Game developers at a crossroad

Korea’s three largest game publishers saw record sales last year - a combined 6.5 trillion won ($6 billion) - but as the mobile gaming market becomes saturated and smaller players crowd into the industry, NCSOFT, Netmarble and Nexon find themselves questioning whether old strategies will continue to work.

Netmarble was the first to reveal its 2017 earnings last Tuesday. The company made 2.4 trillion won in sales last year, a 61.6 percent increase from 2016, and toppled Nexon from its No. 1 spot in the Korean gaming industry. It was only in 2015 that Netmarble first surpassed 1 trillion won in annual sales.

Nexon, which trades on the Tokyo Stock Exchange, publicly announced its 2017 earnings last week. Sales rose 18.7 percent year on year to 234.9 billion yen, or 2.3 trillion won based on the fourth-quarter average exchange rate.

NCSOFT made 1.8 trillion won last year, a rise of 78.8 percent from the previous year.

The three game giants’ combined market cap is currently 36.9 trillion won, higher than the combined market cap of Korea’s three major mobile carriers - SK Telecom, KT and LG U+ - at 32.4 trillion won.

Despite record earnings, the three companies still feel like the game is just beginning. There remain many questions about their future: Should they stick to developing mobile games? Will the old strategy of bringing Korean games to foreign markets remain a viable business model in the future? Last year, much of their earnings came from mobile games and foreign markets, where the companies have been dumping money into R&D and marketing.

Netmarble purchased intellectual property rights for PC games with high brand value from inside and outside the country, including Lineage, Marvel and Tera, and turned them into mobile games. They helped the company enter 54 countries and generate 68 percent of annual sales from overseas.

But in terms of profit, Nexon and NCSOFT took home the most. Intellectual property rights decided their fates. Netmarble had to pay heavily for its aggressive marketing activities and royalties, leaving an operating profit of 509.6 billion won. Nexon and NCSOFT each made 885.6 billion won and 585 billion won last year.

Nexon owns the rights to Dungeon Fighter, which the company acquired from the game’s developer, Neople, for 400 billion won in 2008. Nexon now collects royalties for the game in the range of several billions of won from the Chinese market.

NCSOFT owns the Lineage series from which it has reaped more than 200 billion won in royalty fees alone. A single well-made game can easily contribute to the company’s operating profit through royalty fees.

In mobile games, companies now face a saturated market. The more mobile games take up a company’s business portfolio, the higher the costs. In app stores, publishers must pay a commission fee of 30 percent.

“Mobile is still important, but there’s also a sense of pressure that we have to find new growth opportunities outside the mobile world,” a source at NCSOFT said.

Such a market environment explains the reason why Netmarble’s founder and chairman, Bang Jun-hyuk, highlighted “a return to PC games” in a news conference last Tuesday.

“In 2011, when mobile games were emerging as a new business sector, the PC game market was stagnant, but nowadays, the trend is changing,” he said. “One of our competitors recently saw global success with a PC game - this is a rosy signal for the sector in general.”

The advancement of midsize competitors has added to their concerns. Last year, a smaller publisher called Bluehole released an online battle royale game called PlayerUnknown’s Battlegrounds that became explosive in markets across the world.

Made by 20 developers from 12 countries, the game was released overseas in March before coming to Korea. The studio has since sold 32 million copies of Battlegrounds with a price tag of $30. Accumulated sales are estimated at around 500 to 600 billion won.

Another PC game, Black Desert, also developed by a small studio called Pearl Abyss, is now popular in the United States, and more than 80 percent of the game’s sales are generated overseas.

For now, NCSOFT, Netmarble and Nexon are focused on R&Ds and M&As. They want to develop games outside the mobile screen, using consoles and virtual reality technology. Artificial intelligence and blockchain technology are also on their radar.

During a conference call last Wednesday, Yoon Jae-soo, chief financial officer at NCSOFT, said the company would “push through aggressive M&As overseas this year.”

Last year, Nexon acquired a 65 percent stake in Korean cryptocurrency exchange Korbit for 91.3 billion won.

Netmarble announced plans this month to set up an AI game center in Korea and are preparing to launch an AI lab in the United States to recruit promising developers.

BY PARK SU-RYON [song.kyoungson@joongang.co.kr]