Why the South Korean game market looks almost nothing like it did last year

Kurt is based in Tokyo as the GM for Asia at Boku.

Here’s a snapshot of the South Korean online games industry in 2013. Annual revenue is about to hit US$2.5 billion, its highest total ever after a decade of rapid domestic growth. Locals love MMORPGs so much that some spend nearly all their free time and disposable income playing them. Competition from console and smartphones games barely exists. South Korean consumers are spending more per capita on virtual goods than anyone else in the world.

A year later, the situation has changed drastically. Local companies no longer cater to local tastes. They have turned to China to find growth. The South Korean government’s decision to cap a person’s spending in online games provided some of the impetus for this change. But it wasn’t the only factor. An influx of competition – from the West and smartphone game developers – as well as a shift in demand combined to make the domestic market less attractive to South Korean developers. All of this was on display at the recent industry exhibition in Busan called G-Star, where attendees flocked to titles developed outside South Korea.

Koreans used to love playing homegrown games. The country’s relatively advanced web infrastructure helped companies there get and keep domestic market dominance for nearly a decade. Affordable, fast and nearly ubiquitous broadband service created a demand for increasingly complex graphics that local companies rose to meet. At the same time, Korean manufacturing of low-cost feature phones kept smartphone adoption comparatively low.

By the time the rest of the world’s broadband connections caught up to South Korea’s, Western companies like Valve, which launched DOTA in 2003, and Activision/Blizzard, whose World of Warcraft was introduced in 2004, were already well established. Both DOTA and World of Warcraft mixed Korean MMORPG elements with more Western graphics and characters. The global audiences these games built made it easy to attract local gamers when they ultimately entered South Korea.

Meanwhile, in 2008, two young entrepreneurs, Brandon Beck and Marc Merrill, built a multi-player strategy battle arena game called League of Legends. The game grew virally across the West. China’s Tencent saw this rapid success and in 2011 outbid Nexon for a controlling stake in Riot Games, League of Legends’ parent company. When League of Legends launched in Korea, many doubted its chances. Compared to local Korean games at the time, its graphics were far inferior. But users either didn’t care or actually liked how it looked.

Price pressure

Western games also brought new price competition to the market. While Nexon pioneered the virtual goods business in the early 2000s with a free-to-play model, other Korean MMORPG makers stuck to subscriptions. Games usually cost US$14.99 a month. When League of Legends offered a free-to-play model to compete against the subscription fees offered by similar games, it blew open the market. It took NCSoft, the developer of Lineage and Aion, years to launch a free-to-play version and NCSoft still has not regained the audience it lost. Today, four of the top five games in Korea are from overseas developers – and League of Legends, the largest online game in the world, claims 40 percent of the South Korean market.

At the same time, South Korean smartphone penetration finally caught up to the West. In a land where consumers adopt high-tech products quickly, smartphone penetration was low until 2013 due to their high costs compared to Korean-made feature phones. Now, over 70 percent of Korean people own smartphones. Most of this adoption occurred within the last 18 months.

Even more critically, social gaming exploded on the Korean-made messaging app KakaoTalk, luring more gamers from PC to mobile, says Kyu Lee, president of Gamevil US. KakaoTalk attracted both traditional gamers and new gamers to a multi-player mobile casual game platform where everyone can play. This shift hurt the traditional South Korean online game developers who were late in developing smartphone games – but it has been a huge boost to local mobile game developers. Com2us and Gamevil both posted record revenues last quarter after a recent push into mobile-based social gaming.

MMORPGs in the crossfire

Perhaps the most critical factor forcing these changes is South Korea’s own government. The Korean government has always been wary of the MMORPG games industry for fear that online gaming is distracting young people from their studies. Years ago, the government set a curfew at game cafes and stopped online game play after 10pm. In February this went a step further as the government essentially capped gaming revenue. Today, an individual in Korea can spend no more than US$300 on online games per month. The rule devastated game developers. NHN took a 50 percent loss across certain game genres, Neowhiz undertook massive layoffs, and CJNet reported a 24 percent loss in revenues year on year. Many online gamers spent all of their money on League of Legends and when they hit the limits, fled to mobile devices where they could play uninhibited.

So having either lost or abandoned the local market and seeing too much competition in Western markets, Korean developers looked for partners in China. And they found Tencent, the biggest partner of all.

Indeed, the US$13 billion Chinese game market may have kept South Korean game developers from going bankrupt this year. Two of the top three games in China are Korean exports – Smilegate’s Crossfire and Nexon’s Dungeon Fighter. Crossfire earned almost US$1 billion last year in China, even though it lost the first-person shooter market in Korea to Nexon’s Sudden Attack.

This year’s G-Star set a new attendance record with 200,000 attendees. But the crowd was not impressed by the magnificent graphics from NCSoft’s Lineage Eternal or the first-person shooter gameplay of Nexon’s Sudden Attack II. They came to see new international game experiences like Final Fantasy XIV, Civilization Online, LOL team competitions, and the newest smartphone games. With the little money that they can spend on MMORPGs, they were not that interested in the local titles.

See: 9 awesome indie mobile games we saw at G-Star 2014

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Why the South Korean game market looks almost nothing like it did last year