Powerful mobile devices caused tectonic shifts across industries. In the mobile-apocalyptic landscape, several companies fell into new yawning crevices as they failed to adapt. Mobile solutions created vast opportunities for other companies to provide incredible value and turn that into sustainable profits. But in one primordial pool that the mobile industry spawned, game companies attempt the same failed business model. These companies can create a quick flash of incredible growth and revenue, but in the long term, one mobile game can't sustain an entire company.
Producing mobile games does not require the resources that the traditional public corporation provides, and because of this, companies like King Digital Entertainment (NYSE:KING) can't survive in the long term.
Flashes in the pan
King Digital is known for Candy Crush. This game is just a variation of a tile-matching game that borrows ideas from Bejeweled, Dr. Mario, and Tetris, all the way to the relatively ancient Mahjong solitaire. The game has been incredibly successful, accounting for 78% of King Digital's $632 million in gross bookings for the fourth quarter of 2013 and 67% of $641 million in gross bookings for the first quarter of 2014.
One of the critiques of King Digital is the need to diversify away from the amazing success of Candy Crush, which the falling share of total bookings would seem to indicate. However, one reason for this is that there were fewer Candy Crush bookings overall. And a Google Trends search seems to point to Candy Crush's quickly falling popularity, seemingly matching Zynga's (NASDAQ:ZNGA) FarmVille demise:
Due to this dwindling popularity, revenue has been flat since the third quarter of 2013, and monthly unique payers have fallen from 13 million to 11.9 million.
Not the right type of organization
With Candy Crush's contributions falling, King continues to launch other titles like Farm Heroes. And its research and development costs are increasing, now at 3% of adjusted revenue. But no matter how much a company puts into developing a game, there's no guarantee it will be accepted by the masses. The benefits of a large organization, like economies of scale or job specialization, don't give King Digital that much more of an advantage over a single game developer working from home.
Even the one notable advantage of advertising resources can be matched through a viral hit that has spent absolutely zero on marketing. For example, take the recent hits 2048 or Flappy Bird, created by single developers and with no advertising budget. Meanwhile, King spent $123 million last quarter on sales and marketing.
Zynga seems to have understood the futile attempts to always release new gaming hits, usually based on concepts of past hits, and purchased NaturalMotion earlier this year. NaturalMotion created Clumsy Ninja, a game based on its animation and artificial intelligence technology that it offers to other game makers. As the CEO of NaturalMotion told WIRED:
We don't want to make games other people are making... that's a fool's business. You can't build an entertainment company like that. Entertainment companies should be about creative risk and creating something people have never seen before.
This is much more aligned to the principles leading 2048 and Flappy Bird to success and a principle that King might want to instill before it completely loses its Candy Crush steam. Otherwise, King's organizational size only makes it slower to adapt and create compared to a lone developer.
Dan Newman has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.