In February, Ilkka Paananen, the beloved CEO of Supercell, and arguably one of the faces on the Mount Rushmore of Mobile Games Executives, published his yearly blog post. 

Just like in the years prior, the blog post travels at lightspeed across the mobile gaming industry, achieving two distinctive outcomes:

EXCITEMENT: Ilkka’s annual blog posts excite game developers everywhere. After all, Supercell is our beacon of hope. It’s a company where highly talented developers from around the World form into small squads with the unprecedented creative freedom to craft games that are played (and loved) by hundreds of millions of players.

FRUSTRATION: These blog posts can also annoy game executives and senior leaders. Ilkka’s words often portray Supercell’s game development model as straightforward and simple to carry out. The ‘just give talented people the freedom to do amazing games’ mantra sounds easy to implement, yet no other company has been able to apply it successfully. Not even companies that Supercell has a majority holding in have been able to replicate this culture. Not to mention that Supercell themselves have had issues at either maintaining or achieving commercial success with this model for the past years.

All in all, Ilkka’s yearly blog is an inspirational and quite sincere vision of the top brass of a major mobile games company. But readers of this analysis should also understand that it is more than that: the annual blog post serves as a CEO’s shareholder letter that Supercell publishes together with their financials. Even though Supercell is a private company owned by Chinese Tencent, they have famously kept their legal entity in Finland and thus are mandated by Finnish law to publicize their financials every February. 

Without the context and narrative of the yearly blog post, over the past 5 years, we’d be looking at declining revenues, and crafting our own, less optimistic, explanations. So kudos to Supercell for proactive and effective PR!

In public companies, similar messages would immediately get dissected by stock market analysts, determining what’s PR fluff and what’s the actual beef. But because Supercell is not a public company, Ilkka’s shareholders’ letter is not analyzed with the same zeal.

Luckily, you - our dear reader - have the Deconstructor of Fun crew who combine public data and word-on-the-street insights to read between the lines and interpret what was left unsaid by one of the most influential game executives in the World, Mr. Ilkka Paananen.

Observation #1 Supercell is a SUPER successful company that struggles to grow 

“Clash of Clans has generated over $10B in lifetime revenue. Hay Day has exceeded $2B. Both amazing.”

2022 was yet another declining year for Supercell. This means the return to the decline. The downward trend had just been broken in 2021, which marked the first year with growing numbers since being acquired by Tencent in 2016. 

Revenue was down 6% and is at roughly €1.8B, which is down from 2021 but still up by a significant margin from 2020. In other words, they were able to maintain most of the volume achieved in previous years, but not maintain the growth.

Profitability (EBITDA) was down 14% from €734M to €623M. The difference in revenue was explained by an increase in investments (M&A), though no specification was given on what the company invested in and how much.

Why did the revenue go down? Well, as you can see from the graphs below, Brawl Stars and Clash Royale have both massively declined since 2021.

Clash Royale and Brawl Stars install and revenues dropped dramatically while Hay Day and Clash of Clans revenues stayed stable, which is likely why the CEO highlighted these two titles while not saying a word about the other two. Interestingly, an increase in installs doesn’t affect Hay Day revenue, which talks about the maturity of the game. Source: Data.ai

But as we speak about these declining numbers, once again we need to remind everyone, ourselves included, that these are truly remarkable results by any standards.

The company boasts a monthly active user base of 250 million players. All of its live games have made at least a billion dollars in revenue with Clash of Clans crossing 10 billion and Hay Day exceeding two billion over the lifetime.

Ultimately, the huge increment that the company achieved in 2021 only shows the potential for growth if the company plays its cards right. Supercell is chasing this potential by doubling down on key franchises and allowing their portfolio studios to work on tier 2 franchises.

Observation #2 Lately, Supercell hasn’t been successful at innovating 

“Leading, not following. Let’s call this an aspiration. At our best, we try not to pay attention to what other developers are making and to avoid making incrementally better versions of other games. Of course, we don’t have a perfect record on this front, but we certainly try. I would suggest that the mobile industry’s slowdown in growth and decline in 2022 is, in part, evidence that more innovative games are needed, including from us.”

Since 2018, Supercell has failed to ship a game that could survive a soft launch. Our opinion on why is in line with Ilkka’s words above The lack of successful new game launches by Supercell stems mainly from the fact that all their games after Brawl Stars only offered incremental innovation over products that already existed in mobile, instead of a more disruptive proposal on the platform.

