to a developer that was passionate and knowledgeable about Love Live and would do their utmost best to make SIFAS great again. Instead, SIFAS was sold off to a developer that was burdened with a lot of mobile games and would most likely not have the time or resources to maintain or improve SIFAS. How the move to MyNet Games affected SIFAS will be explained in the next post.  

References

• KLab. (2021). FY2021 3Q Presentation Material. KLab Inc., Tokyo. https://ssl4.eir-parts.net/doc/3656/ir_material_for_fiscal_ym4/108412/00.pdf.
• Shared Research Inc. (2021). KLab / 3656: Shared Research Coverage Report. Last updated 16 June 2021. Shared Research Inc., Tokyo. https://ssl4.eir-parts.net/doc/3656/ir_material_for_fiscal_ym9/100696/00.pdf.
• Shared Research Inc. (2021). KLab / 3656: Shared Research Flash Report. Last updated 10 November 2021. Shared Research Inc., Tokyo. https://ssl4.eir-parts.net/doc/3656/ir_material_for_fiscal_ym9/108501/00.pdf.