The Champs in Online Games
No wonder parents are concerned. Consider 16-year-old Choi Joon Il. The boy was no longer joining his family for meals. He wasn't getting much sleep. And Joon Il's younger brother was heading in the same direction. The culprit: Lineage, an online role-playing game that allows players to log on, create their own characters, enter a never-ending contest, and communicate with other players in 24-hour chat rooms. The game has got thousands of South Korean kids addicted--and their parents in an uproar.
Some even complained to the authorities, who briefly examined the game's supposedly deleterious effect on youth, forcing the maker, NCsoft, to delay for two months an initial public offering last year. But Joon Il's father took another tack. He created his own online character--a knight named Blazing Sword--and joined the fun. "It was impossible to talk to Joon Il," says Choi père. "So I decided to play the game and talk to him in cyberspace." Now, Dad is hooked, too.
A MINNOW. If NCsoft gets its way, millions around the world will be similarly mesmerized. The company is riding Korea's online-gaming wave, which has taken off thanks largely to the nation's early commitment to ultrafast broadband connections. The combined sales of Korea's online-game companies surged ninefold, to $148 million, last year, and the state-funded Korea Game Promotion Center (KGPC) sees sales growing by 50%, to $223 million, this year. To be sure, Korean gaming is a minnow by global standards: Japan and the U.S. dominate the $18 billion industry. But KGPC President Sung Jae Hwan believes the online-game business will help transform Korea into "a powerful knowledge-based economy." That will happen by introducing all of Korea to the power of broadband connections, not just for games but for all kinds of online services and businesses.
Korean companies are betting that online games--although now dwarfed by the console- and PC-based variety built by Japanese and U.S. companies--will become mainstream in the coming years. Already, Sony's online-game site, The Station, has 10 million registered users, and a recent check showed that about 70,000 were playing the role-playing game EverQuest. "Human beings want to interact with other human beings," argues Kim Taek Jin, chief executive of NCsoft. "Gaming with another person has got to be more fun than playing against a machine."
Kim and other optimists believe online gaming will surge globally once households are wired with broadband. It's a long-term bet, because broadband is growing slowly outside Asia. Still, once the U.S. and Europe are wired up, Kim expects business to explode as it has in Korea, where some 42% of 14.3 million households surf the Web using digital subscriber lines (DSLs), cable modems, or other high-speed technologies. KGPC forecasts Korean online-game sales will hit $380 million by 2003 at home, twice as much as PC games and console-based games combined.
PRINCES AND ELVES. No company is making better use of Korea's broadband fever than NCsoft. Lineage is so popular that 110,000 players sometimes log on at once. Last year, NCsoft's operating profit surged eightfold, to $23 million, on sales of $45 million. Already, 2001 revenues have matched those for all of last year. NCsoft's success has made it one of Korea's hottest stocks. Shares have risen 96% this year, outperforming the tech-rich Kosdaq's 41% rise. User fees of $21 a month account for 30% of revenues, with the rest coming from PC salons, where Koreans last year dropped $862 million.
Now, hundreds of other game companies are angling to duplicate Lineage's runaway success. In the second half of this year alone, five outfits, including Actoz Soft, Taewool, and J.C. Entertainment, are planning IPOs. For now, NCsoft dominates the industry, with 45% of the market, followed by Nexon Inc., with a 20% share.
The challenge for NCsoft and other Korean game companies is to repeat Lineage's success beyond their home turf. Initial signs are encouraging: Since launching the game in Taiwan, NCsoft has earned $3.5 million in royalties and lured 75,000 gamers at a time. Heartened by the response, NCsoft and its Taiwan partner, Gamania Digital Entertainment Co., set up a joint venture in Hong Kong to start marketing Lineage there this month. "The venture will serve as a bridgehead for advancing into China," says NCsoft's Kim. Nexon, which has subsidiaries in the U.S., Japan, and Singapore, hopes to generate $8.5 million, or 31% of its total revenues, from those markets this year with its role-playing games Nexus and Dark Ages.
While Korean companies lag behind Japanese and U.S. rivals in traditional games, they have a headstart in online gaming. They have experience running servers that handle thousands of users all seeking an individual online role. And they are tapped into the gamer mind-set: NCsoft introduces a new Lineage episode every few months to keep players interested. "We're weaker than Japanese and U.S. game makers in graphics, but our advantage in server technology will give us bargaining power in forming alliances," says Nexon marketing chief Kang Young Tae.
In the meantime, Korean game makers are establishing footholds in Japan and the U.S. Nexon and Digital Dream Studios, Korea's third-largest game company, have agreed to develop titles for PlayStation2, which allows eight people to play online games. NCsoft is preparing to launch a joint venture in Japan this year to modify Lineage to appeal to Japanese users. In May, NCsoft recruited Richard Garriott, the U.S. game programmer best known for Ultima Online, and 19 others from Destination Games Inc. in Austin, Tex., to develop titles. NCsoft also paid $33.4 million in company stock and cash for the next-generation Internet game Tabula Rasa, being developed by Garriott's team. The game is to be NCsoft's main weapon in its assault on the U.S. "It's a big bet NCsoft is making in the U.S. Its outcome will not only decide its fate there but in the whole world," says Joel Kim, software analyst at ING Barings in Seoul.
Meanwhile, the Korean government is keen to support game developers. "We see a good chance of our online-game industry emerging as a key export," says Sung at KGPC, which is training people to design, program, and market online games. The center has also set up a $12 million fund to incubate game companies and selects a promising gaming proposal each month to help develop into a marketable product.
The country's chaebol now smell money in network games, too. Samsung Electronics, for example, is sponsoring the World Cyber Games, which it describes as the Olympics of online gaming. It is also developing online games to promote its DVD players, digital TVs, and personal digital assistants. Among other big companies eyeing the game industry: Hyundai, SK Telecom, and Korea Telecom. Not that NCsoft views the chaebol as serious rivals. "I'd like to see my company competing neck and neck with Sony and Microsoft," says NCsoft's Kim. He's off to a good start.
By Moon Ihlwan in Seoul