King Digital is in trouble.
The British mobile games studio behind the wildly successful Candy Crush Saga, saw its stock plummet 11% in after-hours trading after posting a disappointing outlook for Q2 yesterday.
This morning, a handful of investment analysts have published negative notes on the company. Credit Suisse said “Candy Crush will continue to decay at a steep trajectory but further that 3 out of 5 [new game] launches will be a commercial failure.”
Founded in 2003 by Riccardo Zacconi and Melvyn Morris, it first really came into the public eye in 2012, with the launch of Candy Crush Saga. A simple, free-to-play puzzler funded through in-app purchases, it went super-viral, and has netted hundreds of millions of players.
King has been beset with difficulties
Despite this wild success, there have been financial — and legal — hurdles. The company’s IPO in March 2014 was disastrous, falling 15% on its first day — one of the worst of the year.
People questioned the wisdom of the IPO upon its initial announcement, given the unpredictable, hot-hit-wonder nature of mobile gaming. “Games companies seem like the kind of startups who might best remain private,” my colleague Jim Edwards wrote, “where they can ride the financial roller coaster of the App Store behind closed doors.”
And at one point last year, the company, there was speculation that King Digital had “waved the white flag on its future” after electing to issue a $US150 million dividend. Stock subsequently dropped 25% in after-hours trading.
At the start of 2015, “Games Guru” Tommy Palm left King Digital. It was a major loss — Palmer is “credited with helping to create the most popular mobile game on the planet, Candy Crush Saga,” VentureBeat reported at the time. (Palmer went on to start his own mobile games company.)
Then in March, King was sued over allegations tht it denied “lives” to players that had been donated to them by friends, in in attempt to force people to buy new lives. The complaint asserts that King is “intentional[ly] profiteering at the expense of customers.”
The same month, it was also sued for allegedly inflating user numbers ahead of its IPO the year before. The lawsuit says that the user figures provided to investors were “materially inaccurate, misleading, and/or incomplete.”
Of course, legal battles don’t detract from the sheer addictive popularity of Candy Crush, which has seen it attract negative press coverage. A 2013 Daily Mail story referred to it as “crack candy,” interviewing women who said “it’s taking over my life” and played for 8 hours a day. ABC put together a piece on “cautionary tales from people obsessed with Candy Crush,” including one woman who ignored her daughter, and another who spent hundreds of dollars on the game.
Earlier this year, things were looking up
But flagship title Candy Crush’s popularity has begun to wane, and with it, questions have been raised about the company’s future. Earlier this year, when King posted 2014 Q4 earnings, it looked like these concerns might have been assuaged — and the stock soared by 15%.
In Q4 2014, King Digital booked sales of $US586 million, above expectations of $US520 million. But this isn’t why investors were excited. Instead — for the first time — less than 50% of King’s revenue was coming from Candy Crush.
It’s a dangerous game developing mobile app casual games. They can become multi-million-dollar businesses overnight, but there’s little-to-no brand loyalty from consumers towards the development studios themselves. Games are also unpredictable: They can become hits at any time, then fade away as quickly as they came.
The ultra-simple Flappy Bird was one of the biggest viral sensations of 2014. It got so big that developer Dong Nguyen ultimately removed it from app stores, as he was unable to handle the pressure. But when his studio .GEARS released its second title, Swing Copters, later that year, it failed to get the same traction.
Another example is Mind Candy. It’s the studio responsible for the web-based mega-hit Moshi Monsters. But it has also seen massive losses over the past few years, as it has failed to capitalise on its success and diversify its portfolio. “Moshi Monsters captured the imaginations of children and launched at a time when the consumer web was just taking off,” CEO Michael Acton Smith said at TechCrunch Disrupt in October 2014. But it’s “been a tough time in the last couple of years… There have been lots of sleepless nights.”
Analysts — and investors — thought that King Digital had managed to sidestep this trap. Its new title, Candy Crush Soda Saga, was doing extremely well, along with its broad stable of other titles — including Bubble Witch Saga 2, Farm Heroes Saga, Pet Rescue Saga, and Diamond Digger Saga.
Analysts praised King — then turned on it
Deutsche Bank said in a research note that the company “has come a long way towards proving it can bring more hits to market.” JP Morgan, meanwhile, believed that King was “increasingly benefiting from its scale & marketing power as it can outspend peers and leverage significant data to encourage cross-game adoption.”
Since then, however, things have soured.
King Digital’s 2015 Q1 results were relatively strong. Revenue beat expectations, coming in at $US569.5 million versus $US553.9 million.
But the company predicts bookings will decline from $US604.5 million in Q1 to the $US490-$US520 mark in Q2, saying the “mid-year period [will] be seasonally softer.”
62% of total gross bookings have come from titles other than Candy Crush in Q1, suggesting King is slowly moving beyond the title — but some analysts are slamming the company nonetheless.
Deutsche Bank now says King “needs another hit,” and that while Candy Crush Soda Saga “[came] on strong, it has “likely peaked already.” As it stands, “all existing games are now in decline, and new game genres may have structurally lower margins… Without clear success from upcoming titles, it appears most likely revenue and margins will decline going forward.”
A research note from Pacific Crest says that “King is in need of a steady new schedule of new titles to grow, which is a much less profitable model than launching a few longer-performing, highly profitable games.” It continues:
We are not sure about the non-Candy Crush growth opportunity. Candy Crush has carried KING since its release in 2012, and we think the story for growth after Candy is still uncertain. Mobile game developers initially rely on a key franchise or genre, and diversification has been a rare occurrence. We are not sure KING is going to buck the trend. It has plans to launch new games, but the probability that any one will be a big contributor is relatively small.
Credit Suisse, meanwhile, warns “not only that Candy Crush will continue to decay at a steep trajectory but further that 3 out of 5 launches will be a commercial failure.”
In short: The mobile gaming industry is notoriously volatile, and the era of Candy Crush Saga is drawing to a close. With no guarantee that King Digital will ever be able to replicate its success again, the company’s future is looking far dimmer than its past.