Valuation in Empire Avenue. Or How to make money in Empire Avenue.

In case you haven’t seen it yet Empire Avenue is a game, played like a stock market.  Check out my first impressions of the game.  Each stocks value is derived from two things.  The number of your shares other people purchased, which I mention first because in this post I’m paying less attention to.  Second the activity of the social media accounts attached to your ticker symbol.  When you sign up you tie your twitter account, Facebook account, YouTube account, and other social media into your EA account.  The game measures your activity on those accounts, and bases your stocks value on that activity.

This game is a neat tool which has been helping me get better at social media.  It just so happens that I’m a bit new to twitter (see below), and am not in the habit of tweeting regularly.  But I have real world goals that I want to meet, and being better at social media helps me reach those goals.  For example getting people to read this blog and click on ads.

A real world company derives its value from the Balance Sheet Equation.  It’s really way more complicated then that, but this is a generalization for folks who are not Business Majors, or Chief Financial Officers.  A ticker symbol on Empire Avenue however is valued by the sum activity of the various accounts you attach to it.  Here we have a pretty picture of my Twitter activity.  You can clearly see how my twitter activity adds into my overall valuation.  You can also clearly see that I do not have many followers on twitter.  😉

Retweets btw are other people retweeting my stuff.  Not me retweeting other peoples tweets.  Took me a good week to figure that out, during which I was doing a lot of retweeting.

I use a Twitter account as a starting point for determining the value for one very important reason.  EA tracks twitter activity for people who have not joined the game yet.  It does not track information for Youtube, Facebook, Flicker, etc unless the owner of those accounts joins the game, and attachs them to their EA account.  This represents a tremendous advantage to twitter accounts.  As well as a huge opportunity.

The calculation seen above is run on every twitter account Empire Avenue see’s.  Which appears to be all of them.  Once you join the game EA displays a list of all your followed twitter feeds.  At the moment far more of them are going to state they they are not playing EA, then are playing EA.  The game ranks and values the twitter accounts.

With one exception that I just discovered.  If you use the Facebook Empire Avenue app, you can purchase shares in Facebook accounts before they start playing Empire Avenue.

Once a player joins EA, then others can buy and sell shares of the twitter account, plus other social media.  This brings the irrationality of humans attempting to buy good deals and sell bad deals.  In other words their share price is no longer a measurement of how active they are on social media.  It becomes subject to the whims of humans.  Which brings volatility.  There are many people on EA who are making Eaves by capitalizing on this volatility.  Or using buy back strategies.  Which are both good strategies, just not one that I want to add to the conversation.  I want to add another tactic to the arsenal.

I’m going to use the term “Fundamental Value” in future blog posts to refer to the portion of someone share price which comes from just their social media activity.  Your “Total Value” is the Fundamental Value plus every share bought by your shareholders on EA.  The Total Value is going to be subject to the whims of the market (ie the opinions of the people out there) while your Fundamental Value is not.  Hence the neat sounding name I have coined for it.

When making your first purchases on Empire Avenue I recommend finding the twitter accounts of people that you know who are not playing EA.  You are buying them for the fundamental value of their twitter activity.  If they happen to start playing, their share price will go up simply by adding additional accounts to the game.  Initially you should buy those twitter accounts who you know have a vested interest in continuing to tweet.  Those who rely on social media, or have built their own business on it, for example.  Avoid purchasing those people who just lurk on twitter.

This should give you a solid base of dividends with which to branch out into people whos’ behavior is riskier.  If you give this strategy a try, let me know how it work for you!  I would love the feedback especially if we can put some numbers on this idea.  See you on EA!

The job of an Analyst.

Carl Manneh, CEO of Mojang, replied to my tweet plugging this blog post.  I was in gamer/business nerdvanah.

Jspringfield211  Mojang Forecast, just for fun.
Carlmanneh: It sure is. Nice post, but I think your evaluation is a bit modest 😉

The strategy of being a business analyst is that you provide data based on calculations and reasonable expectations.  Did I undershoot the number?  Absolutely.  Because the numbers I generated are not for investors, they are internal business numbers.  There is a big difference between a number generated for internal use and a number generated for external use.  If I were making such predictions because the marketing department wanted to know its budget for the next three years, I would want to undershoot the number as well.  “Worst case scenario you have x% of this projected budget to sell ads with next year.”

What I did wrong in that post was state “Were Mojang Specifications to do an IPO they could be worth as much as 50 – 70 million Euro” without the qualification that the numbers were internal.  To the untrained eye it might look like I was forecasting for a different group of people then I actually was.  Or forecasting as an investor, which I was not.  I was pretending to be an employee of Mojang.

Minecraft has no reason to EVER do an IPO and never should.  Becoming a public company fundamentally changes a company in unpredictable ways (And I don’t even know the difference between a Swedish IPO and an American one).  The culture of the Mojang would be altered in a bad way.  At the moment they can take advice from fans or not as they see fit.  Pistons for example.  They are free to add or not add anything based on what they feel Minecraft is about.  In a public company situation they might feel pressure to add a ‘feature’ simply because the shareholders wanted it.  Or because the customers wanted it.  Even if it goes against the spirit of the game.

