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Coffee brief: can a mobile games studio really make it in the long run?

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Rovio, the maker of hit smartphone game, Angry Birds, warned earlier this month that profits this year will be down on last year and “may differ from market expectations” sending shares plummeting more than 50%, the market cap now hovering around $500m.

Here at Dissection, we thought this would give us an excellent opportunity to understand the stresses, pressures and KPIs that a mobile games studio has to contend with.

Specifically we wanted to unpack the “one game wonder” problem that most games studios face. It’s well known that a game in the Top 10 can generate upwards of $1m per day, but with trends changing and platforms evolving, how much should this revenue stream influence the company’s long term valuation?

Should games studios take their successes as short term windfalls? Can the revenue from a single game be expected to persist permanently into the future? When looking at replicability, can the games studios codify a strategy (timing, pricing, partnerships, etc.) that reduces their risk and maximises chances for another successful game?

Even before Angry Birds took flight, Rovio thought deeply about this. They knew that they needed a diversification strategy from the outset. Once they found their hit, that franchise had to grow fast across platforms and mediums.

We set out to minimise the amount of luck that was needed,” Mikael Hed said in an 2011 WIRED interview. “We felt we had done our best game so far. But the idea always was, this is the first step.

Journalists and industry commentators generally see Rovio as having completed their diversification mission – now a ‘true’ media entertainment company. We’d agree too, but with that said, the most recent financials suggest they’re not in the clear, yet.

Perhaps diversification and squeezing every penny out of a franchise just prolongs the eventual decline. With it, so far, being near impossible to create multiple successful franchises.

Some of the things we’ll be covering in this post:

Rovio’s foundations
Rovio’s most recent financial results
Game studio economics
The challenges
What’s next?


Fifteen years ago three Helsinki University students; Niklas Hed, Jarno Väkeväinen and Kim Dikert, participated in a competition. The competition was to create a mobile game. Turns out they were pretty good — they won!

These humble beginnings led the trio, along with Niklas’ cousin Mikael, to set up their own company, Relude.

Relude began by subcontracting work from larger games studios.

In 2005 Mikael’s father, Kaj, invested €1m1. They also changed the company’s name to Rovio Mobile2.

Times were good. They hit an emerging, fast growth, market at the right time. They continued to contract work, but they also created their own games. For the ones that did well, they’d sell them to larger corporates — sometimes netting $1m+ per sale.

Mikael’s approach to running Rovio differed from his father’s. Even just as an investor, his father was hands on. Mickael wanted to build something for the future. His father wanted to build the company up and move for a quick sale. In mid 2005, Mikael left Rovio — citing that ongoing battle with his father.

Shortly after this the Rovio business plan began to unravel: it was based on hits, and Rovio hadn’t come up with any. “We tried to create a bubble and sell it fast,” Niklas says. “But we started doing a lot of work for hire, for the big names: EA, Namco, Real Networks. We could make great games ourselves, but we didn’t have the distribution or marketing.”

By 2009, Niklas had reduced the headcount from a peak of 50 employees to 12. Times were tough.

Thankfully a huge shift in market dynamics meant their timing, again, was fortuitous. Apple had solved Rovio’s distribution problem — with the iPhone and App Store.

Now, rather than negotiating individually with mobile manufacturers and carriers, game developers could now reach an audience of millions through a single company. The iPhone opened up the world.

Mikael rejoined in 2009. They continued to contract for larger companies to make ends meet. But they knew for one of their own games to work, they’d need to focus exclusively on the iPhone. If they made a hit for the iPhone, they could expand to other mobile devices, and other platforms and mediums.

After much trial and error, and months of refinement — in December 2009, Rovio released Angry Birds, its 52nd game. A puzzle game for the iPhone. It reached No. 1 spot in the Apple App Store paid apps chart after six months, and remained charted for months after.

Angry Birds has since been downloaded over 3 billion times3, with paid downloads accounting for more than 25% of total downloads, making it one of the top selling games in the Apple App Store.

In March 2011, Rovio raised $42 million in venture capital funding from Accel Partners, Atomico and Felicis Ventures. In July 2011, the company changed its name to Rovio Entertainment.

In July 2012, Rovio really started action their diversification strategy. They announced a distribution partnership with Activision to bring the first three Angry Birds titles to video game consoles and handhelds, in a collection named Angry Birds Trilogy. They then  released Angry Birds Star Wars, an iteration of its popular game licensed from the Star Wars original trilogy, for mobile devices and PC.

