Are Mobile Games One-Hit Wonders?

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Yesterday Finnish mobile game maker Rovio, known for its immense popular Angry Birds-game, announced it would send home one-third of its staff. The company commented that it has to focus more on generating profit instead of pursuing many activities. Mobile gamers who are familiar with Rovio may agree that the company indeed launched a large number of similar games in the recent years. However, according to WSJ company profit is steadily declining since 2012. Competition is also getting stronger, especially from makers like Supercell. In addition, according to figures of Flurry Analytics, time spent on mobile gaming decreased 35% in Q2-2015 compared to the same period last year. How solid is the future for mobile games?

Hunting for whales

A large chunk of revenues for the mobile game makers comes from users who are reserving an amount of monthly expenses to be able to play without restraints. A lot of games are free to play, but ask a small payment to advance in the game, for instance to buy coins etc. Some players can resist the urge and want to ‘build’, but others are more impatient. For example in Supercell’s Hayday, a farming simulator, it takes significant time to move up in levels. Spending money for diamonds or coins may reduce time required to build. As a result of this business model, Supercell reported revenues of USD 1.7 billion in 2014. For the whole gaming sector, in-game purchases are expected to increase to USD 23.4bn, according to SuperData Research Inc. in the WSJ. Entertainment Software Association (ESA) estimates that 960 million gamers worldwide are playing on a mobile device. This paints a very bright picture for the mobile gaming industry. It seems that Rovio is simply disconnected with the trend.

The Creative will be rewarded

As with most products, producers who are able to present fresh products and / or continue to improve their games which please customers, will be ahead of competitors. Furthermore, companies who stick to their core business and are relentless in focusing on successful products may continue to show strong results. For example Supercell pulls the plug for products which are less popular with gamers in an early stage, and instead continues to improve its hits “Clash of the Clans” and Hayday. This might be the problem for Rovio, it lacks a focus and pursues to many side activities, such as movies. Are Angry Bird gamers really eager for a movie of the feathered heroes? In 2016, this movie will premiere, but one could doubt its success. Well, time will tell…

Playing the game

Rovio and Supercell are certainly interesting companies within a noteworthy sector, but are not listed on a stock exchange. However, there are a number listed on NASDAQ: pure mobile players Gluu mobile (GLUU) and Zynga (ZNGA) and the general computer gaming companies Electronic Arts (EA), Take Two Entertainment (TTWO) and Activision Blizzard (ATVI). The latter 3 companies have a broad portfolio of games which are also available offline, so are less impacted by declining interest for one of its products. Also GLUU and ZNGA have a broad portfolio, but are heavily depended on the success of one or a few games.

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Investors should be careful with shares of these companies and should follow the ‘buzz’ around their games closely to see whether the games are still popular. In addition, the quality of the products and new inventions should also be monitored. The best way is to do ‘mystery gaming’: are the games fun to play? Are there smart ways to earn money from you, the player, or is it just a payment to prevent annoying advertisements? When the games are no fun, neither will be the investment.

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