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Candy Crush crash coming? Publisher reveals revenue decline

If I had a nickel for everybody I saw playing that annoyingly addictive phone game, Candy Crush Saga, I’d have…$2 billion, it turns out.

King Digital Entertainment, publisher of Candy Crush and a bunch of similar games, filed to go public on Tuesday, disclosing $1.9 billion of revenue and net income of $568 million for 2013. With 124 million people playing per day on average, King says it’s bringing in 5.6 cents a day from each.

The question for investors, of course, is whether King owns a one-hit wonder or a more dependable hit factory.

Many see King as the next Zynga (ZNGA) or Groupon (GRPN) -- faddish companies that went public at the height of their popularity only to burn investors when the inevitable fade arrived. On the other hand, Hollywood studios and Las Vegas casinos have developed more reliable formulas for making steady profits.

As I discuss in the above video with Henry Blodget and Jeff Macke, there are already some warning signs in the King filing.

Fourth quarter revenue of $602 million was down 3% from the third quarter, the first time King has disclosed that revenue declined from quarter to quarter. And while the total number of users continued its heady rise, the average number of paying users also declined in the fourth quarter from the third.

“The decline was driven by a decrease in Candy Crush Saga gross bookings, which was mostly offset by an increase in gross bookings across all of our other games,” King said in the filing. “This growth in the other games was driven by a further diversification of our portfolio in the mobile channel as we released more games on that channel in the middle and later part of 2013.”

And, again, that is the question. King released Farm Heroes Saga, its next tent pole offering in January, so its results are not incorporated in the disclosed results yet.

“Gross bookings from this game have increased and we have seen further diversification of our overall gross bookings,” was all King said about the new game in the filing. “In future periods, as we continue to diversify our mobile game portfolio, we expect Candy Crush Saga to represent a smaller percentage of our total mobile channel and overall gross bookings.”

But King’s previous track record doesn’t show steady growth from a diversifying stable of games. King’s revenue was $60 million in 2009, $58 million in 2010 and $64 million in 2011. It wasn’t until Candy Crush emerged in 2012 that revenue shot up to $164 million in 2012 and $1.9 billion last year – more than 1000% growth.

Some research has found that creating hits in digital storefronts like Apple’s iTunes is a near random process, almost unpredictable and with only a loose connection to the quality of the offerings. In one experiment, Princeton Professor Matt Salganik found that letting people see how many times a song had been downloaded was an overwhelming influence over future popularity. As social rankings were made more and more obvious, the emerging hits got bigger and more unpredictable.

To be sure, Candy Crush was developed with attention to the same kinds of psychological factors that casinos use to attract slot machine players.

Related: Candy Crush: Insanely Addictive Today, but Likely on Borrowed Time

And the design worked, with 93 million people playing a day on average in December. But even hardcore players are questioning their devotion to the game.

“Why am I even still playing Candy Crush when all the cool kids are talking about Flappy Bird?” author Emma Brockes wrote in a Feb.15 op-ed in The New York Times about her constant play. “Is there anything more tragic than an outmoded addiction?”

King is hoping to convince investors that it will be able to replace the outmoded addiction with something new. So far, the evidence is missing.

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