[Issues in IP] Is S. Korea losing the IP game to China?

The Korea Herald publishes a series of articles to review South Korea’s position in the intellectual property sector per industry, in the light of mounting challenges. This is the first installment. -- Ed.

South Korea’s initiative in computer and mobile game contents has long been cited as a major growth engine backing the country’s advanced position in the global intellectual property sector.

After decades of neglecting the value of IP rights, however, Asia’s fourth-largest economy may now be standing on the verge of losing the highly promising game business to rising Chinese competitors, industry experts warned.

“To be honest, I see little hope in the future of Korea’s game business,” said Wi Jong-hyun, professor of Chung-Ang University Business School and president of the Korea Academic Society of Games.

“Things may still look favorable in superficial terms such as sales volume but the latest market situations clearly signal that the industry has already missed the golden time to build up its lead in the intensifying global market.”

According to the 2018 Game Industry White Paper published by the Ministry of Culture, Sports and Tourism and the Korea Creative Content Agency, the total sales of the domestic game market is estimated to have surpassed the 13 trillion won ($11.5 billion) last year.

Taking the lead were the three top players dubbed the “3N” -- Nexon, NCSoft, and Netmarble -- which altogether achieved 6.2 trillion won in annual sales.

Adding up to the market momentum was a midsized Korean company’s copyright lawsuit victory against a Chinese infringer, which was interpreted as a positive development for IP rights holders who for years have been troubled by rampant copyright violations in the Chinese market.

In December, a Beijing lower court upheld Korean game developer WeMade’s claim that the copyright of its signature game “The Legend of Mir2” had been infringed by “Legend of Dominance Tour” by China’s 37Games.

“WeMade has become likely to officially sign a licensing deal with 37Games and retroactively collect the royalties for the past three years,” said Oh Dong-hwan, analyst at Samsung Securities, in a report.

He estimated the royalty compensation to be as much as 130 billion won, as the Chinese company has been achieving 1.6 trillion won in average annual sales since 2015, with the disputed game ranked No. 1.

Boosted by the ruling, WeMade -- and a number of other Korean game makers -- vowed to add fresh fuel to their IP businesses, such as expanding collaboration with overseas character copyrights and launching new IP-based game products within the year.

A tangible example is NHN Entertainment, Korea’s fifth-largest game developer in sales, which attracted the market’s attention in early February as CEO Chung U-jin unveiled the plan to take part in the development and operation of “Dr. Mario World” jointly with Nintendo.

After marking a 15 percent jump on the day of the announcement, the company’s stock price has extended its winning streak, closing at 80,900 won on Friday. Citing the profitability of the ongoing collaboration projects, key brokerage houses here including Samsung Securities and Kyobo Securities have recently raised their target stock price for the company to the 100,000-110,000 won range.

Market champion Nexon also renewed its vow to strengthen its IP capacity, especially in the mobile game sector. Its newest release was “Traha,” a mobile massively multiplayer online role playing game which garnered a record 2 million users within 10 days from launch in the domestic market.

 

Market observers and policymakers, however, should not be fooled by these numbers, game experts said.

“Each industry has a megatrend, and it is obvious that China has taken its uptrend while Korea’s momentum has snapped,” said Wi.

The professor especially blamed large game developers for neglecting research and investment into IP until recently.

“In order to create sustainable synergy with IP, business entities are required to create IP, maintain it in a continuous and coherent manner, and to put it to practical use,” he said.

“But for several years, Korean game companies have been preoccupied with commercial application only, neglecting the creation and maintenance phases which are in fact more essential in the long term.”

Unlike the manufacturing sector, where market players exert all efforts into product R&D, content right holders tend to rely on conventional IP, according to Wi.

“Of course, some efforts have ended up in failure and consequently in temporary business losses,” he also said.

“But the ups and downs in the smartphone market, for instance, show how much R&D input is required to keep the industry momentum going. None of the key game developers have exerted that much effort in IP creation.”

Game companies, while admitting the lack of momentum in IP content development, claimed that situations are different in the game content sector.

“Unlike large manufacturing conglomerates, game companies are heavily dependent on a limited range of content,” said a spokesperson for WeMade.

“Facing a higher level of business risks, it is inevitable that game makers should take a more conservative approach in terms of investment.”

It was amid such stalled market situations that Chinese games started to expand their market share and -- more importantly -- NXC CEO Kim Jung-ju put out No. 1 game company Nexon for sale earlier this year.

Participating in the bidding war, estimated to cost as much as 13 trillion won ($11.5 billion), are China’s Tencent, Korea’s runner-up game maker Netmarble, and platform operator Kakao, along with two other competitors.

“A healthy body may survive a virus, but even a common cold virus may turn out lethal to a weakened entity. I believe that this is exactly what is happening to Korea’s game industry at the moment,” Wi said.

“CEO Kim has learned his lesson from the past market struggles, which is why he gave up on the industry and set out to sell off his shares.”

The Nexon chief’s exit should be taken as a red light, not only for market players but also for Korea’s content-related policymakers, he added.

“Should Nexon be acquired, either by a local consortium or Tencent, there will be even less momentum for smaller-sized companies to invest in IP R&D, and this will lead to a vicious circle,” he said.

The key dilemma is the government’s self-contradictory set of policies, encouraging content-backed innovative growth on one hand but undermining game as an addiction, according to Wi.

By Bae Hyun-jung (tellme@heraldcorp.com)
Lim Jeong-yeo contributed to this article.