Bear with me on this post. There will be some financial jargon and a bit of math but the conclusions drawn I believe will be worth your read (at least I hope so!).

Let’s first start with some financial theory which will form the basis of the arguments I make.

In finance, the “efficient markets hypothesis” supposes the following relationship between risk and reward for a financial investment via the Capital Asset Pricing Model (aka “CAPM“):

Screenshot 2013-12-10 14.29.58

What this essentially means is actually not so complex. Essentially, when you buy a stock in the stock market the expected return can be described by the 3 factors shown:

  • rf is the rate of return you could alternatively get by just investing your money into something that is very safe (“risk free”) like treasury notes backed by the government
  • β (beta) is a bit tricky but you can think of β as a description of how a stock is expected to return relative to the market; it is a measure of how correlated with the market the stock is
    • If β = 1 then a stock is expected to perform as well as the general market performs and if a stock has a β = 1.5 then it is theoretically 50% more volatile and investors would expect a 50% higher return when markets go up and 50% lower return when markets go down… so basically a measure of a higher risk from the stock
  • rm is just the general expected return of the market

Ok, so what? Let’s now make the connection to mobile game companies.

CAPM is an asset pricing model and we could consider any class of investable “assets” with this model. So we could think of mobile gaming companies as the scope of assets in CAPM instead of stocks in the stock market (or even games as the assets for that matter). By reconsidering CAPM in terms of mobile gaming companies specifically however we can draw some interesting conclusions.

So let’s do that:

  • What is rf for mobile gaming?
    • Well, it would be the same as in the stock market case. You could deploy capital in treasuries with very little risk and the current yield on a 1-year treasury bill is 0.15%. So pretty close to 0 in today’s crazy economy.
  • What is rm?
    • I would argue that the expected “market” return for the typical company in mobile gaming is negative.


  • CPI > LTV:
  • Super Competitive Ecosystem:
    • The App Store ecosystems are characterized by power law distribution in revenue, an auction based discovery system, and winner take all markets
    • Some thoughts on this from another of my blog posts: here
  • Few Profitable Companies:
    • Anecdotally I only know a small handful of companies who are actually profitable
    • It’s not uncommon knowledge that even the so called “successful” companies have yet to be profitable or are barely so e.g., Kabam (expected to be profitable by end of year, rumored at 5-10% net), Glu (presumably not profitable on Deer Hunter based on 3Q ’13 10Q), Zynga (although losing less money these days), and many others

So reconsidering CAPM in this scenario:

Screenshot 2013-12-10 12.10.07

Typically the graphical depiction of CAPM is described by what is called the Security Market Line (SML) and it typically looks like this (this is just the graphical plot of CAPM):



However, in our scenario, the SML will have negative slope and would look like this instead:

Screenshot 2013-12-10 14.10.31

So a few conclusions to be drawn from this:

  1. We would expect any market player that acts like the market acts (β=1) to lose money in this industry
  2. An industry with negative slope SML is a shitty industry (at least for the majority of market players) and without key systemic changes we should continue to expect to see a negative slope
    • E.g., significantly fewer players in the market, change in App Store ecosystem, new forms of discovery/distribution, etc.
  3. This market should theoretically favor companies with negative β (what does this even mean?)
    • There are likely a bunch of things companies are doing that are not uniquely differentiated enough to allow for positive returns

Negative Beta:

So what does it mean to have negative β? Well, going back to the stock market, a negative β asset would be one that is negatively correlated with the stock market… in other words, it would tend to move in the opposite direction of the overall stock market. So if stocks go down, then a negative β asset would increase in value. Common examples of negative β assets include gold, bankruptcy services companies, short assets, etc.

High-level Conclusion: To have a shot at success in the current mobile gaming market you need to be as uncorrelated from what everyone else is doing as possible.

So based on this analysis, theory implies that you should not do what everyone else is doing and in fact you may in some cases want to do what is opposite to what the market is doing. If the market is going big, go small. If the market is going F2P go paid. If the market is making card battle games or yet another Clash of Clans (YACC) game make something else!

From a real world application perspective, please draw your own conclusions as I realize the gross generalization isn’t entirely true but I contend that the general market still does not get the base insight. We still see way too many players trying to out-execute or out-design some small feature in the same crowded category of game. We see too many similar or identical strategies expecting different results.

This is insanity…

β speaks to a mobile game company’s high level strategy. What are you doing more from a macro level that is differentiated enough and compelling enough to win? The implication of negative β in this market is simple: if the game is rigged against you, the only way to win is to change the game. See Star Trek Kobayashi Maru.

Introduction to Alpha

I’ve setup the basic premise of how to view the mobile gaming market from a financial (and efficient markets) perspective, and now want to dive a bit deeper. More specifically, I make a case for the criticality of the financial concept of “alpha.”

We start by taking another look at CAPM but in a slightly different form, where we depict the formula for actual return instead of expected return:

Screenshot 2013-12-10 12.25.42

Ok, what does this mean?

This formula just states that unlike the expected return, that the actual return for a particular asset can be attributable to “alpha.”

Generally the view is that in an efficient market (of which the mobile game development market is not) that alpha should be zero and any alpha generated is due to luck. However, non-luck based sources of alpha are typically attributed to the following 3 key sources:

  1. Information Advantage: Knowing more than the next guy about a stock, a market change, insider information, etc.
  2. Analytical Advantage: Ability to process info better than others and have a better model to help predict when security prices will change
  3. Behavioral Advantage: What you actually do with the information and analysis you have e.g., acting rationally when others are not or “being fearful when others are greedy, and greedy when others are fearful.”

α for the mobile gaming industry

If α = 0 for you, that means you lose (assuming a positive β strategy). You’re just like everyone else in the mobile gaming industry and you should be losing money and going out of business.

The only way to have a profitable business in this industry is to find or somehow construct alpha!

To some degree this has been a somewhat long read to get to a point that’s similar to simply: you need competitive advantage to succeed. However, what I’m trying to convey is more nuanced than just that basic message:

  • The industry is systemically broken
  • Most of the readers of this post will have no chance at success
  • Unlike a typical business where you should expect to have some ability to make profit, you’re starting from an expectation of negative returns
  • Too many companies are doing too much of the same thing
  • What the majority of the market is doing right now makes no sense

All of these implications can be interpreted for the mobile game industry through the lens of CAPM.

That’s not to say no one can succeed. So how do you achieve alpha in this industry? Well let’s look at the typical sources of alpha by “successful” (note the quotation marks!) mobile gaming companies to find clues:

Source of AlphaPrimary ExampleExplanation
Quality of TeamSupercellAble to leverage an extremely talented pool of game and mobile developers in Finland (I'm sure Nokia's demise helped) enabling them to have a 10x better team for 1/3rd the price
DistributionKing.comTook advantage of their Facebook audience and pushed the audience when Facebook was prioritizing mobile viral, then dominated the supply of Hitfox's Applift mobile ad inventory when it started to explode
Existing Customer BaseWargaming.netWill leverage their 70M users from World of Tanks/Warplanes/Warships on MMO and push them to mobile
BrandWarner BrosLeveraging world known and compelling brands like DC heroes for Injustice
TechnologyMachine ZoneBuild a massive technology infrastructure enabling features that few if any other teams can replicate

If there’s one message I’d like to leave with you today it’s basically this: In this intensely competitive industry characterized by power-law driven revenue distribution, how do you compete? Do you know what your alpha is? Do you believe it?

The implication of alpha can also be summarized in a simple message as well: If you have no alpha then you have no chance to win. Again, what is your source of alpha? If you don’t know you better figure it out.