Web 2.0 Asia

NHN, the company behind Naver.com, recently announced 2009 financial results. The company posted annual profit of KRW 540 billion (roughly US$ 540mm) on the revenue of KRW 1.3 trillion (about US$ 1.3 billion). Both figures are all-time high, according to NHN.

NHN's profit rates, about 40% of the revenue, again proves that NHN is one giant cash generating machine. NHN is actually one of the most profitable companies in the whole Korean stock market, across all industries. The biggest contributor of this financial success is of course Naver's dominating market share in the web ads. Fueled by Naver's 60-70% search market share, Naver also sees a healthy market share of 65-70% in the nation's internet ads market.

However, apparently there are some concerns over the company's long term growth potential too. About 1/3 of NHN's profit comes from Hangame's gaming business (Hangame is the online gaming arm of NHN corporation). This is a pretty unique revenue mix; Imagine 1/3 of Google's profits are being generated by games, though clearly Google and NHN are different companies as apples and oranges are. In and of itself, generating huge profits from a gaming business would be perfectly fine; However, the problem is that much of Hangame's profit gets generated from what's called "web board games", or things like Korean poker ("Go-stop"). There are increased social concerns towards these games: As people can exchange virtual currency into real money, these games can become too addictive and potentially become borderline gamling.

Also generating investors' concerns is the under-performance of Naver's overseas operations. Naver has always been criticized as a service that achieved its greatness by monopolizing the Korean market, not by building technological unfair advantage that can also work in other countries. To overcome these concerns, Naver has been trying hard to venture into new markets and move the needles there; However, Naver's current progress in other markets can best be described as "still trying".

Naver is a great company: after all, it's the world's 7th largest internet search provider, a remarkable position given that the majority of its users are only Koreans. But without meaningful signals coming from overseas market, and less dependency of its gaming business on the poker-like games, at least Naver's stock price could stall for a while.

One of the best mergers happened in the history of Korean web industry was between Naver, a Korean portal, and Hangame, a popular online gaming site. Naver acquired Hangame to form NHN Corporation in 2000. Until this time, Naver had been considered a fledgling, promising web portal at best. Naver was fairly popular, but was a #4 or #5 player - with the solid leader being Yahoo Korea which looked nearly impossible to be dethroned.

But it turned out Naver was very smart, as the company kept investing the cash earned from its Hangame service into Naver search to make the search service better and better, until it became somewhat of a monopolizing web search among the Koreans. Someone at Naver, most likely its founder and Chief Strategy Officer Haejin Lee, had a piercing eye through to the future and saw that search was going to be the biggest killer app of all time on the web. Buying Hangame was a well calculated tactic as improving search required funding and Naver was yet a publicly traded company, though the company just finished $10mm funding. Hangame wasn't cheap at the time either (valued at some $60mm, with Naver worth about $250mm at the time), but Naver decided to make a big bet on Hangame - and the combined company took off from there.

I recently read a story on EST soft, a Korean software company that recently went through IPO (getting itself on the rare list of tech IPOs lately). EST Soft is best known for its Altools suite of free software. EST charges corporate customers, but still the revenue wasn't enough for them to go public. So they started an online game service, including Cabal Online. Gaming service made up about 2/3 of EST's total revenue last year, and without the revenue contribution of game service, EST Soft wouldn't have been able to go public successfully this year.


So, from the cases of Naver and EST Soft, one is faced with a question: Is gaming service the proven cashcow for web and software companies? At least in the Korean market, the above statement has seemingly held true. Game services has been to web/software companies what Jonathan Papelbon has been to Boston Redsox - namely, a trustworthy reliever who could help them win.

It's no secret that web services are very difficult to monetize, and I assume this is not the case for only the Korean market. When faced with a right business model, folks have resorted to things like Google Adsense, freemium, and mobile service. Well, how about adding to the list a gaming service, as a sideways cashcow business that can assist the main business by injecting cash? What do you think? Is this a good strategy, or a less desired strategy that only diverges the company's business model? Will this work in other markets like China or the US?