The maker of Angry Birds has had its wings severely clipped after fourth-quarter sales fell short of even the most pessimistic estimates. Rovio Entertainment Oyj shares dropped 40 percent because of tumbling revenue from licensing its main franchise and soaring spending on attracting new customers.
The Finnish company has a problem. It needs to convince people repeatedly to spend money in its apps (or, being frank, in its app: most of its products are a derivative of Angry Birds). After downloading a game for free, Rovio tries to get users to buy "gems" and "coins", which make it easier to advance through the game's increasingly difficult levels.
Rovio almost doubled its spending on customer acquisition in the three months through December. Licensing revenue more than halved. Total fourth-quarter revenue was 74 million euros, well below the 78-80 million euro analyst estimates.
The game maker's biggest shortcoming, besides its failure to repeat the Angry Bird success, is not exploiting the hottest trend in apps: subscriptions. Rovio sells its gems and coins in one-off transactions, but if it offered users a subscription model — where they paid x dollars a month in exchange for x number of coins — it would keep more of the spoils.
That's because of the way Apple shares revenue with the app developers. Every time you purchase the gems or coins on Angry Birds, the iPhone-maker takes a 30 percent cut. If, however, the user was a subscriber (think how Netflix and Spotify do it) then that cut would drop to 15 percent after the first 12 months' subscription. Google uses a similar tiered model in its Play Store.
While cutting Apple and Google's take, Rovio would also be able to get recurring sales from those customers it spent so much to win, and show much more predictable revenues to investors. And it could still keep selling more coins to addicted gamers when they've spent their monthly allotment.
The Finnish company has taken tentative steps in this direction through a subsidiary named Hatch, although that was started back in 2016 and is still only available in beta in 14 countries, and only through Google Play. Rovio could certainly use some help in monetising its customer base. At the end of September, it had 80 million monthly active users, but only 600,000 spent cash in its games.
As ever with Rovio, there are understandable doubts about whether it's a one-trick pony (to mix animal metaphors) and whether its place is on the public markets. But that number of active users is serious enough, if it can only find ways to exploit them.
To resurrect investor confidence, Rovio desperately needs the embryonic Hatch division to, well, hatch.