JULY 8, 2016 • Tencent Holdings Ltd’s recent acquisition of mobile game developer Supercell Oy naturally raised many eyebrows, not just for its $10 billion valuation, but also how it was really driven by one game, Clash of Clans. The idea that a single game can be worth so much will of course attract all kinds of investor interest to the game space, with many investors looking to win the lottery by betting on the next big title. Which highlights the following points:
- DFC Intelligence looks at Supercell’s long term potential to live up to its$10 billion valuation.
- Supercell may need to expand beyond the freemium business model that drove its initial growth.
- The new DFC report The Business of Video Games examines how introducing pay-to-play business models are likely to be a major growth area for freemium products. For a free sample of the report contact DFC at email@example.com.
Of course, Supercell has other games besides Clash of Clans. This includes the farm building game Hay Day, the Clash of Clans reskin Boom Beach and the more direct Clash of Clans spin-off Clash Royale launched this year. However, make no mistake, with Supercell, it is all about the Clash of Clans franchise with the main issue of games like Clash Royale being will they grow or cannibalize the franchise.
As has been widely reported, in 2015 Supercell generated profits of nearly $1 billion on revenue of about $2.3 billion. Moving forward, Supercell now has significant growth potential just in China alone. Tencent is of course a giant in all things consumer Internet in China, including games. The ability to push Supercell products into China directly should drive significant growth.
Based on current revenue and profits and the potential to grow in China it could be easily argued that Supercell is worth $10 billion. Of course, with a deal of this magnitude it always pays to look under the hood. Games are a cyclical, hits driven business and what is popular today may not be in fashion next year. The question with a franchise is how sticky is it? Will consumers be invested two years, five years, or 10 years from now? In the case of many franchises the answer is yes, but there are also many franchises where investors are better to take the money and run.
DFC Intelligence analysts Jeremy Miller and George Chronis took a closer look at Supercell products and their potential as long-term franchises. This includes examining how a game like Clash of Clans was able to stand out from the pack and also whether Supercell can continue to be forerunners of what will be inevitable increased competition. Finally, of course, there is the issue of how invested consumers are in Clash of Clans as a franchise, not just the gameplay but the characters and universe of the game that can be extended to products like Clash Royale.
Clash of Clans launched for iOS in August 2012, followed on Android in October 2013, and became an immediate hit as a top-notch product for iPads and other tablets. One of the biggest early draws was that there wasn’t a strategy or base building game like it on the market. Of course, this immediately resulted in numerous competing products being launched per the nature of the mobile game space. However, all the quickly launched copycat games could not execute the way Supercell did in terms of frequent updates, solid coding, new features, balancing and just the simplicity of the art and gameplay design. Clash of Clans was also easy to learn as everything was explained well.
Supercell focused on making the game mechanics so it was easy to drop in, check in on your clan, and help in a fight. Unlike a classic MMO, no raid prep was necessary. This ease of joining in fosters a desire to participate that keeps people checking back – making the process part of their daily routine. People also check in regularly to train troops and upgrade their villages. The idea of having a game that is quick and easy to play is extremely attractive in an age when core games often take a minimum ten minute-plus commitment just to load.
Not only was the game easy to play, but Supercell did a great job of explaining how to play. The biggest competition at the time was Kabam who focused on “midcore” strategy games. Kabam games were well done but Clash of Clans simply had a lower learning curve and made room for less competitive gamers. Supercell included a single player mode that was great training ground to learn fundamentals of how to use all the units without the pressure of multiplayer. The progress curve early was very fast and you got 500 “free” gems to start with and you also would sometimes get free gems from cleaning debris from your base, which was required to fully utilize the map to put down new buildings.
In short, Clash of Clans attracted both casual and core players. Casual players could focus on the strategy/city building aspects while a more competitive user could focus on intense multiplayer competition. This broad appeal started to have a snowball effect where word of mouth and game recognition draws more people into the fold. In-game chatting was both fun and actively encouraged, which added to the social element.
Another great feature early in this strategy genre was how Clash of Clans let players build their bases any way they wanted, giving it a somewhat DIY approach much like the immensely popular Minecraft, which Microsoft acquired in 2014 for what is now clearly a bargain basement price of $2.5 billion. An online “how to” culture developed around the game and Supercell supported it.
Another subtlety about clan wars was that people would feel pressure to assist in attacks within the 24 hour limit of the war by using gems to speed up production of troops to get a last attack in before a clan war ended, so as not let clanmates down.
Supercell was very strategic in offering “1 gem boosts” to celebrate Clash of Clans anniversaries, or to usher in big new patches, or as holiday bonuses. Supercell would also periodically offer cheap deals to users to get more value for their precious gems, but nevertheless whittle down their stockpile of gems. Similarly, Supercell would take note of when user game time started to taper off and then started adding in more available rewards, which led players to come back to see if they could pick up extra loot.
