Iron Throne: Kingdom — Another Failed Game Release By Netmarble

Summary:

Netmarble’s newly released game Iron Throne: Kingdom is a failure based on App Annie data.

While the stock did fall to a low of 123,000 KRW in August 2017, it has since recovered since April 2018 due to a timely 25%  investment in a Korean music label that is home to the K-Pop sensation BTS.

Once the failure of this new game become evident to investors, we believe that the stock will again test its all time low of 123,000 KRW.

Analysis

Our analysis of Netmarble’s April 2017 IPO was that it was “priced for perfection”.  While the Lineage 2 game releases have been near perfect in Korea and Japan, its release in the USA has been a bust and the release in China is on hold due to geopolitical tensions.

As a result, we predicted that Netmarble’s stock would fall 45% from its November 26, 2017 closing price of 188,500 KRW to around 103,378 KRW once the revenue impacts of the USA and China releases were fully understood by investors.

While the stock did fall to a low of 123,000 KRW in August 2017, it has since recovered since April 2018 due to a timely 25%  investment in a Korean music label that is home to the K-Pop sensation BTS

 

Recently, Netmarble announced a May 2018 world-wide release of another MMO game called Iron Throne: Kingdom.

Based on App Annie data, we can already tell that the game is a bust with a global annualized revenue run rate (ARR)  that will never be more that $50 Million USD.  This is a drop in the bucket for Netmarble whose 2017 revenue in the range of $2,000 Million USD.

Here are the current revenue ranks on iOS Apple Store for the Iron Throne: Kingdom:

  • USA — #177
  • Japan – #363
  • South Korea — #29

The relation between revenue and revenue rank for mobile games is a power function which we have discussed in other papers.  A top 3 revenue rank game generally translates into a ARR of $1+ Billion which was the case for Lineage II.  A top 10 game drops down severely to $ 160 ARR.

 

 

Here are the App Annie revenue rank charts for the game on iOS Apple for the USA, Japan, and South Korea.

iOS USA — revenue rank 177 on June 4, 2018

iOS Japan – revenue rank 262 on June 4, 2018


Zynga: A Sleeping Dog in 4Q14

  • 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

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

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


Machine Zone: IPO or What?

Machine Zone [MZ] is a Palo Alto-based, mobile gaming start-up with a massively popular Top 3 app store hit called “Game of War: Fire Age.” [GoW]

MZ describes Game of War: Fire Age as

“.. a real-time mobile massively-multiplayer online game and parallel chat-speak translation application that translates over 40 languages for its players in real-time, connecting game players around the globe at the same time in a single virtual universe.”

What makes this building simulation and war strategy game so innovative is the real-time play among the massive number of players (100,000+) online around the globe at the same time.

The other innovative feature is its messaging system featuring a 40+ language real-time translator, including a crowd-sourced library of game jargon. It’s like real-time SnapChat run through Google Translate finely tuned by an incentivized, crowd-sourced library of gamer jargon.

From a NYT review of GoW,

“The game’s most impressive feature is an instantaneous translation of text-based online chat. If someone writes “MDR” in French (for “mort de rire,” or “dying of laughter”), an English-speaking player sees it as “LOL.””

The game is also very social and hard to put down. Once a player joins a GoW “alliance” – similar to a “clan” in Clash of Clans — there is considerable peer pressure to continue playing for sake of the alliance. MZ’s early estimates were that players averaged 2 hours a day 7 days a week playing the game.

We estimate that the GoW’s current revenue run rate is $831M. The company is very profitable, with  a reported head-count of only 150.

Compare this with Zynga who manages a score of mobile and browser games none of which have cracked the Top 10, a headcount of 2,000 (but falling), and a similar revenue run rate (but falling).

Yet, MZ’s prospects for a 2014 IPO are dim because it is viewed as a “one hit wonder”.

This is in contrast to Kabam, the other US mobile gaming start-up most likely to do an IPO in the next year.  Kabam’s interviews with press are peppered with the quotes about how diversified they are with 3 hit games with lifetime revenue over $100M and three more potential hits on the way based on the blockbuster movies The Hunger Games, Lord of the Rings, and Mad Max.

There is also investor wariness of mobile gaming IPOs due to the post-IPO stock performances of Zynga (ZNGA) and King Digital (KING). However, as we write this, King has climbed back finally to its opening price three months after its IPO, so the bad feelings about King have diminished.