Just think about Rush Wars, Clash Quest, Clash Mini, Hay Day Pop, and Everdale... All are/were really polished and offered that true Supercell quality, no doubt.

But there was nothing radically new to them. They were all newer versions of games that Supercell had already made or games that already existed in the market.

• Rush Wars was the PvE version of Clash Royale in the Boom Beach setting

• Clash Quest was Legend of Solgard in the Clash setting

• Hay Day Pop was a puzzle and decorate game with Hay Day IP

• Everdale is a Hay Day Derby feature as a game

• Clash Mini is the most innovative one. It’s Team Fight Tactics for casuals.

There’s nothing bad in incremental innovation. But succeeding with a +1 game requires a specific skill set such as performance marketing expertise, high-velocity LiveOps, and strong monetization. Those are capabilities that Supercell has historically been not that strong at.
Distributing and monetizing better than your competitors with a similar product is not what we expect to see from Supercell - and clearly, not something Supercell expects to see from themselves either.

And yes, several of the past hits by Supercell were heavily inspired by games from other platforms: Clash of Clans was HEAVILY inspired by Kixeye’s Facebook hit Backyard Monsters. Clash Royale was reminiscent of some popular Starcraft/Warcraft mods like Nexus Wars or Castle Fight. And one could even argue that Hay Day was the evolution of previously existing browser and Facebook-based farm games, namely FarmVille 2. But Supercell’s games were all very innovative and disruptive on mobile when launched.

Innovation, something that Supercell has traditionally excelled at, is important because genre-defining games get a first-mover advantage. This advantage allows companies to capture big chunks of audience and create high switching costs for players through:

1. Existing social networking: e.g., when all your friends are playing Fortnite, why would you switch to another Battle Royale game, unless the gameplay is meaningfully different or you like the IP much more?

2. Progression Sunk-Cost: i.e. when you have invested money and time to progress down the power-skill-vanity curve, why would you switch to another similar game, where you have to start from scratch and learn everything anew? 

Ilkka’s points on not having innovated enough are important - but it’s perhaps a statement that politically savvy execs would hesitate to make. Does this statement highlight a disconnection between the teams working on new games and the leadership of the company? How do the teams interpret this message from their CEO?

We bet that Supercell game teams do consider themselves innovative and risk-taking. And yet, they seem to be publicly called out. Furthermore, the acquisition of new studios may also generate additional pressure and competition to achieve.
Ultimately, this presents a situation that could generate frustration and friction. Or perhaps bring a dose of healthy internal competition that could help Supercell's new game teams get extra hunger to succeed. Only time will tell.

Also, if innovation is one of the key points explaining the lack of new hits, one of the points that must be noticed is that many of the original creatives, those who built Clash of Clans, Clash Royale, Boom Beach, and Hay Day, have left the company to start studios of their own. 

Does this point towards an internal environment that has stifled innovation and needs leadership attention to fix? Or is it perhaps a sign that new blood is coming in to bring new ideas?

#3 Supercell needs to run live games just like everyone else

“As I wrote about last year, a big mistake (my responsibility!) was that, for the longest time, we applied the same thinking on team size to both new and live game teams. Our live teams have grown a lot and continue to grow, but we are still not where we ought to be and will continue to push on this front.” 

In the blog post, Ilkka further underlines that running live games at Supercell means focusing on four points:

1. Deeply understand what players truly want and not catering to what they say they want.

2. Making sure that the live services represent all of the players, which means improving the game for everyone instead of targeting the vocal communities or high spenders. 

3. Seeing the game as the holistic experience it is. Thinking bigger and including elements like the animation series (ex. Clasharama), community and esports (. 

4. Having a service mindset. Realizing that you’re not making the game for yourself but for the players. Sometimes the boring quality of life updates over the exciting additions. 

Looking at the list above should not be eye-opening to anyone who has experience working on successful live games. But what is left unsaid is the most interesting part. 

You see, we’ve previously highlighted that the reason why Supercell struggles with live game operations (just look at the decline of both Brawl Stars and Clash Royale) is the same reason why they are so good at creating new games. That reason is the small team size.

The expectations and requirements to operate live games have grown dramatically in the last years both in terms of scope, features, and pace of new updates. Supercell attempted to fight this trend by building better tools and a greater focus on user-generated content. Yet this seems to have not been able to counter the decline in revenues on their live titles.

