King's IPO Begins Its Mega-Hit Dependency Saga

Photograph by Andrew Harrer/Bloomberg

There’s been healthy skepticism regarding the future of King Digital Entertainment, maker of the mega-hit game Candy Crush Saga, in the months leading up to its initial public offering. And even though the company decided to offer shares relatively cheaply when trading started Wednesday, investors seem to think they’re not cheap enough. The company’s shares dropped more than 10 percent this morning.

The doubters are worried that King is a one-hit wonder. Candy Crush has been fantastically successful, of course, but tastes in mobile games are fickle. The company believes it can come up with another hit, describing in a Securities and Exchange Commission filing its belief in a “repeatable and scalable game development process that is unparalleled in our industry.”

The worrisome thing for King is that, by the standards of mobile gaming, the company already has more than one hit. King currently claims three of the top-grossing games in Apple’s U.S. app store.

“For King to hold several positions in the top 10 on mobile is a sign of maturity as a game publisher,” says Joost van Dreunen, chief executive of games industry research firm SuperData. But when it comes to apps, pretty much everything that isn’t No. 1 is a rounding error. The top 10 games make about 80 percent of the revenue, according to van Dreunen.

In the fourth quarter of last year, King said Candy Crush accounted for 78 percent of its gross bookings, the total amount paid by its users for virtual items and access to skill tournaments. In mobile, where King must succeed, the game accounted for 86 percent. This was despite the fact that another King game, Pet Rescue Saga, was the 10th-highest-grossing game in the U.S. at the time.

Assuming all of the rest of King’s revenue came from Pet Rescue, this means Candy Crush was worth well over six times the 10th-most successful gaming app. That’s an even bigger difference than in movies, another hit-driven business. The top-grossing movie of the fourth quarter last year, Hunger Games: Catching Fire, made about four times what the 10th-top-grossing flick, Captain Phillips, pulled in.

King can ride Candy Crush for a while yet: It made $567 million in profit last year—72 times what it made the year before, when Candy Crush was only the 10th-highest-grossing game in Apple’s marketplace. Nothing stays on top for long, though, and King saw the number of people who paid to play its games drop at the end of last year. The company said this reflected the “seasoning of our older games in certain markets among our more occasional customers. Simon Khalaf, the chief executive of app analytics firm Flurry, has found that apps rarely stay at their peak for more than a year, and games decline quicker than popular apps in other categories. “Gravity will eventually settle in and despite a massive marketing budget, even the very popular games eventually come down to 50 percent of their peak within 12 to 18 months,” he says.

Van Dreunen says King’s main challenge is to reconcile the unpredictable process of hit-making with the grinding demands of Wall Street. He predicts King will begin acquiring other game companies and use its expertise to increase the chances their games will rise to the top. This is a fraught path, as Zynga demonstrated by overpaying for developers who had already made the one hit they had in them. To please investors once the inevitable Candy Crush fade arrives, whatever King comes up with is going to have to be more than a mere hit.

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