Garena’s gaming revival could prove a false dawn for Sea

SEA’S latest results paint a picture of great health, with all its business units – from e-commerce to gaming to digital financial services – firing on all cylinders and the group reporting its first profitable year.

But a closer look at the numbers reveals that its digital gaming segment, Garena, has been sputtering for some time.

Digital entertainment revenue in the fourth quarter of 2023 fell 46.2 per cent to US$510.7 million, from US$948.8 million in Q4 2022. The full-year figures reflect a similar slide, with 2023 revenue down 44 per cent to US$2.2 billion, from US$3.9 billion in 2022.

Yet, in its earnings call on Mar 4, Sea forecast double-digit growth in the coming year for Garena’s one-hit wonder – Free Fire.

For a gaming business with a seven-year-old title as its single blockbuster, Sea’s guidance for Garena was a puzzling one.

The slide in Sea’s gaming business started in 2022, when Garena reported a 10.3 per cent fall in revenue to US$3.9 billion, from US$4.3 billion in 2021. On a quarterly basis, Garena has reported growth due to seasonality factors, but on the whole, the slide has not abated.

The unit was the source of Sea’s initial success, and kept the group standing as Shopee burnt money to get on its feet. But with e-commerce and digital financial services now getting up to speed, there is more attention being paid to these units than to Garena.

One key issue Sea faces with the unit is replicating the success of its biggest hit, the free-to-play mobile game Free Fire. Since it was released in December 2017, Garena has yet to make another game that has matched its popularity.

Garena’s business model comprises mainly two components. One is the publishing of games by other game studios, where it gets a cut for every game sold. The second, more lucrative component is dealing with in-game transactions – such as purchases made on Free Fire – which earn a higher margin.

The fortunes of Garena have been closely tied to Free Fire, and took a big hit in February 2022 when it was banned by the Indian government. Lightweight enough to be played on most basic smartphones, the game targets emerging markets, of which India is one of the largest.

There have been attempts to diversify. Garena acquired Canadian game studio Phoenix Labs in January 2020. The studio created free-to-play game Dauntless, which secured Garena millions of players – a key reason for the acquisition. The rationale then was to adapt the game, which was developed for consoles and PCs, to smartphones.

Three years later, Phoenix Labs left Garena via an investor-funded management buyout, leaving Garena back to square one with Free Fire.

Old games often do not experience a resurgence in interest, but retain a core group of die-hard fans in numbers that are fractions of when the game was most popular.

Based on Sea’s Q4 update, Free Fire has achieved what almost no modern video game has: It reversed its slide in users to peak at more than 100 million daily active users in February 2024.

This development did not go unnoticed. Analysts asked for the reasoning behind the optimism. Sea’s response was to point to past trends that it had observed.

It appears that even Sea itself is unsure why the game is receiving such renewed interest. Garena has yet to relaunch Free Fire in India, its biggest market, and, when asked during the earnings call, gave no indication of any plans to do so.

Without a clear reason for Free Fire’s renaissance, Garena would be hard-pressed to keep its popularity up among gamers. A potentially wrong move could lead to the title’s fall, and recovery would be uncertain.

Asked if Garena is working on more games to be more than a one-hit-wonder studio, Sea representatives were quick to say that Garena has made other titles. But the company acknowledges that the popularity and size of Free Fire has made its other works less visible.

Therein lies Sea’s dilemma with Garena. The gaming unit, unlike e-commerce and digital financial services, is heavily reliant on churning out hits to keep the wheels turning. Free Fire’s resurgence has only bought time for Garena – it still needs to solve its fundamental issue of making another wildly successful game.

With its focus trained on its e-commerce and digital financial services divisions, Sea might find Garena more of a distraction in its growth story.