Operating live games is so drastically different from creating new games that you could argue that the talent who built the game is not the best suited to run it.

Supercell realized this, and we’ve seen them in the past years hiring more product people to run live services, bringing marketing closer to the game team, instead of having marketing in California while the game teams are in Helsinki and Shanghai. The company has also begun at employing outsourcing in a more significant way, which is a drastic change to years prior.

Yet the next logical step, which is to grow the live teams from a few tens to a hundred or more has not yet happened. This would contradict the ethos of Supercell and would require the company to adopt drastically new ways of working and managing talent, sacrificing ownership and autonomy, and requiring the company to hire more specialists instead of generalists.

And yet, 2023 seems to be the year when Supercell finally gives in to larger teams that are “unrestrained by anything except what’s best to serve players”. This is great news, as their key franchises desperately need more content more often. We’re bullish about the potential for growth unlocked by this decision.

It’s also a sign that the company will rapidly expand its management structure as it grows its headcount: Prepare to see more C-level roles and leadership positions being created, and filled through internal promotions in all silence.

#4 Supercell missed the boat on performance marketing

“We are not heavily dependent on UA, which was negatively impacted by ATT.”

When discussing the decline of the business, Ilkka mentions three topics: 

1. Firstly, it’s the end of the lockdown-induced hyper-growth. 

2. Secondly, he mentions macroeconomic factors, such as the recession, inflation, and energy prices, which all limit the disposable income of a consumer. 

3. And thirdly, Ilkka talks about the Russian market, which Supercell, along with all other Western publishers, exited after the war sanctions. 

The blog post downplays the effect of ATT on the Supercell event though the downloads have nearly halved over the last year or so. This claim is based on the fact that more than 90% of Supercell’s new users come in organically. This doesn’t mean that Supercell doesn’t spend money on marketing. Quite the contrary. Hundreds of millions of Dollars have been invested into influencer marketing, brand marketing, top-of-the-funnel advertising like TV and outdoor installations as well as attempts to build esports with pretty much all of their live games.

In hindsight, you might argue that Supercell was right not to invest in excelling at performance marketing. After all, the companies that specialized in performance marketing are struggling now. 

Yet, in our opinion, that statement is wrong: If Supercell had invested in building strong performance marketing capabilities, that would have not only led to growth between 2017 and 2020 but also helped Supercell’s portfolio companies to reach a much bigger scale by learning effective growth from their majority owner.

Ultimately, the end of the performance marketing era is not a trap that Supercell dodged, but rather a huge opportunity for growth that the company missed. Supercell is avoiding repeating the mistake and changing the organization by bringing marketing close to the game teams.

#5 Mobile-first, but not mobile-exclusive

“Supercell is known today for its mobile games, but perhaps thinking exclusively about mobile is too limiting? We want to make the best new games, period. I imagine mobile will remain our most important platform for the foreseeable future, due to its reach, but maybe we need to draw inspiration from everywhere/anywhere innovation is happening.”

Last year we analyzed the announcement of Supercell US’ studio, which we believe was in part due ever more challenging and saturated mobile market. In short, the likelihood of launching and scaling new hits on mobile is lower than ever. This has increased the interest in PC and Console platforms. 

This is particularly true for the Supercell audience, many of which are or were avid old-school PC players (Clash of Clans, Clash Royale) or members of the Fortnite generation (Brawl Stars). Undoubtedly, for a big chunk of this audience, mobile is not the only gaming platform.

Nevertheless, the approach taken by Supercell - to create entirely new games for PC/Console platforms - is debatable at least.

The question is why Supercell hasn’t created PC SKUs of Clash Royale, Clash of Clans, and Brawl Stars have? Both Scopely and Plarium had success with expanding their games off-platform years ago. Brawl Stars could be on virtually every platform, from Switch to PS5 while Clash Royale would thrive on PC making it even more streamable.

One nuance worth not missing out on is the “draw inspiration” part. 

In the past, Supercell was successful at drawing inspiration from gameplay patterns from other platforms (Backyard Monsters, Nexus Wars, FarmVille…) and being a first mover on mobile on a different platform. As a follower, Supercell’s track record is less strong. Games such as Clash Quest, Everdale, or Clash Mini, came late to compete in genres where the pie had been already shared failing to get meaningful traction from competitors.

