One-hit wonder?

Photographer: Vesa MoilanenOILANEN/AFP/Getty Images

Gaming Takeovers Chase Coders, Not Goblins

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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The Chinese internet company Tencent is reportedly close to acquiring the Finnish mobile game developer Supercell at a valuation of $9 billion. The possible deal is evidence that the mobile game business is coming of age. But the companies operating in it are not for the average investor, and trying to take them public makes little sense.

The country may have been better known for the handset provider Nokia, but Supercell is a showcase for Finnish tech prowess. The company once borrowed 400,000 euros ($450,000) from the Finnish government so it could get going; last year it made a profit of 848 million euros on 2.1 billion euros in revenue. Most of that comes from goblin-filled Clash of Clans, one of the most commercially successful mobile apps in history. It's a game in which groups of players can create wealth for their "clans" and face off against each other in wars. Supercell still only has 180 employees, and boasts of its "bureaucracy-free environment"; the company is as developer-centric as it gets.

The firm is now at a stage all mobile game stars go through, and relish: Its hit product can still grow. In 2015, Clash of Clans launched in China, which partly explains the jump in revenue from 1.5 billion euros in 2014. Other game companies have seen such booms, too: Rovio with Angry Birds between 2009 and 2013, and King Digital Entertainment with Candy Crush in 2012 to 2014. It proved impossible for them to create new games to rival these megahits, although they've released mildly successful follow-up products. In the game app world, though, mild doesn't really cut it: a quarter of the segment's $25 billion in revenue accrued to the 10 top-grossing games last year. 

The game companies are like some rock bands: There's exhilaration, fame and fortune on the way up, but disappointment is quick to follow. Rovio went through a couple of years of layoffs, abrupt management changes and gloomy soul-searching before a successful Angry Birds movie release last month gave it new hope. King went public in the bubbly growth phase, then disappointed investors when the growth reversed. In February, King was acquired by Activision Blizzard, the makers of World of Warcraft and Call of Duty, for less than the IPO price.

Still, Activision paid $5.9 billion for King -- perhaps because it wasn't paying for the promise of new hit games, but because it was a latecomer to the mobile game industry and wanted one of the best teams around to help "mobilize" its own properties and establishing a strong presence. From that point of view, the Tencent -- Supercell deal makes sense, too: The Chinese company (which, incidentally, owns a stake in Activision) is one of the biggest makers of PC and online games in the world, and Supercell's expertise in mobile is complementary to its strength. 

SoftBank, the Japanese owner of the U.S. mobile operator Sprint, which owns 73 percent of Supercell, needs the cash to reduce its debts. But it's also making a good deal of money: It first bought into the Finnish company at a $3 billion valuation in 2013, and it's selling out in Supercell's exuberant phase (it might not be worth as much next year). Tencent is willing to pay because it needs to develop its game business on mobile platforms and another opportunity to acquire a stellar team may not present itself soon. 

In other words, big videogame companies want the mobile one- or two-hit wonders for the talent and the expertise more than for their unpredictable cash flow or the promise of future hits. Portfolio investors lack such valid reasons to like game developers: They are in for some pain when the big hit game loses momentum, and an acquisition is not necessarily in the cards. King's initial public offering -- like that of social gaming firm Zynga before it -- was probably a mistake. Realizing that, the Supercell founders have set a condition for any and all investors: The company is not to be taken public.

After all, rock bands don't sell shares to the public. It makes no sense from an investment perspective. The same musicians can produce something the public likes one year and something that leaves it indifferent the next. It's safer for a company like Sony or Universal Music Group to work with numerous artists to lower the risk. 

That doesn't mean, however, that investors shouldn't have an opportunity to profit from potential hits such as Clash of Clans or Candy Crush before they become huge. There are schemes for that -- even a crowdfunding platform dedicated to games, where one can invest in tracking shares tied to receipts from the specific game. The scheme is risky and there are no guarantees that the investments will pay off or even that the projects will ever be finished. Yet it's an honest way to present the risk of what is essentially a creative endeavor before it can become a business enterprise. Games are like hit songs, movies or Broadway musicals; their backers shouldn't feel as though they're investing in companies. Rather, they are betting on the success of a work of art. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Therese Raphael at traphael4@bloomberg.net