Keysellers

Gaming the Video-Game Business

grand theft auto Rockstar North
The latest Grand Theft Auto earned $1 billion in three days. Photo: Rockstar North
  • Why it matters

    Why it matters

    Germans spent €2.81 billion on computer games and hardware in 2015, and about a third of the games were sold digitally.

  • Facts

    Facts

    • Some online dealers sell only the “keys” that allow video games to be downloaded from the internet.
    • MMOGA is the market leader of game-key sellers in the German-language region, and its business model circumnavigates German laws.
    • One out of every two Germans is a gamer, and they play on a PC, tablet or console. The average age of a gamer is about 34.
  • Audio

    Audio

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Video-game producers from more than 50 countries help make Cologne’s annual Gamescom exhibition one of the world’s largest such events. About 850 companies will exhibit at the computer-game trade fair, which begins this week.

The computer-game industry has been exceeding expectations for years, with Germans spending €2.8 billion ($3.2 billion) on games and hardware in 2015. Worldwide sales for the industry were close to €80 billion. Recently, the game “Grand Theft Auto V” broke through the billion-dollar sales threshold in just three days.

With 345,000 visitors, Gamescom has long been more popular than the Frankfurt Book Fair or Cebit, the computer trade fair in Hanover.

Perhaps drawing less attention in the huge video-game business is a shadowy but extremely successful phenomenon of late: online dealers who call themselves “key sellers.”

The dealers don’t sell video games as is customary in the trade, packed in boxes and burned on DVDs. All the dealers sell are the keys with which video games can be downloaded from the internet – and at unbeatable prices. Blockbusters can be had at discounts of up to 50 percent. In Germany, about 33 percent of all games are being sold digitally, according to the association of the country’s games industry.

Handelsblatt decided to track down the largest sellers of keys in Germany. Around 4.5 million users are registered at MMOGA Limited. Every month, the firm handles hundreds of thousands of transactions, making it the market leader of game-key sellers in the German-language region. That’s according to a 32-page report by Angermann, a renowned consultant firm for mergers and acquisitions. Under the working title Project Highscore, Angermann scrutinized MMOGA’s businesses.

The numbers in the report are impressive. Year-for-year, there has been a double-digit growth in profits. Between 2012 and 2013, the company generated an annual profit of €5.2 million. An after-tax profit of €30 million is forecast for 2016/2017, the Angermann report says.

Mikel A. of Germany founded MMOGA, which stands for Massive Multiplayer Online Game Association, in March 2007. Last year, MMOGA changed ownership. Mr. A. sold MMOGA to Chinese company Kee Ever Bright Decorative Technology Co. Ltd. for €306 million, Reuters news service reported.

 

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Today, Mr. A. is likely a rich man. Handelsblatt was unable to contact him despite efforts made through another company in which his wife also works; through a law firm; and through people who knew and had worked with him. MMOGA didn’t respond to written inquiries by our editorial deadline. Visiting the Hong Kong address listed on the homepage as the headquarters was also fruitless. There was no company operating under the name MMOGA there, and the superintendent was not familiar with it.

There are probably good reasons for keeping a low profile. Anyone who takes a look behind MMOGA’s facade will discover a business model that circumnavigates German laws. The trail leads to copyright violations and games featuring so much brutality that they are banned in Germany – though MMOGA sells them anyway. Other details would likely be of interest to the tax authorities as well: MMOGA has avoided paying millions in value-added tax.

At the center of it all are the product keys for the games. Insiders from the dealer community and people familiar with MMOGA report the firm bought the keys from wholesale dealers. These dealers obtain the games, in their original packaging, from the producers. It would seem many rip open the packaging, photograph the keys and send the information to online dealers like MMOGA. The games themselves end up in the trash – they are worthless without the product key.

According to a release published in Chinese on the occasion of the takeover of MMOGA, the firm Gross Electronic GmbH, based in the picturesque resort of Bavarian town of Röhrbach, was a top supplier between 2013 and 2015.

The company founder didn’t want to comment on whether game boxes were opened and the product keys photographed on his company’s grounds. When asked, he said he doesn’t comment on individual customer contacts.

The Berlin regional court takes a dim view of the practice. Austrian game producer Koch Media sued MMOGA last summer and was represented in the case by the law offices of Osborne Clarke. The trial was brief. Nobody from MMOGA appeared or made a statement. In a “judgment by default,” the court ruled that separating the product key from the computer game required the consent of the producer. MMOGA’s conduct, the court said, was in violation of copyright law.

MMOGA would be fined €250,000 if it continued to offer Koch Media video-game license keys for sale on the internet. There was no reaction to the court ruling, which was sent to the company address in Hong Kong. MMOGA simply continued to sell product keys from Koch games and paid no fine.

That’s not the only legal problem, either. Handelsblatt’s investigation verifies that MMOGA also violates laws on the protection of minors. For example, with the online game “Hatred,” in which the main character is a sociopathic mass murderer who runs through the streets and kills as many innocent people as possible with weapons such as knives, guns and flamethrowers.

Anybody, including minors, can download the “killing spree like no other” in five to ten minutes. The Federal Review Board for Media Harmful to Minors has put the game on its index and banned its distribution. The game, the department notes, is possibly a glorification of violence, which is illegal, according to the German penal code. That doesn’t seem to bother MMOGA, though. The firm also sells to anyone the brutal “uncut” versions of blockbusters – such as “Alien vs. Predator” (for audiences over age 16) and “Left 4 Dead 2” (over 18). MMOGA advertises, “We don’t require an age check.”

In addition, MMOGA could become a case for tax investigation. In the Angermann report, the company openly touts the fact that it doesn’t have to pay VAT in Germany.

There is a reason for the unpaid taxes, according to the Angermann report. MMOGA, it says, is simply an intermediary between sellers and buyers. The company charges a fee of around 28 percent for mediating the sales of product keys.

Still, a case can be made for MMOGA having to pay VAT in Germany, says Stefan Maunz, an expert in VAT at the law firm of KMLZ. He sees evidence that the sales contract is concluded directly between MMOGA and the gamers.

“Actual games are offered by MMOGA, the payment is handled by MMOGA and the customer contact also is made by MMOGA. Although the image projected by the company is only that of a mediator, for the buyer, at any rate, that is only discernible in the fine print,” Mr. Maunz said.

In such cases, a mediation can be assumed only in exceptional cases – a stipulation in the European regulation. Should MMOGA pass as a mediator, it would be the responsibility of the supplier to pay the VAT in Germany. That’s rather unlikely, Mr. Maunz says.

“The business model only works profitably when no one pays VAT in the end. A classic VAT merry-go-round,” Mr. Maunz said.

MMOGA is apparently not contesting that.

When the video-games trade fair Gamescom begins this week in Cologne, anticipation will build for titles such as “God of War 4” and “Mafia 3.”

When the games are released, MMOGA is likely to offer them on its “mediation platform.” With no protection for minors. At suspiciously low prices.

Massimo Bognannic is an investigative reporter with Handelsblatt. With reporting by Sönke Iwersen and Stephan Scheuer. To reach the author: bognanni@handelsblatt.com

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