[KH Explains] Shift Up shakes up Korean gaming industry with agility

Shift Up, the South Korean game developer behind blockbusters such as “Goddess of Victory: Nikke” and “Stellar Blade,” made an exhilarating debut on South Korea’s KOSPI market on July 11.

The buzz within the Korean game industry revolved around whether Shift Up could challenge the market dominance of NCSoft, a veteran giant in the sector. On its debut, Shift Up’s stock surged to 89,500 won, boosting its market capitalization to nearly 5.2 trillion won ($3.79 billion). This valuation briefly surpassed NCSoft’s 4.2 trillion won.

However, by the end of the day, Shift Up’s stock settled at 71,000 won, narrowly missing NCSoft’s market capitalization. Despite the dip, Shift Up firmly established itself as a formidable newcomer in the market, ranking as the fourth-largest Korean game company by market capitalization, just behind Krafton, Netmarble, and NCSoft.

A developer-centric company with powerful IP

Founded in December 2013, Shift Up has distinguished itself by focusing on subculture games -- titles that resonate with a specific community, offering unique aesthetics and gameplay elements that appeal to their shared interests.

The company’s founder and CEO, Kim Hyung-tae, a pioneering Korean game artist and former art director at NCSoft, has been instrumental in this focus.

Goddess of Victory: Nikke is a prime example, appealing to anime and post-apocalyptic fans with its striking art and engaging storylines.

“Shift Up’s high valuation is largely due to the ongoing success of its current games and Nikke’s potential entry into the Chinese market in 2025,” said Kim Dong-woo, a game sector researcher from Kyobo Securities.

“The company’s strong intellectual property and proven development skills have also set them up for a great revenue structure. They’ve managed to get most of their variable marketing and platform costs covered by their publishing partners, letting them maximize profits as they roll out new titles,” he added.

Last year, Shift Up reported revenues of 166.6 billion won, marking a 155.2 percent increase from the previous year, thanks largely to the runaway success of Nikke, which launched globally in November 2022. Nikke contributed 97 percent of the company’s revenue in 2023, up from 83.6 percent in 2022.

The company’s sales were predominantly international, with 85.8 percent coming from markets in Japan, the US, Taiwan, and Hong Kong, while Korea accounted for 14.2 percent of sales in 2023.

Shift Up’s portfolio also includes the mobile gacha RPG Destiny Child and the AAA action-adventure console game Stellar Blade, which launched exclusively on PlayStation 5 in April 2024. Stellar Blade quickly topped the charts, becoming Japan's number-one PlayStation download in April and securing the second spot in North America. By May, it had sold over 1 million copies, with plans to expand to PC and develop sequels.

The company prides itself on being a developer-focused company. As of 2023, 88 percent of its 292 employees were developers. The team comprises top-tier Korean developers, including veterans who previously held key roles at other major companies. These include not only the founder but also the game engine programming team leader of NCSoft’s Blade & Soul, the former director of Smilegate’s Lost Ark Mobile, and the former game director of Netmarble’s Destiny 6.

Efficient and clever

Shift Up’s key advantage in the gaming industry is its efficient development process. While global gaming giants face rising labor costs and expanding teams, the company remains agile. Labor expenses for global gaming companies have increased from 21 to 26 percent of operating expenses globally between 2018 and 2023. In Korea, labor costs rose from 29 to 37 percent over the same period, according to the Meritz Securities Research Center.

As profit margins shrink, the gaming industry is restructuring. By May 2024, over 10,000 jobs had been cut globally, surpassing the 2023 total of 10,500 layoffs. In Korea, with 92 percent of gaming employees in full-time positions, the industry is instead focusing on cutting non-core areas and underperforming projects.

“Low returns on game investments are prompting restructuring. Companies focusing on PC and console games have seen growth, but increased investment hasn’t always translated into higher revenue,” said game sector analyst Lee Hyo-jin from Meritz Securities.

Shift Up sets itself apart with its lean development process. “Shift Up typically spends four to five years developing a game with a team of about 100 developers. Current projects include Project Witches, slated for 2027, and expansions of existing titles like Stellar Blade, expected in 2025,” said researcher Kim from Kyobo Securities.

He explained that Shift Up engages in rapid prototyping in the early stages to nail down the direction of development and uses clever techniques for efficiency. For example, for facial animations, the development team breaks down expressions into simple movements and uses a lip-sync solution for multiple languages, cutting development time by up to 50 percent.

During a pre-IPO press conference in June, CFO Ahn Jae-woo noted that Stellar Blade was completed in just two-thirds of the usual time and with a third of the typical costs for a AAA console game.

Shift Up’s efficient approach resulted in a 2023 operating margin of 66.38 percent, compared to NCSoft’s 5 percent. This is due to low marketing and labor costs. Unlike NCSoft, which manages multiple projects with a vast workforce, Shift Up focuses on single projects, maximizing profits when successful.

“While Shift Up remains agile, the single-project approach is also risky, so it might be a bit overvalued compared to other gaming companies,” Kim said.