The growth of esports in Japan - are domestic regulations holding back the industry?

Published 27 June 2019 By: Masakatsu Nagashima

Esports

Japan is the well-known home of many popular gaming companies, such as Sony and Nintendo. Revenue from the Japanese gaming industry exceeded $19.2 billion in 2018, and the number of players exceeds 67.6 million, ranking it third in the world1. However, revenue from the Japanese esports market in 2018 was only $44.2 million,2 which is less than 0.3% of the revenue of the Japanese gaming industry as a whole. Considering this grew from a mere $3 million3 in 2017, it is still true to say that esports is experiencing a boom in Japan; yet compared to the $905.6 million global revenue of the esports market in 2018,4 it is relatively small.

This article looks at why this may be the case and suggests that one important factor deterring growth is Japan’s domestic regulatory regime.

Details of legal restrictions on Japanese esports

The major legal regulations related to Japanese esports are:

  1. The Penal Code – relating to gambling;

  2. The Act against Unjustifiable Premiums and Misleading Representations (Premiums Act) – relating to prize money; and

  3. The “Fueiho” law – a law that focuses on the control and improvement of amusement business 5 that impacts upon esports cafes.

There are also other relevant regulations relating to matters such as immigration and employment, but the these three are the most relevant when it comes to the development of esports in Japan. We shall examine each in turn.

Penal Code

Japan has a strict policy on gambling. Under Article 185 and 186 (2) of the Penal Code, a person who gambles or runs a gambling establishment will be criminally liable.6 The exact definition of gambling is not mentioned in the Code, but it is widely known as “betting a property on the contest whose outcome of the contest depends on chance.” This clause relates to esports in two ways.

Banning betting on esports

First, the clause generally bans sports betting. Sports betting falls under the definition of gambling since the result of sports is considered to be affected by chance regardless of the difference in ability of players. Betting on sports is allowed only when legalized by specific laws. As of today, only Soccer Toto (lottery), horse racing, powerboat racing, motorcycle speedway and Keirin are legalized in Japan. Therefore, betting on esports is banned by the Penal Code.

On 20 July 2018, the Japanese legislature passed a law to legalize casinos, and therefore Japan will have several casinos in the near future. However, this is irrelevant to esports betting because the government clearly mentioned that sports betting was not included within the remit of the legalization7. Therefore, esports betting won’t be allowed even when the Japanese casinos open.

Esports competitions

Secondly, the clause also affects esports competitions. If participants of an esports competition pay registration fees to an organizer of the competition and its prize money includes the registration fees, paying registration fees could be interpreted as betting their property on a contest whose outcome depends on chance. Therefore, paying registration fees to the esports competition constitutes gambling. In addition, if participants are considered to be gambling, it follows that the organizer of the esports competition runs a gambling place. Therefore, both participants who pay registration fees and organizers who collect it are possibly subject to a penalty under the Penal Code.

Technically speaking, organizers may be allowed to collect registration fees provided they use it for for the operating cost of the competition and not for prize money. However, in order to avoid an investigation or a prosecution under the Penal Code, Japanese esports competitions commonly have not collected registration fees. For example, the Evolution Championship Series (EVO), a competition for the fighting game Evolution, does not collect any registration fee when organized in Japan, whereas the Evo held in Las Vegas does. In sum, the prohibition on gambling might affect the volume of prize money but holding esports competition is not a problem as long as the issues mentioned above are taken care of.

The Premiums Act

The Premiums Act relates to the amount of prize money to be paid, which used to be a big hurdle for esports competitions to overcome.

This Act generally prevents business operators (Entrepreneur8) from providing unreasonable premiums in connection with their transactions for the purpose of protecting consumers. 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)9. Accordingly, the Premiums Act has been controversial for Japanese esports competitions.

Under the Premiums Act, the three following elements are required to constitute “Premiums:10

  1. any article, money or other source of economic gain paid by the Entrepreneur” (Economic Gain),

  2. as a means of inducing customers” (Inducement) and,

  3. in connection with a transaction involving goods or services which said Entrepreneur supplies” (Connected Transaction). Accordingly, the main concern was whether the prize money paid by the publisher of the game for competition constituted Premiums for the publisher.

When considering whether the prize money of esports competition falls under the Premiums for publishers, it seems to be undeniable that requirement (i) and (ii) are met because: (i) prize money gives the 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 is a different entity from the Entrepreneur.

