Tag Archive Investing in Mobile Gaming Companies

Kabam: What Causes A Unicorn To Stop Skating To Where The Puck Is Going

Lawrence Abrams No Comments

The growth in the numbers of technology startups valued over $1 Billion, so-called unicorns, has abruptly stopped and even reversed.

In the last several months, a number of unicorns have seen their valuations marked down by mutual funds. This has been accompanied by a number of titillating articles about frivolous spending — Dropbox’s Chrome Panda sculpture — and debauchery — Zenefits’ sex in the stairwells — claimed to be endemic to high flying unicorns.

Unlike stories of fallen unicorns, this article is about a company that “officially” is still on all unicorn lists. It is about the mobile game company Kabam, elevated to unicorn status by its last funding round in August 2014 of $120 Million by the Chinese platform company Alibaba.

Kabam had early success at developing games based on movie IP licensed from major studios like Disney’s Marvel studio, Warner Bros., and Lionsgate.

Beginning in 2014, Kabam started timing new releases to coincide with the releases of mega-hit movie sequels like Fast and Furious and the Hunger Games. The results have been a disastrous string of five failures and one success.

Kabam Timeline of Hits and Misses

Kabam Timeline of Hits and Misses

What caused this unicorn to stumble?

There is an inspiring YouTube video of a Keynote address given by Kabam co-founder Holly Liu at a Women 2.0 Conference in 2014.

She talks about key moments in the early history of Kabam when the founders decided to “Go Big” in her words. By this, she meant building products based on a vision of where a market was going rather where the market was at. Today, we use a hockey metaphor of “skating to where the puck is going” not “skating to where it is”

Kabam’s Downfall: “Skating to Where the Puck Is” after 2013

Specifically, for the Kabam founders it was deciding in 2007 to port their games to Facebook via its newly created API in a year when the dominant access to games was through the PC browser.

Then again, at the height of game company success on Facebook in 2010, Kabam founders were anticipating Facebook’s closure of its game API and made the visionary decision to develop only for the mobile phone.

Silicon Valley VCs have a bias toward supporting founders opinions over professional managers when startups periodically face existential choices.

This is because founders have vision (“skate to where the puck is going”) and want to build long-lasting companies. They have a Facebook “move fast and break things” mindset that is risky, but can result in outsized payouts in the end.

Whereas professional managers prefer risk-averse choices (“skate to where the puck is” ) that look to be the fastest path to cashing out via a buyout or an IPO.

Kabam stopped making visionary choices in 2013. What had happened was the emergence of a “talk the talk” culture championed by hired professional managers that favored strategies geared toward short-term revenue goals followed by an IPO.

In 2013, Kabam’s revenue grew 100% that year, fueled in part by the explosion of mobile phone purchases. Kabam had 3 hit games with greater than $100 Million in annualized revenue.

CEO Kevin Chou talked to the press about timetables for an IPO. He even announced publicly early April of 2014 that revenue was forecasted to grow 80+% or more and be in the range of $550 — $650 Million.

The safe bet to achieving these short term goals was to release as many games with $100 M in annualized revenue as possible. And that is what Kabam did, with disastrous results.

Visionary game founders in 2013 would have seen that only a company with multiple chart-topping $1 Billion games could ever have a chance at an IPO.

They would have known that another mobile game company Machine Zone (now MZ) was doing the visionary thing by building a ultra-low latency many-to-many game platform based on Erlang and investing in dedicated servers with field programmable gate arrays.

Visionary founders at Kabam would have stopped doing more of the same, and would have started building a new platform. They would have shut off all talk of IPO, stopped giving the press explicit financial numbers and revenue forecasts, and told investors that revenue would plummet in 2014.

In our opinion, the source of Kabam short-sighted culture was non-engineering managers brought in run Kabam’s operations. COO Kent Wakeford, a lawyer and former AOL executive, has been the face of Kabam to the press in matters of deals. To his credit, he consistently deflected any questions dealing with IPO specifics.

The real source of Kabam’s culture of “talk the talk” was former SVP of Corporate Communications Steve Swasey. The idea for making annual explicit financial disclosures can directly be traced Swasey.

The height of Kabam’s arrogance occurred in December 2013 when Kabam announced that it bought the naming rights for the Cal-Berkeley’s football field for $18 Million paid over 15 years. This idea had to be initiated by Steve Swasey. But, to be fair, this symbol of arriveste had to be approved by Kabam’s Board of Directors and founders.

One can understand the desire of Kabam’s co-founders — all three UC-Berkeley grads — to give back to their alma mater. But, founders should wait years after their IPO to give cash for University buildings. For example, buildings on the the Bay Area campus of Stanford and Berkeley include no less than Gates, Allen, Moore, Varian, Hewlett, Packard, and Wozniak.

