King Digital IPO: How can Ireland’s Candy-Crushing game maker sweeten value?


 King Digital Entertainment’s IPO announcement is, despite its impressive user numbers, a risk. The Dublin-based developer’s games have been downloaded on over 500 million mobile devices and 408 million of those consumers play at least one game per month. Approximately 124 million users play every day. Which means that on any day, 1 in every 60 people on Earth is smashing virtual lumps of candy on their phone. So where does the risk come from?

 King’s profit margins are eye-boggling too: 665 employees generated $1.9bn of revenue in 2013. Some analysts value the company at over $5bn, which would make King, founded in Sweden in 2003, the ninth most valuable publicly-listed Irish firm of all time. Guinness-maker Diageo, by the way, tops out that list with a value of just under $50bn.

Virtual candy needs virtually no production. Mobile comprises 73 per cent of total bookings (ie, virtual goods sold). Zynga made only 35 per cent of its own business from mobile. When it comes to platform, King is on the curve.

 But many more experts have pointed to the failure of Zynga, maker of pixelated agrarian utopia Farmville, which since its 2011 public offering has lost half its share price. And there are signs King might only be ready to list because it knows its business is running out of profitability time. For starters, revenues have begun to drop on Candy Crush, whose players are increasingly shunning the extras and add-ons that King gets its revenue from (the game itself is a free download.) Currently only 3 per cent of Candy Crushers pay to play, down from a high of only 4 per cent in Q2 2013.

 In addition, the number of ‘monthly unique payers’ shrank by 847,000 in the past quarter, suggesting that, while King added 47 million players to its gargantuan base, its games are beginning to plateau. Not the best omen for a public offering. In fact, King has dished out $500 million in dividends to private shareholders in the past six months, including $287m in October 2013 and $213 this month. Why are people taking their money and running? It might be because Candy Crush, which, as had already been mentioned, seems to be reaching a peak, makes up almost 80 per cent of King’s business. The next-best is Pet Rescue. When it comes to treats, people prefer candy to critters.

 So what can King do to increase its market value? First, it should be piling more cash into development. It currently spends six per cent of revenue on R&D, but with Candy Crush dominating the company so much this figure should be far higher (Facebook spends 16 per cent.) Increase the number of games people are playing, and an IPO will be a far safer.

 Secondly, King should avoid being characterized as a ‘mean’ company. King dropped its plan to trademark the word ‘Candy’ in the US. But that plan still holds for the rest of the world, and some view the aggressive tactic as less assertive, more desperate. Which could translate to a difficult public offering.

 Finally, King should make its games more social. Playing one of the company’s games might be a technicolor, musical affair. But it’s still a lonesome one. If King can find a way to connect its gamers more effectively (Rovio, maker of Angry Birds, has suffered similarly in this respect), it may be able to increase that three per cent who’ll dip into their pockets to play. Mobile games such as Word Worm are good at this, turning a one-player lexicographic exercise into a two-player battle.

 Despite all this, expect a flurry of excitement and activity around King’s IPO. Just remember, investors: you have been warned.