Rovio created an active, continuous relationship with the customer. It offered regular updates for nothing, to keep people playing and talking about the product.

Since 2009 Rovio have spawned 14 sequels and spin-offs, most using some variation of the same game mechanic. But the first signs of trouble became clear in 2013. Profits at the studio fell by nearly 50%, sliding from $76.8 million to $37.3 million. And a slew of app store imitators made the once unique game somewhat ubiquitous to iOS and Android gamers.

In December 2014, Rovio laid off 110 employees. Then in August 2015, they laid off a further 230 employees.

Analysts say that lack of diversity likely played a big role in the layoffs. While Rovio rode Angry Birds a long way, it failed to create any other franchises that resonated with players. And in today’s disposable mobile gaming world, that’s a recipe for disaster.

Rovio’s most recent financial headlines

Switching gear for a moment, to look at Rovio’s most recent financial highlights, Jan – Dec of last year. From a glance the company seems to be doing well. Indeed, financially it was Rovio’s best year ever.

  • Rovio’s revenue increased by 55% to €297.2m (191.7)
  • Games: revenue grew 55.9% to €248m (159.0)
  • Brand Licensing: revenue grew 50.5% to €49.2m (32.7)
  • Adjusted EBITDA increased to €64.5m (35.4)
  • EBITDA increased to €60m (35.4)
  • Operating profit increased to €31.4m (16.9) and adjusted operating profit to €35.9m (16.9)
  • Profit before taxes increased to €26.6m (15.4)
  • Earnings per share were €0.27 (0.14)
  • Diluted earnings per share were €0.27 (0.14)

ARPU is trending upward, revenue is trending upward, so what’s the problem? What caused the share price to plummet?

It mainly centres around the fact that Rovio issued a profit warning for 2018. They slashed forecasts, they now forecast their 2018 operating margin at 9-11% versus 10.6% in 2017 and said it expected sales of €260-300m versus €297m last year. This was below analysts’ forecasts of a margin of 14.5% and sales of €336m.

We think expectations may have been too high at the time of Rovio’s listing, which valued it at €1 billion.

We’ll jump into it next in the economics of a games studio, but recently Rovio have had to pay more to get people to play their games. Competition in the mobile game industry is tough and user acquisition has become more expensive for all companies.

Games studio economics

Overall the economics of a mobile games studio are not that complicated, there are two main components:

(1) the cost of acquiring a user to download and play a game

and (2) the lifetime value of that user while they play that game

Having (1) < (2) gives you positive unit economics, allowing you to use growth capital and multiply a return on capital. It does, obviously, get more complicated when you start branching into other revenue streams (as Rovio have) but let’s unpack the unit economics of a mobile game first. We’ll try and keep it brief.

In order to figure out LTV, some additional metrics are required.

  • Retention: how long users generally stay on the app, measured as a percentage.
  • ARPDAU (average revenue per daily active user): an aggregate daily revenue figure across the whole range of an app’s active users.
  • Virality: the idea that each paid user will attract a friend through word-of-mouth, sharing or some in-game dynamic

These three key metrics are just a small slice of what marketers deal with in promoting an app. Understanding the relationship of what you spend versus the amount you earn back is essential. When a marketing team can lock down their metrics, it’s simply a matter of them figuring out a budget and constantly monitoring the metrics for each cohort to ensure goals are being reached and improved upon.

When all the jargon is stripped away, investment into paid marketing is nothing more than an investment formula. If you have a $1 CPA and a $1.50 LTV recouped in 90 days, you’re able to make a 50% ROI every three months. Compound this and your annual ROI begins to look pretty healthy.

There are many factors that can disrupt this formula as marketers begin to scale up. Typically, CPAs will rise over time as you’ll eventually need to pay more to reach an ever scarcer audience. Like what we’re seeing with Rovio right now. There’s only a certain number of times you can market at a relevant audience, and if they don’t install, they don’t install.

At the same time LTV may fall, as you have exhausted the pool of the highest likely spenders and user quality starts to diminish over time. As the margin from ad spend starts to shrink, it’s important to set clear goals like minimum ROI and to not spend beyond a level of certainty that makes economic sense — another reason why marketers must stay hyper-focused on the metrics every day.

