Games creators ask investors to play along

March 13, 2014 12:40 pm

Games creators ask investors to play along

By Richard Waters

‘Candy Crush’ maker’s IPO shines a spotlight on a current bonanza

Why would any sane investor put money into a business that depends on the fickle abilities of a creative few to deliver blockbuster hits?

That is the question facing potential backers of King Digital Entertainment, maker of the hit game Candy Crush Saga. With a stock market listing looming, King put a preliminary price tag on its shares that values its business at up to $7.6bn.

It is also the question that faces the entire games industry, as it focuses its attention on one of the biggest business bonanzas from the mobile internet.

Hit factories – whatever industry they are in – often appear to defy rational analysis. But it is possible to get to the bottom of at least some of their secrets, and arrive at a more rational view of their ability to produce lasting returns.

Unfortunately, when it comes to casual games on mobile devices, the results of this demystification are not always reassuring. Consider the three factors that appear to account for the success of serial hit producers.

The first is that they benefit from some form of privileged distribution: they can get access to customers that others cannot. That helps them attract the best talent, as the most creative seek them out to maximise their career prospects.

This partly explains the success of the music labels in the golden age of radio. The best could secure airtime for their acts, ensuring they found an audience when others struggled in obscurity.

It also explains why the start-up incubator YCombinator has become a hit factory for new technology businesses. A stint in YCombinator opens doors to the venture capital industry’s most exclusive networks, guaranteeing it first sight of the most promising new start-ups.

When it comes to the mobile internet, however, privileged distribution is a hard thing to ensure. App stores and social networks rule, leading to rapid viral uptake for the hits. To some extent, games companies like King can buy an audience with pay-per-download advertising. But this is an expensive method of building a business that cannot match the returns from the self-sustaining viral hits.

The second factor that has sustained some hit-driven businesses has been their ownership of durable intellectual property. In movies, console games and book publishing, this has led to the sequel effect: successful properties, if properly managed, can be milked for a long time.

The investment that audiences have made in these properties account for their lasting success. After spending $50 on an enjoyable video game, it becomes a lower risk to buy the sequel than to buy some other, unknown product.

But here, again, mobile games companies are at a disadvantage. Their games are designed to be easy to pick up but highly addictive, and their freemium business models mean there is often no charge for playing at the outset. Players will still be attracted to familiar characters or brands – but the costs of trying something new that a friend has recommended are minimal.

Rovio, maker of Angry Birds, has taken another approach to cashing in on its intellectual property, licensing its characters for toys and planning a full-length feature film. This model has proved effective elsewhere, but it usually takes more than a single property to make a lasting business: Angry Birds will need stablemates before Rovio can claim to be the Walt Disney of mobile gaming.

The third explanation for the most effective hit factories is the hardest to account for: they have stumbled on a formula that generates repeatable success with unrelated products, almost like conjuring ideas from thin air.

A combination of highly evolved development processes, effective management of technology and creative genius come into play. Pixar was the unparalleled example of this, squeezing delight out of its massive server farms and band of dedicated artists. The perfectionism drilled into the company from the beginning by chairman Steve Jobs also had much to do with it.

Whether through hubris or just wishful thinking, games companies frequently lay claim to their own versions of the hit-making formula. Zynga, the once high-flying social gaming company, professed to have come up with a superior method of data analysis to optimise its playing experience – until the shift to mobile gaming pulled the rug from under its feet.

Now, it is companies like King and Supercell, maker of Clash of Clans, that claim to have discovered the magic touch. If they are right, the high valuations they are attracting will one day come to be seen as bargains. But that is a big “if”.