In a just released report (obtained by Inven) of an audit that was performed for Krafton’s financial statements, one of the key issues raised was the viability of the Bluehole Studio subsidiary without additional support from corporate (Krafton). Bluehole Studio’s two live products are TERA and Elyon. For those who are not familiar, Krafton has tended to operate with a “sink or swim” attitude when it comes to the subsidiary companies that operated under an umbrella that has changed brand names over the years. Previously when the main corporate name was Bluehole, Inc, this was known as the Bluehole Alliance. When the company decided to rebrand under the Krafton name, the Bluehole Alliance was rebranded into the Krafton Game Union (this was later rebranded as Krafton CI in another restructuring). With this more recent corporate restructuring, distinct design studios were created, but the umbrella brand name has more recently disappeared (as of April 2022, the following are the design studios that maintain their independent company structures):
While that old umbrella brand has vanished, there is still the same degree of cross over and resource sharing (it’s also an effective cost cutting measure with the now standard practice of requiring less people, to do more). The above listing (in terms of their ordering) is also intentional since Krafton is pretty much all about PUBG now (that is how their investor relations reports and financial statements read like now). All of the short statements written under the studio names are BS because the company puts out a lot of garbage designs and code (quality and excellence are oxymorons).
In 2021, Bluehole Studio had sales of 19.7 billion KRW ($16 million US) and had 44.9 billion KRW ($36.7 million US) in operating expenses, leading to an operating loss of 25.2 billion KRW ($20 million US). The subsidiaries largest expenses were employee compensation, performance based incentives (with PUBG’s success, the company grants bonuses based on franchise performance while sharing a smaller bonus amount to employees across the company), and since going public, employee stock compensation.
Back in January 2021, Bluehole took back the publishing rights of TERA from Nexon for the KR region. Back then, I knew nothing would change on the development side (even though Bluehole was soliciting KR players input for changes during this transition) because the primary focus of the studio at that time was getting Elyon out the door (it finally launched in the west in October 2021); Elyon had launched in Korea in December 2020 and thus was also a priority domestically. Over the course of 2021, Elyon dropped off the top 50 PC Bang rankings (for a new game, it nose dived fairly quickly). Krafton’s IPO went live during the summer of 2021 (translation = we are only seeing the tip of the financial picture at Krafton and of its subsidiary units with this audit report).
The accounting firm that performed the audit noted:
Bluehole Studio posted a net loss of KRW 25.4 billion last year, accumulated losses of KRW 25.5 billion, where current liabilities exceed current assets by KRW 18.5 billion. There are significant uncertainties that may raise significant questions such as in the normal course of business, that it may not be possible to recover assets and repay liabilities. Krafton responded to this concern by stating that they plan to improve their financial structure and secure stable operating capital by raising funds through a capital increase from Krafton, and improving operating cash flow.
The word salad response from corporate headquarters doesn’t even address the root cause issue with Bluehole Studio; IT ISN’T MAKING MONEY FROM THOSE TWO FRANCHISES. Remember, TERA’s Japan service is closing in less than a week (April 20th) from this posting (and that region was one of the more profitable ones). Actual major content updates has been slow going which unsurprisingly results in player retention issues. Krafton has been a good lesson in corporate hubris ever since they struck some gold with PUBG. The company leadership has no real vision and tried a shotgun approach back in 2019 (multiple versions of the TERA IP on mobile as one example, a social media avatar mobile game that lasted only a few months, and an overpriced at $30 turn based RPG that quickly became abandonware after just 6 months). The alarm bells raised by this audit also puts all of Gameforge’s recent TERA Thaler bonuses into perspective. Additionally, with the entire Russia issue with Ukraine, Gameforge will feel an additional squeeze with revenues from the RU region as players there feel the financial squeeze in other areas (for those in this demographic who have not yet fled the country).
Safe to say, Krafton’s future financial disclosures as well as more scrutiny on this particular issue (material information now that it has been reported publicly on Inven), will provide for some interesting “popcorn” eating moments. Elyon is seeing a fairly large update for NA/EU which again, means that there was little design and development focus on TERA PC and Console (and I already mentioned prior that the lack of any meaningful content updates by the middle of 2022, would translate into longer term revenue and retention issues with TERA). TERA’s 10th anniversary in the west is coming up in May (NA launched on May 1, 2012 while EU launched on May 3, 2012); I believe that milestone may lack any oomph to it (but that’s another post for when those dates arrive).
Additionally, the Inven report noted that Bluehole Studios is working on a console shooter project codenamed BLACKBIRD along with two mobile games, Project FF (a character collection RPG which sounds like their half-baked take on Genshin Impact that is mobile only) and Project Whale (it just states this is a casual mobile game based on Unity). To put it more simply, the subsidiary (along with the lack of corporate engagement and oversight), is ignoring one of their core assets (the TERA IP) while burning through cash developing these new titles that are more than likely to end up failing like some of the past shotgun initiatives.
Corporates (Krafton HQ) solution to that seems to be to just raise more capital via the stock market (forgetting the fact that shareholders will be looking for that ROI). My personal take is that Krafton CEO Chang-Han Kim (who again got there via being the co-founder of Ginno Games which was acquired by Bluehole for Devilian Online in 2014; was renamed Bluehole Ginno and later became PUBG Corp) is in over his head (brilliant computer programmers aren’t necessarily the best people to lead a large publicly traded company).
