Lose money, no problem: Twitter’s IPO is a California dream

Twitter King IPO Analysis

The tech industry is captivated by two upcoming IPO’s, which offer an interesting contrast. Twitter is a great example of what software companies used to look like: it is American, it generated $250 million in sales in the first half of 2013… and lost nearly $70 million. That’s what the California model of software IPO’s looks like. Modest sales and big losses.

King, on the other hand, is in the vanguard of a new generation of European software companies. The privately held Candy Crush Saga developer has not released any 2013 sales data, but several interviews with British gaming industry sources indicate that King’s revenue for the first half of 2013 was also likely close to $200 million while generating $60 million to $80 million in profit. Another new Euro mobile app vendor, Supercell, is expected to generate more than $800 million in sales in 2013 and at least $400 million in profit.

There are several drastic differences between the California dinosaur and the nimble European mammals. Twitter has not been able to figure out how to make one dollar of profit despite of operating since 2006. Supercell launched its first iOS game in June 2012 and is now probably topping $200 million in quarterly revenue. Twitter has failed in China while Supercell’s Clash of Clans is the No. 3 grossing iPhone game in China as of today.

Of course, Twitter does have one core strength that may trump the valuations for King and Supercell for the time being: It has at least the appearance of permanence. It is very hard to see how another microblogging service could replace Twitter in most markets outside of China anytime soon. The spectacular success of Vine has only enhanced the grip Twitter has on its niche.

In contrast, there is no way to tell whether European mobile app giants like King and Supercell can continue their recent winning streaks. Both of them have launched two back-to-back blockbusters and currently hold 4 of the top 10 positions on many iOS sales charts across the world. But their ability to continue churning out winners is clearly in question.

Neverteheless, it is fascinating that even though the California tech titans Apple and Google created the iOS and Android app markets, it is the two European vendors and one Japanese company (GungHo) that have started dominating the global app market revenue competition. California has the magic touch in the old businesses of building web-based services and operating systems. But it has turned out to be quite weak when it comes to generating content for its own app stores.

Over the past summer, three Finnish companies — Supercell, Frogmind and Rovio — achieved the No. 1 iPhone download position in Japan, a country that has an app market that rivals the size of the entire United States market in revenue. No U.S. vendors could even crack the top 10 in Japan.

It will be interesting to see how investors value Twitter versus King: Will they prefer the cash-bleeding, aging giant or the wildly profitable, volatile new app market champion?

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