Regulations threaten S Korea’s gaming industry

March 18, 2014 5:45 pm
Regulations threaten S Korea’s gaming industry
By Song Jung-a in Seoul
Kim Jin-woo, a high school student in Incheon, South Korea, used to play online games like League of Legend, Fifa Online 3 and Sudden Attack for up to 10 hours a day in smoke-filled internet cafés, having instant noodles when hungry or sometimes even skipping meals.

“They are so fun to play that you forget about time. It is not easy to quit such games in the middle as they are sort of team sports,” he says, recounting his middle school days as a hardcore game player.
“Online gaming is very good for relieving stress. To play soccer, you have to gather many friends, set the time, etc. But you can play online games anytime you want and you don’t need friends to do it,” he says.
As his grades at school fell because he had no time left for study, he would have big arguments with his mother, but her frequent nagging did not stop him from playing games.
“At that time, nothing could have stopped me. Playing games was my only joy in life,” he recalls. “It was not just me. Most of my friends played games for hours a day.”
It is players like Mr Kim that have made South Korea the world’s second-biggest online game market, after China, generating an estimated Won10.7tn ($10bn) in revenues last year. Domestic competition has fostered a games industry – with companies such as NCSoft and Nexon – that has been a pioneer in both genre and business models.
But concern over the wellbeing of youngsters like Mr Kim has led Korean politicians to introduce a number of measures curbing the games industry, and causing game developers to fear that their good old days are gone.
The homepage of the Korea International and Digital Entertainment Association, the country’s game industry group, is adorned with a “death” banner in protest against the recent anti-game bills, reflecting its deep concern about the future of the country’s biggest cultural exports.
After a curfew introduced in 2010 blocked overnight access by users under the age of 18, a bill submitted last April by a ruling party lawmaker proposed that online games should be subject to state supervision, along with other addictive social evils such as alcohol, drug and gambling. Another pending bill says game makers should contribute up to 1 per cent of their annual sales to a fund created to help cure addicted people.
Late last month, the government introduced new measures to limit the money and time spent on computer games of a gambling nature such as online poker games, sharply reducing online traffic for such games.
Online game developers fume that the bills would be like a death sentence for the industry already under pressure from gamers’ increasing shift to mobile games and growing competition from China.
“They just blame games for everything without trying to address the underlying fundamental social problems such as poor welfare, competitive education and high youth unemployment,” says Kim Sung-kon, director at Korea International and Digital Entertainment Association. “I am not sure whether the industry can survive under this kind of regulatory environment.”
Kim Sung-kon fears that the industry’s tarnished image might lead to less investment and the exodus of talented game developers, pointing to the dearth of new smash hits. He stresses that the proposed curbs are contradictory to President Park Geun-hye’s aim to promote the games industry as a key pillar of Korea’s “creative economy”. South Korea’s game exports were estimated at about $2.9bn last year, contributing more than half of the country’s content exports.
South Korea’s domestic online game market still accounts for nearly 30 per cent of the global total, although it has been overtaken by China, which makes up about 45 per cent of the global market.
China is South Korea’s largest export market, taking in nearly 40 per cent of the country’s total game exports, followed by Japan and Southeast Asia. Korean online games such as Smilegate’s Crossfire and NCSoft’s Blade and Soul,are still popular in China, but they are coming under increasing competition from games made by Chinese rivals such as Tencent and Shanda Interactive Entertainment. They are also losing domestic market share due to the huge popularity of League of Legend of US game developer RiotGames, which was acquired by Tencent.
“The business environment is getting tougher with Chinese game developers catching up fast on quality,” says Choi Yong-ho, strategic planning director at NHN Entertainment, the country’s third-largest game developer.
Pressured by the growing challenges from China and the saturated domestic market, local game makers are increasingly turning their attention to less-regulated mobile games, which are growing fast but less profitable.
They are also accelerating their push into overseas markets. NHN Entertainment, for example, plans to launch its first mobile game in Shanghai this year. “We have to go global as the domestic market is limited,” says Mr Choi. “This year will be the watershed for our overseas expansion.”
Kim Jin-woo, the student, says he still enjoys online games but not as much as he used to, as mandatory night classes at school leave little time to play. But he is sure that online gaming is not something that the government can regulate.
“You can easily borrow someone else’s ID to play games during the night. Somehow I gradually lost interest in online games, but it was not because of my mom or government regulations.”
Game developers turn to mobile
Faced with increasing regulation and stalled growth in online PC games, Korean game producers are shifting to fast-growing mobile games, which are easier to make and take less cost and time to develop.
The country’s mobile game market has been growing fast since 2012, when KakaoTalk, the country’s dominant mobile messenger, opened its platform to mobile games. Some of the most popular online games including Devsisters’ Cookie Run, CJ Group’s Everybody’s Marble and Wemade’s Wind Runner, all distributed through Kakao’s platform.
The country’s mobile game market was estimated to have grown by half to Won1.2tn ($1.12bn) last year, with mobile game exports jumping fivefold to nearly $170m. But revenues of Korean mobiles games accounted for just 5 per cent of the global total in 2012, and local mobile game producers have yet to produce a global hit on a par with Angry Birds.
We’re looking at China, Southeast Asia and North America as our main targets. It is relatively easy to expand into such markets, if we can use international platforms like Line and Facebook
– Choi Yong-ho, NHN Entertainment
But that may change as Korean game developers increasingly seek to develop mobile games and take them abroad.
“We’re looking at China, Southeast Asia and North America as our main targets,” says Mr Choi at NHN Entertainment. “It is relatively easy to expand into such markets, if we can use international platforms like Line and Facebook.”
South Korea’s advanced mobile internet technology bodes well for local game makers. The country with a population of just 50m has more than one mobile phone per person.
“The country’s mobile environment has developed so fast that our game producers have advanced experiences and knowhow in making mobile games,” says Chung Dae-ho, analyst at LIG Securities. “They can be competitive abroad, if they can offer well-made mobile games through global platforms.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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