Executive Cases: Interviews with Senior Executives of Early-Stage Companies:
NEXON – South Korea
Prepared by George Foster and Sandy Plunkett
NEXON is a worldwide pioneer and leader in free-to-play (F2P) online games. It creates rich, deeply immersive gaming experiences that appeal to a broad base of users. Founded in South Korea in 1994, it aggressively pushed for foreign expansion since its infancy and moved its headquarters to Japan in 2005. NEXON was one of the first companies to understand and capitalize on the opportunity to provide games for a global audience utilizing the F2P business model, in which play is free and users have the option to purchase in-game items to enhance their experience. On 14 December 2011, NEXON was listed on the Tokyo Stock Exchange with a US$ 1.2 billion initial public offering in what became the largest IPO of the year in Japan.
NEXON’s development and operations span more than 60 games across more than 100 countries including China, South Korea and Japan, and North America and Europe. Each game is tailored to the unique geography in which it is played. Titles include the popular franchises Dungeon&Fighter, MapleStory and Sudden Attack. Its creative development studios have produced some of the most successful online titles in video game history including The Kingdom of the Winds, NEXON’s first massively multiplayer online role-playing game (MMORPG) which is the world’s longest-running MMORPG. NEXON continues robust experimentation with new genres and formats, including various devices and platforms.
Seung-woo Choi is Chief Executive Officer of NEXON Co. Ltd. He has been with NEXON since 1999 and led the company through its aggressive globalization strategy. Under his leadership of the corporate development and overseas business departments, NEXON’s foreign revenues came to represent more than 50% of total revenues. He received the 2008 Presidential Award for the Foreign Expansion of Korean Cultural Contents. Choi holds a BA in international relations from Seoul National University.
Q1: What was the source of the initial idea, and how did that idea evolve into a viable, growing company? How did it change over time?
Kim: “We like to play together, and we were inspired by the technology of thousands of people on the same server. In the 1990s, PC proliferation was rapidly increasing and more people started to seek entertainment through the PC. At the same time, the Internet was taking off and provided an environment where people could connect virtually. We wanted to provide an entertainment arena in which people could play games together using the Internet, and that evolved as broadband penetration increased and technologies improved. Our dream was to build a game company that would make history along the lines of Nintendo and Square Enix. We introduced game after game in the midst of a constantly changing technological and social landscape. Our business model went through many changes to reflect the respective time periods – from PC cafés to personal users, and monthly subscriptions to free-to-play – but we always strove for the same goal of making enjoyable games for a wide audience.”
Q2: What were the major growth accelerators for your company in the early years of high growth?
Kim: “We think the timing really helped us. While the gaming world was still dominated by consoles, the PC market was growing rapidly, and users were eager for more entertainment. Our games were accessible online for the PC platform, which at the time was quickly becoming a home device and appealed to both genders and diverse age groups. Early penetration of broadband and the popularity of PC cafés in Korea also helped. Eventually, our conversion to a free-to-play model became a major growth accelerator because it appealed to a wider audience, and enabled us to aggressively expand into foreign markets early.”
Q3: What role did key aspects of the entrepreneurial ecosystem surrounding your company play in the growth of your company?
Kim: “We benefited from the ecosystem in general. Many were predicting the rise in PC and PC-related entertainment and the market was full of potential for software engineers. South Korea requires all able-bodied men above the age of 18 to enlist in the military service for a couple of years. As a growing domestic company, we were eligible to provide a programme in which these men could work for NEXON instead of going to the military, which was a very attractive alternative for young talents.
“The network infrastructure at schools incubated start-up efforts. Back in the days when the Internet was not available at the national level, top-tier universities in Korea had already established networks for their students. The infrastructure at these universities – Seoul National University, KAIST, POSTECH – enabled elite students to discuss and experiment together. A lot of the online entrepreneurs – Jung-ju Kim, Hae-jin Lee (founder of NHN), Jake Song (developer of The Kingdom of the Winds and Lineage) and Sang-beom Kim (former executive director of NEXON) – met at school. Additionally, the first PC games in Korea were distributed over school networks.
“Our entrepreneurial spirit pushed us to grow during our formative years. The growing PC and Internet industries held so much potential, and PC-based entertainment was just starting to take off. In the 1990s, we were the only gaming company in Korea to produce new titles every year. Some did better than others, but we eventually grew into one of Korea’s biggest gaming companies.”
Q4: What key aspects of the entrepreneurial ecosystem surrounding your company that were absent (or existed only in a weak form) created the greatest challenges for growing your company? Please describe and discuss how you met/were impacted by these gaps in the ecosystem and their resultant challenges.
Kim: “There were not many people we could turn to for advice or help, as the PC game business was just emerging. Pre-1990s, South Korea was centred on conglomerate corporations with strict hierarchies and traditional industries. We instead turned our attention to other companies, which oftentimes did not provide the answer but helped us find one. Data and documents from Japan’s Square and other companies provided a surprising plethora of information, such as the types of incentive programmes or policies companies adopted as they grew. We needed to look beyond the PC gaming scope to packaged games and other industries.”
Q5: At what stage did you invest significant resources seeking to grow your company internationally/beyond your domestic country or region? What factors were pivotal in deciding when to seek growth internationally and where to seek that growth?
