Supercell: Zero to $3 Billion in Three Years; Enter the New Videogame Boss: SoftBank’s Son

Supercell: Zero to $3 Billion in Three Years

Deal Brings Second Free-to-Play Firm Into SoftBank’s Stable

JUHANA ROSSI, SVEN GRUNDBERG and JOHN D. STOLL

Updated Oct. 15, 2013 7:47 p.m. ET

HELSINKI— Petteri Koponen visited a dingy office on the outskirts of Finland’s capital in 2010 to meet with a group of developers launching a mobile-games company called Supercell. “Basically it was just one room with very small windows,” recalls Mr. Koponen, an early investor in startups. “At that point, they didn’t have chairs for everyone.” The company’s co-founder, Ilkka Paananen, was hunched over a cardboard box he used as a desk as he discussed the company’s plans.On Tuesday, Japan’s SoftBank Corp.9984.TO +2.07% agreed to buy 51% of the Finnish company, which has two games and fewer than 100 employees, for $1.5 billion. It is the largest ever investment for a mobile-app company, according to Rutberg & Co. Two of Supercell’s co-founders stand to make more than $200 million apiece.

The investment in Supercell is another cog in SoftBank Chief Executive Masayoshi Son‘s sprawling empire, which now includes Sprint Corp. S 0.00% Supercell will be paired with Gungho Online Entertainment to enlarge SoftBank’s stable of free-to-play mobile games.

But it’s risky: Zynga Inc., ZNGA -0.99% a U.S. social-games maker that went public in 2011, has a market capitalization of $2.8 billion, down about 60% from its debut. Its prospects faded after it failed to create a convincing successor to its “FarmVille” franchise.

Supercell is among an army of new firms to quickly generate significant value and disrupt mature industries by latching on to new distribution systems such as Apple Inc.AAPL +0.53% ‘s app store and FacebookInc. FB -0.02% ‘s network. But unlike many of its peers, including Sweden’s streaming music company Spotify AB, Supercell is profitable.

The company serves as a poster child for the burgeoning “freemium” game distribution strategy. It allows players to download and play titles for free in apps stores, but it requires them to pay for extras, such as special weapons or power boosters that speed up a game’s play.

About 10% of Supercell users purchase in-game extras, much higher than the industry norm. Last year, the company made a profit of more than 40 cents on every $1 of goods it sold, or $40.3 million on sales of $105 million.

Supercell’s success has come with only two games on the market: “Hay Day,” an app that simulates farming, and “Clash of Clans,” which simulates combat. Both debuted last year on Apple’s iOS and “Clash of Clans” was recently launched on Google Inc. GOOG +0.67%‘s Android in a move aimed at better targeting Asian markets.

Supercell has also capitalized on the emergence of tablets. Having created its games primarily for use on products like the iPad, Supercell has never experienced the pain of shifting from mature devices, such as consoles and computers. Initially, Supercell was interested in using Facebook as a distribution platform, but that strategy shifted as executives came to believe tablets will overtake computers and consoles as gamers’ primary tool within five years.

Mr. Paananen met with a co-founder at a café in London’s Paddington station last year and began discussing the decision to pull the plug on a Facebook game, “Gunshine,” and move away from dependence on using the social network as a distribution platform. That decision would also mean Supercell had to kill a game, codenamed “Magic,” that was under development for five months.

Supercell had little money to spend on marketing, so partnering with Apple, which gives high visibility to games it sees as having potential, was a critical ingredient. Developers cross their fingers hoping their apps will be featured prominently because Apple, which takes 30% of the revenue a developer gets in the app store, doesn’t get payment for the exposure.

Mr. Paananen has been fond of saying the company has been “incredibly lucky.” He also noted that “Clash of Clans” and “Hay Day” are social games, meaning players invite other players, creating a snowball effect. Users who compete with friends online tend to spend far more on in-game purchases than solo players.

Since the decision and the launch of “Hay Day” and “Clash of Clans,” Supercell has pivoted from a one-room start-up to one of the fastest growing companies in the gaming industry’s history, with sales rising from $203,000 in 2011 to $105 million the following year. The pace gathered steam this year as revenue hit $178 million in the first quarter alone.

The company’s value has also skyrocketed. In April, Supercell secured $130 million in funding from a trio of investors, including California-based Institutional Venture Partners. At the time, IVP said the company was worth $770 million. Six months later the value had ballooned 289% to $3 billion, or the largest valuation for a mobile app company, according to Rutberg.

In an interview Tuesday, Mr. Paananen, Supercell’s CEO, said the company’s success in Asia in recent months has greatly increased the company’s value. He said “Hay Day” and “Clash of Clans” are the only titles to be among the best-sellers in both the China and Japan Apple apps stores. He attributes some of the success to a cross-promotional deal signed with GungHo early in the summer.

“Japan has been a big graveyard for Western gaming companies,” he said. “I think what has happened since the previous investment round is our games have had staying power in the Western markets and now we’re proving it in a tougher place.”

Mr. Paamanen, now 35, co-founded a games company called Sumea in 2000 that relied on distributing games for wireless carriers, including Vodafone and AT&T. He grew up during an era he calls the “golden age” of gaming, spending hours with titles like “The Sims” and “Monkey Island.” He sold Sumea and later resigned to take time off in 2010, but his sabbatical didn’t last long.

Joined by Mikko Kodisoja, a longtime associate, the group registered a new company in May 2010 and set to work. The dream, hatched after Mr. Paamanen read about Netflix Inc.’s flat corporate culture, was to build a company with little need for managers.

