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[Gamesbriefers] Is mobile gaming in a bubble?

By on April 9, 2014
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Continued from a conversation published earlier this year: what was the biggest gaming event in 2013?

Eric-Hautemont1Eric Hautemont CEO of Days of Wonder

For me the main event of 2013 was that F2P on Mobile likely hit a peak.

The fact that King almost floated but didn’t, that the guys who were top of the pack in paid games 2-3 years ago (Rovio) have all but thrown in the towel, transitioning over to F2P, and perhaps more ominously reports that CPI hit $ 8+ this season all point to a peak in the F2P mania on Mobile devices.

Whether this peak is a local one or an absolute one (à la dot.com boom and bust) remains to be seen.


Oscar ClarkOscar Clark Evangelist for Applifier

Never been a fan of the ‘Peak’ concept… although in terms of the current ‘lazy/greedy’ flavour of F2P perhaps I can’t entirely disagree

Fortunately F2P is all about adaptability so we will see better evolutions coming which may not get the ‘peaks’ of revenue but have a chance to deliver a more sustainable game development economy


Teut WeidemannTeut Weidemann Online Specialist at Ubisoft

How can a market peak if it still expanding (aka iOS sales)?


Ben Cousins1Ben Cousins Head of European Game Studios at DeNA

How could .com have had a ‘boom’ when in that case most of the high valued companies were making neither profit or revenue?


harry holmwoodHarry Holmwood CEO of Marvelous AQL Europe

The boom was in valuations not profits/revenues. It could be argued we’re there again. The biggest problem we face as an industry is our inability to predictably recreate success stories, other than by playing the ‘outspend the competition’ arms race.


Martin DarbyMartin Darby 

The “boom” was the bubble, when the amount of available venture capital exceeded the size of the market. -right?


Ben Cousins1Ben Cousins Head of European Game Studios at DeNA

It’s rightly more commonly called a ‘bubble’, because it was a speculative bubble. Is the valuation of mobile games companies using perfectly normal multiples on revenue really the same thing? I don’t think so.


eric seufertEric Seufert Mentor at Gamefounders

But I don’t think we’re seeing a “boom” in terms of unrealistic / frivolous valuations based on irrational enthusiasm. King is reportedly trying to raise $5BN for its IPO, which is 10x 2013 revenues. Supercell was on a $720MM run rate when it sold, meaning its $3BN valuation was only 4.2x. These aren’t “boom” multiples.


Ben Cousins1Ben Cousins Head of European Game Studios at DeNA

Correct, Netscape revenues were $33 million (negative 10 million net income) in ’95 pre-IPO.

The offer price for the IPO valued the company at $1.4B or 42x 1995 revenues. Almost exactly 10x the Supercell multiple.

During the first day’s trading Netscape’s market cap was at $3.7B or 112x 1995 revenues

That’s a speculative bubble.


robRob Fahey

Ben is quite correct to say that there is no speculative bubble in the mobile games market right now. The valuations we’ve seen in the past couple of years are perfectly justified by standard models for company valuation, which is a complete contrast with the dot.com era.

I think the narrative which says that these valuations are “crazy” in some way is coming from commentators both on the tech side and on the traditional games side who haven’t yet grasped the actual scale of the mobile game market.

Of course, it should go without saying that you don’t need a bubble to have a bust. A genuine boom (growth in revenue and income rather than just wild inflation in asset prices) can also go bust – there was, for example, no particular asset price bubble foreshadowed the games industry’s former crash in 1983. It remains plausible that mobile gaming has hit a peak in 2013 even without any bubble in asset prices. Market saturation or a turn in consumer sentiment could turn the direction of the graph; the emergence of a new technological or social trend, or an unfavourable macroeconomic headwind, could turn it dramatically.

We could see levelling off or a downturn in 2014, or another year of growth. I’d say the indicators favour the latter, personally, but I wouldn’t expect the growth to match 2013 – a slowdown but by no means a halt or a decline.


Ben Cousins1Ben Cousins Head of European Game Studios at DeNA

What data is leading to your expectation of slowdown Rob?


robRob Fahey

Well, this is all crystal ball gazing, faith and divination from chicken-guts at this point in time, but there are a handful of things that push my thinking in that direction.

First and foremost, the incredibly rapid rise in CPA is a concern on two fronts. It eats into the income of successful companies and sets the bar for success incredibly high, discouraging market newcomers and leading existing firms to consider new approaches or new platforms. I’m also concerned that one widespread reaction will be to adopt more aggressive monetisation strategies, which could cause consumer fatigue.

Secondly, we’re reaching the exhaustion point on the first wave of smartphone adoption in developed markets. Places like China are still incredibly exciting and India is barely out of the starting blocks, but in the developed world we’re five years into this and the natural growth from new smartphone adoption is tailing off. Apple and Samsung are still seeing sales growth but that’s a false friend to content creators; the vast majority of those phones are now replacing other smartphones, so the addressable market isn’t growing all that rapidly.

