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Even as it waits for its coveted 2016 3D movie, Rovio's iconic franchise is being overshadowed by new entrants

Privately held Finnish gamemaker Rovio Entertainment Ltd. announced this week that it was laying off 130 employees in Finland, roughly 16 percent of its workforce (1 in 6 workers).  The cuts come after profits failed to recover this year after falling by half in 2013.  The mobile-minded gamemaker's recent struggles are a stark departure from its meteoric annual growth from 2010-2012.
 
I. pRelude : How Rovio Quietly Crept Into the Mobile Gaming Market
 
Originally named "Relude", Rovio launched after three Finnish students at the Helsinki University of Technology (currently Aalto University School of Science) won a Nokia Oyj. (HEL:NOK1V) and Hewlett-Packard Comp. (HPQ) co-sponsored game development competition, with the game King of the Cabbage World.

Rovio headquarters
Rovio's offices are housed in a high-rise in Espoo, Finland. [Image Source: Wikimedia Commons] 

Based in Espoo, Finland, Relude in the beginning developed 2D arcade-style games written in the mobile J2ME (Java 2 Platform, Micro Edition (J2ME)) platform, which compatible with a variety of handsets from Nokia, Samsung Electronics Comp., Ltd. (KRX:005930) (KRX:005935), and other top feature-phone makers.
 
The first major shift for Relude occurred sometime around 2006.  Cofounder Niklas Hed's uncle Kaj Hed decided to make a major investment in his nephew's intriguing, but small firm.  The elder Hed had reportedly just sold a mobile payments firm named "Trema" that he had founded in 1992.  After cashing out his firm for a cool $160M USD he had entered the world of venture capital, founding a Holland-based holding company, Trema International Holdings B.V.
 
Kaj Head
Serial entrepeneur Kaj Hed (center, left in black) helped fuel his nephew's mobile gaming startup.
[Image Source: Europa Press]

Pouring a mere €1M ($1.27M USD) into Relude, Kaj Hed gained over 90 percent of the company's shares.  His nephew and fellow cofounders Jarno Väkeväinen and Kim Dikert, meanwhile were able to hire on more than a dozen engineers, growing the game studio to 25 employees.  The studio was subsequently renamed Rovio Mobile and refocused on the mobile gaming market.  
 
In 2009 Niklas Hed's cousin Mikael Hed-- the son of Kaj Hed -- was appointed CEO.  

Mikael Hed
Mikael Hed is Rovio's current CEO. He led the gamemaker through its boom years.

By November 2009, Rovio had released 51 games.  But it was hardly a household name in the U.S.  But that would soon change after Rovio announced in Dec. 2009 its 52nd game -- Angry Birds for Apple, Inc.'s (AAPL) iPhone.
 
II. The iPhone Edge
 
Launched in 2007 the iPhone initially turned away all but a select handful of third-party app makers.  But in 2008, Apple reversed that decision.  In March 2008 it launched an SDK for developers, in June 2008 it launched the new iPhone 3G, and finally in July it completed its effort with the launch of the iTunes App Store.
 
Rovio began work late that year on a game that would become (according to Rovio) the best-selling mobile game of all time -- Angry Birds.  At the time of its launch the iPhone gaming market was still immature, with most titles weekly clumsily utilizing Apple's unique high-precision multi-touch controls.  

Angry Birds app
Angry Birds was one of the first truly touch-friendly games. [Image Source: Social Beta]

What set Angry Birds apart was that it was one of the first truly touch-minded titles, built around a unique slingshot mechanism.  The game also was noteworthy for its attractive art and memorable characters.
 
By June 2010, Angry Birds was No. 1 app in the App Store with over 2.5M downloads (at the initial price of $0.99 USD), netting Rovio more than $1.7M USD in revenue.  Its next order of business was cashing in on the wildly popular app, which was now in high demand on other platforms.  Early ports included:
In 2011, Rovio introduced even more ports, for various platforms including Apple's Mac App Store; Microsoft Corp.'s (MSFT) Windows and Windows Phone; plus various handheld and traditional gaming consoles from Microsoft, Sony Corp. (TYO:6758), and Nintendo Comp., Ltd. (TYO:7974).  
 
The gamemaker was on fire.

Rovio offices
Rovio employees work in their offices in Finland. [Image Source: Getty Images] 

In March 2011, Accel Partners (Palo Alto Calif.) (via Luxembourg subsidiary Silavano Investments S.a.r.l.), Atomico Ventures II Ltd. (UK), and Felicis Ventures (founded in Palo Alto by former Google senior manager Aydin Senkut) poured $42M USD into Rovio, for 9.95, 9.95, and 1.00 percent respective stakes.  This effectively valued Rovio at $200M USD, factoring in employee holdings of ~9.42 percent and Kaj Hed's diluted 70 percent stake [sources: 1, 2].
 
