Can Krafton’s KRW 900 Billion Investment in Unknown Worlds Pay Off with Subnautica2 ?

[한국금융신문 김재훈 기자] Unknown Worlds Entertainment (Unknown Worlds), a U.S. development subsidiary of Krafton (CEO Kim Chang-han), has begun a full-fledged launch schedule of its new product, "Subnautica 2." Unknown Worlds was highly anticipated as a company that Krafton spent about KRW 900 billion to acquire for the post-Battleground, but left a regret such as failure of new works. As it brought out its representative IP (intellectual property) to restore its pride, attention is being paid to whether it can prove Krafton's investment perspective.

On the 29th, Krafton announced that Unknown Worlds revealed the first teaser trailer for Subnautica 2 at Microsoft’s recent "X-box Partner Preview" event, marking the beginning of its official release schedule. Unknown Worlds plans to release Subnautica 2 in early access format for multiple PC and console platforms in 2025.

Subnautica 2 is the official sequel to the studio’s globally successful title, Subnautica. Set in an alien underwater world filled with mysterious marine life, diverse ecosystems, and hidden secrets, Subnautica 2 is a survival adventure game that allows players to craft survival tools, build underwater bases, and explore the depths of an alien ocean, creating their own survival stories along the way.
The success of Subnautica 2 is a point of interest for both Unknown Worlds and Krafton. In December 2021, Krafton acquired Unknown Worlds to strengthen its console development capabilities and secure Western-focused IPs. This initial investment alone was approximately KRW 650.8 billion. With an additional KRW 204.4 billion to be paid out by 2026 under an “earn-out” clause based on post-acquisition performance, Krafton’s total investment could reach approximately KRW 855.2 billion.

This is the largest M&A case since Krafton succeeded in listing in August 2021. Unknown Worlds, founded in 2001, is known for hit titles such as Subnautica, Half-Life Mod, and Natural Selection. At the time of the Unknown World acquisition, Krafton has been criticised for its over-reliance on Battlegrounds, and with the discontinuation of Battlegrounds India, its main cash cow, the company is in need of a new growth engine.

However, Krafton’s ambitious 2022 release, Moonbreaker, fell short of expectations. Based on a science fiction universe created by bestselling author Brandon Sanderson, Moonbreaker is a turn-based strategy game that was poorly received by players due to issues with quality and polish.

Unknown Worlds’ struggles also impacted Krafton’s financials. According to Krafton’s business report, Unknown Worlds recorded impairment losses of KRW 244.5 billion as of the end of 2023, marking an increase of KRW 110.6 billion from the previous year’s impairment loss of KRW 133.9 billion. An impairment loss is an adjustment to the carrying value of an acquired entity's assets in anticipation of a decline in their value at the end of the year. It is the book value of the acquiree minus the recoverable amount, which is deducted from the assets of the acquiring company and is not recovered. This led Krafton to record a net loss of approximately KRW 13 billion in Q4 2023, despite reporting its highest revenue to date.

Krafton has no choice but to look forward to it once again as Subnautica 2 is the masterpiece of Unknown Worlds, Subnautica IP. The original Subnautica is a major box office hit, with global sales of 5.3 million copies. Krafton is also emphasizing Subnautica 2 as its core pipeline title along with 'inZOI'and 'The Bird that Drinks Tears'.
However, some in the industry predict that it is unclear whether Subnautica 2 will perform as expected. This is not only because there are more competitors in the survival adventure genre, but also because it's not as popular as Battlegrounds.

In addition, there has also been some back-and-forth between Krafton and Unknown Worlds over the release of Subnautica 2, which has raised concerns about the quality of Moonbreaker-like finish. Recently, Unknown Worlds reportedly has Charlie Cleveland, the founder of the company and father of Subnautica, stepping down as CEO and focusing on developing new works including Subnautica 2.

‘Subnautica 2 will feature the survival and exploration elements that players loved in its predecessors, Subnautica and Subnautica: Below Zero, as well as a colourful undersea ecosystem to provide a deeper gaming experience,’ said a representative from Krafton. ’We will continue to do our best to make it a success by receiving various feedback from players to improve the gameplay.’

김재훈 한국금융신문 기자 rlqm93@fntimes.com