Exchange Rate↑·External Risks↑... Obstacles to Korean Game Companies' Global Expansion

Increase in Operating Costs Due to Rising Fees from Exchange Rate Hike
Some Game Companies Also Gain Foreign Exchange Profit from 'Dollar Assets'
"Global Business Environment Becoming Increasingly Difficult"

[Asia Economy Reporter Seungjin Lee] Domestic game companies are facing dark clouds due to external adverse factors. The won-dollar exchange rate has surpassed 1,420 won, sustaining a ‘strong dollar’ which has increased operating costs and added burdens, while some companies are struggling with massive dollar-denominated debt.

Strong Dollar Makes Operating Environment Difficult for Game Companies

According to the game industry on the 3rd, as the won-dollar exchange rate surged, many domestic game companies have seen a significant increase in operating costs starting from the second half of this year. Kakao Games, which announced its Q3 earnings, recorded sales of 306.9 billion won and operating profit of 43.7 billion won, both below market expectations. In particular, operating profit dropped to about half of market forecasts, reflecting the impact of increased operating costs due to the sustained strong dollar. Cho Hyuk-min, Chief Financial Officer (CFO), explained during the Q3 earnings conference call that “foreign currency-related valuation losses were reflected due to the strong dollar market situation.”

Many domestic game companies that publish games developed by overseas developers are expected to continue facing increasing operating cost burdens as the strong dollar trend persists. This is because royalty fees are mostly paid in dollars regardless of the developer’s country. For example, ‘Uma Musume Pretty Derby,’ developed by Japan’s Cygames and published by Kakao Games, is also known to pay fees in dollars.

Netmarble is struggling due to a $2.19 billion acquisition of a mobile social casino game company, SpinX, last October, for which it borrowed $1.4 billion. Since interest must be paid in dollars, the company is suffering from a double burden of rising interest rates and a high exchange rate.

Last month, Apple’s App Store raised content prices within applications due to the won-dollar exchange rate. Consequently, game companies had no choice but to adjust item prices according to the App Store’s revised pricing, which effectively resulted in price increases and led to backlash from some game users.

Kakao Games 'Odin: Valhalla Rising' Taiwan Image

‘Managing Expressions’ Amid Foreign Exchange Gains

Conversely, some domestic game companies with more dollar assets than debt or those primarily operating overseas services are managing their expressions carefully. As of the end of Q2, NCSoft and Krafton’s dollar assets amounted to 713.3 billion won and 1.2137 trillion won, respectively. Their asset valuations have been rising recently due to the strong dollar. Foreign exchange gains are classified as non-operating income, and compared to the won-dollar exchange rate of 1,298 won at the end of Q2, the recent rate has risen by about 10%.

Game companies with a high proportion of overseas sales are also welcoming the ongoing strong dollar trend. Krafton’s overseas sales ratio reaches 94%. Smilegate’s overseas sales exceed 83%, and Com2uS generates 54% of its flagship Summoners War intellectual property (IP) sales from North America and Europe.

An industry insider explained, “Although development and investment costs increase with the exchange rate, game companies with a high proportion of overseas sales will see foreign exchange gains that significantly exceed these costs.”

Strong Dollar Followed by China-Taiwan Risks

Recently, as tensions between China and Taiwan deepen, domestic game companies are busy monitoring the situation. Taiwan is a representative country where domestic games are very popular and where domestic game companies prioritize launching games when going global.

However, at the closing of the 20th National Congress of the Communist Party of China on the 22nd of last month, Chinese President Xi Jinping reinforced a hardline stance by stating that he would “never promise to renounce the use of force” regarding Taiwan, prompting exploration of related risk factors.

Currently, NCSoft’s ‘Lineage W’ and ‘Lineage M’ occupy the first and second places in Taiwan’s Google Play sales rankings, and many domestic games such as Kakao Games’ ‘Odin: Valhalla Rising’ are ranked highly. Additionally, Kakao Games plans to release global new titles ‘Eversoul’ and ‘ArcheAge War’ in Taiwan next year.

An industry insider said, “So far, no risk factors such as sales declines due to external adverse factors have been detected in Taiwan, but we are keeping a close watch. The strong dollar, conflicts between Taiwan and China, and other global issues continue to create difficulties in the operating environment.”

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