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Dear Rovio, please don’t IPO, you’ll kill the market
Together with law firm Osborne Clarke, I host a lunch 3 or 4 times a year where a bunch of games companies and financial investors get together to chat about the games business and the difficulties of investing in it. It is not a pitching event: it is about closing the gaping chasm in understanding between investors and game makers to make better deals happen more often in the future.
Last week, we were discussing Zynga’s IPO, and how its dismal performance has made it harder for social and mobile games startups to raise money. (In a straw poll at the end, I – the eternal optimist – was one of only two people who thought that it will be harder to raise capital for mobile/social games in Europe in the next 18 months than it was in the previous 18 months.)
As I summed up, I said “And please God, don’t let Rovio float, that will really kill the market.”
This post is a short analysis of why on reflection, believe that plea to be sensible and rational.
The Rovio hype-curve
Rovio is a hugely successful business which, after many failed iterations, found a game and a brand that captivated millions. Their core game, Angry Birds, has 200 million MAUs and between 20 and 30 million DAUs. Their merchandise is everywhere. They have even announced an Angry Birds/Star Wars tie-in.
I expect them to announce an IPO in 2013.
To my mind, the Star Wars deal is the moment that Rovio jumped the shark. They are at the peak of the Gartner hype cycle. They have phenomenal, high margin success. When I talk to people outside the games industry, they talk about “making the next Angry Birds”.
That’s the point. There is no next Angry Birds. Even Rovio, the creators of Angry Birds, can’t make the next Angry Birds. Perhaps more accurately, they know that the chances of making their next game as successful as Angry Birds are so slim (about 2%, if their track record of creating over 50 games before discovering the unique blend of art, gameplay, humour and music that made Angry Birds so successful is anything to go by) that they would jeopardise everything they have built by trying. (Bad Piggies may prove me wrong, and make me look very foolish over the next few months).
So instead of innovating, they are exploiting. Extremely well. With 90% gross margins in their best years.
The investor problem
Very few public market investors understand the games industry well. They understand that the industry is changing. They understand that Rovio has had massive success on smartphones (and they absolutely have – all credit to them). They would like a piece of the Angry Birds action.
I expect them to be disappointed. If Rovio floats in 2013, it will be because its growth is behind it. It will become a business, based on the exploitation of a single hit, that is milking its asset for all it is worth. Like Activision – and using an different industry analogy – Rovio is an oil exploitation business, not an oil exploration business. Eventually the oil will run out.
Unfortunately, the hype remains strong with Rovio. If it floats, it will benefit from growth multiples even as it becomes a declining business. As the market realises the reality of what it has bought, the valuation multiples will contract, and the company’s share price will fall.
Not only that, but investors at large will start saying – as they are saying in the wake of Zynga’s disastrous performance – “well, if Rovio can’t make it, what hope is there for all these other games businesses.” Enthusiasm for gaming investments in Europe will collapse.
So, please, Rovio, for all our sake’s, don’t IPO.
And if they do, and you are raising money for your mobile/tablet/online games businesses, close your financing, at any price. Pronto.