The One Hit Wonders of the Digital Domain

You did it once, so what's to stop you from doing it again?

In every creative field there is the belief that a first successful effort is simply the hors d'oeuvre, the introduction to wonders yet to behold. In music, art, literature and, increasingly, software, the sense is that one success ought to lead to another.

But there is also a growing realization that the reality is much harder to grasp than the dream. Bands are notorious for having one great hit and then disappearing into the vast diaspora of lounge acts in road-side Holiday Inns.

In software, too, the data are beginning to show that for all the attention paid to serial entrepreneurs, their achievement is more the exception than the rule. This has been brought into high relief, as the following article explains, by the IPO scheduled for the maker of Candy Crush, an addictive mobile game which has achieved astonishing market penetration - but whose longevity and ability to generate the net present value of future cash flows is, at best, uncertain.

King Digital Entertainment, the parent company, has filed for an IPO which values the company at $5 billion. This despite the fact that 80 percent of the company's revenue comes from that one game. Maybe they're on to something - and maybe this is as good as it's going to get. But either way, the market's acceptance of this offering (whether sacrificial or not), will tell us a lot about the state of global finance and the monetization of dreams. JL

James Surowiecki comments in The New Yorker:

Serial innovation is tough: studies suggest that most new products fail.

For more than a year now, tens of millions of Americans have found time each day to devote themselves to an essential task: swiping at their phones and tablets to arrange colorful candy icons in rows. They are playing Candy Crush Saga, a wildly addictive mobile game that has been downloaded more than half a billion times. You can play the game for free, but enough people have been willing to pay for extra lives and various performance-boosting tools to make it staggeringly profitable. Last year, Candy Crush’s maker, an Irish company called King Digital Entertainment, had almost two billion dollars in sales, five hundred and sixty-seven million dollars of which was pure profit. Last month, King filed for an initial public offering, which is expected to value the company at five billion dollars.

The I.P.O. is no surprise, given King’s domination of the booming mobile-game business, but it’s likely to end badly, because King is part of a venerable tradition: the one-hit wonder. Like Coleco, with Cabbage Patch Kids, or Ty, Inc., with Beanie Babies, King’s business is dependent on its one star product; although the company has more than a hundred titles, almost eighty per cent of its revenue comes from Candy Crush. King has done a great job of making money from the game, and of keeping it fresh, but Candy Crush is still a fad, and, like all fads, it will fade. Indeed, as King’s filing makes clear, the number of people who pay for the game has already begun to taper off, as have sales and profits.
In its I.P.O. filing, King claims that a “unique and differentiated model” for developing games will enable it to create new hits, and plenty of analysts believe that King has cracked the code of hooking consumers. But that’s unlikely. The world of pop culture contains many more one-hit wonders than hit factories. After all, luck plays a huge role (is there really a good explanation for the hula-hoop frenzy of the fifties?), and, more fundamentally, serial innovation is just tough: studies suggest that most new products fail. In the gaming industry, success has always been highly unpredictable. Parker Brothers, according to a history of the company, found that there was no secret formula: products that tested well often flopped in the marketplace, while “an in-house flop could become the hit of the industry.” It says something that King, which has been making games for a decade, had profits of just $7.8 million in 2012. The company didn’t make eighty times more in 2013 because it had cracked a code; it just caught lightning in a bottle.
It’s true that a few companies—Disney, say—have been able to consistently ride the Zeitgeist. But King has the misfortune to be in an industry where this is especially difficult, simply because it faces so much competition. “With traditional industries, it’s typically very expensive to get into them, and very expensive to actually make a product,” Michael Cusumano, a professor at the M.I.T. Sloan School of Management, told me. “But, with software, marginal costs are close to zero. That makes it easy for new competitors to enter the business.” Disney flourished not just because of creative genius but also because, historically, animation was incredibly labor-intensive and costly, and few companies could afford the distribution network and marketing operation necessary to get films in front of millions of people. Such high barriers to entry still exist in Hollywood or in traditional video-gaming. Only companies like Marvel or Activision can afford to make The Avengers or Call of Duty. Even then, things are chancy—that’s why studios love sequels—and failure is an ever-present threat. The company Harmonix, which launched Guitar Hero and Rock Band, games that in their day were as huge as Candy Crush, ended up being sold, after a few years, for fifty bucks and a pile of debt.
Development costs in the game-app world are very low. Angry Birds was made for just a hundred and forty thousand dollars, and Candy Crush was created by a team of fewer than ten people. Established companies have some advantage when it comes to marketing power, but hits can come from anywhere. Flappy Bird, a game that was recently downloaded fifty million times in a couple of weeks, was created in a matter of days by a single designer. No wonder that even the industry’s powerhouses have struggled to generate new hits. Zynga has never come close to the success it enjoyed with FarmVille. Angry Birds is still by far Rovio’s most successful product. King has released a couple of successors to Candy Crush, but neither is a breakthrough. What Cusumano says of the software industry in general seems true of mobile gaming in particular: “Typically, companies will have that one big product, and then they’ll sell some sequels to it. But, unless they manage to become the center of an ecosystem, over time they tend to weaken and disappear.” It’s easy to see why King’s founders want to go public: money. But the money isn’t worth the hassle. As a public company, King will have to show shareholders consistent results and ever-growing profits. Such expectations are, frankly, silly in crazily competitive, hit-driven industries, and trying to meet them is a recipe for frustration. If King stayed private, it could milk its cash cow and build games without having to worry overmuch about hatching a new cultural juggernaut. We expect companies to constantly be in search of the next big thing. But, for one-hit wonders, the smartest strategy might be to just enjoy it while it lasts.