Candy Crush: Addictive Game, Incredible Business, Horrible Investment

The world's most popular mobile game is making an absurd amount of money. But for how long?

King Digital Entertainment, the company behind the mega-hit game Candy Crush, has filed its IPO papers with the SEC, offering investors a look inside its massive popularity. And, well, dear God. Last year the company took in $1.88 billion with $568 million in profits—half $1 billion in profits! To put this in perspective, a mobile gaming company specializing in colored sugar baubles made more than a quarter of Amazon's lifetime earnings in a year.
Here's a brisk look at the most insane numbers, using these charts from the IPO as a guide.
1. The players. Start with the top-left graph, which shows 124 million daily average users (i.e.: DAUs). Candy Crush, a free-to-play game, attracts 98 million of those players. So, 100 million people play the same game every day. That's about the size of America's four largest states—California, Texas, New York, and Florida—combined. But the vast majority of these players don't pay Candy Crush a cent. So how does it make money?
2. The payers. Now to the top-right graph. Candy Crush's business depends on about 12 million daily players, or 4% of its population, to buy power-ups. There's nothing scary about a freemium business model so long as you move enough gamers through the door to convert them into payers, but it's already clear how challenging this will be for King, who admits in the IPO filing that average monthly payers have already declined by 1 million since the third quarter of 2013.
3. The profit. Now a look the bottom two graphs. First, the astonishingly good news. "Of the 5000 companies in NASDAQ, only 6 have as much revenue ($1.88b) and fat profit margins (30%) as King," Wall Street Journal buisness editor Dennis Berman tweeted this morning. But take a closer squint at the Q4 figures for revenue, gross bookings, profit, and adjusted earnings: They're all falling. King explains that "this movement is as a result of the seasoning of our older games in certain markets among our more occasional customers." It's a plausible explanation, but it's not a good excuse: You don't IPO into a crowded and competitive mobile gaming market when your consumer base is "seasoning"—which is admirably original IPO-speak for "disappearing."
4. The platform. Candy Crush's success might or might not last. But the power of mobile as a business seems pretty durable at this point. Weeks after Facebook and Twitter announced that they've figured out the mobile ad game, King says 70% of its bookings were generated by mobile users—a 7X increase since December 2012. It already has 408 monthly active users—a third as much as Facebook and 70 percent more than Twitter.
5. The problem. King isn't a diversified business. It's a viral hit. And the thing about viruses is that they tend to go away after a while. Candy Crush accounts for 78% of King's total business (and 86% of its mobile biz) and most of its meaningful numbers—paying users, revenue, profits—are already declining. Meanwhile, the experience of Zynga, Farmville, and Angry Birds suggests that these games are mobile mayflies, bursting into experience and flaming out in the blink of an eye. Candy Crush might be a marvelous game. It appears, for now, to be a slightly less marvelous investment.