MZ is not a “one hit wonder”. We believe CEO Gabe Leydon’s claim that MZ has developed a “game engine” that can be “re-skinned” to create other genres of games with the same underlying play and communications innovations.

MZ, along with with Kabam and the mobile division of Electronic Arts [EA], are in the running  to become the preeminent US-based mobile gaming company – “The Pixar of Mobile Gaming”.

MZ just needs diversification that will come with a second hit, preferably in a different genre, that boosts its revenue run rate over $1,500M.

It would be a shame for MZ to sell out now as it has enough cash for working capital and new development teams. Their total venture capital to date is reportedly only $16M so there is no urgency on the part of VC’s to cash out.

This is in contrast to Kabam with over $125M in VC money and higher cash burn rate from a reported headcount now of 800.  No wonder it is Kabam, and not MZ, who is always talking to the press about IPO plans and the damage caused by the Zynga and King IPO debacle.

But, MZ could use additional investment in 2014 to pay a dividend or to buy some of the shares of existing employees as shareholders. This would take the edge off the IPO wait.

King did something similar by paying out $504M in dividends over the two quarters before it went public. However, the taxation of dividend income might be quite a bit less in the UK than in the US.

What follows is an estimate of MZ’s current revenue run rate and valuation. We are doing this to quantify the outstanding financial performance of this company and to place it along side the elite companies in the mobile gaming world.

We use the same methodology to value MZ as we have employed in previous papers to value King, Zynga, and the start-up Kabam. We have used it also to make prescient buy recommendations of two undervalued Japanese mobile game companies – Mixi and Klab.

There are two pieces of data used in our analysis: (1) app store download and revenue ranking charts provided by data analytics company App Annie; (2) a mapping of App Annie revenue rankings to current revenue run rates.

Launched in July 2013 on iOS Apple store, GoW took only one month to become a Top 20 revenue ranking game on the App Annie charts. By September 2013, it cracked the Top 10 and remained there for the rest of 2013. In 2014, GoW has remained a Top 3 game on the App Annie charts.

Launched 9 months later on Google Play in May 2014, GoW shot up quickly to #6 on the revenue ranking charts and has remained there since.

Game of War Fire Age all time

(Source: App Annie)

Game of War Fire Age Jan 1 ios

(Source: App Annie)

Game of War Fire Age google play since may

(Source: Appie Annie)

GoW seems destined to join the elite “Billionaire Game Club” along with Supercell’s Clash of Clans, King’s Candy Crush Saga and GungHo’s Puzzle and Dragons. The first two games have remained a #1 or #2 revenue ranking game in the US now for a 1 ½ years and counting. However, Candy Crush’s downloads have been in decline for a year even though its revenue rank remains at #2.

The next step in valuing MZ is a mapping of app store revenue rank to revenue dollar run rate. GoW is a free to play game with in-app purchases. Downloads and purchases are primarily made via iOS Apple store and Google Play.

VC firm Andreessen-Horowitz’s mobile guru, Benedict Evans, has estimated that the current global ratio of monthly active users (MAU) of Android to Apple iOS is 1,000M to 470M or 2:1.

The reverse is the case for app store purchases. Evans has estimated that the trailing 12 month Apple iOS to Google Play app store revenue, which excludes presumably Apple’s and Google’s 30% cut, is $10B to $5B, or 2:1

According to App Annie, 75% of app store revenue is mobile games or $11.3B. So, roughly the trailing 12 month revenue for mobile game app store revenue is $7.5B for iOS and $3.8B for Android.

Combine this with MAU numbers results in an average iOS to Android yearly spend per MAU of $15.96 to $3.80 or 4:1.

However, this is an average of “whales” and “zeroes” who spend nothing. According to a Swrve report, “zeroes” make up 98.5% of mobile game users. Disaggregating the weighted average of 1.5% “whales” and 98.5% “zeroes”, yields an average of $1,333 mobile game spend per MAU on iOS for those who spend at all.

Obviously, the Swvre number is based on all users not MAUs. Assuming MAUs are only 10% of Swrve’s number still yields an iOS average of $133 yearly mobile game spend per MAU who spends at all. Wow!