In 2010-2012, Rovio also introduced a new expansion to the Angry Birds cross-platform game library every year (2010 -- Seasons; 2011 -- Rio; 2012 -- Space).  

Angry Birds Space
Angry Birds Space

By May 2012 Rovio recorded its millionth download of the game franchise.  And in Nov. 2012 it partnered with LucasFilm to make Angry Birds Star Wars, based on the iconic science fiction franchise.  Also in 2012, the spinoff "Bad Piggies" debuted.

Thus, at the end of 2012 Rovio appeared on top of the world. But the question was what was next?
 
III. The Great Stall
 
Rovio's staff was swelling, but the root problem was that none of its non-Angry Birds side projects achieved significant international popularity.  And the Angry Birds sequels saw increasingly lower levels of downloads, perhaps a byproduct of the saturation of the mobile touch-gaming market.

Angry Birds merchandise
Roughly half Rovio's 2013 revenue came from Angry Birds merchandise. [Image Source: Dean Takahashi]

Rovio countered by trying to diversify its popular franchise via merchandise and other new ventures.  It launched Angry Birds cartoons and sold Angry Birds toys (plushes, etc.).  It even operated a theme park ("Angry Birds Land") in Finland.  The effort sort of worked: by 2013 non-game merchandise accounted for nearly half of the revenue.  But the growth of the non-game revenue was not enough to salvage Rovio's stalling growth.
 
Its revenue by year was:
  • 2010 [source]
    • Revenue: $10M USD €6.5M EUR
    • Profit: $3.8M USD / €3M EUR 
  • 2011 [source]
    • Revenue: $95.82M USD / €75.6M EUR
    • Profit: $44.9M USD / €35.4M EUR [source]
  • 2012 [source]
    • Revenue: $192.9M USD / €152.2M EUR
    • Profit: $70.3M USD / €55.5M EUR 
  • 2013 [source]
    • Revenue: $198M USD / €156M EUR
    • Profit: $34.1M USD / €26.9M EUR 
The 2013 stall in profit forced Rovio to shelve plans for a potential initial public offering (IPO) of stock.  Overall 2013 could have been far worse, but it was the first stumble for the once superstar of the mobile market.
 
Money pig
[Image Source: etechmag]
 
Despite its struggles, Rovio decided to stick with the current blueprint.  Its strategy this year largely appears to be more of the same -- diversification.  
 
It has continued to develop an animated 3D film that will launch in July 2016.  To be distributed by Sony's movies division, the film stars the voice talents of Saturday Night Live (SNL) alums Jason Sudeikis, Bill Hader, Maya Rudolph.

Angry Birds movie
A 3D Angry Birds movie is planned for summer 2016. 

The developer also launched a new genre of Angry Birds game with Angry Birds Epic.  But sales of the new expansion have been less than epic, trailing the traditional Angry Birds entries.
 
IV. Has Rovio Ran Out of Ideas?
 
IHS Inc. (IHS) analyst Jack Kent opined that while Rovio continues to try to cash in on its iconic franchise, it's growing long in the tooth, or... er beak.  He comments:
 
What we've seen from Rovio over the last few years is that it's very reliant on the Angry Birds brand.  It hasn't really had much success with titles that don't use Angry Birds.  So, what it's really been doing is trying to exploit the Angry Birds success as much as possible.
 
A key headache for Rovio is that other mobile firms are suddenly catching the lightning it once held, displacing its products from top sales spots.  King Digital Entertainment plc (KING) and Finland's Supercell are among the hottest. King makes Candy Crush Saga and is nearing 700 employees.  

Supercell makes Clash of Clans and other popular titles.  In 2013 it made $2.4M USD per day ($850M USD+) -- more than four times the revenue of Angry Birds.  Supercell also sold a 51 percent stake to Softbank Corp. (TYO:9984) subsidiary GungHo Online Entertainment, valuing it at $4.1B USD.
Rovio Angry Birds
In a press release Rovio CEO Mikael Hed sounded resigned to his firm's slippage, saying in an interview with BBC News that the ax might as well fall "sooner rather than later", and adding:
 
We have been building our team on assumptions of faster growth than have materialized.
 
At the end of 2014, Mikael Hed will step down from the CEO spot and new CEO Pekka Rantala will take over.  Mr. Rantala had served as Nokia's marketing chief until 2008, and since had worked at various non-mobile firms.

Rovio new CEO
Former Nokia exec Pekka Rantala (left) will replace Mikael Hed as CEO in January. 

It will be up to the new CEO to rally the smaller workforce of roughly 670 employees, and try to reignite his firm's slumping game downloads.  At the same time he must try to bring its new projects like the 3D movie to fruition.  He has a tough job ahead of him, to say the least.  Will Rovio once more flourish under his lead? Only time will tell.

Sources: Rovio, BBC News





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