PUBG sues Garena

  • PUBG’s publisher Krafton has filed a lawsuit against Garena, Apple and Google; coincides with the launch of Free Fire Max. 
  • Tencent being a large shareholder of both Sea Ltd and Krafton should provide some comfort
  • Recent correction in Sea Ltd is alongside a big correction in high-growth e-commerce companies globally. Maintain BUY with TP of US$278. 

PUBG’s publisher Krafton has filed a lawsuit against Garena, Apple and Google. Krafton claims that that “Free Fire and Free Fire Max extensively copy numerous aspects of Battlegrounds, both individually and in combination, including Battlegrounds’ copyrighted unique game opening “air drop” feature, the game structure and play, the combination and selection of weapons, armor, and unique objects, locations, and the overall choice of color schemes, materials, and textures”. Besides asking Garena to “immediately stop its exploitation of Free Fire and Free Fire Max,” Krafton requested Apple and Google to remove the games from their storefronts. However, none of the parties have complied with Krafton’s request, resulting in this lawsuit. It also asked YouTube to remove videos featuring Garena’s games.

Lawsuit timing co-incides with the launch of Free Fire Max.  It has been 4-years that Free Fire has been operating successfully and it comprises for bulk of the US$2bn profit after tax expected from Garena in 2021F. However, recently launched Free Fire Max targets high-end smartphone users also targeted by PUBG Mobile and PUBG New State, which might be a factor in objections being raised by Krafton in our view. One can’t deny if it is an attempt to halt popularity of Free Fire Max. PUBG is considered the original battleroyale game which went on to inspire heavyweights like Fortnite, Apex Legends, who put their own spin of the genre but none has proven to have infringed copyrights of PUBG. 

Krafton had also sued Epic Games of Fortnite in May 2018 but dropped the case in June 2018 without any explanation. Krafton  had claimed then that that EPIC had copied ideas, notably its “Battle Royale” structure in which 100 players descend on an island and then fight until one remains.  As we understand, PUBG had filed the lawsuit when Fortnite was gaining popularity posing a threat to PUBG. 

RECENT COPYRIGHT BATTLES IN GAMING

DATECOMPLAINANTDEFENDANTCASEFINAL VERDICT
2021Clayton HaugenActivision BlizzardThe publishers of the video game franchise “Call of Duty,” copied “Mara” character which was a copyrighted character of Clayton created in 2017Ongoing
2019Blizzard and NetEase4399 NetworkChinese publisher 4399 Network’s mobile game Clash of Fighters and online title Gunplay Battlefront were both found to have infringed on copyrights for Blizzard’s team-based shooter OverwatchBoth Blizzard and NetEase won US$579,000 (RMB4m)
2014King Digital EntertainmentRunsome AppsRunsome Apps opposed by saying that King purchased the rights to a game called Candy Crusher, which allowed it to challenge his own trademark containing Candy. However, both the companies after a year’s worth of battle, amicably resolved the disputeAmicable resolution

Tencent being a large shareholder of both Sea Ltd and Krafton should provide some comfort. Tencent owns 19% stake in Sea Ltd and 14% stake in Krafton. We see a high possibility of a mutually acceptable outcome in this case as Tencent is not only a big shareholder of both companies but also a big developer and publisher of games.  

Recent correction in Sea Ltd is alongside a big correction in high-growth e-commerce companies globally. Stocks of high growth companies like MercadoLibre and Coupang have also corrected sharply as investos shift to a stricter valuation metrics based on revenue multiple instead of gross merchandise value (GMV) multiple earlier. Sea Ltd is trading at 12-month EV to revenue of 7.3x near  its historical average of 7.4x and much lower than its peak of 16x in 2021. Maintain BUY on Sea Ltd with unchanged TP of US$278