Smiling on the Outside, Sad on the Inside: The Crisis of South Korea’s Domestic Mobile MMORPGs

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Smiling on the Outside, Sad on the Inside: The Crisis of South Korea’s Domestic Mobile MMORPGs

The Crisis of Domestic Mobile MMOs

Written by 김지웅Jacob Kim

Hello there! I’m Jacob.

I am a Principal Associate at Kakao Ventures specializing in game investments. A lot of people have recently shown interest in the trends of the gaming industry as well as concerns about its future. As an investment analyst deeply involved in the industry, I would like to share my thoughts and observations, hoping to be of some help to relevant companies, especially startups who are in the midst of developing new games.

Today, I’d like to discuss the MMORPG (Massively Multiplayer Online Role-Playing Game) genre, specifically South Korea’s domestic mobile MMOs.

The Korean game industry has made remarkable progress, starting with PC MMOs and continuing to achieve outstanding results even within the mobile paradigm by leveraging the 'Lineage-like' formula. (‘Lineage’ is the name of a popular South Korean MMORPG series developed by the game company NCSOFT.)

However, we are living in an era of unmanageably rapid change, and time is ripe for a new recipe. Although, it is true that domestic MMOs have held on for longer than expected in such a fast-changing environment - Lineage M, released in June 2017, still ranks at the top of sales charts. Even recently, MMOs using the "Lineage-like" formula continue to be released (approximately 20 similar games in the seven years following Lineage M's release).

On the surface, MMOs may seem to be doing well.

But upon closer inspection, there is an underlying crisis that cannot be ignored.

But first, to make one thing clear, MMOs do make money.

According to research, the average ARPU (Average Revenue Per User) for global mobile game paying users in 2022 was $34, while in Korea, it was a staggering $171. The reason for this fourfold disparity is that mobile MMO sales account for nearly 70% of the revenue in Korea.

For Lineage M, the monthly spending per user is approximately $480 (about 640,000 KRW). The graph below compares the estimated ARPU of Survivor.io and Lineage M, clearly demonstrating how profitable MMOs can be.

MMOs are indeed lucrative. When examining individual games under a microscope, MMOs still achieve top market sales and record astonishingly high ARPU, making them "golden eggs."

But now let us shift our focus towards a broader view of the domestic mobile game market: The market size is about $4.8 billion (approximately 6.4 trillion KRW) as of 2023, but it is expected to experience negative growth(*) for the second consecutive year following 2022. Contrary to the belief that the mobile game market would continue to grow indefinitely, it is sadly not the case.

* 2021 ($5.9 billion) → 2022 ($5.2 billion) → 2023 ($4.8 billion)

The following data on Korea’s domestic mobile game MAU (Monthly Active Users) indicates a continuous and steep decline in the number of gamers. Both the market size and the number of users are falling. Perhaps, more likely than not, the domestic mobile game market has reached its cap?

While the report attributes the negative growth of the market in 2022 to the end of COVID19-driven demand, I personally believe one of the biggest reasons for the negative growth in 2023 is that ‘the MMO market has simply reached its growth limit’.

As shown in the chart below, MMO sales proportion in 2023 decreased by a significant -8.8% compared to the previous year. And unfortunately this trend is unlikely to be reversed.

Here are my reasons:

Crisis 1: High ARPU & Narrow User Pool

Of the 6.4 trillion KRW domestic mobile game market, NCSOFT achieved sales of 1.78 trillion KRW with its Lineage series (accounting for about 27.8% of the domestic mobile game market, as of 2023). Like NCSOFT, most MMO companies in the country adopt a strategy of generating high ARPU from a narrow user pool in the domestic market.

*Translation of Korean text in the picture: The Korean market is optimized to rely on a small number of high-spending users.

According to data presented at Think Games 2023, the Korean game market has a very different structure compared to global standards. This points to a need for awareness, a sense of crisis surrounding the market’s distorted structure. The main points of the presentation were:

• The reliance on a small number of high-spending users is causing a severe "Galapagos Syndrome" in the Korean game market.
• The top-grossing 30 games in Japan and the US cover a wide range of genres, including puzzles, simulation, LBS, strategy, sports, and social casino. This variety attracts a broad global user base.

I vividly remember the audience exclaiming, in somber surprise, when the data were presented and the following conclusion was soon drawn: The dependency on a small number of high-spending users is showing its limits. Users have experienced high fatigue (in terms of spending and playtime) over time, and the continuous release of over 20 similar MMO games in the last 7-8 years is gradually shrinking the market share individual MMO games can capture.

