Rovio's Skyrocketing Growth and the Increasing Dominance of Smartphone Gaming

By Michael Comeau

NEW YORK (Minyanville) -- Finland's Rovio Entertainment, maker of the phenomenally popular Angry Birds series of mobile video games, just released its full-year 2011 financial results, and the numbers are spectacular -- particularly when compared with the old-school of the video-game industry.

For 2011, Rovio's revenues hit $106.3 million (¿75.4 million), jumping more than ten-fold from 2010 as downloads of Angry Birds, Angry Birds Seasons, and Angry Birds Rio reached 648 million.

Rovio also reported that actively monthly users reached 200 million, making the Angry Birds franchise about one-fifth as big as Facebook in terms of user count.

And it's not all about the top line. Rovio is extraordinarily profitable, with a pre-tax margin of 64% that easily outpaced industry giants like Activision ( ATVI) and Electronic Arts ( EA), which are growing at much slower rates.
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And according to Reuters, Rovio is planning an IPO on the Hong Kong Stock Exchange in 2013.

It makes sense.

Zynga ( ZNGA), though down nearly 50% from its March high, is still valued at nearly $6 billion.

Also, note that Zynga recently paid $180 million to get its hands on OMGPOP, maker of the monster mobile hit Draw Something, and reportedly made a $2.25 billion offer for Rovio.

EA and retailer GameStop ( GME) have also paid huge sums to get their hands on casual/social/mobile gaming companies.

So it's obvious that there is a whole lot of money chasing the fast-growing producers of these addictive games.

Now, looking at Rovio as a potentially investable public company is pretty tricky. Wall Street will want to see evidence that the company is more than a one-trick pony. Angry Birds shows no signs of falling from grace, but there was a time when investors thought the same thing about Guitar Hero and the Nintendo Wii. And while there are plans for an animated Angry Birds film a few years down the road, there's no telling if the public will care by then.

However, we should be looking at Rovio's Angry Birds as something else: A symbol of how much the video-game industry has changed with the increasing domination of smartphone platforms like Apple ( AAPL) iOS and Google ( GOOG) Android.

In the past, smartphones were not optimal for use as gaming devices, but with advancements in graphics processing and touchscreen technology, they've gotten a whole lot better.

And since the games are free or very cheap, for many people, it doesn't make sense to drop $180+ or more on a standalone device for which the games cost $30+. (See: Smartphone Games Likely to Hinder Nintendo 3DS Success.)

As a result, ever-improving smartphones (as well as tablets like the iPad) have severely impacted sales of standalone mobile-gaming devices like the Nintendo 3DS (See: Nintendo Joins the Long List of Apple Victims), and are likely hurting console sales at the margins.

It can be boiled down to this: Smartphones aren't better, but they're good enough for most people.

But back to Angry Birds.

According to a feature in Wired, the original game -- which remember, is the foundation for a multi-billion dollar franchise -- was developed for about ¿100K at a time when Rovio was down to 12 employees.

That would be just a fraction of the voice-acting team featured in Call of Duty: Modern Warfare 3.

The lesson to take away is that we now live in an era where just about anyone with an imagination can make and distribute a video game to literally hundreds of millions of smartphone users all across the globe, and this has enormous ramifications from a competitive standpoint.

Programming for iOS or Android games is infinitely simpler and less expensive than traditional platforms like Microsoft ( MSFT) Xbox 360 or the Sony ( SNE) PlayStation 3. It can also be easily outsourced.

And since smartphone games are all digital, distribution is taken care of through uploads to servers.

As far as pricing goes, every game is free or inexpensive, and customers can usually try before they buy, making these games enormously consumer-friendly.

This is a far cry from traditional video games, which are expensive and complex to produce and distribute, and pricey to the end user.

Now, I don't think consoles are going away, but they do appear to have hit a wall in terms of growth.

Going forward, the growth is in smartphones and tablets, and everyone wants in.

However, the publishers will go from competing with less than a dozen peers to a practically infinite number because the barriers to entry are so rapidly disappearing.

--Written by Michael Comeau of Minyanville.

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