Getting back to valuation of MZ, we use the macro numbers above to scale up a “power function” relation developed by Think Gaming, Inc. between revenue and revenue rank for iOS Apple Store in the US.

We then test the relationship for reasonableness by comparing points on the curve with game-specific revenue disclosures by King for its three Top 15 hits.

Below is our latest effort at mapping Global app store revenue rank to estimated 2014 revenue run rate in $ Millions.

mapping update

Spreadsheet update

When we plot the log of both numbers, the relation is not linear, but kinked up at #3. Hence, it is not a pure power function. Mobile game revenue is very concentrated at the top and the long tail is very thin after game ranked 10,000.

This is in contrast to the original “long tail” work using bookstore data which came to the conclusion that excluding the book “long tail” from a store – books with revenue rank >10,000 — meant excluding 30%+ of sales.

For mobile games, it might turn out that excluding the mobile game “long tail” – mobile games with revenue rank >10,000 — might mean excluding only 5% of sales. By removing these games, mostly IP rip-offs, you lose only 5% of revenue but improve app discovery. Take note of that Apple and Google.

Because of a “power function” relation between revenue and revenue rank, a GoW at #3 is not really knocking on the door of the “Billionaire Game Club” but is still hundreds of millions of dollars away from #2.

The one well known example of a power function is the half-life relation. Another less well known example is the Zipf function named after a 1930’s linguist who mapped out word count in literature as a function of rank.

I like to characterize the top three global ranking games – Clash of Clans, Puzzle and Dragons, and Candy Crush Saga –as the “the-of-and” of mobile game revenue ranking. BTW, the last phrase is meta-Zipfian.

The final step in valuing MZ is to pick an appropriate price/sales (P/S) ratio. Below is a spreadsheet of the pre-IPO and current P/S ratio of King and Zynga.

trailing PS

Given the disappointing post-IPO stock performance of these two companies, we believe that investors in mobile gaming companies would never again pay the pre-IPO P/S ratio of King at 3.76 or Zynga at 6.82. We believe that the current P/S ratio of King today at 2.46 is an appropriate number to use in valuing a US mobile game company today.

Valuing MZ at a P/S ratio of 2.46 and a run rate of $831M produces a current valuation of $2.04B.

A year from now with the launch of a second hit and a run rate of $1.5B, we would up the P/S ratio to 3.0 and value MZ at $4.5B. An investment now in MZ has the potential to double in a year.

We estimate that MZ must be sitting on between $200M and $300M in cash, given its run rate and relatively small headcount, and the fact that mobile gaming companies have little cash tied up in receivables and inventory.

And MZ’s venture capitalists have no immediate need to recover its investments as total venture capital in MZ is reportedly around $16M with Y Combinator as seed investor, Anthos and Baseline in the Series A, and Menlo in the Series B.

The only need for MZ to seek outside investment in the neighborhood of, say $200M, would be to take the edge off the IPO wait of employees/shareholders by paying them a dividend or by buying some of their shares.

The best option would be to finance this through a Series C venture capital round.

A less preferred source would be a minority stake from a strategic partner like Softbank or TenCent who could open doors in the Asian market. But, Softbank is the majority owner now of both GungHo Online and Softcell, both of whom compete with MZ for gamers. A majority investment by Softcell could raise all sorts of conflict of interests.

The least preferred would be an outright acquisition by another publicly held gaming company.  Zynga is drowning since the tepid response to “FarmVille 2: Country Escape”. CEO Don Mattrick has admitted that Supercell’s similar  farming game Hay Day has “eaten our lunch”.

There is a single intriguing buy-out candidate in Electronic Arts [EA], with its mobile division on the rise. It now has “The Simpson: Tapped Out” at #7 and  “The Sims: Free Play” at #18. GoW would double that division’s revenue and boost mobile’s share of EA revenue to between 20% and 30%.

There could be some really interesting synergies between these two companies with MZ’s strength is massively global real-time play and communication and EA’s yet untapped ability to “put petal to the metal” .

That is, EA should be the early leader in porting graphics intensive games via its Frostbite 3D engine to the soon to be released iOS 8 featuring a new graphics API called Metal that taps directly into “metal”  — the 64-bit A7 CPU — achieving a reportedly 10-fold speed increase in 3D graphics rendering over the previous iOS graphics API called OpenGL.