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Will Angry Birds Become the Next FarmVille?

Saturday - 4/20/2013, 5:30am  ET

Nobody could have predicted that Angry Birds would dominate the world of mobile gaming. But it does, and it's all thanks to one company: Rovio. The Finnish gaming business' creation has been downloaded over a billion times, and 30 million users play daily. 

Rumor has it that Rovio could go public one day, taking a page out of fellow gaming company Zynga's playbook. Zynga is a much larger company with a more diverse roster of games, including Farmville and Words with Friends, but not long after the company's IPO, its stock dropped like a rock. Could Rovio be next?

Financials with friends
Rovio might be privately owned for now, but it has still revealed a few crucial tidbits about its income statement. The company hit Angry Birds pay dirt in 2009, and recently Rovio announced that its revenue in 2012 had doubled from 2011 to 152 million euros, or $199 million. Its net profit was impressive as well -- at $71.1 million, it held a healthy 35% margin, up 57% from last year.

2012's numbers were not so pleasant for Zynga, on the other hand. In March its stock reached a high of $14.69, but the company suffered a negative annual net income, after spending 86% of its revenue on research and development, as well as selling, general, and administrative expenses.

So what's the difference between these two companies? Are they simply at different points on the same trip to failure, or could Rovio avoid Zynga's fall?

Friending companies vs. friending consumers
Size isn't the only big difference between these two companies. Their strategies for generating revenue are surprisingly dissimilar as well. In 2012, Zynga gathered the bulk of its sales from its online gaming purchases and advertising, and thanks to its presence on Facebook, these revenues were staggering.

Rovio has of course made dough off of its games and ads, as well. However, there's one huge revenue generator that separates this company from Zynga: merchandise. From plush toys to Halloween costumes to hoodies, if you can think of it, there's an Angry Birds product for it. This accounted for 45% of the company's revenue last year, and Rovio has no plans to stop anytime soon. Chief Financial Officer Herkko Soininen recently expressed plans to create new entertainment offerings, including cartoons to feature films.

Selling merch is by no means a new tactic for gaming companies. Nintendo has sold paraphernalia based around its iconic plumber Mario for decades. Through this strategy, Rovio can focus less on the volatile world of mobile gaming and more on the promotion of beloved characters. If the company can continue reaping profits through merchandise while creating new games (and new characters to capitalize on), its moat could become wider than Zynga's.

That doesn't necessarily mean Rovio should go public. Angry Birds may be iconic, but there's no telling how popular any of Rovio's next offerings will be, and this kind of endeavor could take a lot of time and money to see through. An IPO may look tempting when a company needs capital, but Rovio's attentions would be spread too thin if it simultaneously focused on moving into video entertainment and appeasing shareholders. Still, Rovio's merchandise success proves that classic revenue-generating tactics can still be effective in a modern, mobile environment.

And then there's Zynga. This company's post-IPO performance has been dreadful, and investors are beginning to wonder if it's "game over" for this company. Turns out, being so closely tied to the world's largest social network can be a blessing and a curse. You can learn everything you need to know about Zynga and whether it's a buy or a sell in our new premium research report. Don't even think about picking up shares before you read what our top analysts have to say about Zynga. Click here to access your copy.

This article was originally published as Will Angry Birds Become the Next FarmVille? on Fool.com

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