Candy Crush mania is about to hit Wall Street. King Digital Entertainment, the company behind the highly addictive mobile game, is prepping an IPO that could value the company between $8 and $10 billion. A regulatory filing with the Securities and Exchange Commission shows that Candy Crush Saga is indeed a phenomenon, and a highly lucrative one at that. But King will still face challenges convincing Wall Street that it can parlay a hit title into a thriving, sustainable business.
While traditional game publishers like Activision Blizzard and Electronic Arts have long been successful public companies, a new cadre of social and mobile gaming firms have yet to gain traction Wall Street. Social gaming company Zynga seemed to be riding high when it went public in 2011 with more than 227 million monthly active users playing games like Farmville and Words With Friends, but its IPO sank on fears that the company’s business model was too reliant on Facebook.
The company struggled on Wall Street throughout 2012 as its desktop-based games lost users and it began steadily racking up losses. Its stock bottomed out near $2 per share in November 2012 and is currently trading at about half its IPO price.
Like Zynga, King’s games originally became hits as Facebook apps, but they’ve reached a much broader audience on mobile devices. In the third quarter of 2012, before Candy Crush hit the iOS and Google Play stores, King had about 52 million monthly active users across its games and $41 million in total revenue. By the fourth quarter of 2013 those figures had exploded to 408 million monthly users generating $600 million in revenue (games like Candy Crush are free but force users to pay to eliminate time restrictions). Seventy-three percent of the company’s sales now come from mobile users.
King has achieved a user base that dwarfs Zynga’s. At the time Zynga went public in late 2011, its most popular game, CityVille, had 60 million monthly active users. Candy Crush has 93 million daily active users. The metabolism of the mobile market has increased rapidly since Zynga went public, with games now going viral as easily as YouTube videos. Flappy Bird, a painfully simple game which accrued millions of downloads in the span of a few weeks earlier this year, was basically the “Friday” of mobile games.
Unlike traditional gaming titans like Nintendo and EA, though, the giants of mobile have so far proven to be one-hit wonders. Flappy Bird was made by a single developer in Vietnam who has no other hit titles to his name. Zynga spent $180 million to acquire the company that made the popular mobile app Draw Something, then promptly shuttered the developer a year later after interest in the game waned. Even Rovio, the developer that kicked off the mobile gaming revolution with Angry Birds in 2009, has failed to develop a new IP that approaches the birds’ popularity. King, which generates 78 percent of its gross sales from Candy Crush Saga, will be particularly exposed to this phenomenon if users tire of its flagship game. Here’s a scary sign for King: a chart that shows the faddishness of games like Angry Birds and Farmville.
In its SEC filing, King says it has plans to diversity its portfolio. The company has actually developed 180 games in its 11-year history, but most are played only by diehard King fans (the company calls them “VIPs”) on the company’s website, royalgames.com. The most popular games among these players are eventually adapted into apps for Facebook and mobile devices.
But King won’t need the same number of hit games as Nintendo to be successful since it constantly updates its titles. Candy Crush gets new levels every two weeks and how has more than 500. This strategy has successfully converted 12 million of the company’s users into paying players who spend more than $17 per month on its games. King seems to recognize that no matter how many games it pumps out, the chances of another Candy Crush-level success are slim. It’s important then to keep the stream of content coming so gamers keep playing—and paying for—the flagship title. “Continuous innovation is important, but mobile’s different in that I don’t really think you need another hit,” says Julie Ask, a principal analyst at Forrester Research. “This is about earning a spot on someone’s phone and figuring out how to monetize those moments.”