In February 2020, the developers of Free Fire, the world’s most popular mobile video game, launched a new feature. Free Fire is a high-octane battle royale in which players’ avatars dash around a virtual world killing each other with elaborate weapons like the Vector Akimbo (a submachine gun) and the Katana (a Samurai sword). But the new feature offered something different. Called the Training Ground, it’s a zone where you can practice your skills away from the adrenaline of competition or simply hang out with friends. You can ride a Ferris wheel or zip around on skateboards. You can set off fireworks and go to a private movie theater. The Training Ground couldn’t have come at a better time: Just as the real world was entering pandemic-era lockdowns, this virtual world was opening up, offering players new ways to socialize via avatar. The more time players spend in the game, the more likely they are to spend money, tricking out their characters with in-game purchases like costumes, guns, and pets. In 2020, Free Fire helped generate $3.2 billion in gaming revenue for its maker, Sea Limited.
Sea is a Singapore-based tech company that went public on the New York Stock Exchange in 2017. In addition to gaming, it operates other business lines, including Shopee, an Amazon-like e-commerce site that sells a variety of goods, from electronics and home appliances to food and beauty products, and SeaMoney, a digital financial services arm. Sea’s diverse portfolio puts it squarely in competition with Grab and GoTo—two ride-hailing, food-delivery, and fintech giants—in the intensifying battle of Southeast Asia’s super-apps. Each company is bidding to become the region’s most popular one-stop digital shop for an array of services. Sea’s gaming division, called Garena, may seem like something of a sideshow in this contest. But during the pandemic, the profits that division generates—more than $2 billion in 2020—are giving Sea the financial firepower to outgun its rivals.
Sea’s pandemic-era edge
Consider how Sea’s gaming prowess has bolstered its e-commerce business. With many white-collar workers logging in from home, Shopee was always poised to do well during the COVID crisis. But Sea lavished investment on the platform to gobble up market share, luring customers with tasty offers of free shipping and cash back, and attracting new retailers by reducing its commission on sales. Shopee lost $1.3 billion in doing so, but orders were up by 130% year on year in 2020 to 2.8 billion, and revenue rose by 160% to $2.2 billion. For the first time, Shopee overtook its main regional competitor Lazada, owned by China’s Alibaba Group, as the most popular e-commerce site in Southeast Asia.
The pattern repeated itself in digital payments. In 2019, Ovo, an e-wallet company that partners with Grab, and GoPay, GoTo’s fintech platform, were the clear leaders in Indonesia, the region’s largest market. Yet 12 months later, Sea’s ShopeePay had more users than either of them, according to a study by Ipsos. Shopee’s large customer base in Indonesia boosted ShopeePay’s user numbers—the in-house wallet is the slickest payment option on the e-commerce site—but Sea also offered ShopeePay customers cash back on purchases. They can also use ShopeePay on Google Play and at big chains like Wendy’s and Krispy Kreme.
With Shopee, Sea is also moving into food delivery, a sector it until recently has ignored. The food delivery service it runs in Vietnam, called Now, overtook Grab in 2020. Orange-clad riders from ShopeeFood are catching up with the green-uniformed fleets of Grab and GoTo on the streets of Jakarta, where the company is offering 60% discounts. Although it’s early days for Shopee’s food delivery business, the parent company’s scale and wealth give it a huge advantage. As Yanjun Wang, Sea’s chief corporate officer, told investors on an earnings call earlier this year, “We do become the market leader naturally.”
Investors are taking note. Before COVID-19, Sea’s share price was hovering at $45. It now trades at over $280—a gain that outperforms that of Amazon and Tencent over the same period and makes Sea, now worth around $147 billion, the most valuable company in Southeast Asia.
In 2020, Grab and GoTo, both of which are unprofitable, had to raise money through round after round of appeals to private investors as they suffered a downturn in their core ride-hailing business. Sea, as a group, has yet to turn a profit either; net losses in 2020 totaled roughly $1.6 billion. But Garena’s divisional profits are funding exceptional growth for the company overall, and investors seem satisfied with that strategy for now.
