Portfolio dynamics for mobile games


App Annie recently published a very interesting study that examines the success of three different portfolio strategies as relates to mobile gaming. The three strategies are:

  • Franchise-focused: A mobile gaming studio releases games across a set of genres within one franchise. The franchise builds brand recognition and helps to attract users familiar with the franchise to new releases (eg. Rovio with Angry Birds);
  • Genre-focused: A mobile gaming studio specializes in a single genre or a limited set of genres and releases games that capitalize on that speciality. The IP of the games is flexible (eg. King with the Candy Crush series and its other match-3 puzzle games);
  • Diversified: A mobile gaming studio builds the broadest possible portfolio of titles in terms of both IP and gaming genres (eg. Zynga with its vast array of unique titles).

App Annie found that, empirically and based on its own proprietary App Store and Google Play data for 100 mobile gaming companies, the genre-focused strategy outperforms the other strategies.

This shouldn’t be surprising: for 2014, King and Supercell dominated the Top Grossing charts across Google Play and the App Store, and both pursued fairly distinct cross-promotional launch tactics (Supercell with Boom Beach, King with Candy Crush Soda Saga) from their popular, genre-defining properties into new games.

But the study raises two important questions about evaluating the viability of genres in mobile gaming as well as the optimal construction of a portfolio of mobile games:

  1. Should extreme outliers for certain genres — eg. Candy Crush Saga for the match-three puzzle genre or Clash of Clans for the city battle genre — be included in viability studies for those genres?
  2. Can the viability of a portfolio strategy be evaluated over one year — especially in a year in which outlier games produced the lion’s share of revenues for certain portfolios?

Portfolio theory isn’t an absolute profit maximization strategy; its purpose is to limit co-variance amongst investments through diversification, thus reducing risk for a level of expected return. Portfolio theory as applied to mobile gaming involves limiting risk by building revenue streams across a wide range of consumer tastes (game mechanics / genres), some of which can be assumed to wane in popularity over time.

It makes intuitive sense that, in 2014, portfolios built around the games that dominated the top grossing charts would outperform those that didn’t; not only because the games that defined the most popular genres of 2014 (Candy Crush Saga, Clash of Clans) generated so much money that they could support multiple loss-making games and still produce highly profitable portfolios, but because the entire point of a portfolio is to avoid variance over time, and even in the frenetic world of mobile gaming, one year isn’t a lot of time.

The true test of a developer’s portfolio of games is how it withstands changing consumer tastes; within one year, that’s impossible to validate. Of course, this isn’t to say that the companies whose genre-focused portfolios performed well in 2014 aren’t diversifying: diversification seems to be one of the underlying trends of the entire mobile gaming industry, even for the companies that reached billion dollar valuations in 2013-2014.

The point is, measuring the success of various portfolio strategies across a timespan of one year misses the crux of portfolio theory, which is to not focus on the short-term performance of single investments but rather to defend a set of investments against co-variance in the event of precipitous changes in environmental variables (in the case of mobile gaming, consumer appetite for different types of games). By this standard, a long-term evaluation of the various strategies might be impossible to make for Western companies, given the relative youth of the industry.