Investors Should Consider Companies That Utilize The Freemium Effect

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During his recent interview with Tobias, Joseph Boskovich, Co-Founder and Partner at Old West Investment Management, discusses the significant revenues that mobile gaming companies generate utilizing the freemium effect. Here’s an excerpt from the interview:

Tobias Carlisle: Right. So I think the one spin that we didn’t discuss was Zedge.

Joe Boskovich: Yeah. Yeah, so Zedge is really inter… Well, obviously Rafael, I feel like the risk is muted and the potential return is infinite, and Zedge is similar. Zedge is the smallest company. It has a $15 million market cap right now, and he bought Zedge in the… So when he sold IDW Entertainment to John Malone, he used the cash from that sale, and he bought two assets. He bought IDW Publishing, and he bought Zedge, and both are kind of in the content space. And Zedge was founded as a wallpaper and ringtone app, which sounds kind of silly. And we thought it sounded kind of silly, too, so we received our shares from the spin, but we never really bought more into it. And there was an acquisition two years ago that really changed the way I view Zedge. So this was in the fourth quarter of 2017. Zedge bought a company called Freeform Development, and they retained its founder, a gentleman by the name of Tim Quirk. And I was kind of fascinated by that, right? What’s Freeform Development? Who is Tim Quirk?

Joe Boskovich: So I kind of dug in a little bit more, and I actually found a great podcast with Tim Quirk, and that really changed the way I thought about Zedge, and what I realized… So wallpapers and ringtones, as silly as that may seem, Zedge has 35 million monthly active users, which is a huge number, right? I mean, find an independent app that’s not already owned by Google or Facebook, that has that sort of user base. So really…

Tobias Carlisle: What’s the product? What’s the product look like? Because I do remember ringtones and wallpapers being a huge business, and I saw somebody… I saw it on Twitter. Somebody tweeted out a stat saying something like… And I’m going to get the timing wrong, but it could be 10 or 15 years ago, that was like a $5 billion-a-year business, that because… Just because of the way that phones have developed, it’s no longer such… It’s no longer as big as that. So what’s the consumer getting when they buy these things?

Joe Boskovich: Well, so they still have 35 million monthly active users. So people are still interested in that core product. But then I think you need to take monthly active users to daily active users to hourly active users. So what makes Instagram or Facebook or Snapchat, what makes them so popular? It’s not that… They have a big monthly active user base, but these users, they’re using it daily. They’re using it hourly. They’re using it by the minute. So how do you increase user engagement? So when they bought Freeform Development, I kind of sat there once I… and I’ll talk about Freeform in a second. But it’s not about the wallpapers and ringtones. It’s about the 35 million monthly active users. And how do you monetize that user base?

Joe Boskovich: So at the time, Zedge, they were doing about $12 million a year in revenue, and it was all advertising, from the big advertising exchanges, right? So you’d download a wallpaper, and then you have to watch a 30-second commercial. That was 100% of their revenue. So how do we monetize beyond that?

Joe Boskovich: So I watched this podcast with Tim Quirk, who founded Freeform Entertainment, and he has a really interesting background. He was a musician growing up, and then he was one of the early employees at MySpace and did very well there. Then he was hired by Google, and he was hired by Google to help… He was one of the first employees hired at Google to kind of build the Android store. When he was hired by Android, his title was… Sorry about that. When he was hired by Android, his title was… He was the head of all digital content programming. And keep in mind, his background is music.

Joe Boskovich: So what he was baffled by at Android was here we live in this world where, in the digital age, movies, books, music have all just gotten absolutely pummeled, right? If you look at music sales, they’re down in the dump. If you look at book sales, down in the dump. Movie sales, down in the dump because this new digital age, piracy, or whatever, it’s changed everything. But the one content category that had been killing it was mobile gaming. And really what mobile gaming had figured out was this whole freemium model.

Joe Boskovich: So in his interview, the company he uses is he talks about King’s, which makes the mobile game Candy Crush. And he talks about how, with Candy Crush, originally it was a paid app, and nobody was downloading the app. So then they make it a free app, and they have all these in-app purchases. And by having these in-app purchases, all of a sudden, all these people are downloading the game. So there’s 300 million monthly active users that Candy Crush had built up to. They had 300 million monthly active users, and most people get the game for free, never pay, but the people that do pay are the hard-core fans. There’s only a 3% conversion rate, but out of that 3% conversion rate, Candy Crush was making a billion dollars a year.

Tobias Carlisle: Wow!

Joe Boskovich: So Freefrom basically took the lessons that he had learned at Android and applied it to music. So he was doing this with artists now. So he was taking artists. And artists, instead of giving their content away for free on iTunes, now there’s all these metrics where you could unlock music and take different conversion metrics. So the fan’s not paying for the music, but you’ll watch a commercial or you take some other action that generates more money for the artist than they would make if the album was free on iTunes in the first place.

Joe Boskovich: So that kind of really resonated for me. So when Zedge bought Freeform, then they were… Take what Freeform was doing with music and extend that to all content, so artists. So right now, if you go on Zedge’s app, they launched Zedge premium, so they basically now have… It’s a marketplace, and they have about a thousand different content creators on that marketplace right now, from artists to musicians, and it’s basically providing a platform where artists can monetize their creation. They can monetize their content that otherwise they weren’t getting paid for. So you take a dedicated artist who has a day job, and now they have their content up on Zedge, and they’re making $100 a month, let’s say. And although they can’t retire, that’s significant income to help them do what they love.

You can find out more about Tobias’ podcast here – The Acquirers Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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