In our opinion, we do not think Kabam can recover. It is running out of cash. The IPO window is permanently closed to mobile game companies after the Zynga and King Digital IPO debacles. Kabam’s only hope for more funds is Alibaba, its prime investor to date.

The naming of the football field at UC-Berkeley in December 2013 looks to be Kabam’s symbolic “Kiss of Death.”

Former SVP of Corporate Communications Steve Swasey at Cal Football Field Naming

Kabam’s Downfall: Talking the Talk

Lawrence Abrams No Comments

The growth in the numbers of technology startups valued over $1 Billion, so-called unicorns, has abruptly stopped and even reversed.

In the last several months, a number of unicorns have seen their valuations marked down by mutual funds. This has been accompanied by a number of titillating articles about frivolous spending — Dropbox’s Chrome Panda sculpture — and debauchery — Zenefits’ sex in the stairwells — claimed to be endemic to high flying unicorns.

Unlike stories of fallen unicorns, this article is about a company that “officially” is still on all unicorn lists. It is about the mobile game company Kabam, elevated to unicorn status by its last funding round in August 2014 of $120 Million by the Chinese platform company Alibaba.

Kabam had early success at developing games based on movie IP licensed from major studios like Disney’s Marvel studio, Warner Bros., and Lionsgate.

Beginning in 2014, Kabam started timing new releases to coincide with the releases of mega-hit movie sequels like Fast and Furious and the Hunger Games. The results have been a disastrous string of five failures and one success.

Kabam Timeline of Hits and Misses

Kabam Timeline of Hits and Misses

What caused this unicorn to stumble?

There is an inspiring YouTube video of a Keynote address given by Kabam co-founder Holly Liu at a Women 2.0 Conference in 2014.

She talks about key moments in the early history of Kabam when the founders decided to “Go Big” in her words. By this, she meant building products based on a vision of where a market was going rather where the market was at. Today, we use a hockey metaphor of “skating to where the puck is going” not “skating to where it is”

Kabam’s Downfall: “Skating to Where the Puck Is” after 2013

Specifically, for the Kabam founders it was deciding in 2007 to port their games to Facebook via its newly created API in a year when the dominant access to games was through the PC browser.

Then again, at the height of game company success on Facebook in 2010, Kabam founders were anticipating Facebook’s closure of its game API and made the visionary decision to develop only for the mobile phone.

Silicon Valley VCs have a bias toward supporting founders opinions over professional managers when startups periodically face existential choices.

This is because founders have vision (“skate to where the puck is going”) and want to build long-lasting companies. They have a Facebook “move fast and break things” mindset that is risky, but can result in outsized payouts in the end.

Whereas professional managers prefer risk-averse choices (“skate to where the puck is” ) that look to be the fastest path to cashing out via a buyout or an IPO.

Kabam stopped making visionary choices in 2013. What had happened was the emergence of a “talk the talk” culture championed by hired professional managers that favored strategies geared toward short-term revenue goals followed by an IPO.

In 2013, Kabam’s revenue grew 100% that year, fueled in part by the explosion of mobile phone purchases. Kabam had 3 hit games with greater than $100 Million in annualized revenue.

CEO Kevin Chou talked to the press about timetables for an IPO. He even announced publicly early April of 2014 that revenue was forecasted to grow 80+% or more and be in the range of $550 — $650 Million.

The safe bet to achieving these short term goals was to release as many games with $100 M in annualized revenue as possible. And that is what Kabam did, with disastrous results.

Visionary game founders in 2013 would have seen that only a company with multiple chart-topping $1 Billion games could ever have a chance at an IPO.

They would have known that another mobile game company Machine Zone (now MZ) was doing the visionary thing by building a ultra-low latency many-to-many game platform based on Erlang and investing in dedicated servers with field programmable gate arrays.

Visionary founders at Kabam would have stopped doing more of the same, and would have started building a new platform. They would have shut off all talk of IPO, stopped giving the press explicit financial numbers and revenue forecasts, and told investors that revenue would plummet in 2014.

In our opinion, the source of Kabam short-sighted culture was non-engineering managers brought in run Kabam’s operations. COO Kent Wakeford, a lawyer and former AOL executive, has been the face of Kabam to the press in matters of deals. To his credit, he consistently deflected any questions dealing with IPO specifics.

The real source of Kabam’s culture of “talk the talk” was former SVP of Corporate Communications Steve Swasey. The idea for making annual explicit financial disclosures can directly be traced Swasey.