To make it clear, it is useful to refer to the Guidelines to the Premiums Act (Guidelines11) publicized by the Consumer Affairs Agency (CAA), an administrative agency of the Cabinet Office supervising the Premiums Act. Applying the interpretation of the Guidelines12 to the esports competitions, even when a provider of the prize money (the organizer of esports competition) is the different entity from the Entrepreneur (the publisher of the game), the prize money is likely to be connected with a transaction of the publishers as long as the publishers host, co-host or support the esports competitions for the publishers of the game. Therefore, requirement (iii) can be satisfied, thus the prize money can be considered “Premiums.”

This interpretation is arguable and depending on the kind of game or scheme of esports competition the conclusions may differ. However, since an applicable loophole discussed below became clear even if prize money falls under the “Premiums,” further discussion is no longer necessary.

The loophole

The Guidelines mention that the Premiums can be paid when it is considered “compensation for work13.”

As it was unclear from the Guidelines whether the prize money was compensation for work for esports players, JeSU, a newly established national governing body of esports, created a professional license system to make it easier to prove that the prize money is “compensation of work.” After that, unofficial comment of the Chief of the Representation Division of CAA appeared on a popular gaming magazine14 and mentioned the prize money of esports competitions can be considered as compensation for the work and high-level performances of esports players and it does not depend on whether the players are professional or not.

Because it was an unofficial comment, the risk of the Premiums Act technically still remains. However, many esports competitions have been operating on the assumption that most of the prize money of esports competitions would be considered compensation for the work of the esports players.

The comments of the Chief of the CAA resulted in real progress, and although there is still some lack of clarity, the Premiums Act is not seen as big of a hurdle as it was before. This improvement encouraged games publishers to put up increasingly large sums as prize money for esports competitions. Indeed, 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. These facts likely contributed to the big growth in 2018.

Fueiho

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 and 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 games15) are subject certain regulations. The Fueiho has regulated Game Centers since 1985 as amusement arcades have historically been used for gambling.

If a business is subject to the Fueiho, it must obtain permission to operate from the Prefectural Public Safety Commission (PPSC) (Article 3.1) and comply with various restrictions such as limitation of business hours or entrance limitations for minors. Among these restrictions, one of the most influential regulations may be banning from giving prize money to players when a competition is held in a Game Center (Article 23.2).

Esports Competitions

Esports competition venues may be subject to the Fueiho. However, there are ways that they can circumvent its regulations. For example, venues like the Hyper X arena in Las Vegas, which always equips PC games for guests and allows them to play, it is likely to be categorized as a Game Center. However, as of now in Japan, competition venues does not prepare the TV game machines for guests, thus the guests don’t play the game provided by the organizer in the venue. Accordingly, the venue is unlikely categorized as the Game Center. Indeed, many esports competitions have been held in Japan including the LJL without being subject to the Fueiho. Therefore, with regard to the esports competition, the Fueiho is not likely a big hurdle.

Esports Cafes

However, the Fueiho can be a big hurdle to the developmnt of esports cafes. Based a literal interpretation, 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 the guests to play the games. Like video gaming cafés (known as PC bangs) in South Korea, esports cafes would contribute to making esports more popular and help to improve players’ levels. Restrictions on esports cafes may have a negative impact on the development of esports throughout Japan.

Despite the threat of the Fueiho, esports cafes have recently grown in number in Japan. Although PPSC has not actually enforced the Fueiho rules on the esports cafés as of today, the risk would cause a chilling effect on their expansion. This is an undesirable situation for the market as a whole in Japan.

Since the purpose of the regulation of the Game Centers is to prevent gambling and delinquent acts, in most cases the application of the Fueiho to esports competitions and cafes does not really fit the intended purpose of the law. Therefore, it is expected that Japan will legalize or at least soften the regulations of the Fueiho as it relates to esports.

3. Conclusion

2018 was a landmark year for Japanese esports. While several legal issues still remain, the Japanese esports market increased more than 13 times and the word “esports” was nominated as a national buzzwords,16 reflecting the growing prevalence of esports in Japanese society. One of the reasons for the growth may be that the legal hurdles, especially surrounding the Premiums Act, became less concerning. It is important to consider these regulations when operating an esports business in Japan because they are complicated and impactful. However, as the 2018 growth shows, the esports market in Japan can and will continue to develop, even under the current regulatory environment - although improvements to the current regime will only help further expansion. Given Japans large and engaged gaming population, the author believe that the Japanese market can continue to grow and become even more popular.

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Author

Masakatsu Nagashima

Masakatsu Nagashima

Senior Associate, TMI Associates

Masakatsu is a Japanese attorney who joined TMI Associates in 2012. Since then, he has represented various entertainment and sports clients in Japan (including esports related clients). He graduated from UCLA School of Law LL.M. in 2018. He was a speaker at the EBA (Esports Bar Association) Conference held in June 2019 in Los Angeles.

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