Supercell – Look east.

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Supercell looks like it is out of ideas.

• Supercell has had a difficult 2017 driven by its failure to release a new game but also by a shift in spending in Western markets away from gaming towards media consumption.
• During 2017, Supercell suffered a 14% drop in revenues to EUR1.8bn and a 21% drop in EBITDA to EUR729m.
• The cause is the fall is obvious as Supercell did not release a new game in 2017 and its long-standing winner Clash of Clans is starting to show signs of ageing.
• Supercell’s games are all pretty similar in that they involve strategic warfare for control of the board.
• Supercell has four of these including Clash Royale, Boom Beach and Hay Day in addition to its long-standing showrunner Clash of Clans.
• The games are free to play but rely on in-app purchases that accelerate the user’s progress through the game or provide upgrades.
• Clash of Clans is clearly showing its age as it has slipped to No. 7 in the App Annie top grossing charts on iOS from No. 2 in 2016 and Supercell’s other titles are also falling.
• The last 12 months have also seen a shift in spending as 2016 was dominated by games but now the money is being mostly generated by paid media streaming services such as Netflix, Pandora Music, YouTube, HBO Now and Hulu which are all now in the top 10.
• This is a sign that the market appeal of this genre of games may be flagging and that Supercell needs to do much more than just release a fresh new game in its historically successful category.
• Of this there is no sign.
• However, the same is not true in China, South Korea, Singapore and Japan where the iOS top grossing charts continue to be dominated by gaming.
• This is why I suspect that Supercell has said that it is focusing on Asia to restore growth in 2018 which should be greatly aided by the fact that it is majority owned by Tencent.
• While, this may help Supercell to restore growth, its declining relevance in Western markets (especially USA) will make it more difficult for Supercell to become the lynchpin in Tencent’s strategy to expand beyond China.
• While Tencent dominates at home, its content is not relevant overseas which is why it has been taking stakes in a range of digital assets such as Supercell, Snapchat and Spotify.
• This could help Tencent to stitch together a portfolio of digital assets into a digital ecosystem offering for developed markets.
• However, progress to date has been very slow and I begin to wonder whether Tencent is beginning to miss the window of opportunity for this strategy.
• Tencent remains my favourite digital ecosystem globally but the time is approaching for this position to be reconsidered.