The height of Kabam’s arrogance occurred in December 2013 when Kabam announced that it bought the naming rights for the Cal-Berkeley’s football field for $18 Million paid over 15 years. This idea had to be initiated by Steve Swasey. But, to be fair, this symbol of arriveste had to be approved by Kabam’s Board of Directors and founders.

One can understand the desire of Kabam’s co-founders — all three UC-Berkeley grads — to give back to their alma mater. But, founders should wait years after their IPO to give cash for University buildings. For example, buildings on the the Bay Area campus of Stanford and Berkeley include no less than Gates, Allen, Moore, Varian, Hewlett, Packard, and Wozniak.

In our opinion, we do not think Kabam can recover. It is running out of cash. The IPO window is permanently closed to mobile game companies after the Zynga and King Digital IPO debacles. Kabam’s only hope for more funds is Alibaba, its prime investor to date.

The naming of the football field at UC-Berkeley in December 2013 looks to be Kabam’s symbolic “Kiss of Death.”

Former SVP of Corporate Communications Steve Swasey at Cal Football Field Naming

Zynga: A Sleeping Dog in 4Q14

Lawrence Abrams No Comments

  • We forecast that Zynga’s 4Q14 bookings will be at the low end of guidance of around $183 million, based on App Annie revenue ranking trends.
  • QoQ revenue growth in casino games has been wiped out by QoQ declines from its tentpole game FarmVille 2: Country Escape.
  • While new releases Looney Tunes Dash! and New Words with Friends sported impressive download rankings, the monetization to date for both has lagged, possibly by design.
  • We rate Zynga a hold, optimistic that this sleeping dog will awake eventually with vigor that lasts long enough to reward patient investors.

Zynga (NASDAQ:ZNGA) is a San Francisco-based mobile game company named in honor of Zinga, the deceased dog of its founder and former CEO Mark Pincus. It’s logo is a red dog. Its headquarters is known as “The Dog House,” which it owns and has been its most impressive acquisition to date.

This article is an update to our June 2014 article for SA, Zynga is a Dog Without a Top 10 Mobile Hit.

During its 1Q14 conference call, CEO Don Mattrick narrowed the FY14 booking guidance to between $770M-$810M. We said that was attainable only if Zynga had a Top 10 mobile hit.

Well, that has not happened. YTD bookings by quarter have been $163M, $174M and $175M for a total $512M.

During its 3Q14 conference call, Mattrick narrowed guidance for 4Q14 bookings to between $183 and $213 million.

Based on App Annie revenue ranking charts, we forecast that Zynga’s 4Q booking will be at the low end of guidance of $183M and full-year booking will be around $695M, a full 12% below FY mid-range guidance of $790M.

Our advice is to let this sleeping dog lie.

If you own this stock, hold. If you don’t own stock, stay away until this dog wakes up as evidenced by a new release with a Top 25 revenue rank.

Don’t be fooled into buying based on recently-released Looney Tunes Dash! sporting a Top 10 download rank. Monetization matters and the rabbit doesn’t have it. The bunny isn’t money.

Mattrick gave 4Q14 bookings guidance of between $183 and $213 million based on the following expectations:

  • continued growth of casino slot games
  • special events driving growth of FarmVille 2: Country Escape
  • launch of New Words With Friends
  • launch of Looney Tunes Dash!

Below is a table of App Annie revenue rankings for games on iOS Apple Store USA, by far Zynga’s biggest market, by quarter beginning dates.

When you combine all casino slot games, we would say that slots revenue was up in 4Q, but that it was wiped out by the downtrend in Zygna’s tentpole game FarmVille 2: Country Escape.

Zynga games by revenue rank

(click to enlarge)

However, the game has yet to crack the Top 50 in revenue rank.

(click to enlarge)

Below is the download rank chart for New Words with Friends. Notice the impressive early Top 5 download ranking during the period before December 2, 2014 when the game was totally free without ads or freemium elements.

(click to enlarge)

Here is the revenue rank chart which began with a December 2, 2014 update that added freemium elements. Monetization has been poor to say the least.

(click to enlarge)

In sum, we rate Zynga a hold, optimistic that this sleeping dog will awake eventually with vigor that lasts long enough to reward patient investors.

There are a few things that might awake this dog: (1) a release from recent acquisition NaturalMotion that is a hit; (2) better monetization from casino slot games, possibly with redeemable perks at Vegas gaming establishments; (3) reconsideration by CEO of real money gaming; (4) purchase of company that makes Trivia Crack.