One element we haven’t talked about (although it’s listed below in the challenges) is the problem that smaller games studios face with distribution. Earlier in the foundations of Rovio, we saw that the iPhone opened up the market. One platform, worldwide distribution. Surely that should help a small games studio? Unfortunately not. These days a game can only go as far as it is viral, or as far as the spend can bring it. A lot of great games don’t make it mainstream or big-time, simply because of the distribution problems they face.

This challenge brought about the publishing norm that we see in the mobile games industry.

The publishing model therefore sits at the confluence of the needs of studios sitting on large hits but with long-term product pipelines (ie. their next release date is more than nine months away, when the user base of the current hit is expected to have decayed substantially) and small studios sitting on games with great potential but without the marketing budget to seed their game with a large user base at launch.

The terms of a publishing agreement generally involve a revenue sharing component and a user acquisition component.

The developing studio agrees to split revenues with the publisher (generally at a rate of 50% of net revenues) in exchange for a pre-determined acquisition budget to be spent by the publisher on the game (sometimes the revenue split will compensate for the acquisition spending, eg. 80% of the revenue goes to the publisher until acquisition spending has been recouped).

An agreement structured this way is no-risk for the developer because the game is guaranteed to receive users without any upfront costs (except for development costs, which are sunk). The structure of the agreement involves some risk on the part of the publisher, although the publisher would have thoroughly vetted the game in terms of its potential to generate revenue.

The question that arises from these agreements is: on what criteria should a developer make the decision to go with a publishing agreement or not? What factors determine the prudence of the decision? And can this decision be modelled?

The challenges

Mobile game development is a long resource intensive process. In this instance we’re talking about producing hit after hit. Let’s take it that the development time for a game is between 6-12 months, an that’s being kind. That means as the leadership team of Rovio are having to make a call now on what game, genre, dynamics, they think is going to be a hit in early 2019. Then factor in variables such as hardware improvements, what the competition is doing, etc. and you start to see why it’s rare that a company builds hit after hit. The present value of future cash streams attributed to a future release decreases drastically as the timeline for projection exceeds one year. If the games studio is rather cash rich, you can have the approach of being able to buy smaller studios when their games hit certain metrics.

Your studio becomes associated with a niche. Look at ustwo, King, Rovio, you can categorise them within a sub-genre of games. Yes, consumers are company agnostic, e.g. they don’t mind who publishes a game, just as long as it fulfils a need at the right time. Approaching it from another angle, studios build up a certain expertise at the graphics and gameplay of a certain niche. It becomes increasingly difficult to be able to think on the innovation curve of another sub-genre to be able to produce the next viral hit. It would be difficult to imagine Rovio producing Fortnite – the game that, at the moment, has the crown.

Lifetime value of customers is directly related to the game revenue. The ability to monetise a user in-app is crucial for any games studio. If people simply download the app without converting from the free tier to the paid tier, in the long run you’ll run into problems. Careful attention must be paid to the game dynamics and psychology – the entire commercial model.

Volatility within the licensing space. What’s a trendy brand today, could easily be exhausted tomorrow. For example, how much more can realistically be squeezed out of the Angry Birds movie franchises? Two or perhaps three movies? When modelling future revenue, this will need to be taken into account.

User acquisition costs. Increased marketing costs have priced many small studios out of the user acquisition market. Publishing is the only viable launch option for studios without large cash reserves, absent incredibly vitality.

What’s next

Investors are desperate for proof that Rovio isn’t a one-product wonder, and that it can repeat its Angry Birds success. So far, the company is burning through its cash to bring more users on board, but revenue from its main products is tumbling.

We see Rovio having a tough time on the stock market, bringing valuation down, and more in line with the uncertainty surrounding future cash flows.

Thankfully, for Rovio, they have a strong team, they have visibility of short term cash flows, they understand where their cash is coming from, and the Rovio brand is synonymous with games.

In our opinion they need to get back to quickly testing games. They need to diversify and launch games outside of the Angry Birds empire (much like they did with Battle Bay). They need to better predict and implement changing consumer tastes.


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  1. His father was an entrepreneur who founded several companies, including Trema, a financial-software business that was eventually sold to a private-equity house for $150 million in 2006.
  2. Rovio, meaning “bonfire” in Finnish
  3. https://www.forbes.com/sites/andyrobertson/2015/07/16/angry-birds-2/

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