The Korean online game market is the largest market among the major online game markets in the world based on revenues. According to a May 2003 report issued by IDC, a leading market research firm, the Korean online game market grew by approximately 78% in 2002 with aggregate subscription revenues of US$289.5 million, as compared to US$162.7 million in 2001. IDC estimated that in 2002, Korean online game revenues represented approximately 50% of all online game revenues recorded in Australia, China, Hong Kong, Korea, Malaysia, Singapore and Taiwan and surpassed the online game revenues recorded in the United States market for the same period. IDC also estimated that out of approximately 12 million online game players in Korea in 2002, 32% were subscription fee-paying online players.
We believe the fundamental factors helping to shape the leading market position of the Korean online game industry are as follows:
Š High rates of Internet connectivity. Korea has a high penetration rate of Internet access and
general availability of broadband connectivity. According to Korea Network Information Center, as of June 2003, the number of Internet users was 28.6 million, representing a penetration rate of 64.1%. Faster connections and declining Internet access fees have enabled online game companies in Korea to design more sophisticated graphics and contents to attract more online game players.
Š Established online game culture. The widespread use of Internet cafes, which are outlets
equipped with personal computers, or PCs, monitors and software to enable users to work or browse on the Internet and to play online games, has contributed to the established online game culture in Korea. Most people in Korea access the Internet in the country’s over 20,000 Internet cafes to play online games. The recent emergence of wireless broadband is expected to further expand the locations in which players can play online games to various locations, such as coffee shops and airports.
Š Growth of home online gaming. Both the high penetration rate of PCs and the propensity
of PC users in the Korean home user market to obtain PC equipment upgrades, due to relatively low costs of such upgrades, have helped create a robust home online gaming environment. As more PCs are able to support the new three dimensional, or 3D, graphics and superior sound quality required by the recently released online games, more players are expected to subscribe to online games at home, instead of going to the Internet cafes.
Š First mover advantage and governmental support. Based on the growth of the online game
industry in Korea, we believe there is broad societal acceptance of online gaming in Korea. With strong governmental support, including the provision of overseas marketing support, grants and technical research and development support, the Korean online game industry has grown rapidly in the past several years. As a result of the advanced and sophisticated games Korean online game companies have recently exported abroad, Korean online games have established a leading position in the online game markets in China, Taiwan and other Asian countries.
Key Korean industry trends
Korea is a relatively mature market in the online game industry. According to IDC’s May 2003 report, there are over 100 companies dedicated to developing online games in the Korean market. MMORPGs are currently the most popular game genre, according to IDC, with a significant number of Korean online game companies focusing on MMORPG development. However, there are only a few successful MMORPGs in the market as competition is intense among various game developers and publishers. We therefore believe that the leading online game companies are engaged in intense domestic competition to build larger and more secure market positions through the development of broader online game offerings and the pursuit of enhanced financial and operating resources.
We expect that with rising customer expectations in Korea, smaller online game companies may have difficulty in financing the development and marketing costs of 3D online games due to recently increasing demands for more sophisticated graphics and special sound effects.
Furthermore, due to intense domestic competition, we believe online game companies can no longer rely solely on the “word-of-mouth” marketing method. Larger online game companies now typically launch extensive and expensive marketing and advertising campaigns. As a result, we expect that smaller online game companies may be forced to align with larger ones for game development resources and distribution platforms. Larger companies also are expected to seek to invest in and acquire potential online games in order to shorten the product development and launch time within their game portfolios. We currently estimate that development, launch and marketing costs for a new 3D online game can be as high as US$20 million per MMORPG and development time can take up to two or more years.
In pursuit of additional revenue growth, several of the leading Korean MMORPG companies have exported their online games, principally through licenses and joint ventures, to other geographic markets. Due to similar infrastructure factors supporting the online game industries, such as high levels or high rates of Internet penetration and broadband adoption and a sizable PC market, we believe the primary target markets are China, Taiwan, Japan and the United States.
We believe that online game companies that will be successful in the Korean online game market need to possess the following three key characteristics:
Š Strong stable cashflow. With development costs and marketing costs rising, strong stable
cashflow will be required to fund the continuous growth of the online game business. We also expect that smaller online game content companies will be attracted to companies with substantial financial capabilities for funding, game development and marketing needs and distribution platforms. Intense domestic competition makes it increasingly difficult for the smaller online game developers to compete with the larger companies which have the financial strength to distribute, marketing, develop and acquire new online games;
Š Proven server architecture know-how. The successful online game publishers will need to be
equipped with an easily distributable and expandable, or scalable, server network capable of supporting sophisticated online games and will also need to have to ability to configure and monitor the server network to handle thousands of concurrent users without downtime and server interruptions; and
Š Proven online game distribution platform. A complete distribution platform includes server
centers, billing and payment systems, advertising and marketing channels and service support centers. With a well-established distribution platform, an online game company will be able to not only publish its internally developed online games efficiently and effectively, but can also leverage its platform to publish games developed by other game developers. The above characteristics have helped the larger companies or companies with recent games that are highly popular to further gain market share. As a result, the Korean market is currently experiencing an industry consolidation. According to IDC’s May 2003 report, the five largest online game companies accounted for 73.7% of the total revenues in 2002.