Well this has caused quite a stir hasn’t it? Even the venerable FT has no less than four articles this morning covering the proposed IPO of King Digital, maker of Candy Crush Saga.
What is more, the message is loud and consistent. The whole world, it seems, is lining up to point out the ephemeral nature of success in mobile gaming and, in this light, the chokingly expensive price tag of $500m for a company that sells virtual lollipop hammers.
Slate was explicit. The King IPO is for “suckers”.
No doubt, the history lesson that is Zynga, developer of Farmville, is staring us in the face. And the signs of stagnation for King are already there. Revenue in the fourth quarter dipped from $621m to $602m.
Missing something?
But hold on just a moment.
If the whole world thinks King is over-valued then one of two things must be true. Either the IPO will not get away at these levels, or investors are missing something.
Since they have plumped for a listing in New York it could also be that they think American investors are stupid – an unhelpful and lazy subtext that, I can assure, is untrue in general.
Or if you are Slate not even a subtext.
If King are forced to adjust their valuation expectations, then we can all come back and go another round. A company that made $1.8bn of revenues and $714m of profits in 2013 has a price, even if you think they never sell another bombalicious fish again.
More interesting then, is to ask what we might all be missing.
Tough crowd
Casual gaming is hard.
If the games are easy to learn and difficult to master then so is the business. Nevertheless, there is a clear template for success.
It starts with the 10% rule. Understand that only 10% of downloads will lead to active users, and only 10% of active users will pay, and only 10% of payers will be heavy payers, although at this point you could have found a willingness of $50 per month or more.
As I said, it’s a tough model: 0.1% of downloads are going to lead to real monetisation.
Well-oiled machine
It is at this point that the real strength of the company becomes apparent, because the value is in the operations.
If the company understands the demographic of its individual users and the patterns that suggest willingness to pay, they can manage their customer lifecycles to maximise revenues.
To do so they will also need a seamless experience from download through to payment. It is the same model used in real money gaming (poker, online casino, sports betting) by the likes of 888 and bwin/Partygaming.
Attract, entertain, convince, monetise, retain – and repeat across as many games as possible.
Shifting the focus
In actual fact, it is likely that at some point the company that develops this platform most successfully will outsource the gaming development altogether.
Said a different way, they will provide the whole suite of operations as a service to independent developers hoping to chance their arm on a viral hit.
Look at flappy bird. It sounds like Dong Nguyen was crying out for such a platform.
Suddenly the conversation is about cloud, analytics, big data and the network effect.
I think this is perhaps what the far-sighted investors are considering in their valuations of Zynga and King and others, and at some point I suspect their will find their winner.
As with all such equations, the key factor will be how much they lost along the way.