Kabam’s IPO Plans Are Kaput

Lawrence Abrams No Comments

Summary

  • Kabam is a mobile game startup with IPO aspirations and a reportedly $1 billion-plus valuation.
  • In early December, the CEO delayed IPO plans, blaming generally unfavorable conditions for a mobile game company IPO.
  • We show that the real reason for the delay was the disastrous performance of two of three new releases based on hit movie IP.
  • Kabam’s failures raise questions as to the sustainability of its headcount, its ability to produce hits based on movie IP and whether any mobile game company should do an IPO.

We are just a couple days into the New Year and already we have our first scratch – Kabam – from lists of technology companies most likely to do a 2015 IPO.

Kabam is a San Francisco-based mobile gaming company that had a track record of licensing movie IP (intellectual property) and producing top 25 revenue-ranking mobile games. But two new, highly-anticipated games based on The Hunger Games and The Lord of the Rings movie IP have had disastrous releases as evidenced by sub-200 App Annie revenue rankings.

As a result, Kabam’s plans for an IPO are kaput for now.

Kabam CEO Kevin Chou confirmed this day in a December 10, 2014 interview with the NYT. But, he blamed the delay on a generally poor environment for mobile game company IPOs created by the Zynga (NASDAQ:ZNGA) and King (NYSE:KING) post-IPO debacles.

In this article, we present App Annie revenue ranking charts of recent releases from Kabam showing terrible gamer response to two of its three most recent releases. In our opinion, this is the real reason for Kabam’s IPO postponement.

We wish to state at the outset that our definition of “plans to do an IPO” aredirect quotes from CEO Chou stating Kabam has plans to do an IPO. This is in contrast to a strict definition — filing an S-1, which Kabam has never done, as has been point out to us by the company.

We feel that of SA followers, and the investing world in general, are comfortable with the first definition and not the second. There are plenty of articles on SA talking about companies with “plans for an IPO” where a S-1 has never been filed. Uber and Airbnb are the most prominent.

If you are uncomfortable with our definition, please read no further.

So first, we want to present URLs where there is a direct quote from CEO Chou of IPO plans.

We start with a Bloomberg video interview way back in October 15 2013. Pay attention to segment 2:11 – 2:45

Interviewer: Are you thinking about an IPO”

Kevin Chou: “We are.”

Next a Wall Street Journal interview on February 17, 2014

“WSJ: You have said previously that you are considering an initial public offering. Any updates?

Chou: We had another very serious discussion about an IPO in our board meeting in January. Our revenue is growing rapidly and we have been profitable since 2012. We have over $70 million of cash in our bank account. We are at the scale, where we can actively consider an IPO. But we also want to do it when the time is right, and we don’t have a definitive timeframe yet.”

Finally, a Newslook video interview given around the time of the Alibaba investment in August 2014. Pay attention to segment 3:30-3:53

Chou: ” You know it could be as early as 2015″

In early 2014 interviews, CEO Chou was justified in saying that the an plans for a Kabam IPO would be unwise due to Zynga and King’s performance.

But even then, part of the blame was attributable to a 2014 revenue fade of its most successful game The Hobbit: Kingdom of Middle-earth, based on an IP license from Warner Bros. (a division of Time Warner (NYSE:TWX)).

Below is an App Annie revenue ranking chart of The Hobbit game, showing the game’s Top 10 revenue ranking in 2013 and the fade throughout 2014 to a Top 30 position today.

(click to enlarge)

The relation between revenue dollars and revenue rank is a severe power function. We have estimated that a #10 ranking game is associated with an annualized revenue run rate of around $250M worldwide where as #25 rank is associated with an annualized run rate of around $90M worldwide.

The power function ratchets up at #5. We estimate that the top 5 revenue ranking games worldwide today have an annualized run rate of between $800M and $1,500M – Clash of Clans (Supercell), Candy Crush Saga, Puzzles and Dragons (GungHo Online), Game of War-Fire Age (Machine Zone), andMonster Strike (Mixi).

In mid-2014, Kabam announced a series of IP licensing deals with Warner Bros., Lions Gate (NYSE:LGF) and Disney’s (NYSE:DIS) Marvel Division.

The company reportedly built up its headcount to 850 employees worldwide with 400 in San Francisco, 350 developers in its Beijing studio headed by co-founder Mike Li, and 85 developers in its Vancouver studio.

It accepted a $120M strategic investment from Alibaba that reportedly valued the company at more than $1B. This was on top of $125M in venture capital money raised previously from the likes of Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Ventures, Intel (NASDAQ:INTC) Capital, Warner Bros., MGM and a number of other venture capital companies.

The company even purchased for $18M, spread out over 15 years, for the rights to place “KABAM” on the football field of The University of California at Berkeley, the CEO’s alma mater. (A startup kiss of death?).

