[Into the Stocks] NCSoft Stumbled by Probability... Revenue Diversification 'Within Reach'

Growing Gamer Complaints About Probability-Based Items... Political Reactions Cause Stock Price Drop
New Releases Expected to Perform Well This Year... Opportunity for Low-Cost Buying

[Image source=Yonhap News]

[Asia Economy Reporter Gong Byung-sun] 200 million won. This is the enormous amount that can be required to create the top item, the ‘Mythical Weapon,’ in NCSoft’s flagship mobile game, Lineage 2M. The reason for such a huge cost is that the item is created through a ‘Complete Gacha’ system, where individual items are combined to craft a new item. To make a Mythical Weapon, a total of 10 crafting manuals are needed. Each manual requires material items, which cost around 3 to 5 million won each. Moreover, because the Complete Gacha system does not disclose the probabilities of the second stage, gamers purchase, combine, and fail without related information. Like gambling, under low probabilities, gamers hope for the top item.

As NCSoft excessively promotes gambling-like elements, consumer dissatisfaction is growing. The political sphere has also reacted, causing NCSoft’s stock price to fall. However, securities firms forecast that the growth potential outweighs the negative public opinion and regulations. The influence of public opinion and regulations is expected to be less than anticipated, and NCSoft can diversify its revenue away from being solely dependent on Lineage.

Hero Item Drop Rate ‘0.004%’... Gamer Dissatisfaction Grows Amid Gambling Controversy

Recently, gamers’ dissatisfaction with probability-based items has been directed at NCSoft. In Lineage 2M, not only the aforementioned Mythical Weapon but also the drop rate for hero-tier items boasting high combat power is only 0.004%. As situations where people easily spend over 1 million won repeatedly occur, NCSoft has started to be perceived as an ‘Online Kangwon Land’ (a reference to a famous Korean gambling site). Although the probability manipulation issue initially surfaced at Nexon, the criticism is now aimed at NCSoft.

As dissatisfaction grew, the political sphere responded. In December last year, Lee Sang-heon of the Democratic Party proposed a ‘Complete Revision of the Game Industry Promotion Act.’ The revision broadly defines probability-based items, including paid combination Complete Gacha items, making them subject to regulation. Article 59 of the revision requires game developers or distributors to disclose the types of probability-based items and the supply probabilities for each type. Ha Tae-kyung of the People Power Party is also expected to propose a bill this week requiring each game company to establish a ‘Game User Committee.’ This bill would grant citizens the authority to directly monitor whether game companies manipulate probabilities.

Concerns arose that NCSoft’s main revenue source, paid items based on probabilities, could see sales decline. According to the Financial Supervisory Service’s electronic disclosure system, paid item sales accounted for 89% of NCSoft’s total revenue. If regulations are imposed, sales of paid items could be impacted. NCSoft’s stock price, which had exceeded 1 million won in early February, fell to 933,000 won on the 22nd.

Securities Firms: "NCSoft, with New Releases Ahead, Has Opportunity to Diversify Revenue"

However, securities firms evaluate NCSoft’s future as bright. Weaknesses have already been factored in or have limited impact, while positive factors remain.

Although the stock price fell due to the aforementioned weaknesses, securities firms see it as a buying opportunity. Lee Moon-jong, a researcher at Shinhan Financial Investment, explained, “The impact of regulations on sales is either nonexistent or very limited,” adding, “Despite knowing the low probabilities, gamers actively purchase items.” Furthermore, NCSoft already discloses the probabilities of probability-based items according to its self-regulation guidelines.

The chronic weakness of revenue being concentrated on Lineage is expected to diversify. According to NCSoft’s 2020 business report, annual revenues from the mobile games Lineage M and Lineage 2M were 828.7 billion won and 849.6 billion won respectively, accounting for 70% of total annual revenue, raising concerns about excessive concentration. Amid these concerns, new releases such as Blade & Soul 2 and Trickster M are scheduled for this year.

From NCSoft’s perspective, the outlook for each game is promising. Blade & Soul 2, set to launch in May, approaches gamers with an East Asian martial arts theme. An Jae-min, a researcher at NH Investment & Securities, said, “It is expected to gain popularity as it is more familiar and accessible than the Lineage series,” adding, “It targets people in their 20s and 30s and features excellent graphics, supporting multiple platforms including mobile, PC, and consoles.” In fact, Blade & Soul 2’s pre-registration surpassed 4 million within 23 days, proving its popularity. This is 9 days faster than Lineage M.

Trickster M is also a highly anticipated title with over 4 million pre-registrations. It utilizes intellectual property that succeeded in the past PC online game market and is expected to attract female gamers with its charming characters. However, on the 22nd, NCSoft decided to postpone the release date from the 26th to sometime in the first half of the year to improve the game’s completeness.

Domestic revenue is also expected to diversify due to overseas market expansion. Lineage 2M is targeting the Taiwanese and Japanese markets. It is expected to perform well particularly in Taiwan, where awareness of Lineage is already high. Korean games such as Lineage M, Lineage 2: Revolution, and Pearl Abyss’s Black Desert have all shown strong results in Taiwan. In Japan, Lineage 2M is expected to outperform Lineage M, as it is more accessible and has the advantage of being a 3D massively multiplayer online role-playing game (MMORPG).

Reflecting this, securities firms generally have high target prices for NCSoft. Mirae Asset Daewoo raised its target price from 1.26 million won to 1.75 million won. DS Investment & Securities also raised its target from 1 million won to 1.3 million won. NH Investment & Securities and Daishin Securities maintained their target prices at 1.4 million won and 1.2 million won respectively, both over 20% higher than the current stock price.

This content was produced with the assistance of AI translation services.