Merchant Advance Blog

Blog Article: Candy Crush and the IAP IPO – Billion Dollar Cheat Codes

 

As widely reported in the world of tech and business journalism, Swedish software developer King, famous for its colourful iOS game Candy Crush, is preparing its IPO plans as I write these very words. And what, you ask, does a tiny company that makes a dentist’s-nightmare version of Bejeweled – a simple gem-matching puzzle exercise that’s been around since your mobile phone looked like a suitcase – value itself at in the world of business? According to data released in recent days: seven point six billion dollars. That’s a lot of gumdrops. The global dominance of app-based mobile computing has created new patterns of consumer activity that were unthinkable ten years ago – the idea of spending in tiny microtransactions has proven so appealing to online buyers that it has permeated everything from music to games to magazines. Why spend $50 on a game, or $12 on a CD, when you can purchase its component parts bit by bit for only $0.99? The gaming industry was once driven by Hollywood-style AAA releases, such as Starcraft, Half-Life and Medal of Honor. These were giants of the realm with impeccable developer pedigree, huge budgets, and shiny technological advances guaranteed to pique the attention of the entire market, all the while motivating a whole secondary market of enthusiast PC hardware designed to run the latest titles in stunning high fidelity. Today, however, the market is dominated by the kind of game that fits in your hand, runs on your phone, can be built at low cost by a small team, takes five minutes to enjoy instead of five hours, and is sold to the consumer at a minimal or even zero initial cost. This trend has created an entire industry of agile software developers looking to cash in on the next runaway mobile games success. You’ve heard of the big hits, of course: Farmville. Words With Friends. Birds, both of the Angry and Flappy varieties. The companies behind these attention-grabbing apps have boasted enormous short-term profit – though, in some notable cases such as developers Zynga and Rovio, they have struggled to replicate their one-hit wonder status, leading to sharp declines in investor confidence. Zynga, makers of Farmville, went public in rather spectacular fashion in 2011, shares peaking at a price of around fourteen dollars only to dive to a low of just over two dollars per share by 2012 as their games became outpaced by newer, trendier arrivals. Rovio’s cooling-off coincided with a trend toward repetition of the same core gameplay in its Angry Birds releases (often with licensed tie-in branding providing the only – largely visual – differentiation between games,) showing that there are only so many multi-coloured, badly tempered fowl that users are willing to fling before they sense the staleness of app startups’ models. Analysts fear that King may suffer the same precipitous effects of buyers’ fickle interests and aversion to the same old thing – despite the fact that its games have a longstanding tenure atop the heap of Apple’s highest-grossing downloadable offerings. The free-to-play model with “in-app purchasing”, or IAP, has found its way into the design of games everywhere, from handhelds to high-end next generation hardware. Even for a triple-A” Xbox or Playstation release costing upwards of $50 at launch, additional downloadable content released after the retail product has hit shelves may be able to double or triple the actual profit a developer receives from selling one copy of a purchased game – at a minimal overhead cost. The foundations for one’s enjoyment of the game are provided, but the juiciest extra goodies may be locked behind a pay-only door much like that which has been widely adopted by online editions of magazines and newspapers. It’s startlingly easy to be lulled into the sense that one’s purchases of more items or lives are not a big deal – the oft-repeated idea of “for the price of a cup of coffee each day!” being amortized into death by a thousand taps. Game developers will go out of their way to sweeten the pot by reminding the player that IAP offers a shortcut to success. Finished the game but want to keep going? Need a few extra lives? Want to speed up construction of that building? Can’t get past the fire demon on the sixth floor? It all comes at a price – one that is relatively modest, but one that is cleverly calibrated to offer tantalizing glimpses of something more valuable behind each new door. So much so, in fact, that the combination of a largely young, entertainment-craving user base and easy, always-on one-tap buying has led to a rash of legal conflicts between developers and parents blindsided by huge IAP bills. According to figures published by King, 17% of Candy Crush users are “regular buyers” who spend approximately $17 per month on the game in order to replenish their supply of in-game lives and items. This is not far off from the pricing system defined by long-established subscription models for multiplayer online games (exemplified by the enduringly popular World of Warcraft) whose developers have made