First, Finland had timber. Then there was Nokia (NOK). Today its most visible export is video games.
In the fall of 2012, Supercell, the maker of mobile games Clash of Clans and Hay Day, moved into a space that once housed Nokia’s research and development team. The building is too big for Supercell’s 110 employees, but the company chooses real estate the way a practical parent buys kids’ clothing: Better go up a size so we don’t have to do this again soon.
It’s easy to imagine growth spurts in Supercell’s future. Clash of Clans and Hay Day have been among the 10 top-grossing iOS games in the U.S. since late 2012, with the exception of one week last year. Supercell’s hits don’t seem like a logical choice for mobile devices, those portals to instant gratification. You have to build a village when you start playing Clash of Clans, a strategy game set in a world of giants and dragons. This means buying a gold mine, then gold storage, then purchasing and building more stuff with that gold. Soon you’ll raise an army. Then you raid another player’s village. This leads to alliances, wars, and on and on.
Supercell’s games are free to download; 90 percent of players never give the company a dime, it says. Revenue comes from sales of virtual items that help players advance. Of those who do pay, a relatively small number account for most of what the company takes in, just as casinos rely on high-rolling whales. Supercell declined to discuss how much profit comes from its heaviest users, but the formula works. The company made $892 million last year, a profit of $464 million before taxes. Clash of Clans makes $4.6 million every day, up from $1.9 million last year, according to digital-game researcher SuperData.
This free-to-play model has come to dominate the mobile games market, which SuperData projects will total $19.3 billion this year. The appeal is obvious: The games are free. The danger is that they can feel like scams, where the gameplay is constantly interrupted unless you pay up. Supercell has done well at calibrating the psychology of its games. The goal is managing resources, and for many players, spending real money for imaginary gems is logical. “You can play without spending money, but they have all of the hooks to give people the incentive to do so,” says Michael Pachter, an industry analyst with Wedbush Securities, a financial-services firm. “The biggest hook is revenge. When someone takes your stuff, you’re willing to spend to get it back.”
But success in gaming is transient. Companies always have trouble making hits. Just ask Zynga (ZNGA). The company went public on the strength of its Facebook (FB) empire, but last year, its revenue was three quarters what it was at its initial public offering. Angry Birds maker Rovio, based in the neighboring Finnish city of Espoo, earned less money from games in 2013 than it did the year before. King Digital Entertainment, the Dublin-based creator of Candy Crush Saga, has seen its stock lose almost 30 percent of its value since going public in March. For a reminder of its own mutability, Supercell need look no further than the eerie emptiness of its own headquarters. Nothing lasts forever.
Ilkka Paananen, one of Supercell’s founders and its chief executive officer, doesn’t see it that way. He says Supercell has several solutions to avoid the fate of Zynga and others. The first is to keep expanding and updating its existing games so players never reach the finish line. It has already updated Clash of Clans and Hay Day, a virtual farming game, more than 20 times each. Paananen says the inspiration for this approach comes largely from Blizzard Entertainment’s (ATVI) World of Warcraft, which has 7.6 million subscribers 20 years after introducing the first Warcraft game. Supercell also focuses more on player engagement than the development of new offerings. Each game has a team of about 15 people, some of whom field suggestions from players about how to improve the game—and respond by regularly adding characters and features.
Last October, Supercell sold 51 percent of itself to SoftBank (9984:JP), the Japanese conglomerate, for $1.5 billion, and Paananen has started talking about a preposterously long-term vision. “As a company we are three years old,” he wrote to employees at the time, “so we’re only 1 percent done if we plan for the next 300 years.”
Gaming will never come close to having the economic impact on Finland that Nokia did. About 2,400 people work for game companies in Finland; Nokia once employed more than 125,000 people and still has 55,000. Even without its devices business, sold to Microsoft (MSFT) in 2014, Nokia brought in 14 times as much revenue as Supercell did last year.
That said, the Finnish gaming industry is clearly in its ascendancy. It grew 260 percent from 2012 to 2013, according to Neogames, a local industry group. Its roots, however, run back to the early Aughts, when Nokia began buying games from local startups for its phones. “Nokia’s boom had a much bigger effect than Nokia’s demise,” says Petteri Koponen of Lifeline Ventures, a venture capital firm that was Supercell’s first backer.
Finnish gaming culture had been growing for decades, with a direct line of descent from the demoscene, a computer art subculture that began in the 1980s. Back then, games came on disks with copy protection that enterprising gamers sought to overcome so they could pass them on to friends. When they did, they often added code that displayed a digital signature.