Last May, Sea raised over $1 billion from a sale of convertible notes, followed by another $3 billion through a secondary share offering in December. The sales added to a cash pile that amounted to $5.7 billion by the end of the first quarter of 2021.
Most analysts agree that Sea’s extraordinary rise accelerated Grab’s decision to go public with a SPAC merger, announced earlier this year. The same goes for GoTo, the result of a May 2021 merger between the Indonesian ride-hailing business Gojek and Tokopedia, an Indonesian e-commerce company. Executives of the combined entity say they plan to take it public in a joint listing in Jakarta and on the Nasdaq that could come as early as this year.
Grab’s SPAC merger, which is expected to close by year-end, presumes an equity value of $39.6 billion, up from a reported valuation of $14 billion following the venture’s most recent funding round in October 2019. GoTo’s investors assumed the two companies had a combined valuation of $18 billion when they merged; executives of the Jakarta-based venture say they will seek a valuation of $35 billion to $40 billion when the company goes public. The question is whether Grab or GoTo can hold back Sea’s great wave.
Sea’s gaming origins
Forrest Li, Sea’s 43-year-old founder and CEO, arrived in Singapore in 2006. Born in the Chinese city of Tianjin, he attended Shanghai Jiao Tong University, where, according to Bloomberg, his inability to understand the local dialect drove him to spend his nights playing video games in an Internet café. After graduation, he worked in the China divisions of Motorola Solutions and Corning, before heading to the U.S. for an MBA at Stanford. Among his classmates was Liqian Ma, the Singaporean woman he would later marry. At her graduation ceremony in 2005, Li heard Steve Jobs’ famous commencement address, in which the Apple cofounder exhorted students to “stay hungry, stay foolish.” Li has said Jobs’ speech encouraged him “to jump out of the corporate world and turn myself into an entrepreneur.”
Li’s first attempt failed. Shortly after he and Ma settled in Singapore in 2006, he founded GG Game, which focused on developing single-player video game titles at a time when multiplayer games were booming in popularity. It eventually shut down. In 2009, Li went in a different direction.
As Li got to know Southeast Asia’s gaming market, he realized it had a problem. Gaming companies from the U.S. and China hadn’t invested in server infrastructure in the region, which meant their games were often slow and cumbersome to play. What’s more, they were designed for the high-powered smartphones, consoles, and PCs that were ubiquitous in the rich world but unaffordable in places like Indonesia and the Philippines, where gamers used cheap devices with lower bandwidth.
His solution was Garena, which he set up in a Singapore shophouse with seed money from Toivo Annus, the late cofounder of Skype. The company launched local-language versions of international hits like League of Legends and FIFA, with a technical infrastructure that made the games as fast and responsive on a mid-range phone in Jakarta as they would be on a high-end device in Los Angeles. Li’s strategy won Garena tens of millions of users, as well as the attention of tech giants like Tencent, which became an early investor. Garena’s gamers formed a ready-made audience for Free Fire when Li unveiled it in 2017. It wasn’t original: Fortnite and PUBG had already popularized the battle royale genre. Li simply made it available to players in emerging economies who had been ignored by the industry.
Sea declined to make Li and other company executives available for interviews.
Li turned his attention to e-commerce in 2015, spotting a similar opportunity. The market for smartphones in Southeast Asia was growing fast: In 2013, 17% of Indonesians ages 18 to 35 had one. By 2018, that number was 66%, according to Pew. And yet the existing e-commerce sites were designed for computers, which few Southeast Asian consumers owned.
Li developed Shopee as a mobile-first platform, and he lured his gamers to it to reduce the cost of acquiring early customers. For example, Shopee is the cheapest place to buy Garena Shells, the digital currency players use for purchases in Garena’s games. Li also incorporated the same digital-payments system on both platforms to make purchases as frictionless as possible, and made sure they could buy the kinds of devices and merchandise they wanted.
Shopee is now repeating this trick as it expands into new markets outside Southeast Asia. In 2019, Sea launched the Shopee app in Brazil, where Free Fire was—and remains—the most popular mobile video game. Players who log in to Shopee can unlock codes to acquire in-game items. Shopee’s Brazilian operation remains small, yet according to analytics firm SimilarWeb, it’s currently the most downloaded shopping app in the country.