It's time to look elsewhere.

As a VC analyst specializing in the gaming sector, what concerns me most is the continuing trend of startups aiming to develop domestic mobile MMOs using the ‘Lineage-like formula’.

In the startup ecosystem, industry milestones and prominent companies or items serve as a strong motivation or inspiration for entrepreneurs. However, since MMOs are the leading genre in the domestic gaming industry, many entrepreneurs fall into the trap of "misguided motivation." This means they are driven to follow the MMO trend because it seems like the most successful path, even though it may not be the best strategy.

Crisis 2: Problems with Global Expansion

The issues with global expansion fall into two main aspects.

First is the "content" aspect, where the formula used in domestic MMOs does not work in the global market. Second is the "marketing" aspect, where attracting global users is challenging.

First – Content

South Korea’s domestic MMO launches typically start with closed beta testing (CBT) and open beta testing (OBT) within the country before the official launch. Simultaneously, they conduct live services domestically while polishing a separate global build. They set up teams (L10N, overseas development team, overseas business team, etc.) for localization and make extensive efforts with local publishers to increase the hit ratio.

While some success has been produced with such efforts in markets like Japan and Taiwan, achieving explosive momentum in the market remains rare.

Consequently, many South Korean companies with MMO lineups generate major cash flow from domestic services and only moderate additional revenue from overseas markets. For instance, NCSOFT's revenue structure comprises 65% from Korea, 19% from Asia, and 7.5% from North America and Europe.

It has already been proven in the market that domestic MMOs have the significant drawback of not succeeding globally.

Therefore, it is very important to think about "Going Global" from the initial planning and development stages and prepare user, gameplay, and business models for a global audience. In terms of business and launch, the longer the delay in moving to the global market after domestic live services, the lower the success rate. Given the already severe Galapagos syndrome, is domestic live service data really that important?

Second – Marketing

For the past few years, MMOs have been consistently targeting a narrow user pool, commonly referred to as 'Linjeossi' within the industry. (‘Linjeossi’ in Korean is a neologism referring to middle-aged men with ample pocket money to spend on games.) This means they haven't actively recruited new users. Without aggressive marketing, Linjeossi users would voluntarily download and spend money on the games.

Summarizing these characteristics, we can describe MMO users in Korea as follows:

"Organically acquired users with high retention and high ARPU."

What an attractive item MMOs seem to be! But hold on a second. Let us ask, what would be the ROAS (Return on Advertising Spend) of a highly popular MMO such as Lineage M?

In the startup investment scene, it is nearly impossible to find cases where organically acquired users have high retention and high ARPU. If such a case exists, there would be no need for marketing campaigns—maybe brand marketing at best.

This is why companies that have grown through massive MMO revenues commonly lack user acquisition (UA) experience. The incredible allure of ‘high retention, high ARPU through organic acquisition’ has proven to be a double-edged sword, leading to a neglect for UA strategies. But rather than pointing this out as a weakness, it seems more accurate to say it was an inevitable environment.

The bigger issue is that in terms of ROAS, acquiring users who spend over $100 on a single MMO game overseas is impossible. Even hiring a marketing head with extensive UA experience won't resolve this problem. To capture a broader and more diverse user pool while attracting users who spend reasonably, the game's structure must now align with global standards. Solving this issue does not seem easy.

In summary, the crisis in MMOs regarding global expansion stems from the lack of a process for developing global content and the absence of performance marketing capabilities targeting global users.

Conversely, if a company can address these issues, it could seize significant opportunities. In fact, quite a few companies are shifting their focus to create "new methodologies."

“Can we, as a startup, achieve sustainable growth?”

This is one of the biggest insights I've gained from being in the startup scene. The question of whether a startup can achieve sustainable growth is something every startup worldwide must consider.

South Korea’s domestic MMO (Lineage-like) that I've been discussing so far can grow to a value of approximately 50-100 billion KRW if a good team starts developing the game now.

The problem comes next.

For game startups facing expectations of continued growth in order to  succeed in several next-round investments, a strategy limited to the domestic market makes it challenging to achieve sustainable growth.

The key points when deciding on investments in game startups are:

• Is the team capable of creating global content?
• Do they have a well-established strategy for acquiring global users?
• Do they have the internal capabilities to execute the above two conditions?

If a team meets these conditions, we proceed with deal review first. Even with one or two missing aspects, if Kakao Ventures' spirit of co-piloting can fill those gaps, we are willing to meet the team anywhere.

The next topic I’d like to share is <Small but Strong Indie Games in the Global Market>.

Stay tuned for more insights!