And besides, if things are going we well as Carl indicates…  They really don’t stand to gain that much more money than they already have from an IPO.  😉

Minecraft Bonus Post!!!! Mojang Forecast.

Another week, and another bonus post.  Lucky you.  This bonus post, however, is going to be a bit less project oriented and  a bit more analysis oriented.  Which you may or may not find interesting.  Consider yourself warned.  This post started because I was replying to someone on the escapist about Minecraft.  

Mojang Specifications has really dominated gaming news from E3 2011.  Microsoft announced Minecraft for the Xbox with Kinect support.  Mojang with Sony Ericsson announced a mobile version on the Xperia PLAY device.  Notch recaps all the points in his blog post.  He also mentioned on twitter that the game officially hit 2.5 Million purchases.  On the Escapist Forum Bags159 noted that is an impressive number only if it comes along with price information.  He is correct.  I wrote a reply to fill Bags in on rough pricing information about the game.  It seemed like a good idea to polish that reply a bit, as my first drafts tend to wander.  Also the math is interesting, and forecasting is fun.  Here goes!

So how much has Minecraft really made to date?  

This is actually relatively easy to figure out at any given time because Mojang has always posted total sales on their Minecraft website.  Which means that people have been tracking this information.  There have been price changes, which must be taken into account.  We can gather a little information, do some estimating, and come up with reasonable numbers without too much effort.

Crafthub wrote an article about this excellent graph of the 2010 purchases. 

The information is a little old, obviously.  But as the chart goes up to 10/18/2010, it captures most of the Alpha sales of the game. The game moved into Beta on December 10 2010 at which time the price changed. Based on the chart there would have been just over 150,000 purchases in Alpha.  At the time the price was 9.95.  Lets call it 200,000 purchases for easy numbers.

Alpha total is: 200,000 x 9.95 = 1,990,000  About a million Euro in Alpha.  Not bad.

Checking the stats page we see that to date (6/12/2011) they have sold 2,505,070 copies of the game.  Subtract the number of sales in Alpha from that and we get the number of sales in Beta.  Then we can multiply that by the €14.95 Beta price.

Beta total is: 2,305,070 x 14.95 = 34,460,796.50

Add the Alpha Total and the Beta Total together and get the Total Gross Income = 36,450,796.50

A word about Gross Income for anyone still following this that does not have an understanding of Financial Accounting.  That is not the profit the company makes.  There are taxes to take out, approximately 48.3% in the case of Sweden.  There are an unknown amount of expenses (new offices, servers, Paypal transaction fee’s, data fee) to take out.  So it would be incorrect to assume that they have that amount sitting in an account somewhere.

So what about the future of Mojang Specifications?

Business School teaches you about the Innovation Adoption Curve.  Some might argue that the Demand Curve should be used here.  The demand curve would usually be more appropriate for computer game sales, but because Notch released the game almost the moment that he made it, the innovation adoption curve better describes the sales of this unique game.  Generally we don’t get to see the ‘ramp up’ phases in computer games.  AAA “Game Industry” games shoot for a huge opening weekend and then demand trails off.  Those kind of releases match the demand curve.  But because the game was released early and updated frequently the purchases of Minecraft will be different then the purchases of say Skryim (which will be release about a week before Minecraft officially releases).

Assuming that Alpha correlates to the “early Adopters”  phase.  Beta is the “early majority”. That means that official release (starting 11/11/11 or the week after) will pick up the “Late Majority”, and then some “Laggards” at the end.  Mojang could see another 2 million purchases in “Release” and .3 million from “Laggards” at 20.  Let’s hedge our bets and assume they see slightly less then that.  That could still be another 36 million Euro.

So that shows a really nice future for Mojang Specification on just PC sales on a single game title.  Mojang Specifications also has a second title coming out, Scrolls.  That game targets the Collectible Card Game market.  Scrolls aims to be a better computer CCG then Magic the Gather port, because it will be native to the computer.  There is a good sized audience out there interested in this type of game, and there could be quite a lot of cross over from Minecraft.  But the game is completely different.  At this time we have no reason to assume that Scrolls will be awesome, and no reason to assume that it will be a flop.  Better to focus on Minecraft as a basis for valuation of the company.

In terms of just Minecraft it’s not exactly clear how to think about the Xbox and Xperia sales.  Perhaps PC sales will drop off precipitously and the Late Majority will be made up of console and mobile purchases.  Or there could a late majority of PC purchases lurking out there.  There are many people who have heard about the game but don’t really like it the way it is.  Maybe they will swoop in after release. 

Were Mojang Specifications to do an IPO they could be worth as much as 50 – 70 million Euro.  Possibly 100 million Euro if Scrolls is a modest (in compared to Minecraft) success and expenses are kept low.  Mojang is a small team of people who do very little in the way of traditional marketing (they do use LOTS of Inbound Marketing, however) and therefore expenses could be kept very low.  Then again success may spoil them, and they could start spending like mad.  

I see a bright future for the Mojang Team.  Notch is a smart guy, and Carl (the CEO) is no slouch either.  The whole team is pretty impressive.  They have the additional benefit of living in a culture with very different values then America.  Hold onto the money guys and stay in Sweden.  And good luck!

Is anyone going to buy an Xperia just to play Minecraft?  Or wait until it comes out on all Android phones?