We recently featured a small micro-cap company named Eventure Interactive, Inc. (Stock ticker OTCQB: EVTI) in the technology sector that is focused on delivering a “whole product solution centered” around its social calendar app.
We were intrigued to hear that the company’s product roadmap included the launch of mobile games. The Company recently announced that games “compliment our social calendaring app” and “provides a more complete experience for users.”
So why would a social calendaring app company want to develop mobile games?
This piqued our curiosity so as the earnings season is wrapping-up, we decided to take a closer look at the gaming industry and mobile gaming sector for investors.
On the surface, the mobile gaming sector doesn’t look like a hot industry for potential investments. From an investment point of view, why in the world would any investor want to invest in companies who give away their products away for “free?”
And do these mobile gaming companies really make money when they are giving away their core products for free?
It’s like GE giving away its light bulbs for free. You would just never do it. Unless, you had a hidden formula to generate revenue…a lot of revenue.
With the free-games model, one would think that the market value of the gaming and mobile gaming sectors to be relatively small, maybe even nascent.
But here’s an interesting data point – the top 25 public companies in the gaming industry represented generated $54.1 Billion in revenue last year. If you were to take the combined revenue of those top 25 companies, it would rank #96 in the top 100 companies in the world based on total revenues. What we thought was a small industry is actually a fairly significant industry.
And mobile gaming is the fastest growing area in the entire gaming industry. According to research firm Newzoo, it’s valuing the mobile games market at $25 Billion for 2015, an increase of 42% from 2013, with Apple and Google Play leading the way at $4 Billion and $3 Billion in revenue respectively.
So what’s the secret to revenue generation in the gaming industry?
One word – “freemium”.
“Freemium” allows users to download and play the games for free from app stores. The strategy is to get massive user adoption – think millions, if not tens of millions of users.
The freemium model starts out innocently enough, but can quickly escalate revenues as users pay for extras to enhance their gaming experience. Extras include:
- Purchase of in-game products (e.g. weapons, power boosters, etc.) to give users a leg-up against other players and to speed-up game play
- Purchase of tips and extended lives to allow users to quickly ascend to higher levels
- Unlocking of additional higher levels in the games
- Pay to suppress annoying advertising
As first blush, “freemium” seems like a risky core revenue strategy because why would a user want to pay when they can play for free?
Most mobile games now have a social aspect to them so users can recruit friends and family to play, and users then end-up paying to try to get a leg-up on other players. This inherent “social stickiness” in mobile games is the same reason why Facebook, Twitter and other social network platforms have exploded to become mainstream in our everyday lives. Once you’re tied to a network of gamers, it’s very difficult, it not impossible, for you to leave.
Let’s take a look at the math.
Revenues for mobile gaming will continue to grow because of the growth of mobile gamers. According to eMarketer, in the US alone, it is projecting smartphone gamers to grow to nearly 116 million, which is close to a 20% annual growth. This does not factor into the tablet gaming audience, which is projected to grow to 106.5 million gamers, which represents a little over 14% growth.
Privately held mobile game publisher SGN stated that approximately 10% of players end-up paying for extras on their games. This amounts to pretax profit margins of approximately 20%. 10% user conversion from free to paying seems to be an industry high-level benchmark, as it was also confirmed by Supercell.
eMarketer went on to cite that mobile game players spend an average of $4.58 per month on games, with the 35 to 44 age demographic spending the most, just over $6 per month.
And once a mobile game is launched, it’s similar to software. There might be minor costs associated with upgrades, but the majority of the work is completed so the margins can be similar to software margins, which are for the most part, substantial.
Newzoo also confirmed that 247 different mobile game publishing companies each made over $1 Million in revenue in 2013, with King Digital Entertainment PLC (NYSE: KING), SuperCell and Kabam, Inc. leading the way, so there seems to be a large appetite and appeal for different games.
Here’s the story of Kabam, the once little start-up company who is now a worldwide sensation:
In conclusion, the mobile gaming sector and companies who are developing social games portfolios look poised for continued strong growth in 2015 and beyond as evidenced by King’s announcement of it’s strong 2014 performance and the hyper growth activities in the sector.
Perhaps Eventure is on to something after all.