Rovio, the Finnish maker of Angry Birds, recently reported that its net profit plunged 52% year-over-year to $37.3 million in 2013. The company attributed that steep decline to higher investments in its animation, toys, book publishing, and theme park businesses. However, Rovio's anemic 2.5% revenue growth to $216.3 million has sparked concerns that the Angry Birds franchise is headed for a crash landing.
Over the past four years, Rovio has attempted to build a media empire similar to Disney's (NYSE:DIS) on the scaffolding of its Angry Birds mobile games. To date, Rovio has released 10 main Angry Birds-themed titles, one of which was a kart racer and another of which was a spin-off title, Bad Piggies.
Two of the newer titles depart from the classic touch and flick formula of the earlier games -- Angry Birds Epic is a role-playing game, whereas the female-focused Angry Birds Stella uses collectible telepods, similar to Activision Blizzard's (NASDAQ: ATVI) Skylanders and Disney's Infinity.
Rovio's growth has been explosive -- rising from a mere €5.4 million ($7.4 million) in 2010 to well over $200 million. That growth has silenced critics over the past few years, who frequently called it a one-trick pony.
In 2013, Rovio opened six amusement parks in Finland, Spain, and China, and published over 100 children's books in more than 30 languages. It even launched an animation studio, which will release the first Angry Birds feature film in 2016. As a result, the company's staff grew by 500 people to reach 800 employees worldwide. Revenue from toys, amusement parks, books, and cartoons accounted for 47% of Rovio's total revenue in 2013 -- up from 45% in the previous year.
With these forays into amusement parks and movies, the parallels between Rovio and Disney become obvious. But can Red Bird, Blue Bird, and Boomerang Bird really have the same lasting universal appeal as Mickey Mouse, Donald Duck, or Goofy?
One thing that Rovio shares in common with Disney is its originality. Whereas other mobile game makers such as Zynga (NASDAQ:ZNGA) and King Digital Entertainment (UNKNOWN:KING.DL) rose to prominence with cloned versions of other games, Rovio's games have been fairly original.
Angry Birds revolutionized the concept of physics-based puzzles, while Bad Piggies encouraged gamers to construct creative contraptions to reach the goal. Rovio also didn't simply slap a fresh coat of paint onto each subsequent installment of Angry Birds -- Space added gravitational pull into the physics equation, Star Wars gave the Birds formidable Jedi powers, and Friends encouraged gamers to play with their Facebook (NASDAQ: FB) friends.
As a result, Rovio relies more on the straight purchase business model rather than completely on in-app purchases within a "free" title, as Zynga, King, and countless others do.
The danger of relying on in-app purchases
That's not to say that Rovio doesn't also rely on any in-app purchases. By 2011, 40% of Angry Birds players were making in-app purchases. That success convinced Rovio to pepper its games with more microtransactions over the past three years, culminating in the December 2013 release of Angry Birds GO! -- a game that was negatively received for selling $10 to $50 upgraded karts to gamers.
There's a huge drawback on relying on in-app purchases to generate revenue -- a recent report from marketing firm Swrve revealed that a whopping 50% of all in-app revenue was generated by only 0.15% of all players.
The report also revealed that 60% of all in-app purchases were made within the first two weeks of a player playing the game -- which bodes ill for mobile gaming companies that rely completely on in-app purchases to keep their games alive.
Building a brand
For now, Rovio has created a sustainable business model with its flagship games, toys, books, and movies, but here's the big problem -- the company's just not that exciting anymore.
Industry watchers are used to seeing explosive triple-digit revenue growth from companies like King. Rovio's single-digit revenue growth and double-digit profit decline indicate that it's a maturing company rather than a growing one. Morover there are three other key challenges facing Rovio:
When Angry Birds was launched in 2009, Google only offered 20,000 mobile apps for Android. Today there are over a million. That larger market equals legions of competitors.
Mobile gamers have short attention spans -- meaning that the same gamer enthralled with Angry Birds one day could be obsessed with Candy Crush Saga the next. Therefore, there's no guarantee that Angry Birds will still be a relevant gaming IP in five years.
Numerous developers, including Disney (Toy Story: Smash It!), have cloned Angry Birds' core gameplay mechanics. Therefore, Angry Birds could eventually become a classic gameplay foundation for a "new" game -- just as Bejeweled was to Candy Crush Saga.
The good news is that Rovio recognizes these problems -- that's why it invested so much in Angry Birds theme parks, toys, and books that it slashed its bottom line in half.
Rovio wants its iconic birds to be ingrained in the public consciousness as much as Disney's Mickey or Nintendo's (NASDAQOTH: NTDOY) Mario. If Rovio comfortably establishes its high-flying mascots as classic characters, it could move forward and expand its franchise to newer titles -- just as Nintendo did with Mario Kart, Smash Bros., and Mario Party.
The bottom line
In conclusion, Rovio's success over the next few years depends heavily on the staying power of its mascots and its ability to keep its games fresh.
The Angry Birds film in 2016 -- which will be produced by John Cohen (Despicable Me) and directed by Clay Kaytis (an animator for Wreck-it-Ralph and Frozen) -- could be the blockbuster film Rovio needs to put its mascots over the top. More importantly, a box office blockbuster could convince investors that Rovio should finally go public -- a plan that the company abandoned last month due to concerns that its portfolio was not diversified enough.
In a Reuters interview, Rovio's marketing chief Peter Vesterbacka stated that the company was not building its business "for 100 days, but for 100 years" -- wise words that King probably should have heeded before launching its disastrous IPO.
Leo Sun owns shares of Facebook and Walt Disney. The Motley Fool recommends Activision Blizzard, Facebook, and Walt Disney. The Motley Fool owns shares of Activision Blizzard, Facebook, and Walt Disney. 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.