steady profits from users paying $12 to $15 a month for the privilege of accessing the virtual world of their choice in a time before IAP existed. Even games such as these, however, are increasingly moving over to a Free- to- Play (caveat: Pay to Excel) model. There’s no doubt that IAP looks like a business-model success, at least in terms of keeping users hooked on entertainment in the relatively short term. Candy Crush is estimated to post a daily revenue of over $800,000 with close to eight million active users per day. Even tech savvy adults possessing disposable income, most of whom might be considered wise to the nefarious ways of online scams, are easily pulled into the mindset of “just one more round” that IAP presents to mobile gamers. Gizmodo.com’s Ashley Feinberg wrote a somewhat darkly humorous piece called “Holy S***, I Just Spent $236 on Candy Crush – Help” last August – only the tip of the iceberg when it comes to stories about IAP bingeing. Dong Nguyen, developer of Flappy Bird (though not an IAP-enabled game, one that garnered enormous profit from in-app linked advertising) even pulled his phenomenally popular creation from Apple’s online store citing guilt over what he considered to be its addictive nature. As a lifelong video-games enthusiast (that’s putting it lightly: I didn’t just want to type “truly gigantic nerd” right off the bat), IAP and downloadable content are somewhat touchy subjects. Most of the time, these optional extras may be worth the money – especially when players pay for expanded realms to explore, or new ways to get more mileage out of games they love – but often enough, the return on one’s in-app purchase can be as trivial as a new colour for your digital horse: a shameless freebie with a price tag attached. This tactic has earned scorn among gamers for essentially allowing a developer to charge players extra for content that already existed, or that may have taken very little effort to produce. Whether legitimately used to deliver new content or not, IAP has replaced the novelty and devious sense of fun that many games used to harbour when it came to unlocking secrets and getting the most out of one’s investment. This used to be called cheating! You would go get your Nintendo Power and enter codes into games (up, up, down, down, left, right, left, right, B, A, Start!) to coax them into divulging hidden items, giving you more lives, skipping that tricky section or making your head grow three times bigger than it should. Today, you simply open your wallet. A whole generation of players has grown up with the imaginative limits of their gaming experience enforced by paywalls rather than the development of rich new ideas or the discovery of cagily programmed trade secrets. The joy of long-form immersion, development and exploration has, in effect, been replaced with paid access to ever-hastening acceleration, more turns, more points, more pizzazz – the sensation of reaching into a candy jar with rhythmic, mindless regularity so as to chomp on those addictive little sweets faster and faster. This brings us back around to the business side of things. Much of the anxiety surrounding King’s upcoming IPO centers on the idea that, like Zynga and Rovio before it, the developer will struggle to produce a worthy successor to Candy Crush – one that will keep buyers clicking that IAP button. Eventually, no matter how bright and fun it may be, people may get the sense that they have seen all the angles of a mobile game (and, perhaps by extension, the business behind it) – this is where AAA-level developers of the past generation may hold the advantage over mobile gaming hotshots. World of Warcraft, for example, is ten years old (a veritable Methuselah in gaming industry terms) and continues to entertain over seven million regular subscribers. Despite shedding some of its player base and transitioning to a limited free-to-play system, its longevity, and, by extension, the success of parent company Blizzard’s business model, has been built on its developers’ ability to weave new, compelling and increasingly challenging chapters into the game’s richly populated and story-driven universe – a policy of gradual expansion in contrast to mobile games’ monetized approach to instant gratification. Starting up a business and making it profitable may involve many calculated risks and judgement calls – many of which relate to decisions about short-term and long-term strategy. Creating a big splash and generating instant buzz is certainly every startup’s dream. But once the sugar rush wears off, important questions arise. How will you see your business model through its youthful growth spurt and into a stable, well-adjusted middle age? What kind of support might you need? How can you plan for development and enrichment that will keep your customers engaged? Much like a skilled gamer might, keep your eyes not only on your target but also on what is around and ahead of you. Mobile-style agility, combined with imagination and the desire to evolve and explore new strategies, may prove to be the key to your success.

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