It’s the latest example of sky-high valuations pegged on young companies that own hot software properties—and just as importantly, tens of millions of young users—in the growth areas of digital economy.
No single defining characteristic unites these companies, but many share common traits. One is their business: several game developers have numbered among the digital tech companies that have fetched high valuations in various deals during the past 12 months.
Mojang is a video game maker known for its hit franchise Minecraft, a game in which players build anything they want, including their own game spaces, with virtual materials.
Two other video game makers, Anglo-Swedish King Digital Entertainment PLC, maker of Candy Crush Saga KING +0.38%, and Finnish Supercell Oy, have recently commanded valuations on par with what Microsoft is considering paying for Mojang. King’s valuation was $7 billion when it listed in an initial public offering in March.
King’s share price tumbled in August after it posted disappointing June quarter results, and the company’s market capitalization now hovers around $4.2 billion. It’s problem: convincing investors that it’s not a one-hit wonder.
Finland’s Supercell was valued at $3 billion when the Japanese network operator and Internet giant SoftBank Corp. 9984.TO +2.89% acquired a 51% stake in the company in October 2013. Supercell is known for its simulation games with “Clash of Clans” the most prominent title in its stable.
While Mojang, King and Supercell are video game makers, their business models and product lines differ. King and Supercell rely on mobile games which are free to download for players, some of whom then make in-app purchases. Mojang, in contrast, charges fees for Minecraft which it offers across a range of platforms: PC download, console and mobile.
Furthermore, King and Supercell have so far kept their games just that: games. Mojang has expanded its business to merchandise and licensing, similar to Rovio Entertainment Ltd., the owner of the Angry Birds franchise –although Rovio’s effort has met with mixed results.
Are the valuations for King, Supercell, and now, possibly, for Mojang justified relative to their growth and earnings potential?
For sure all three companies are making sizable amounts of money at eye-popping profit margins, and are considered by many to be genuine businesses –unlike many tech companies in the dot com bubble of the 1990s.
In 2013 King posted a net profit of $568 million on net sales of $1.88 billion, and Supercell made a profit of $464 million on revenue of $892 million. Mojang’s profit was $128 million on net sales of $325 million in 2013.
Actual profit from the Minecraft game was even higher because Mojang paid $129 million, by coincidence practically the same amount as Mojang’s annual profit, in licensing fees to a separate company which Mojang’s owner Markus Persson has set up to control intellectual rights to Minecraft.
Another point: these game developers are young and fairly small in size compared to other tech companies with similar valuations. King is something of a giant dinosaur: it was founded in 2002, and its headcount is now close to 700. Supercell was founded in 2010 and has about 150 employees.
Mojang got its start as Mr. Persson’s hobby project in 2009 and was incorporated a year later. The company is tiny: only about 40 employees and its ownership is split among Mr. Persson and two of his confidants, early employees of Mojang.
Instagram reportedly had only 13 employees and no sales at the time. With Instagram as yardstick, Mojang looks like a well-established corporation with dizzying profit margins.