The first office was the portrait of austerity, equipped with a hodgepodge of furniture salvaged from a nearby recycling center. The goods were driven to the small office in Mr. Kodisoja’s 2006 Volkswagen Passat, and the upholstery was ripped during the move. As Supercell grew, it eventually rented out a floor in a one-time Nokia Corp.NOK1V.HE +4.88% building in downtown Helsinki.

Mr. Kodisoja and Mr. Paananen both stand to make about $237 million on the deal with SoftBank, but Mr. Kodisoja won’t abandon his Passat even though he tacked a picture of a Ferrari to his office wall when he launched his first gaming company 16 years ago at the age of 20.

Supercell developers have employed some pretty traditional methods to stay sharp. On Thursday nights, the office becomes a parlor of board games, with 10 to 20 employees pulling boxes from the office’s kitchen shelves with titles like Puerto Rico, Terra Mystica, Coloretto, Battlestar Galactica.

One of the company’s employees is the founder of the Finnish Board Game Society and Touko Tahkokallio, the company’s game designer, got his start on board game design.

In creating Supercell, Mr. Paananen said he wanted to model the company after a “world-class hockey team” and not “a recreational league for kids.” The company prides itself on hiring the best talent it can find, often paying a premium to lure prospects away from warmer locales to Helsinki.

Supercell is a conglomeration of “cells,” or groups consisting of a half-dozen workers working somewhat autonomously on projects that are more likely to fail than succeed. In 2012, the year it launched “Hay Day” and “Clash of Clans,” it also killed four games. In 2013, it has axed another two or three, Mr. Paamanen said.

When the company kills a game, the employees gather around and open bottles of Champagne for each member of the team, while successes are celebrated with beer. One creation that didn’t make the cut was “Battle Buddies,” a cartoon-like strategy game meant to have more mass appeal than “Gunshine” had. The “Magic” project had five employees working day and night until it was killed.

Supercell’s formula is not unique. In nearby Stockholm, for example, Mojang AB has become a similarly robust profit machine due to its “Minecraft” building-blocks game. The success of that title has turned Mojang into an overnight sensation in a matter of a few years, pulling in $90 million in profit last year on $235 million in revenue.

Like Supercell, Mojang employs only a handful of staff, has little appetite for corporate hierarchy and is extremely conservative when it comes to launching games. Employees routinely interrupt the company’s CEO during meetings, and most of the company’s news is distributed via random posts on Twitter by any one of its 35 employees who refuse to sign non-disclosure agreements with partners.

 

October 15, 2013, 9:32 PM

Enter the New Videogame Boss: SoftBank’s Son

MAYUMI NEGISHI

SoftBank Corp.’s9984.TO +1.93% CEO Masayoshi Son has already become a telecom tycoon, with the recent acquisition of No. 3 U.S. mobile carrier Sprint Corp.S 0.00% Now, it looks like the mercurial Japanese executive is setting out to build a videogame empire as well. SoftBank said on Tuesday that it has teamed up with Japanese mobile-gaming subsidiary GungHo Online EntertainmentInc.3765.TO -1.66% to buy 51% of Finland’s Supercell Oy, developer of the wildly popular tablet and smartphone game “Clash of Clans.”  It’s the latest move by the canny Mr. Son in the mobile-game market, which is growing faster by both revenue and users than the established console-game market.

The deal comes only a few months after the company raised its stake in GungHo from 33.6% to 58.5%, booking a one-off valuation gain of ¥149 billion in the process. GungHo’s “Puzzle & Dragons” game — available in Japan and the U.S. — boasts 19 million downloads; it’s estimated that one in every three smartphone users in Japan has it. The game’s phenomenal success made the company the world’s top-grossing publisher on Android phones, and the third-biggest earner for Apple’s iPhones and iPads globally in August, according to App Annie.

SoftBank also sank $150 million into U.S. social-game maker Zynga Inc.ZNGA -0.99% in 2010, although Zynga has subsequently struggled.

Mr. Son is known as a serial investor and entrepreneur, who’s guided SoftBank to invest in a mind-boggling 3,000 companies – some of which have resulted in big payouts. Some of SoftBank’s most successful investments were Yahoo Inc.YHOO -1.82% and its former Japanese affiliate Yahoo Japan Corp., and a 36.7% stake in China’s top online retailer, Alibaba Group Holding Ltd., which is preparing to list its shares in what is likely to be one of the largest initial public offerings by an Internet company.

One trigger for the Supercell deal may be that the popularity of GungHo’s “Puzzle & Dragons” is showing signs of peaking. “Clash of Clans” recently upended GungHo’s hit game as the world’s top grossing gaming app on iPhones and iPads. GungHo shares have more than halved since May, when the small gaming house’s market capitalization surpassed Nintendo Co.’s.

Buying mobile-game makers is also an easy way to enter and disrupt the videogame market, in which free-to-play games on cellphones, tablets and PCs are overtaking console games in terms of revenue. Established videogame makers and console makers like Sony Corp.6758.TO -0.26%, Microsoft Corp.MSFT +0.12%, and Sega are now experimenting with ways to break from a business model based on selling consoles and dedicated software. The rules are changing in the gaming industry as people play more games on mobile devices, said Tokyo-based gaming think tank Enterbrain Inc. President Hirokazu Hamamura.

“It’s becoming a multiplatform, borderless world,” Mr. Hamamura told JRT. “Console makers are increasingly pitted against platform providers, and mobile hardware makers, and mobile phone carriers. Console makers’ enemies of tomorrow will include (Japanese mobile carrier) DoCoMo, or SoftBank.”