The stock price of King Digital Entertainment fell over 15% on its public debut on the New York Stock Exchange, despite the great success this mobile game maker has enjoyed from Candy Crush Saga, one of the biggest hits in the social mobile gaming industry.1 The drop was not surprising, however, as investors expressed fears that King was “at risk of becoming a one-hit wonder.”2
Somewhat similar story happened over two years ago during Zynga’s IPO. The developer of the then most popular game FarmVille priced its IPO at $10 per share but the stock closed 5% down from its offering price on the first day.3 There has been considerable decline in the popularity of its games as well as in the profits since then. As of the end of April 4, 2014, Zynga’s stock is traded at $4.20 a share.
Indeed, in its filing with the U.S. Securities and Exchange Commission, King warned investors that its games could lose players and generate less revenue as a result over time.4 King’s revenue and gross bookings dropped in the fourth quarter of 2013, suggesting that the company might be leveling off.5 Will King become another Zynga?
Despite both companies’ reliance on the freemium approach as their business model, a close examination would reveal several significant differences between Zynga and King. First, King is more successful than Zynga in terms of revenue at the time of IPO. The most recent quarterly revenue and gross bookings in the I.P.O filing are $287 million and $235 million (Q1-11) for Zynga, compared to $632 million and $602 million (Q4-13) for King.6
Secondly, Zynga is more diversified with regard to sources of revenue than King. Zynga’s top three games accounted for only a little over half of its online game revenue since 2011.7 In contrast, King’s top three games accounted for 94% of the total gross bookings in 2013.8. Nevertheless, King anticipated more diversification of its gross bookings through future releases of new games.9
Thirdly, Zynga’s dependence on the relationship with Facebook has subjected it to more risks. While listed as a risk factor in its initial filing,10 its close relationship with Facebook did end in November 2012, followed by an immediate 13% drop in Zynga’s stock price.11 On the other hand, King has no such dependence.
Lastly, the games that generate profits for Zynga and King are very distinct. Zynga has mostly simulation games, e.g., FarmVille, Zynga Poker and ChefVille, where there is usually no definite goal and players have much freedom to control a character or a thing. Meanwhile, King’s profitable games are mostly puzzle games, where the objective of the game is to solve the puzzle and completion of one level will allow players to advance to the next one. Arguably, a person is more incentivized to purchase items in a puzzle game than in a simulation game. This is because the items available for purchase in a puzzle game are usually to accelerate the progress of solving puzzles, which gets to exactly the heart of the game. Meanwhile, it is a bit pointless to buy anything in a simulation game. Since a simulation game has no strictly defined goal, obtaining any item via purchase will not help progress the game, so why bother spending the money? Additionally, from a personal point of view, puzzle solving games can be much more addictive than simulation games in general, which could make a big difference with respect to the revenue of the developer companies.
Of course, it is still hard to determine whether King’s stock will do better than that of Zynga just based on the preceding comparison. In any case, it is too early to conclude that King will meet the fate of Zynga, given the substantial differences between the two elaborated above.
William Alden, App Maker Buckles on 1st Day of Trading, N.Y. Times Dealbook (Mar. 27, 2014), available at http://dealbook.nytimes.com/2014/03/26/candy-crush-maker-king-falls-in-trading-debut. ↩
Julianne Pepitone, Zynga shares close below IPO price, CNNMoney (Dec. 16, 2011), available at http://money.cnn.com/2011/12/16/technology/zynga_ipo. ↩
King Digital Entm’t PLC, Registration Statement (Form F-1) 6 (Feb. 18, 2014) [hereinafter King F-1], available at http://www.sec.gov/Archives/edgar/data/1580732/000119312514056089/d564433df1.htm. See also Michael J. de la Merced & Nick Wingfield, Maker of Candy Crush Puts Value at $7.6 Billion, N.Y. Times Dealbook (Mar. 13, 2014), available at http://dealbook.nytimes.com/2014/03/12/king-maker-of-candy-crush-game-seeks-up-to-532-8-million-in-i-p-o. ↩
King F-1, supra note 4, at 5; Jenna Wortham & Michael J. de la Merced, App Maker Seeks I.P.O. to Further Momentum, N.Y. Times Dealbook (Feb. 19, 2014), available at http://dealbook.nytimes.com/2014/02/18/candy-crush-maker-files-for-an-i-p-o. ↩
Zynga Inc., Registration Statement (Form S-1) 4 (July 1, 2011) [hereinafter Zynga S-1], available at http://www.sec.gov/Archives/edgar/data/1439404/000119312511180285/ds1.htm; King F-1, supra note 4, at 5. ↩
Zynga Inc., Annual Report (Form 10-K) (Feb. 21, 2014), available at http://investor.zynga.com/secfiling.cfm?filingID=1193125-14-62902&CIK=1439404. ↩
King F-1, supra note 4, at 54 ↩
Zynga S-1, supra note 6, at 14. ↩