Supercell Beats ‘Angry Birds’ From Obscurity to $3 Billion Value; Why a Finnish Gaming Company Is Worth $3 Billion

Supercell Beats ‘Angry Birds’ From Obscurity to $3 Billion Value

“Angry Birds” can fend off egg-swiping pigs, but they aren’t a match for medieval soldiers.

Supercell Oy’s three-year ascent from obscurity to a $3 billion valuation illustrates the fast-changing fortunes of the gaming industry. With a sale announced yesterday, the maker of the “Clash of Clans” strategy game stole the thunder of neighbor Rovio Entertainment Oy, the developer of “Angry Birds” long considered Finland’s most likely target for a gaming takeover or initial public offering.Supercell co-founder Ilkka Paananen, 35, has found success betting on a shift in gaming from consoles and big screens to smartphones and tablets, designing free games with features that get fans to spend more money while playing — the so-called freemium business model. The initial popularity of the Helsinki-based start-up’s titles in Europe and U.S. has quickly spread elsewhere.

“What made Supercell particularly irresistible was its remarkable summer success in Japan,” said Tero Kuittinen, a New York-based analyst at Alekstra Oy, a mobile-diagnostics company. “Right now, the app industry suspects that Rovio hasn’t yet learned how to make freemium games that succeed in revenue competition.”

After players download “Clash of Clans” for free, they can wind up paying $100 a pop for additional features as they reach new levels. In “Hay Day,” trunks of gold coins cost $80 each. Both titles are among the top-five iOS store grossers in the U.S., and have been there for months, according to market researcher App Annie.

Soaring Value

Yesterday’s purchase by Japan’s SoftBank Corp. (9984) of a 51 percent stake for $1.53 billion marks a swift rise in Supercell’s valuation. In April, Supercell closed a $130 million round of financing that valued it at $780 million.

Paananen, a gaming-industry pioneer, began Supercell with friend Mikko Kodisoja in 2010, seeking to build an organization with no hierarchy and as few managers as possible. They were joined with four other founding members and have continued to work in teams of about half-a-dozen people even as it grew. It has about 130 workers today.

Supercell hasn’t disclosed its finances, though in May it was raking in $2.5 million daily from virtual goods sold on its two top games, equal to about $75 million a month.

Supercell and Rovio now dominate the Finnish gaming market. The two accounted for more than two-thirds of the industry’s 324 million-euro ($437 million) revenue last year, according to researcher Balance Consulting. Neogames Finland, a national non-profit industry organization, estimates the market will more than double to 800 million euros this year.

Nokia Effect

Paananen attributes the rise of Finland’s gaming industry partly to Nokia Oyj (NOK1V), once the world’s largest mobile-phone maker and the country’s most valuable company by far.

“Nokia brought work both by ordering games and introducing mobile gaming companies, also Finnish ones, to tele-operators, which were the only distribution channel at the time,‘‘ Paananen said in an interview last year. ‘‘They facilitated the market, which was very useful at the time, around 2001 to 2003.’’

Last month, Nokia agreed to sell its handset business to Microsoft Corp. in a $7.2 billion deal. In the past few years, Nokia cutting thousands of jobs helped spur an expansion of Finland’s startup industry.

Rovio Strategy

Supercell’s games are played on devices such as Apple Inc. (AAPL)’s iPads and iPhones, as well as smartphones and tablets running Google Inc. (GOOG)’s Android software. ‘‘Clash of Clans” focuses on combat strategy, with users raising barbarian armies, while “Hay Day” simulates crop tending.

Differing from Supercell’s strategy, Rovio sells “Angry Birds” games for a couple bucks a download — and a version of the title ranks as the most dowloaded paid app for iOS. Still, its games don’t appear in the top 50 of most-grossing games — the ones that make the most money.

To expand its revenue base, Rovio, based in Espoo near Helsinki, has licensed its characters to everything from lollipops and soft drinks to T-shirts, toys and theme parks. The company is also going after Walt Disney Co. (DIS) by expanding to animated films.

“If Rovio is a media company, we’re a gaming company,” Paananen said. “We live and breath games and wish to develop games.”

Saara Bergstroem, a Rovio spokeswoman, said in an e-mail that the Supercell deal is “very good news” for the industry. “Naturally a deal this size brings positive visibility for the industry and is certain to attract new investors.”