What began as the digital equivalent of a scribble on a wall, claiming that so-and-so was here, evolved into increasingly elaborate demonstrations of coding and artistic prowess that included 3D graphics and music. Demo competitions drew thousands to Helsinki. Over the course of a few days, participants packed gyms, conference halls, and eventually arenas, where teams sat in front of computers, creating demos. The finished products resembled animated videos set to electronic music, with visuals ranging from abstract shapes and colors to cartoonish narratives. Most game companies in Helsinki trace their lineage to the contests.
Paananen, now 35, was tangentially involved in the demoscene. He fell hard for gaming during his teenage years, though playing didn’t lead him to coding. He began studying business at Aalto University in 1998. When his friends decided to turn their demo team, called Sumea, into a business, Paananen was the only person the team knew with any business acumen. So they made him the CEO. Sumea sold some games to Nokia and in 2004 was acquired by Digital Chocolate, a gaming studio run by Trip Hawkins, the founder of Electronic Arts (EA), the California company that created The Sims and Madden NFL. Paananen became Digital Chocolate’s president, running the company until 2010.
That year, Paananen and five others started Supercell as a gaming company whose focus was Facebook. He was able to raise $12 million from Accel Partners in 2011. The check from Accel had barely cleared when Zynga went public, filing financial documents showing that the magic behind Facebook gaming was largely an illusion. Around the same time, Supercell realized that its first game, Gunshine, wouldn’t be a hit. “We changed the strategy after we studied Zynga’s S-1,” Lifeline’s Koponen says, referring to the regulatory document the U.S. company released before its initial public offering.
Supercell threw away everything it had built and started making games for tablets. Within 18 months the company launched Clash of Clans and Hay Day. Each was an immediate success. “The likely winner in this game is the one who learns the fastest, not the one who has the best plan,” Paananen says. “We are a great example. Our strategy was dead wrong.”
Supercell has the reputation of being a good place to work, though it isn’t easy to get hired. Finnish labor law requires a four-month probationary period after which companies subject each new employee to a rehiring process. “It’s basically a formality in 99 percent of the companies. For us that’s not the case,” Paananen says. “We want to keep the company as small as possible. We are paranoid about the culture.” He declined to say how many employees have come on board in the past four months.
A similar mercilessness pervades the cells—the small groups that devise games and are the inspiration for the company’s name. The end to a project can be swift. Each idea is tested with progressively larger groups, then moves to outside tests. The final step before a global launch is to release the game in Canada, which has similar demographics to the U.S. but lower stakes.
If a game doesn’t perform well at any phase, it is euthanized, and the team that made it has to stand in front of the whole company and explain what went wrong. Then everyone drinks Champagne.
Clash of Clans and Hay Day made it through this process: Few others have. In March, Supercell released Boom Beach, a war-in-the-Pacific-themed game and only the third mobile game it has on the market. It’s currently the sixth-highest-grossing iOS game in the U.S.
Once a game goes live, the cell working on it adds staffers to analyze gameplay and communicate with players. The company maintains active message boards where it solicits ideas for improvement, and they are very well-trafficked by players who suggest new powers for wizards and beg for options to block annoying players. The company also regularly contends with player dissatisfaction regarding new features.
The team that made Boom Beach has veterans from each of Supercell’s earlier games. An early version had a steampunk aesthetic, but the developers scrapped it in favor of a more mass-market army theme, says Timur Haussila, who runs the Boom Beach team. The game has done well, but it also demonstrates how hard it is for a company to move past a successful formula. You feel as if you’re playing Clash of Clans set in World War II. “Clash of Clans earns almost three times more per user than Hay Day, which explains why the company opted to release Boom Beach featuring comparable mechanics to the former,” wrote Joost van Dreunen, CEO of SuperData, in a recent report. “Of course, this is also the strategy that, according to skeptics, kills innovation.”
Rovio rose to prominence when people were much more willing to pay a few dollars for a download, and it has had trouble adjusting to a free-to-play market. How long will Supercell’s magic last? The cell that created Clash of Clans has split up, and several of the developers are working on other creations. No one knows whether their games will make it out of the office or whether they’ll soon be standing in front of their colleagues, grimly sipping bubbly. Lasse Louhento, one of the original Clash of Clans team members, says the company knows the pressure is on to come up with something new. “There’s no one thing that will work again and again and again,” he says. “That doesn’t exist.”
6 June 2014 | 1:31 am – Source: businessweek.com