Japan is the third-largest gaming industry in the world, yet esports accounts for less than 0.3% of its revenue. Why?
In 2017, the Japanese esports industry was worth $3 million. In 2018, it was worth $44 million. Hang on, that’s a huge growth. Why am I reading this article? Because $44 million is less than 0.3% of the revenue of the Japanese gaming industry as a whole. It turns out, there are three Japanese legal regulations that have had a huge impact on its esports growth.
The Penal Code
In Japan, gambling is strictly policed, and anyone gambling or running a gambling establishment is criminally liable. Within the Japanese Penal Code, betting is defined as:
“betting a property on the contest whose outcome of the contest depends on chance.”
As such, the Japanese Penal Code bans all sports betting. In fact, sports betting in Japan is only allowed on four things (spoiler: esports isn’t one). The lucky 4 are: Soccer Toto (lottery), horse racing, powerboat racing, motorcycle speedway and Keirin.
Not only does this affect esports betting, it also applies to esports competitions. If participants of an esports competition pay registration fees to the organizer of the competition and that prize money includes the registration fees (the format of almost all esport competitions), paying registration fees can be interpreted as betting. This is because by paying the fees you are “betting a property on a contest whose outcome depends on chance”.
Equally, the tournament organisers, who are the ones collecting the registration fees, can be charged for “running a gambling establishment”. Of course, they can collect fees as long as they do not use these for prize money, although Japanese esports competitions have generally not collected fees, out of fear of prosecution under the Penal Code. This obviously has an immediate impact on prize money, and a knock-on effect on growth of the industry.
2. The Premiums Act
The Premiums Act prevents business operators from providing unreasonable premiums in connection with their transactions. The main concern for esports in Japan was whether the prize money paid by the publisher of the game for competition constituted Premiums for the publisher.
Under the Premiums Act, the three following elements are required to constitute Premiums:
“any article, money or other source of economic gain paid by the Entrepreneur” (Economic Gain),
“as a means of inducing customers” (Inducement) and
“in connection with a transaction involving goods or services which said Entrepreneur supplies” (Connected Transaction).
If the prize money of an esports competition is subject to the Premiums Act, the amount of prize money cannot exceed the lower value of either (i) 20 times of the value of the transaction; or (ii) 100,000 Japanese Yen (this is around $900).
When considering whether the prize money of esports competition falls under the Premiums for publishers, it seems to be undeniable that requirements(i) and (ii) are met because: (i) prize money gives Economic Gain to a winner, and (ii) it is enough to induce players to play the publisher’s game because buying and playing the game is essential to win the competition. On the other hand, it is unclear whether requirement (iii) is met due to the vagueness of the language, especially when a provider of the Premiums (the publisher) is a different entity from the Entrepreneur (the Tournament Organiser).
Luckily, the Japanese Cabinet Office provides a Guidelines to the Premiums act. These Guidelines mention that the Premiums can be paid when it is considered “compensation for work.”
In 2018, an unofficial comment of the Chief of the Representation Division responsible for the Premiums act appeared on a popular gaming magazine. He mentioned that the prize money of esports competitions can be considered as compensation for the work and high-level performances of esports players, for professional and non-professional players.
These comments resulted in real progress, and have meant that the Premiums Act is not seen as being as threatening to esports competitions as before. Prize money has grown accordingly: the Japanese publisher Cygames provided $1 million as a first-place prize in the Shadowverse World Grand Prix in 2018 and the League of Legend Japan League (LJL) in 2019 prepares 27 million Japanese Yen ($245,000) as a total prize.
The “Fueiho” relates to mainly esports cafes (known as PC Bangs). It is an Act that was passed to protect public morality and pure moral surroundings. It is supposed to prevent acts which potentially inhibit the sound development of juveniles.
Under the Fueiho, “Game Centers” (i.e. amusement arcades — defined as a business where the business owners equip the arcade with slot machines, TV games machines or other entertainment facilities in a certain divided space and allow guests to play the game) are subject to certain regulations.
If a business is subject to the Fueiho, it must obtain permission to operate from the Prefectural Public Safety Commission and comply with various restrictions such as limitation of business hours, entrance limitations for minors and a ban on giving prize money to players if they hold competitions.
The Fueiho has been a major stumbling block to the development of esports cafes in Japan. Esports cafes are likely subject to the Fueiho under the definition of Game Centers because the business owners provide TV game machines or other entertainment facilities to guests and allow guests to play the games. We only have to look at the prevelance of esport cafes in South Korea (and the corresponding size of their esports market) to see how drastically the Fueiho has affected the Japanese market.
However, not all hope is lost. Looking to the intended purpose of the law, which is to prevent gambling and delinquent acts, the application of the Fueiho to esports cafes doesn’t really fit. It is very much expected that Japan will soon legalize or at least soften the regulations of the Fueiho as it relates to esports.
2018 was a landmark year for Japanese esports. Although several legal issues still remain, as worries around the Premiums Act lessened the Japanese esports market increased more than 13 times and the word “esports” was even nominated as a national buzzword.