Nintendo is reaping the benefits of Pokémon Go, a surprise hit that sent the company’s stock into the stratosphere. But as fans of FarmVille and Candy Crush Saga know, Pokémon Go is not the first mobile game to become a global phenomenon. As the companies behind those sensations found out the hard way, one hit can suspend gravity on Wall Street for only so long.
In 2009, Zynga found success with FarmVille, prompting the company to go public on the strength of its 2010 results. But Zynga, which has struggled to maintain revenue growth, has been unprofitable ever since.
King Digital had a breakout hit in 2011 with Candy Crush Saga. Since then, its revenue has fallen in half, and other titles have failed to make up the difference. Profit for the company, which was acquired early this year by Activision Blizzard, has so far held up better than Zynga’s.
But Nintendo can hold out hope, thanks to the example set by Clash of Clans. This 2012 game transformed the fortunes of its owner, Supercell, which was snapped up in June by Chinese internet giant Tencent for $8.6 billion. That Supercell enjoyed double the valuation of King Digital may be a reflection of its revenue growth, which was faster than Zynga’s yet slower than King’s. But unlike King, Supercell’s rise continued for two years after its breakout moment.
|sources: Company Reporting, jackdaw research Analysis|
Is it possible that Supercell will face the same problems as its predecessors? Revenue growth slowed last year but was far from flat. Further, Supercell has avoided a mistake made by the other two: Zynga and King Digital both rapidly scaled up their headcounts as revenue exploded. Zynga had 2,000 employees at the time of its IPO and continued to grow its workforce for some time after. Even now, it employs more than 1,500 people (following several rounds of layoffs). King Digital went from 144 employees at the end of 2011 to 1,200 at the end of 2014.
Supercell had just 180 employees at the end of 2015, up from the 148 it employed a year earlier. The company generated almost $13 million per employee in 2015, in contrast to less than $500,000 per employee at Zynga last year. Even if revenue falls off in the next two years, Supercell will be much better insulated, at least from a cost perspective.
The winning business model is clear: Build an addictive app that’s free to download, and convince roughly one in 100 users every month to pay to unlock features. But what’s also clear is that lightning in the form of a true hit rarely strikes the same company twice. So a business like Supercell that remains lean even after a big success is certainly on the right path.
Jan Dawson is founder and chief analyst at Jackdaw Research, an advisory firm for the consumer technology market.