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How $4.25 m was not enough to save Eternal Earth developer Sparkplay

By on August 9, 2010
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In an emotional company blog post yesterday, CEO Matt Mihaly announced that Sparkplay has laid off all but two staff and looks likely to go bust.I’ve added it to the Job Loss Tracker.

Sparkplay operates Eternal Earth, a free-to-play MMO funded by virtual goods. In February 2008, Sparkplay raised $4.25 million in Series A funding from Redpoint Ventures and Prism VentureWorks.

The announcement is obviously terrible news for the company and my heart goes out to founders and staff. I’ve been there before, and it’s not pleasant.

But regular readers will know that I am a huge proponent of free-to-play, and seeing a free-to-play games company going bust is something that I would like to look at very carefully, to get the best possible learnings from it.

Unfortunately, I don’t know anything about the specifics of Sparkplay. (I’ll repeat that: everything that follows is WILD SPECULATION). I’d love to get some validation from Matt one day.

But in the meantime, here are some thoughts that occurred to me.

1. Costs were higher than revenues

This seems like a pretty likely assumption, given that the company was running out of money. There are many ways that could have happened but here are the two biggies:

  • CPA > LTV: I teach masterclasses on making money from social games, and this is one of the very few equations I use. In essence, if it costs you more to acquire a customer than the lifetime value of a customer, you will never be profitable.
  • Development / maintenance costs were too high: CPA is a marginal cost. But if the underlying costs of operating a game are too high, then you need a *lot* of users to pay for them. And in an environment where customer acquisition is getting ever more expensive, it can be tough to breakeven.

I think all developers need to focus on these three elements – CPA, LTV and ongoing development cost – closely to ensure they are on a route to profitability.

2. Kill games that are underperforming

The success of companies like Zynga is that they launch games cheaply, see if they resonate at scale and then throw money at them. (Note, all things are relative: Zynga probably spends several million dollars on development and marketing at launch these days).

But they are also prepared to kill games that don’t cut the mustard. Just last week, they shut down Street Racing, which had over 400,000 MAUs. I argued over at Develop that Zynga’s decision to shut down Street Racing was entirely rational for a company with much bigger fish to fry.

Sparkplay only had one title. If it began to falter, they didn’t have other titles to fall back on. This could be a problem in the long run for any company that has only one major title (like Jagex, Mind Candy, Ankama etc). It makes “adapt or die” much harder when there is only one title that you can adapt.

3. Beware fixed costs

Eternal Earth saw falling traffic (at least according to Alexa, which I acknowledge is a deeply flawed tool).

One obvious interpretation is that Sparkplay scaled down its customer acquisition activity when it became clear that it was running low of money. That could explain the sustained dip in May.

More importantly, a games service has a relatively high proportion of fixed costs (with the exception of customer acquisition costs, which are variable). Once the number of users falls below a breakeven threshold for paying for coders, artists, sysadmins and so on, a games company starts becoming loss-making pretty quickly.

That Alexa chart, showing that the company lost 50-75% of its users through the last six months could also explain the financial difficulties. Of course, without more insight into the exact situation of the company, I can’t determine the exact causes of this decline.

4. Be wary of investors

Sparkplay raised $4.25 million in Series A funding. That’s a hell of a lot for a consumer Internet business. In a fabulous post, Dave McClure argues that the costs of launching a consumer internet business are lower than they have ever been. $5 million is the top end of what he thinks people need.

I’ve warned before about the dangers of taking too much money too early. You can staff up before you have got your business model tested in a cheap, start-up environment. All of a sudden you need to deliver what it takes to make a VC happy. It can be difficult to pivot in those circumstances.

I even entitled my post on the topic: “Seed, Series A, Series B: Why the wrong funding can kill your company

Conclusion

I don’t know if any of these issues affected Sparkplay. I do know that free-to-play MMOs are cheaper to launch and easier to pivot than traditional games. On the other hand, it is a competitive market, switching costs are low and CPA is rising fast.

There are lessons to be learned from Sparkplay’s demise. I just wish I knew more to be certain *which* lessons were the key ones.

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