Choi: “From the beginning, we were intent on building a global company and designed games so they could easily be exported. We also started early; The Kingdom of the Winds was released in Korea in 1996, and we took that to the US in 1998. NEXON established its first foreign branch in the US in 1997, a joint venture in Japan in 1999, and a branch in South-East Asia after that. We encouraged players in foreign markets to try our games, as they were different from what was currently available. If they did not like a game, we made another one. The games might not have been the best games ever created, but we kept trying.
“In the mid-2000s, we made a definitive move to enter the market in China. We had acquired experience in independent operations through launching our global server for MapleStory and establishing the US subsidiary. Crazy Arcade BnB, KartRider and other casual games became hit titles in China and confirmed the exportability of our intellectual property and business model. The success gave us renewed confidence that we could succeed in foreign markets. In the late 2000s, Europe, North America, China, Taiwan and Japan all showed explosive growth. We continued to make strategic investments. We acquired Neople in 2008 because we believed in its potential for the international market including China. As Dungeon&Fighter showed strong growth particularly in China, and revenues from Japanese operations started contributing, we were determined to make aggressive mergers and acquisitions to obtain promising intellectual property that could be customized and exported.”
Q6: What were the biggest challenges in building growth internationally? How did you meet or adapt to those challenges?
Choi: “The biggest challenge was that although we had been quite successful at capturing what the Korean gamers wanted, the games were difficult to export because they had been built on our experiences in Korea and these experiences were limited. The Kingdom of the Winds failed to receive attention at its initial launch in the US and we had to pull out. One of the reasons we failed was that Korea had many different payment models including small-sum payments through cellular phones and gift certificates, but the US was based on credit cards. To respond to such challenges, we had to go back to square one and rebuild parts of our business. We made pre-paid cards and sold them in different stores, similar to Apple’s pre-paid iTunes cards. Today, more than 50,000 stores in the US sell NEXON cash cards.
“The second big challenge was ‘cultural translation’. Our first international venture merely offered a literal translation of the Korean game into English, but we quickly came to realize that was not enough. The games had to undergo cultural translation as well, to localize and capture local taste. Now we tailor the game to each region to appeal to the local population. Content localization has become our primary expansion strategy.
“The third challenge was the lack of high-speed Internet infrastructure in regions other than the US at the time we started to export The Kingdom of the Winds. We had to wait for that; and as Internet proliferation increased, reception of our games improved as well. In the meantime, we devised methods to work around the infrastructure; for example, we split our clients into smaller files to cope with slower connection speeds. We learned to make the most of what we had in spite of environmental limitations.
“The last challenge was the perception that PC games based on F2P are lower quality. This was especially prevalent in international markets including Japan and the US, where there already was an active, sizeable and scalable package game market. At that time, F2P PC games were just taking off and their presence was so small compared to the popular, high-quality package games. F2P PC games had a stigma that they were inferior to package games. In essence, why would a company provide a game for free?”
Q7: What major role, if any, did key aspects of the ecosystem in the country (or countries) you first sought international growth either promote or impede your ability to grow in those international markets?
Choi: “Obstacles certainly existed but helped us think more in depth rather than impeding us. For example, within South-East Asia, differences in gamer preference, governmental regulations and markets made the export process difficult at times. China has very strict regulations within games. National flags cannot be shown and English must be kept to a minimum. Violent scenes have to be censored to show no blood or bone. Moreover, the Chinese people have specific preferences we had to cater to, including a window mode for games, a chat function and specialized music. We had to localize the content of each of our games to fit the needs, while adding items that would appeal to the Chinese market. Another example is Taiwan. It has a big motorcycle culture, so we collaborated with Yamaha to launch successful items within KartRider, which is originally a car racing game. Each country has its own barrier to entry and local tastes that cannot be ignored. By working with each of these cultures, we have come to appreciate the importance of localization, which has enabled us to build a strong strategy for international expansion.”
Q8: Seeking international growth often has both high moments and dark (low) moments. Briefly describe one high moment and one dark (low) moment in seeking international growth.
Choi: “A low moment for us was from the late 1990s to the early 2000s when international expansion efforts kept hitting walls. At times, we had to rethink our international expansion strategy, especially when we had to shut down US operations after the failed launch of The Kingdom of the Winds. The inflection point came when Jung-ju Kim and I visited Japan in 1999. We saw a long line of people waiting in front of an electronics store, and were shocked to find out that it was for the new Nintendo console. People were lining up for a new console but had little knowledge of the PC online games. Compared to the established console market – and Japan was very console-focused at the time – the barrier to international markets seemed formidable. However, this re-motivated us to challenge that perception and situation. We started to resume foreign business development in earnest in 1999. Since then, 14 years have come and gone. We just kept trying, and eventually our perseverance paid off.
“A high moment for us was during the mid-2000s when revenues from international subsidiaries were rapidly growing. It was then that we felt our efforts had finally paid off. For example, we were closely monitoring the status of Dungeon&Fighter in the late 2000s because it was growing rapidly overseas. We saw that maximum concurrent users across China, Korea and Japan had passed 2.3 million in 2009, and it felt unreal when reflecting upon our history. That was definitely a high point for all of us. But at the same time, we continue to experience high moments – they may be high revenues, a new strategy we are excited about or a trend in the market, but we strive to keep our eyes focused on our initial goal of providing accessible entertainment.”