By Michelle Jones
Zynga's (NASDAQ:ZNGA) initial public offering was one of the most highly anticipated of 2011, but the company has only disappointed investors. The same has been true more recently with King Digital Entertainment PLC (BATS:KING), which plunged earlier this month. And the story has been similar with Glu Mobile Inc. (NASDAQ:GLUU) since its 2007 IPO.
Zynga judged on a single hit game
But there's one place where Glu seems to differ. Wall Street might be starting to change its opinion of the company. Or at the very least, investors don't seem to know what to make of it. So is Glu Mobile really different than Zynga? Or are all gaming companies doomed to be nothing but one hit wonders? PTT Research CEO and lead analyst Mark Gomes has studied gaming companies and says Glu Mobile is indeed different from Zynga and King Digital.
"There's a really old rule of thumb in the video game industry," Gomes told ValueWalk in an interview. "You never judge a gaming company positively or negatively on the basis of a single game. What happened with the Zynga IPO and the King Digital IPO were both a breach of that rule."
He notes that both Zynga and King Digital soared high on the wings of games that were popular firsts in their categories. Zynga made Farmville, the very first hit game on Facebook's (NASDAQ:FB) platform, while King made Candy Crush Saga, which was the very first big mobile game. He thinks investors simply judged these companies on these first hits, and since they weren't able to create more hits, their share prices have plunged.
How Glu Mobile is different than Zynga, King
He says Glu Mobile's success hasn't been based on just a single game, as the company has a long history of selling games, starting with games on feature phones. Gomes adds that the reason Glu struggled for a while is because of the transition to smartphones, noting that other companies like Facebook have had the same issue, but they're coming back. He thinks Glu will come back as well because the company has been making investments in the future.
Specifically, he says the company spent on analytics, intelligence, research and development, and infrastructure. Meanwhile Glu didn't release many new games because it wanted to research first to find out how to monetize its games to the fullest and make the most money possible out of them. Now, he says Glu has figured out the secret to success in the gaming industry.
Turning a profit on all games
In addition to being able to turn a profit on any game, the company creates a base known as a game engine that can be used multiple times with multiple concepts.
"They decided that they were going to focus on developing game engines," Gomes said. "And what that meant was that any time they make a game, they want that game to be built in such a way that if the concept of the first game isn't great, that they can build another game using the same engine, just a different concept."
Essentially, he says Glu Mobile develops code that governs the rules of a game. It's not really a new concept in the gaming industry, but it's one that seems to have escaped Zynga. For example, the game Deer Hunter follows the rules of players targeting an object and pressing a button to see whether they successfully targeted the object. He says the same code could be repurposed for numerous other concepts, like the Dino Hunter game Glu also released. Another example is the hit Kim Kardashian game, which was based on the engine for a game called Stardom. That engine was developed by a smaller company Glu Mobile acquired for the purpose of getting that engine.
And because Glu repurposes its game engines, it can make games much more cheaply than competitors Zynga and King Digital. As a result, the company can turn a profit on virtually any game it releases - whether or not it's a runaway hit. All Glu needs is mild to moderate success for a game to be profitable.
The problem with Zynga
Gomes believes that Zynga hasn't been able to stay profitable like Glu because the company spends so much money on making games and doesn't come up with fresh concepts.
"What was kind of most distressing recently about Zynga is that their saving grace is supposed to be Farmville 2. Well, sorry guys, but Farmville was something nobody had seen before when it came out, and Farmville 2, people have seen that before. We're kind of tired of it."
He says Zynga's biggest problem is that it hasn't figured out how to consistently crank out profitable games. The game maker is simply spending too much on developing games and not making enough on those games.
A suggestion for Zynga
The analyst even offered a concept for how Zynga could reuse the engine it developed for Farmville in a new, fresh way so that it could develop other games cheaply and turn a profit on them, even if they're not a runaway hit.
He suggests that Zynga could buy the rights to Pokemon and develop a new game, as it could use the same engine. Pokemon was a popular idea back when it came out, and just like on Farmville, players take an action and then come back before too long to take another action. Instead of planting carrots, he suggests that players could have Pokemon all over the world and pet them, feed them, and take care of them.
Gomes notes that Glu Mobile isn't the first company to build on top of the same engine. Electronic Arts Inc. (NASDAQ:EA) has been doing the same thing with sports games for years. As a result, it's difficult for competitors to bid competitively for licensing rights each year because it will cost more for them to develop the games because they have to start with a new game engine.
Trouble ahead for King Digital
So what about King Digital? Unlike Zynga, the company is using the same game engine so that it can make games cheaply. However, Gomes sees big trouble ahead in spite of that. He says because the company made so much money on the first Candy Crush Saga game, King has essentially exhausted the concept.
"If that pony can't find another trick, all of their games that they're coming out right now are basically the same game."
In addition, he says Chinese replicas are presenting a huge barrier for King because the game engine it uses is so simple that it's easy to replicate.