Is Candy Crush Killing Millennial Media?

Today has been another bad day for Millennial Media (NYSE: MM  ) investors. Shares are closing in on November's all-time low after the mobile display advertising specialist posted uninspiring financial results. 

Adjusted fourth-quarter revenue grew 44% year over year to $109.5 million, and Millennial clocked in with a smaller loss than analysts were targeting. Unfortunately, the current quarter is going to get worse. Millennial Media is forecasting a steep sequential dip to between $72 million and $76 million in revenue, well short of the $83.3 million that analysts projected. A sequential decline between the seasonally potent holiday quarter and the first quarter is natural, but a 32% quarter over quarter drop is brutal. The implied year-over-year pro forma growth is closer to 15%, and that's far less octane than what Millennial Media investors are used to.

Millennial Media went public two years ago as the leading mobile marketer that wasn't owned by the tech giants behind Android and iOS. Being operating system-agnostic had its benefits, and when it went public it had Zynga (NASDAQ: ZNGA  ) and Pandora (NYSE: P  ) as its biggest clients.

A lot has changed for both of those companies, particularly as Zynga saw gross bookings peak at $1.15 billion that year before plunging to $716 million in 2013. Pandora's still growing at a healthy clip, but its biggest growing segment is premium subscriptions. These are the accounts that pay up so they don't have to see any ads.

Millennial Media isn't framing its disappointing guidance in the context of folks paying for premium access the way that they do with Pandora. However, the upcoming King Digital Entertainment IPO could serve to illustrate the popularity of app developers choosing in-game purchases over bombarding gamers with ignored ads. The next time you fire up King's Candy Crush Saga you won't see any third-party ads. As King explained in this week's prospectus, it generated just 1% of its revenue from selling third-party advertising in 2013, so it discontinued the practice.

"We do not expect to derive any significant portion of our revenue from the sale of advertising space in the foreseeable future," reads King's SEC filing.

This is a pretty big deal. King scored nearly $2 billion in gross bookings last year, a lot more than Zynga had at its peak.

Millennial Media can make things up in volume. It's serving up ads on 50,000 apps now, far more than the 30,000 apps it was servicing when it went public two years ago. However, if more developers follow King's lead and decide to use its popular titles merely to sell virtual extras or promote other games in their portfolios, it would be bad news for mobile marketers.

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