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For those of you who are not so familiar with mobile gaming, I'll start with a short intro.

Flappy Bird

Flappy Bird is a mobile game that was released on May 24, 2013. On February 9, 2014, the game was removed from both the Apple (NASDAQ:AAPL) App Store and the Google (NASDAQ:GOOG) Play store. In between these dates, the performance of this game was so bizarre that I'm sure some people in the mobile gaming industry are still scratching their heads. Take a look at the game ranking since its release up until its removal from the app stores.

(click to enlarge)

This is data courtesy of AppAnnie.com.

For some reason, the Google Play store data is not available anymore. This is the app's performance over the last seven months. The app had a bumpy start with the ranks going up and down with a very high variance. Following its release, the game was below the 1500th place in the ranks, placing it well down in the App Store limbo, for five months. On December 8, the game was in the 1359th spot in the overall app ranking in the U.S. Apple App Store (for iPhone). That was six months and four days after the game launched. Five days later on December 13, the game reached the 252th spot. A week after, it flirted with the 100th place. After three weeks, on January 17, the game reached the first place in the overall category. This was in addition to taking the first place in the games category. All of that was nothing of interest, unless this game hadn't been one of the most awful games ever released as a mobile game-which it was! Anyone that played it knows what I'm talking about. Poor graphics, extremely hard game-play, and a very simple yet annoying interface. This game is practically impossible to advance in.

The game was developed by a Vietnamese game developer named Dong Nguyen. This guy operates a studio called GEARS. As far as anyone knows, he is the only employee of GEARS, so the cost of developing Flappy Bird was very close to $0. In a world where Zynga (NASDAQ:ZNGA) spent $412M annually on R&D in 2013, and Glu Mobile (NASDAQ:GLUU) is spending $47M a year, this is nothing short of a mystery.

Putting Things in Perspective

One has to put things in perspective. How successful was Flappy Bird really? Flappy Bird had no in-app purchases. It made money by in-app advertising. According to the game developer, the app made $50K/day in its last days at the top. This is a very good figure for any game, especially one that was developed with almost no cost and no marketing. The game was sitting in the first place for 24 days. Twenty-four days X $50K = $1.2M. This is a huge figure for one individual from Vietnam. I think we can safely add another $300K from the entirety of the game's life up until January 17. So we come up with $1.5M for the app's entire life. But wait. That's just because Dong removed the app on February 9. If he hadn't removed the app, with a $50K/day rate, this app would have brought him $4.6M/quarter. That's a high figure even for a big game publisher like Glu Mobile, representing 13.2% of their last quarterly revenues. If you add to that the fact that at a certain point Dong had the #1, #2, and #6 spots in the rank, it looks like if he hadn't taken his game off the store, his quarterly revenues would suffice a small NASDAQ-listed company.

Should the Gaming Industry Be Worried?

I believe the answer to that is no. From time to time, we'll see random mobile hits for no apparent reasons. Every now and then a kid will develop from his basement a game that will turn viral for some reason (insanely hard, ridiculously poor looking). The question an investor (like me) in a game developing company needs to ask himself is, is making a hit one time in your lifetime a solid base for a business? Again, the answer is a clear NO. The virality of games or other apps is a mystery. No one quite knows what will make a hit-game or a viral video in YouTube for that matter. Some try to produce a hit for years, and out of a thousand tries they produce one (e.g., DrawSomething by OMGPOP). After that hit they may never reproduce their achievement, and in the case of OMGPOP's original owners, they played their cards right, as Zynga paid over $180M for the name, and eventually killed it. One can't build a business on the chance he has a "magical" tool for making hit games. We have to accept the fact that no one knows how to make those games. I'm sure no one saw Flappy Bird coming. So, how do you build a gaming business? You build a strong platform, with strong brands, and a strong monetization mechanism. You turn it into a science. So, you won't be publishing a game like Flappy Bird (thanks, God) any month, and you won't have a blockbuster success like Deer Hunter 2014 with each game you release. But you'll have a solid platform on top of which you'll produce games that bring you revenues; you tune and tinker your platform until it's optimized to extract the maximum revenues from each day any of your games are live. I believe this is what Glu Mobile is doing, and should keep on doing. The occasional Flappy Birds will continue showing up every now and then, but in the longer term, the only way to make gaming a business is the Glu way.

Conclusion

We as investors should treat this story as unrelated noise. The big gaming companies shouldn't waste time on understanding the mysterious ways by which human society causes "things" to go viral, and how come Dong Nguyen brought an 8-bit game to perform as the star of the App Store for 24 days. In my view, that would be an impossible mission. The gaming companies should keep their head in the game (literally) and keep on building their platforms and frequently publishing consistent and great games. Over the long term, that's the only way of building a business in this industry-all of the rest is just noise.

Disclosure: I am long GLUU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: How Did One Guy From Vietnam Conquer The App Store?