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In the spring of 2001, in the depths of the dot-com slump, the Korean Internet portal and search engine Naver.com was on the ropes. The site, once a hot prospect that had attracted $30 million in funding, had seen ad sales plunge and was down to less than $5,000 in the bank. Managers at Naver's parent, NHN Corp., knew the game would be over if they couldn't come up with a new source of revenue. Their salvation: selling avatars, or digital characters that game players and chat room denizens use to represent themselves online. "We had doubts about the plan," says Kim Hee Suk, NHN's chief strategist. "But it was like a miracle. We saw explosive sales growth."
Explosive it was. Last year, NHN earned $25 million on sales of $63 million, compared with $7.4 million in revenues in 2000, before the company launched its avatar strategy. And it's still growing: This year, NHN expects profits of $51 million on sales of $144 million -- nearly half of which comes from avatars and other services for gamers. And since NHN's initial public offering last October, investors have been able to get in on the action. On the first day of trading, its share price doubled, to $37. NHN now trades at about $150 and boasts a market cap of $1.1 billion.
NHN is just one of more than a dozen Korean Internet upstarts that have rebounded from the crash of 2000. Like the U.S., Korea saw its Net stocks head for the stars and then plummet back to earth. The Kosdaq -- Korea's tech-heavy answer to NASDAQ -- fell by more than 80% in 2000, and hundreds of Internet companies went belly up that year. But since this spring, Kosdaq is up by 43%, and its index of 11 Internet stocks has nearly tripled.
Does this mean there's another Internet bubble ready to pop in Korea? Probably not. Three-quarters of South Korea's 15.2 million households enjoy speedy, always-on Internet connections, and a core group of Net survivors have figured out how to profit from that. E-tailers and purveyors of online games and auctions are prospering, and the three top portals and search engines each have more than 20 million visitors a month. "With the Internet already an important part of life here, smart Net companies are steaming full-speed ahead," says Park Jong Min, e-business analyst at Samsung Securities Co.
The smartest have found a way to tap into the millions of cyber-communities Koreans have created in recent years. Neowiz Corp. offers a chat site that has some 450,000 visitors discussing sports, travel, sex, and much more at any given time. At Daum Communications Corp., Korea's largest portal, users have formed more than 3 million groups trading information and opinions on everything from unification with North Korea to the best recipe for kimchi.
The boom in broadband connections has created entirely new markets. Koreans are expected to spend some $374 million this year for online games, up from $317 million last year, according to the Korea Information Strategy Development Institute. Much of that money will come from fees paid by players of action-packed role-playing games. But some companies provide access to basic online games for free and make their money elsewhere. Neowiz, for instance, sells thousands of different avatars -- everything from fluffy puppies to the abominable snowman -- for 10 cents to $10 apiece. The company then charges extra if users want to add accessories such as earrings, or to give their avatar a car or horse. Neowiz also collects fees from gamers who want to undo moves or for blocking specific rivals from playing against them. Avatars are expected to generate about $30 million in revenues this year, or 40% of Neowiz' total sales, up from $20 million in 2002. Daewoo Securities Co. puts Korea's digital-character market at $114 million this year compared with $68 million last year.
The next challenge for these Korean online leaders is expanding overseas. NCsoft Corp., the world's largest online game company, made about 19% of its $63 million in sales outside Korea in the first half of 2003, up from 13% in the year-earlier period. The immediate target for most other companies is Japan, where broadband is growing rapidly. NHN says it will likely break even with its games in Japan in the second half, while Neowiz is preparing to start selling avatars there next year. Next up: the U.S., where NCsoft hopes to introduce three new games by next spring. If these companies can repeat their home-field success, they may well emerge as new champions of Korea Inc.'s revival. By Moon Ihlwan in Seoul