The crossover between Garena and Shopee is more than merely functional. Garena imbued Shopee with what Jason Davis, an associate professor at Singapore’s Insead business school, calls “the DNA of gaming.”
“Gaming companies move very fast, with a lot of innovation and very high demands from customers for the latest thing,” he says. “There’s something about the way Garena does innovation that works well in e-commerce too.”
Above all, Sea has mastered the attention economy, drawing ever more eyeballs with carefully targeted novelties. Free Fire’s developers, for example, tailored the game to particular countries by introducing new characters based on local heroes. Gamers in Indonesia can play as Joe Taslim, an Indonesian martial artist and actor. In India, gamers can appear in the guise of Hrithik Roshan, a Bollywood actor. In newer markets like Brazil and Egypt, Garena has hired superstar DJs to create exclusive songs accessible only through the game.
Likewise, Shopee has featured live quizzes hosted by local influencers. The prizes are Shopee Coins to be spent on the site. The platform tailors other initiatives to national tastes. The Indonesian version of Shopee, for example, features an area called Shopee Pilih Lokal, meaning “Shopee chooses local,” which is dedicated to products like batik and Muslim fashion. Shopee isn’t the only e-commerce business in Southeast Asia to adopt these tactics: Lazada last year launched LazLive, a section dedicated to livestreaming. But Justin Hall, partner at Singapore venture capital firm Golden Gate Ventures, says Shopee has done it in more markets and with more sophistication. Shopee’s success, he says, is due to “a better understanding of local preferences and shopping habits.” Although Li has enticed customers with discounts, he has also made sure to keep them engaged.
Can Sea stay hot?
After its performance in 2020, what can stand in Sea’s way? There are three potential obstacles. The first is the uncertain nature of the gaming business. So far Sea has relied heavily on Garena’s profits. But even the most popular games have a shelf life. The company expects Free Fire to grow for at least another two years. The question is, what comes next?
To increase its chances of developing a successor to Free Fire, Sea last year added to its in-house expertise by paying an undisclosed sum for Phoenix Labs, the Canadian company that makes the hit game Dauntless, in which players kill monsters that prey on survivors of a global cataclysm. Similar investments are likely to follow. Sea last year launched an investment arm called Sea Capital that will help the company acquire smaller outfits with profitable titles. Even if Sea fails to replicate Free Fire, Garena’s pockets are so deep that it could simply buy regional publishing rights to international hits to keep its coffers full.
The second question is about loyalty: Will customers stick with Shopee even if it reduces incentives in search of profitability? Recent research by consulting firm RedSeer suggests they may. According to Roshan Raj, RedSeer’s head of Southeast Asia, discounts were the top priority for e-commerce consumers surveyed in 2019. But by the fall of 2020, sentiment had changed. “It was less about pricing, more about safety and convenience,” Raj says.
That trend suggests Sea has room to reduce the offers it dangles in front of customers so long as it can keep them satisfied with a streamlined logistical operation. It is already doing so in Taiwan, where Shopee remains the clear market leader despite cutting its shipping subsidies and increasing the commission it charges retailers on each sale.
The third question, and the biggest, is whether SeaMoney, Sea’s financial services division, can conquer the competition. Sea’s battle with Grab and GoTo will be fiercest in fintech, not least because the potential rewards are so enormous. Almost 300 million people in Southeast Asia are unbanked. In Indonesia and the Philippines, the proportion is as high as 70%. In recent months, tech companies, including Sea, have engaged in a feeding frenzy, buying up Indonesian banks in hopes of turning them into digital firms.
Although millions of people across the region use Grab and GoTo for a plethora of services, from ordering taxis to booking massages, so far finance hasn’t been one of them. “People don’t think of Grab and GoTo as financial services companies,” says Davis, who has been studying Southeast Asia’s super-apps for years. “I don’t see any one company having a dominant brand yet. There’s an opportunity for SeaMoney to build one.”
Access to cash will be decisive, and here Sea has an early lead. “Their performance,” Davis says, “gives them a runway to push hard and get ahead.”
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