Even if it got beaten to a major deal by Supercell, Rovio keeps growing. Sales doubled last year to 152 million euros, with consumer goods accounting for about half of that. The company said last year it’s working toward an IPO. Bergstroem said Rovio has no announcements on its plans now.

“It is not clear how a buyer would value Rovio’s licensing and merchandising power — it is possible that its strength particularly in Asia might appeal to Disney or Mattel,” Kuittinen said. If its new titles appeal to consumers, “Rovio’s value would increase dramatically.”

To contact the reporters on this story: Ville Heiskanen in Helsinki at vheiskanen@bloomberg.net; Kasper Viita in Helsinki at kviita1@bloomberg.net

Why a Finnish Gaming Company Is Worth $3 Billion

U.S. gamers may not give much thought to it, but of the five top-grossing games in the U.S. App Store today, four have been developed by two companies, the London-based King and the Helsinki-based Supercell. The latter has just attracted the biggest investment ever for a mobile application developer: $1.5 billion for a 51 percent stake from Japanese telecom giant SoftBank.

Supercell, now the highest valued mobile app company in the world, started out in May 2010 in a dingy Helsinki office filled with discarded furniture. In 2011, its revenue reached a mere $203,000. The following year, it made a profit of $40 million on sales of $105 million. In the first quarter of 2013, sales jumped to $178 million. All the money comes from two strategy games: Clash of Clans, featuring warfare, and Hay Day, focusing on farming.

There is only one app company that has boasted a higher valuation than Supercell — Angry Birds creator Rovio, also based in Finland. Analysts have bandied about numbers as high as $9 billion but have since cut their highly speculative estimates. Rovio’s sales this year will almost certainly be lower than Supercell’s.

What is it about Finland, a snowy country of 5.4 million, that makes the “app economy” prosper so? Quite possibly a unique combination of mobile-game addiction, excellent education and the happy circumstance of being home to one of the early global leaders in mobile technology.

The prevalence of digital gaming in Finland is about the same as in the U.S.: Two thirds of the population plays a video game at least once a month. But Finns play a lot more of those games on their mobile devices. The country has the highest mobile penetration rate in the world, with an average of about 1.8 devices per person. It was only natural that they wanted to develop the games, too, especially since in the 2000s, mobile phone maker Nokia, whose revenue once equaled 20 percent of Finland’s economic output, was willing to pay outside developers to produce games for its Ngage and Symbian platforms.

Finland had the talent to do it well. According to the United Nations Conference on Trade and Development, Finland has the world’s highest proportion of people employed in information technology and communications — more than 8 percent. That is a consequence of having one of the world’s most advanced education systems. In a recent study of skill levels across the developed world, the Organization for Economic Cooperation and Development put Finnish adults in second place after the Japanese in literacy and numeracy and in second place after the Swedes in problem-solving in technology-rich environments.

The factors came together to produce a veritable boom of app start-ups. The Finnish mobile-game industry now consists of more than 150 companies, 40 percent of them established in the last two years. These are mostly small firms. The entire industry employed 1,800 people in 2012, according to the trade group NeoGames. Yet some of them may well repeat the success of Rovio and Supercell. Companies such as Fingersoft and Boomlagoon have already produced hits. Grand Cru, set up in 2011, recently raised $11 million from a group of investors including Qualcomm and Nokia as it prepared to launch the game Supernauts.

Developers from Finland, and from Europe in general, are benefiting from marketing pipelines built by U.S. companies such as Apple and Google. According to a recent study, the “app economy” in the European Union accounts for 529,000 jobs, which would not have been created if not for the U.S. application ecosystems. Small companies such as Supercell — or King, which successfully developed Facebook games before branching out into mobile gaming — would have been hard put to market their products without the open distribution platforms set up across the Atlantic.

Europeans are often proving better than Americans at filling the U.S.-built pipelines with content, at least where game apps are concerned. Apart from their apparent advantage in skills, the Finns have one other trump card: Their start-ups have preserved the spirit of the open-source community, which helped a Finn, Linus Torvalds, develop the Linux operating system. Supercell is a company with no hierarchy, in which small “cells” work on game prototypes that are later accepted or rejected by the entire team. In the SoftBank deal, all its owners sold exactly 51 percent of their holdings, sticking to the company’s culture of “all being in this together.”

In the app economy, players like these are hard to beat, as long as they keep coming up with marketable ideas, as the Finns have been doing.

(Leonid Bershidsky, an editor and novelist, is a Bloomberg View contributor. Follow him on Twitter.)