Could this be hinting at an intention to bring back Supercell’s ability to spot “the next big thing” and bring inspiration from mobile to new platforms?

#6 Hybrid and Remote work

“Where and how people live and work is unique and there didn’t seem to be any major roadblocks to returning to the office. All that said, we have become a lot more open-minded about this and support hybrid, even fully-remote work to both attract the best people and retain them.”

In other words: Helsinki, where all the games have shipped from to date, has returned to the on-site studio while the newly formed American studio is fully remote. To accommodate those left in between, Supercell is offering hybrid opportunities as well.

Time will tell if this is a good move. But we are skeptical that a company like Supercell can form and maintain its culture in new teams in a fully remote setup. Their creative method is founded on small teams that work closely together forming tight bonds between individuals, which fosters spontaneous generation and communication of ideas and allows fast pivoting.

Move onto Zoom and Slack and you leave room for miscommunication while increasing the need for constant realignment and reiteration of direction and decisions which it time away from being creative. The hybrid work decision also contradicts the broad trend of publishers bringing employees back on-site after struggling to perform effectively with remote work.

Strategically it is understandable why Supercell has taken this decision. Bringing the best people to Helsinki or Shanghai is tough, no matter how much you pay them. Yet it feels like Supercell is watering down its secret sauce with this approach. 

Why not just open up a studio in already established locations where it’s easy to attract foreign talents like Barcelona, Vancouver, Berlin, Montreal, London, Stockholm, Paris, Montpellier, Abu Dhabi, Los Angeles, or Lisbon? 

We’re sure many would gladly relocate to these game industry cluster locations. And given the brand power (and the enormous compensation packages) of Supercell, the top tier of the local talent would wait in line for their chance to join.

Of all of the initiatives presented in Ilkka’s blog post, this is the one we’re most pessimistic about. Supercell has been adamant about repeating that “quality is worth killing for”. But is it not worth asking game devs to show up in person?

#7 Growing with M&A

“We continue to invest in new studios and provide more capital when we see promise. In addition to our 3 internal studios, we now have investments in 15 external companies.”

In 2016, Supercell started investing in other companies. In a typical Supercell fashion, they did it with no fanfare, which resulted in even more interest because of the limited context around their plans. In 2017, Mikko Kodisoja, co-Founder of Supercell, said to Venture Beat:

When we look for external teams and studios, first and foremost we’re looking at the team. The team should have a similar kind of culture to what we have at Supercell, so there can be full ownership for the teams that develop the games…. 

We want to diversify our portfolio and invest in teams that do something different from us…

Their vision has to align with ours. We want to make games that last for decades. People play them and remember them. All the studios we’ve invested in have that same kind of mentality

Mikko Kodisoja, co-Founder of Supercell

The original M&A strategy can be interpreted like this: Supercell invests in companies that look, sound, and feel a lot like them. Companies that dream of becoming Supercell. 

The good part about this strategy was the simplicity and focus on finding a cultural fit, which makes any cooperation much easier down the line. It’s easy to know if you’re jiving with a target company, as you’re looking for the same characteristics that you already possess. Also, there are a lot of companies that do their best to mimic Supercell. And why not? After all, the aspiration of building a great (top-grossing) game with a small team in an organization where teams come first is every developer's dream. 

However, the original M&A strategy proved to be unsuccessful. 

Supercell invested in companies that had much to gain from Supercell, but that Supercell had little to gain from -- both in terms of M&A strategy and results produced. In reality, the situation is even worse, as the acquired companies didn’t seem to have received the “cheat codes” they were hoping to obtain from Supercell. And with only 400 people and a declining product portfolio, there was limited time to spread the magic around.

On a high level, there are two M&A strategies: 

1. The first one is buying synergies, such as publishing, genre expertise, audience arbitrage, and operations. Essentially you’re acquiring companies that will make your existing business better. Purchasing early-stage companies, which is what Supercell has mostly done, is part of this strategy.

2. The second strategy is buying scale. This is what the large cash-rich companies are doing to further solidify their dominance in the market. Think of Tencent acquiring Supercell as buying scale. 

It seems like Supercell’s investment strategy has evolved. They are still clearly focused on finding a cultural fit with the founders. And they continue to make early-stage bets. What has evolved is Supercell’s value offering. 