Many players of a game like Clash of Clans would simply “grind” by playing for hours and never spending any money. However, over time, non-paying but dedicated grinders would not only have a ton of time invested in the game, they would have built social relationships with their clanmates. These consumer would eventually be much more likely to invest money in the game. This is basically the textbook of how to run a mobile F2P game over the long term. Grind them down to the point where their time becomes more valuable than their money.
Clash Royale launched in early 2016 as a spinoff of Clash of Clans. From looking at the game it is clear that Supercell developers closely examined collectible card games such as Blizzard’s Hearthstone and Magic: The Gathering etc. On paper this makes huge sense because it is likely many Clash of Clans players also played card battle games. Blizzard’s Warcraft IP was very successfully re-purposed into Hearthstone and Supercell did the same thing for Clash of Clans.
Clash Royale’s gameplay was very close to Clash of Clans and clearly targeted towards the Clash of Clans audience. In Clash of Clans the goal is to destroy the opponent’s Town Hall, or destroy 50% or more of the rest of the opponent’s base to meet the minimum victory requirements in a match. In Clash Royale, the goal is to destroy either the opponent’s “King Tower” before the opponent does the same to you, or destroy more Crown Towers than the opponent. This is very similar to the victory requirements of Clash of Clans. Further, all the characters, spells and abilities from Clash of Clans translate nicely into the Clash Royale cards so it was easy for a Clash of Clans player to pick up Clash Royale. From personal observations, most Clash of Clans clan members seemed to get into the game very quickly and became regular Clash Royale players.
However, Jeremy Miller notes, from his own experience, that as a result of Clash Royal, his Clash of Clans playtime has gone WAY down and he no longer has interest in spending any more money in Clash of Clans. While he still plays the game, he only does a few attacks a week as opposed to a few times a day. For him, Clash Royale clearly cannibalized Clash of Clans.
The other issue with Jeremy Miller’s personal experience is that having played a ton of Clash of Clans, he has become less willing to drop more money into another long term grinding F2P game. This includes Clash Royale, which he really likes to play.
Overall, this gets to the heart of the matter for any F2P grinding, MMO or strategy or card battle game. One of the reasons consumers spend money is that they want to be part of something and to succeed. There is an audience of high-level players that of course spend money. This includes raiding in an MMO, unlocking the highest level of buildings and abilities in a Clash of Clans-style strategy game or acquiring the most powerful cards in a card battle game like Clash Royale or Hearthstone.
Where games like Clash of Clans have been successful is in creating a community of more casual consumers that feel an urgency of wanting to catch up faster to the “big boys.” The problem is money is a limited resource and that sense of urgency can start to die off. Clash Royale is a fun game, but like Hearthstone it can be a great deal of fun without ever having to spend money.
The best analogy may be what happened with Blizzard’s World of Warcraft (WoW). Launched in late 2004, WoW got millions of consumers willing to pay $15 a month. The game still has a huge base but it has peaked and is on a slow decline. More importantly, WoW burned out many consumers on the monthly subscription model. New subscription MMOs were simply not successful at retaining users for the long term. For many consumers it appears that Clash of Clans may be creating burnout in not only the base building/strategy category but the entire free-to-play concept.
Of course, it is important to note that, like World of Warcraft, Clash of Clans can be viewed as a superstar franchise with its own universe, characters and, more importantly, massive audience. Clash Royale is an example of how that audience can be translated into new products. There is also of course the potential for merchandise and spinoffs beyond games. A WoW movie launched in June 2016 and despite mediocre reviews it looks like it will be at least a minor success.
Overall it seems the jury is out as to whether Supercell is worth $10 billion. Much may depend on what Tencent can realistically do with the company. Supercell games have already been available in China for a while, but Tencent should be able to greatly increase Supercell’s footprint in China. As for squeezing more revenue outside of China, the acquisition seems to be more about buying a cash cow that is probably unlikely to equate to major long-term non-China growth. The exception would be if Supercell could somehow translate the Clash of Clans franchise into perhaps another genre. This is entirely possible but in reality hard to do.
Would that be a F2P game, a TV series, a movie, or a console action game? There are a lot of possibilities that Tencent could guide Supercell toward and that brand IP value may be something that goes beyond the existing Supercell revenue numbers.
What could be interesting for a company like Tencent is how well they can expand beyond the pure free-to-play/freemium model. Tencent has acquired the two leading freemium games outside China in League of Legends and now Clash of Clans. A major growth determinant for Tencent beyond China is whether they can expand these franchises into new opportunities.
The DFC Intelligence report The Business of Video Games has analysis on the growing potential for pay-to-play games and high-end products that can add extra revenue streams on top of an initial purchase. The upcoming DFC report on PC Game Market Forecasts pegs pay-to-play PC games as the fastest growing market segment. In much of the world, including North America and Europe, this is the most exciting growth opportunity. For a free sample of these reports and any other DFC research reports or services contact us at firstname.lastname@example.org.