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Free-to-play marketing costs rise and profitability falls at King and Supercell

By on March 24, 2015
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Supercell has recently reported revenues of €1.55 billion for 2014, from Hay Day, Clash of Clans and Boom Beach. It made profits (EBITDA: Earnings before interest, tax, depreciation and amortisation) of €515 million.

That compares with revenues of €519 million and profits of €242 million.

This is both fantastic, and also worrying. Revenues grew almost threefold. Profits almost doubled. But hidden in these numbers are costs that are growing faster than revenues and profits. Look at the table below:

Supercell's financial performance 2013-2014

Revenue grew by 200% and profits grew by 113%. But costs are rising. Those operating costs are not staff costs. Supercell ended 2013 with 138 staff, and only added a dozen new people in 2014. It is possible that some of those costs are outsourced costs of development or technology. But I suspect nearly all of that growth is marketing. Like the Superbowl ad with Liam Neeson.

So marketing costs are rising at a pace that is outstripping revenue growth. King, the maker of Candy Crush Saga, is keeping costs under control. 2014 revenue grew from $1.9 billion to $2.3 billion (up 20%), while profits grew just 8% from $714 million to $768 million. Much of the cost growth was associated with equity-based compensation for stuff. Marketing costs grew 20% (i.e. in line with revenue) from $377 million to $455 million.

Note that Supercell figures are quoted in euros. King figures are quoted in dollars.

King financial performance 2013-2014

So King is spending almost half a billion dollars a year on marketing. Supercell is spending, according to the Financial Times, €400 million a year marketing, and its operating costs are growing faster than revenues and profits. I expect this trend to continue throughout 2015: development and marketing costs will continue to spiral, revenue growth will slow and profitabiity will decline. I wonder whether investors are ready for this news.

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: thecurveonline.com