Third, I actually find the extremely rapid uptick in App Store revenue in 2013 slightly worrying. It feels a touch bubbly to me – when consumers in any market switch to very high-spending behaviour rapidly, there’s often a bit of a hangover a few months down the line where spending drops back sharply before hitting a more sustainable level of growth. This may not occur – we don’t have enough nitty gritty on the App Store spending data to really tell, but it’s a risk factor.

Finally, and this is related to the second point – I look around on the subway every day and see everyone with their nose stuck in either a game or an ebook on their phone. I don’t think the ebook readers (generally older) are going to start playing games any time soon. Maybe the handful playing DS or PSP games will start playing mobile games; but realistically, most of the growth in this (admittedly very developed) market is going to have to come from people putting down Puzzle & Dragons or Hay Day and picking up something new. Japan’s already at the point of needing to recycle users rather than attract new ones, then, and I doubt other markets are terribly far behind.

That’s a natural inflection point on the growth curve – it doesn’t mean we’re doing anything wrong, just that we’re hitting logical market size limits. Those limits are largely invisible walls though, and where you think they exist is as much a matter of faith as of data, I fear.


harry holmwoodHarry Holmwood CEO of Marvelous AQL Europe

The challenge right now is that the revenues (clearly) are there (which often they were not in the dotcom bubble), but my concern is how much money is chasing these revenues. As user acquisition costs rise, revenues alone are not a good enough barometer of performance. One could build a billion dollar turnover business in no time by selling $10 notes for $5.

The way we can (relatively) reliably gauge value is a combination of profit (not revenue) multiples, an understanding of a company’s ability to recreate earlier/current successes and knowledge of how long current/existing properties can continue to be successful.

There are companies that are showing potential in all of those areas, and dotcom ‘boom/bubble’ vs current state of affairs is not a direct like-for-like comparison, but it would be wrong to think that the current valuations don’t include a good measure of wishful thinking IMHO.


Eric-Hautemont1Eric Hautemont CEO of Days of Wonder

Harry perfectly captured what I was trying to say.

If you want a non dot.com comparison, think of what happened in the social space (i.e. FB games) in the last couple of years: buying revenue is always a dangerous temptation and it usually ends badly.

I do think CPI are close (in time, not necessarily in price) to having hit a peak: the price may temporarily go much higher still, like a short squeeze; but my bet is it will look like an aberration in retrospect, not unlike what happened to CPC and similar ad prices during the dot.com era.

As for valuations, yes the multiples on revenue (not necessarily profit) don’t look as crazy as during the heydays of the dot.com. But one can wonder how sustainable these revenues are, and how quickly they could collapse (Zynga anyone). In retrospect, prices paid may look completely speculative; time will tell.

Also to be clear: Supercell valuation might prove to be completely sustainable. I’d be way more concerned about private valuations of second-tier players, many of whom I suspect would already have a hard time raising money at the same price as they did a year ago – or even hard-time raising money, period, in today’s environment.


Teut WeidemannTeut Weidemann Online Specialist at Ubisoft

“First and foremost, the incredibly rapid rise in CPA is a concern on two fronts.”

There is more than one way to aquire users. People are thinking too narrow.

“Secondly, we’re reaching the exhaustion point on the first wave of smartphone adoption in developed markets. … the vast majority of those phones are now replacing other smartphones, so the addressable market isn’t growing all that rapidly”

Still a couple of billion people to sell to there. Much more than have smartphones there, we just beat a billion.

“Third, I actually find the extremely rapid uptick in App Store revenue in 2013 slightly worrying.”

Thats odd, how can spending in a marketing mark a bubble? The App Store, even tiny compared to Apples’ revenue, is still competing now with the total games market world wide. No worries for me.

“Finally, and this is related to the second point – I look around on the subway every day and see everyone with their nose stuck in either a game or an ebook on their phone. I don’t think the ebook readers (generally older) are going to start playing games any time soon”

Wrong method of statistics. We have proof that the smartphone & tablet gamer plays at home, not on commute.
For me, unless everyone above 13 has a smartphone on earth, there is no end to this. F2p is 10 years old, started in Asia, conquered Europe and now USA and RoW. Still a lot to go, no end in sight.


Emily GreerEmily Greer CEO and co-founder at Kongregate

I really don’t think the CPI story is all that interesting. Web CPAs have averaged $2.00-$3.00 for years and the LTVs for web and mobile games seem to be fairly similar: it’s to be expected that CPIs would rise to similar levels. Are the CPIs higher than the average LTV for a game? Yes, but again that is also true in web, and again to be expected in a situation where there is a power law distribution of lifetime ARPUs. The average LTV of a game that can support paid UA is quite a bit higher than the CPIs we’re seeing.

However I do think the consequences are interesting in that it makes it obvious to the average small developer that lightning striking on a good game to make it a huge hit is not a viable strategy anymore, if it ever was. A big hit will take capital, which you will need to have available from an existing strong business (like King), already raised from a VC (like Supercell), or need to partner with a publisher. Since the first two are not available to the average developer I think there’s going to be a big resurgence in the publisher model over the next year.

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