Rolling up the mobile gaming industry

This blog post explores the phenomenon of financial roll-ups within the mobile gaming industry. All opinions are my own.

Part I: On roll-ups

As a Canadian, the term “roll-up” conjures up childhood memories rolling up Tim Horton’s coffee rims for prizes. For the rest of the business world, “roll-up” refers to the financial strategy of rolling up small companies into larger entities. It’s often used by private equity firms to generate financial value. 

Roll-ups create financial value in two ways. First, they generate economies of scale. When financial sponsors buy many versions of the same business, say dentistries or air conditioning distributors, they can combine backend services such as HR to reduce costs. Second, roll-ups create value through financial scale: larger entities are generally valued more per dollar of earnings. Within the financial industry, this is called “multiples expansion”.

If this financial discussion feels too dense for an interactive media blog, don’t worry; we’re almost through. The important takeaway here is not how roll-ups work from a financial perspective, but where and when the strategy is deployed.

Roll-ups work best for stable industries with long-term predictability. By and large, these are mature, boring industries lacking in innovation. Risks of disruption or competition in these industries are low, which reduces competitive risk and increases cash flow predictability. Some prime candidates for roll-ups include funeral homes, waste management, and car repairs. 

With that context, it’s hard to imagine a more unlikely industry for a private-equity style roll-up than the mobile gaming industry. At face value, the mobile gaming industry is fast-growing and fragmented, with thousands of new games entering the app stores every year. All the same, mobile gaming is very much undergoing a roll-up.  

The evidence can be found in a little-known Swedish company called Stillfront. Despite its obscurity, Stillfront is one of the most prolific acquirers of mobile game studios. In the past year alone, Stillfront acquired four notable mobile studios: Kixeye for $90m, Storm8 for $300m, Candywriter for $75m, and Nanobit for $148m.

When traditional gaming publishers go shopping, they look for storied brands, stellar teams, and promising future titles. When Stillfront buys companies, it looks for cash flow. Everything else—the team, the brand, the promise—is subordinate to the cash-minting capabilities of existing titles. 

Stillfront summarizes this strategy succinctly in its 2019 annual report: “Looking ahead, our strategy remains unchanged – to focus on low risk and long life-cycle games. we continue to see strong opportunities for profitable growth through further acquisitions.” 

In other words, it’s rolling up the mobile gaming industry. Stillfront is first and foremost a financial company. And it has done remarkably well. Over the past two years, Stillfront’s stock saw an almost 10x return. 

Stillfront stock performance over past 3 years . Source: Stillfront

Part II: Where we are in the mobile gaming cycle

Stillfront’s success forces us to confront a reality: mobile gaming has become a predictable industry lacking in disruptive innovation, not unlike waste management or car repairs (at least from a financial sense). It is ripe for roll-ups and consolidation. But how did we get here? 

As with all things, it’s helpful to trace back through history to understand the present. 

The early days of mobile gaming felt like the wild west. Developers reimagined old browser games or came up with wacky new concepts. But over time, developers came to recognize mobile’s unique advantage over PC and console: its unparalleled ability to track players across their digital lives.

Through unique identifiers such as the Identifier for Advertisers (IDFA), mobile games could trace a player's journey from ad engagement, to install, to gameplay, to in-app purchase with incredible accuracy. Combining this with increasing ad targeting sophistication from Facebook and other ad platforms, mobile games became the playground of data analysts. 

Even more than gameplay innovation, the use of data became the key differentiator for mobile gaming: in aiding user acquisition (UA), in segmenting users, in curating personalized offerings, in managing player lifecycle, and so on. Attribution became paramount. Under this paradigm, both cost of acquisition (CAC) and player lifetime value (LTV) could be calculated with pinpoint accuracy. As long as CAC was lower than LTV, mobile games printed money. It was, in a word, arbitrage. 

But nothing good lasts forever. As more mobile gaming companies got in on the arbitrage, mobile ads became increasingly expensive to buy. By 2019, a paying user cost almost $36 to acquire.

The steep rise in acquisition cost had several notable impacts on the industry. First, it meaningfully reduced the number of viable game genres. While many games were fun to play, few had the monetization capabilities to justify such steep user acquisition costs. The few genres that did often dug deep into primitive player needs: match-3 decoration games targeted towards older women (Gardenscapes, Lily’s Garden, etc.); raunchy interactive stories that tugged at baser desires (Chapters, Tabou, etc.); 4x games aimed at “whales” who paid to dominate others (Game of War, Lords Mobile, etc.); social casinos that satisfied gambling cravings (Slotomania, Jackpot Party, etc.), and so on. Being fun was no longer enough; mobile games needed to create habitual loops that continuously engaged and monetized their player base. Occasionally, these loops became exploitative. 

