Trick or treat: The trouble with Mind Candy

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I like Mind Candy very much, and I hope it will become the British Disney. I am, unfortunately, not convinced that it will. A confluence of issues are causing headaches for the company, and it needs to hurry up and sort them out.

1. Tablets, tablets, tablets.

Moshi Monsters is a kid’s product that lives in the browser. That was fine, back when young kids didn’t have consoles and their parents wanted to be able to supervise their online time. Browsers beat consoles  for that young demographic who often played with the supervision or involvement of their parents. Since Mind Candy launched Moshi Monsters, though, Steve Jobs’ Cupertino behemoth has changed the rules of the game not once not twice, launching the iPhone and the iPad and changing the way kids interact with technology for ever.

A recent report from Common Sense Media entitled Zero to Eight says that 63% of American children under the age of eight have access to a smartphone at home. Forty per cent have access to tablet (whether iPad, Android or other) and that number has jumped from 8% in just two years. Thirty eight per cent of children under the age of two have used a mobile device for media.

When Moshi Monsters launched, the market was uncrowded. The competition came from sites like Club Penguin, the free Flash-based gaming channels of the kids TV channels and portals such as Miniclip. Now, children are starting to play games much earlier on touch devices. That means that there is much more competition from other games like Hay Day, Dragonvale and Candy Crush Saga, as well as a problem attracting a younger demographic to a non-touchscreen experience.

2. They grow up so fast

A kid’s brand has two strategies available to it. One is to be evergreen. I liked the Mr Men and Thomas the Tank Engine as a child. Now my kids like them too. The franchises benefit from a renewing supply of customers as kids grow into the product and then grow out of it.

The other is to age with your customers, a strategy which Lego has managed well (although to be fair, it has done very well at the onboarding end of the process too).

I have no insight into Moshi Monsters’ demographics. But I fear that its audience is ageing. At the young end of the market, kids are growing up navigating touchscreen devices, not the mouse and keyboard. They are used to switching between games with the touch of a button with little loyalty. A browser game risks being on the school device (a PC) not the fun device (a tablet). So Moshi’s audience ages. Which is perhaps fine when they are 10, or when they are 12. But will 14 year olds be playing Moshi Monsters? Or 18 year olds?

If I am right, and Moshi’s demographic is aging, it is in for trouble in a couple of years time.

3. Fickle kids

On the laptop, Moshi Monsters is a destination. On the tablet, it is one of many apps, competing for attention with Dragonvale and the marvellous apps from Toca Boca and tens of thousands of other apps. It is the matter of a moment to tap that little button to shut down one app, select the icon of a new app and be playing a different title.

Moshi has to adapt to no longer being a destination in a competitive world. It is the same problem that Facebook faced as the world became increasingly mobile. It can be navigated, but it is hard.

4. When growth stalls, valuation plummets

Next year, Mind Candy could see its revenues and profits double but its valuation halve. I’m not making a specific forecast here, I am just making a point about what happens to valuation when a company shifts in the minds of investors from being a growth stock to being a cash-generative business. All businesses are valued on the basis of future cashflows. (In technical terms, the value of a business is the present value of future cashflows of the company, discounted – i.e. adjusted – for the risk that the company does not achieve those cash flows).

For a long time, Mind Candy was the golden child, proving the European companies could be successful at creating Intellectual Property with global appeal and longevity. Its star was high. But what happens if growth stalls? If the US launch is harder than anticipated? If the audience is aging?

The answer is that the valuation falls, even as revenues and profits rise. Investors will often value a company based on a rule of thumb based on comparable companies. A growth company might trade at 40x forecast earnings, or even more. A mature company might trade at 10x earnings. That might be the same company, that feels the same internally, suddenly seeing its valuation fall by 75%, even as revenues and profits rise.

I fear that may be happening at Mind Candy. It feels great internally: Moshi still doing well, licensing revenue growing, a movie out this Christmas. But if investors start thinking that this is a maturing business, all the revenue growth in the world won’t offset the fall in multiples.

What is Mind Candy to do

I very much hope that I am wrong in my concerns. I would love Mind Candy to become the British Disney. For that to happen, several stars need to be aligned.

• Mind Candy needs to be on tablets. Right now. In any form. MVP, MDP, Minimum Awesome Product. It needs to be learning and iterating on a fast-changing medium before it is too late.
• Mind Candy needs a new IP. This is tougher. But it needs to refind the scrappy startup attitude that allowed it to pivot away from Perplexcity and launched Moshi, and it needs to start experimenting.
• Mind Candy needs to figure out how to keep onboarding young children. If it fails to launch a new IP, its best hope is to position Moshi as an evergreen brand, and that requires, well, being evergreen.

I hope that Mind Candy is on track to do all of these things. If not, it risks first its valuation falling as it transitions from being a growth stock to becoming a mature investment. Then it risks losing its audience as they age and migrate to Facebook or the next messenging app that teenagers adopt. Then it risks becoming an also-ran.

Please, Mind Candy, don’t do that.

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