Finland’s Rovio posts an unexpected loss on higher spending on advertising and marketing

The maker of ‘Angry Birds’ posted a quarterly loss as it spent heavily to attract mobile-game players.

The maker of ‘Angry Birds’ posted a quarterly loss as it spent heavily to attract mobile-game players. PHOTO: ANDRES KUDACKI/ASSOCIATED PRESS

By Stu Woo

Updated Nov. 23, 2017 12:39 p.m. ET

4 COMMENTS

Shares of “Angry Birds” maker Rovio Entertainment Corp. plunged 22% Thursday after a surprise, third-quarter loss raised fresh questions about the company’s ability to navigate the fickle tastes of today’s mobile gamers.

Thursday’s rout came after the Finnish company reported its first earnings since going public in September. That listing—envisioned years ago when “Angry Birds” was a runaway hit and Rovio was one of Europe’s most promising tech startups—was scaled back sharply. Instead of listing in New York, the company chose the local Nasdaq Helsinki market. Investors valued the company at about $1 billion, far short of the $2 billion underwriters had hoped to hit.

Rovio’s fast ascent as one of the pioneers of mobile gaming—and its various attempts at remaking itself since then—has made it a poster child for the challenges of the nascent industry as a whole.

After starting out charging players to download its games, it adopted the “free-to-play” model rolled out by competitors like “Clash of Clans” maker Supercell. The model offers players the game for free, relying on in-game purchases and ads to generate revenue.

That has kept Rovio and competitors focused on luring and holding onto a very small slice of dedicated players. Only 2.5% of all mobile-game players ever spend money, according to analytics firm AppsFlyer.

Rovio’s head of games, Wilhelm Taht, said in an interview last month that the company wants to make fewer games per year and “run them like a service.” For example, in “Angry Birds 2,” players get five turns to complete a level. If they run out of turns, they can wait 30 minutes for a free turn, or buy turns to immediately play again.

Apathetic Birds

Mobile game developers struggle to keep players.

Percentage of people who open game

apps after downloading*

40

%

30

20

10

0

Day 1

21

3

27

6

16

10

*Game app is downloaded on day 0.

Sources: AppsFlyer

Game makers have tried, with mixed results, to churn out new hits. In the meantime, they must tweak existing games to keep money-spending players from moving on. Rovio has also been spending heavily on advertising to bring in new players.

Rovio on Thursday said revenue rose 41.2% in the third quarter ended Sept. 30 to €70.7 million ($83.1 million) compared with the year-ago period. Rovio said 90% of its sales came from games, almost all of which were “Angry Birds” related. The rest came from licensing.

The game maker spent €22.2 million on “user acquisition” costs in the third quarter, quadrupling the €5.4 million it spent in the same period in 2016. Rovio also spent heavily on marketing the launch of its “Angry Birds Match” game in September.

The expenses hit profit. Rovio said it lost €800,000 in the period, compared with a profit of €3.9 million in the same period last year. Analysts and investors were expecting a hefty gain.

Rovio Chief Executive Kati Levoranta said the company’s strategy was to pump money into marketing its top performing games, and that it expected to recoup these costs in eight to 10 months.

Thursday’s earnings marked the latest swing for a company that helped popularize smartphone games when it released “Angry Birds” eight years ago. It tried to turn itself into an entertainment powerhouse, with in-house divisions that published books and produced a hit movie.

But two years ago it acknowledged it had ventured into too many businesses. It laid off employees and said it would focus on games. Rovio now licenses the non-gaming aspects of “Angry Birds,” including merchandise and a movie sequel, to third parties.

Another industry trailblazer, Zynga Inc., publisher of “Words with Friends,” has also struggled to stay profitable amid the competition. Its stock now trades for less than a third of its peak, in 2012.

Many of Rovio’s other big competitors have since been swallowed up by rivals or investors with deeper pockets. Videogame giant Activision Blizzard Inc. bought “Candy Crush” maker King Digital Entertainment in 2016 for $5.9 billion. Supercell, the “Clash of Clans” developer, in 2013 sold a 51% stake for $1.5 billion to Japan’s SoftBank Corp., before Chinese giant Tencent Holdings Ltd. and partners bought an 84.3% stake for $8.6 billion last year.

(http://www.autoadmit.com/thread.php?thread_id=3807777&forum_id=2#34763011)