Looking from the side, Supercell seems to be more encouraging for their portfolio companies to take moonshots. Just looks at Frogmind which pivoted from Supercell-like games to the UGC (user-generated content) gaming platform Hype Hype. Or Space Ape, which found success by doing something that Supercell wouldn’t do - a music game (and simultaneously failed by doing what Supercell would do - Boom Beach Frontier). 

Most importantly, Supercell’s true value offering as an investor is their big fat checkbook, which allowed Metacore to blitzscale and capture the emerging merge genre with outstanding ad campaigns. Word on the street is that these ad campaigns might not be profitable. But that’s why having a sugar daddy like Supercell is crucial. They’ll fund you till you starve out the competition. And after that, you’re left alone with that big juicy merge pie. 

#8 Supercell Engine vs. Unity and Unreal

“We will improve and expand our internal engine, maybe even to rival third-party engines.”

Since the beginning, Supercell had its proprietary engine that has evolved from a 2D engine into a full-fledged 3D engine with strong multiplayer capabilities, as can be seen with Brawl Stars.

Now we know that Supercell had at least one game in Shanghai developed in Unreal Engine (Clash Heroes), which hinted at a potential shift of strategy. But it seems like this will be a one-off, as Supercell is adding more resources to once again make their own engine a competitive advantage on all the platforms.

Despite being open to large live game teams, at its core, Supercell’s ethos is to have compact teams, particularly for new games. Their in-house engine strategy synergizes with that because the goal is to give tools to small teams that allow them to deliver AAA-quality games without the need for massive team sizes.

Ilkka’s bullishness is also seen in this statement, as he envisions the internal engine as a potential growth accelerator for Supercell: Given that the company already owns 15 other studios with a few more being acquired every year (via majority investment), we can see this engine being adopted by new and existing studios. 

Yet mentioning the engine as a potential growth strategy along with all the other focus areas such as innovation, team sizes, and M&A gives a feeling that the CEO might be focusing on one too many things to get back on the growth track.

Supercell’s laundry list of improvements indicates a major strategic shift

Supercell is one of the rare companies that doesn’t try to beat the competition; rather, it tries to beat the high score set by its own prior games. To date, Supercell has created 5 genre-defining games and generated billions in revenues -- all with little more than 400 employees (!). 

However, since 2016 Supercell has had only one year of growth in terms of revenue, and that was 2021 when the lockdowns supercharged the whole market. As a result, an ever larger portion of our industry is wondering if Supercell’s heydays are behind them.

Our short answer is no. Out of all the gaming companies out there, Supercell is one of the very few capable of shipping consecutive monster hits. In 2020 we argued that to return to a growth path, Supercell should also consider additional levers to complement its high-risk, high-reward development strategy:

1. Strengthen Live Services and performance marketing to stabilize its existing portfolio, while continuing to drive growth through new releases

2. Leverage M&A to add new titles to their portfolio or new capabilities to scale how they operate existing games. While Supercell has been active on this front, in reality, the company has spent four years and around $100M with little to show for it.

It seems like folks at Supercell read our analysis (or we were just thinking about the same things). Because in two short years, Supercell has radically changed its thinking about live games by unlocking team size, composition, and seniority requirements for those working in a live team. 

Supercell revamped its marketing: They changed their CMO (who now runs the America Studio), hired marketing people in Helsinki to sit next to the game teams (previously all marketing was done out of San Francisco), and re-engaged with performance marketing, though IDFA put a kibosh on that. 

And on the M&A side, they invested in a wide set of companies that, unlike the first investments, don’t look to imitate Supercell, but have a mission, capabilities, and ways of doing things different from their parent company.

What’s really interesting, and something we never saw coming, is Supercell’s (increased) investment into their own proprietary engine with the goal of leveraging it both internally and externally. Supercell has games in development in Unreal (Clash Heroes), and most of their portfolio companies are using Unity. Yet it seems like Supercell sees an opening to level up their own engine that has gotten them so far, rather than abandoning it for someone else. That’s an epic strategy, pun intended.

Overall, it’s great to see the CEO so fired up about the future. Many of us have whispered a question “When will Ilkka ride into the sunset? After all, he sits on top of the Gaming Company Founders Leaderboard from now till eternity.” 

But it seems like Mr. Paananen has plenty of fire left, and we can’t do more but sit back and admire him steer one of the most successful gaming companies ever. A company he created.

XOXO
Deconstructor of Fun