In May 2014, Kabam announced a deal with Lions Gate to make a game based on The Hunger Games movie franchise starring Jennifer Lawrence.

This game would be developed by its 300-person Beijing studio, headed by co-founder Michael Li. It was this studio that developed Kingdom of Camelot, Kabam’s first big hit, released in March 2012.

The Hunger Games game was released on November 5, 2014 and the results have been disastrous despite the fact that the movie has been a hit.

(click to enlarge)

In June 2014, Kabam announced a licensing deal with Warner Bros. to make another game based on The Lord of the Rings IP.

This game was released on October 15, 2014 and again the results have been disastrous despite the fact that movie has been a huge hit:

(click to enlarge)

Finally, In July 2014, Kabam announced that its Vancouver studio was at work on a game based on licensed IP from Disney’s Marvel Entertainment Division. On December 10, 2014, the Marvel-based game was released.

Only the Marvel game has performed decently with a current App Annie revenue rank of #33:

(click to enlarge)

Kabam still might recover in 2015 with scheduled releases of another Marvel-based game and a game based on Mad Max IP licensed from Warner Bros.

But, Kabam’s recent failures raise several questions for us pertaining to Kabam specifically and to the mobile game industry generally:

  1. Can Kabam afford to maintain its 850 headcount, especially the 300 headcount at its Beijing studio responsible for the poorly-received The Hunger Games game?
  2. Are the recent the poor results the specific fault of Kabam or the fact that basing games on hit movie IP is no longer a valid strategy?
  3. Given the dual difficulty of producing and sustaining a Top 10 revenue-ranking mobile game, might there be a better alternative for financing and providing investor liquidity than IPOs?

Relating App Store Revenue Rank to Revenue

Lawrence Abrams No Comments

From two of my recent Quora posts:

Question: How much money does the average mobile game make?

There are tons of games on the App Store and Google Play. Everyone seems to know about the hit games. How much revenue does the run-of-the-mill game generate? Is the revenue curve steady and flat? Do some genres do much better than others?

My answer:

Question should be rephrased:

How much money does the MEDIAN revenue rank game make.. ie game with revenue rank 100,000 out of about 200,000+ on iOS Apple US?

Answer: near zero.

Relation between mobile game revenue and revenue rank is a severe power function, more severe than the bookstore relation estimated 10 years ago and used to justify “long tail” inclusiveness in online stores.

I have estimated that top 10 revenue rank games derive 50% of revenue whereas the “long tail” of mobile game revenue ranks — games ranked 10,001 – 200,000+ derive only 5% of revenue. Long tail here is far smaller than books where revenue rank books 10,001 – 200,000 derive 30% of revenue.

To go back to the first question, I have a more precise answer. I have estimated that the trailing 12 month global mobile game revenue, less 30% cut from Apple and Google is $11.2B. Mobile game long tail — games ranked 10,001 to say 200,000 get 5% or $560M. Divide that by # of games in long tail — 200,000 – 10,001 = 189,999 560,000,000/198,999 = $2,847 is the AVERAGE yearly revenue of a mobile game in the long tail– with revenue rank > 10,000.

Question: How can you estimate the revenue of a mobile app based on its revenue rankings in App Annie?

There should be an exponential drop off, so if someone has done a study with a few data

My answer:

It is a power function with an upward kink at game rank #3-4

mapping update
As far as games, these are my current estimated revenue run rate after 30% store cut worldwide on iOS and Google (note portion of revenue is 4:1 iOS to Google)

Big 3 — what I call the “and, of, the” of a Zipf power function.

Clash of Clans $1.8B (Supercell)
Puzzle and Dragons $1.6B (GungHo Online)
Candy Crush Saga $1.0B (King)

Next 7
Monster Strike $900M (Mixi)
Game of War: Fire Age $600M (Machine Age)
Brave Frontier $400M (Alim/gumi)
Hay Day $400M (Supercell)
Farm Heroes Saga $350M (King)
Battle in Warring Games $200M (Sumzap)
Pet Rescue Sage $175M (King)

Top 10 World Wide Mobile Games by Revenue Rank receive estimated 50% of mobile game app store revenue >>> $6.5B out of $11B

In contrast, I have estimated “long-tail” of mobile game app store revenue — games ranked 10,001 + to 240,000 receive around 5% of revenue.

This is a lot less that the original “long tail” estimates for book sales of book ranked 10,000+ of around 30%

Not much loss in cutting out the “long tail” in mobile games on the app store in return for great gain in app store discovery and quality of merchandise.

RIP Long Tail Justification for Online Store Inclusiveness: 2004:2014