By the same token, it also became more difficult to introduce new gameplay. New gameplay needed to produce player spend that exceeded the ever-increasing user acquisition costs. The higher the UA cost, the more unlikely it became for new gameplay to meet that bar. As a result, fewer studios took bets on gameplay innovation, opting instead to copy proven formulae. All this led to gameplay stagnation: few innovations and many, many replications. 

When Playrix launched Gardenscapes in 2016, it combined Candy Crush-esque match-3 puzzles with a narrative, decoration metagame that proved to be incredibly successful. It was quickly copied by other big studios: from Firecraft’s Matchington Mansion, to Tactile Games’ Lily’s Garden, to Storm8’s Property Brothers, to Jam City’s Vineyard Valley. Gardenscapes is still being replicated today. 

Lily’s Garden by Tactile Studios, a replicate of Playrixs’ Gardenscapes

The second key effect of higher UA cost was on the balance sheet. As UA became more competitive, the payback-period to recoup acquisition costs lengthened. In years past, payback-period on UA spend (also expressed as Return on Advertising Spend, or ROAS) was measured in weeks or months. Today, it’s measured in years. Indie studios can no longer snowball earnings into new UA campaigns, as these earnings came in at a slower clip. As result, user acquisition required huge capital outlays and more patient capital. Few outside of the largest mobile publishers could pony up such large cash reserves. 

The third trend in mobile gaming, unrelated to user acquisitions, was the lengthening of the player lifecycle. Once players formed habits, they tended to stick around for a really long time. Candy Crush, launched by King in 2012, is still one of the most popular and profitable mobile games today. From the publisher perspective, this means revenue predictability. Mobile games with existing core player bases are guaranteed steady streams of future revenue. Stillfront calls these games “long-lifecycle games”. Zynga calls them “forever titles”. 

Let’s summarize these trends in aggregate. Today’s mobile gaming market centers on a limited set of genres. Fewer companies are willing to invest in gameplay innovation. New entrants are gated by exorbitant user acquisition costs. Existing titles produce steady long term revenue. Put together: the mobile gaming market today is mature, predictable, and lacking in innovation—a perfect set up for consolidation and roll-up.

Stillfront is not the only aggregator in town. From Scopely’s acquisition of FoxNext to Zynga’s acquisition of Peak Games, the mobile gaming industry is becoming more concentrated. Few large incumbents are owning bigger shares of the pie. 

Part III: Where do we go from here

In the short run, the path of least resistance will be more consolidation. Well-capitalized acquirers like Scopely and Stillfront will continue to gobble up cash-producing studios. 

At the same time, it’s difficult to believe the current paradigm will continue indefinitely. The history of the mobile gaming industry can be viewed as a journey of optimization. Companies optimize their gameplay design, live-service, and user acquisition for a very specific set of conditions that form the mobile ecosystem. If these conditions were ever to change, then current optimizations will no longer be “optimal”. This will prompt a reconfiguration of the industry. 

Several catalysts could drive such change. The first comes from advancements in mobile hardware and networking. New experiences, such as cross-platform play, will become possible as phones become more powerful and networks become faster. Roblox and Fortnite were not conceived as mobile games, but both have become major forces in mobile gaming. Genshin Impact, a popular Chinese RPG game, introduced console-quality gameplay to mobile. 

The second catalyst comes from the rise of influencer marketing as an acquisition channel. Influencer marketing works best for social games such as Among Us. Most mobile games today don’t fit in that category. 

The third catalyst comes from changes in targeting. Apple recently announced its decision to deprecate the IDFA, effectively cutting off paths for hyper-targeted advertising. Apple’s decision may break the business model of many games that depend on hyper-targeted ads. On the other hands, companies with strong brands or inherent player networks could become beneficiaries. 

The mobile gaming industry is undergoing consolidation. This will continue as long as underlying conditions remain unchanged. Stillfront and other aggregators will take more shares of the pie. But if history is any guide, technology never remains constant. In time, new catalysts may force the mobile industry to reinvent itself in order to find a new maxima.

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