I'm a French entrepreneur, who moved to Finland in 2004 to specialize in mobile and online business.
Today, Sulake, owner of virtual world Habbo Hotel and Finnish social network Irc-Galleria, announced that they have made 50 million Euros, leading to a 4.8 million profit. Congratulations.
But let’s look closer at these figures, see if we can identify any problems.
Where is the money?
The first and most apparent issue is the profit.
The company has made a 4.8M profit. In other words, Sulake has spent 45.2M euros in a year.
Where has all the money gone?
To put things in perspective, this means that Sulake has spent 3.75M euros per month.
I assume there’s 3 components there:
- Human resource costs (development, design, management, marketing, sales, legal)
- Infrastructure (servers, bandwidth etc)
- Other expenses (marketing, licenses, travel expenses etc)
Let’s get back to this issue more in detail afterwards.
General overview
IRC Galleria:
IRC-Galleria has ~506 637 users (add all the current users, plus ~7000 people over 40).
On January 19th Taneli Tikka reported the site had 506 751 users.
That’s right, between January 19th and March 30th, IRC Galleria has reported a growth of… -114 users.
Which means the site has completely stagnated.
In addition, the site does not have an application platform like Facebook does, has extremely limited mobile support, and does not allow mass exporting of their content on other sites.
Let’s compare that to Facebook:
(Red: FB, Blue: IRC, Google Trends chart here)
I checked today and “there are 499,120 people in the Finland network.” That’s only 7000 people fewer than IRC-Galleria. But that’s also ignoring people who belong to another network.
If you go to create a FaceBook ad (bottom row Advertising -> Create an ad), you will see that everybody “in” Finland is 1,041,860 users (thanks to Juhani Polkko for the tip).
And that’s with an application platform, mobile support, and the possibility to connect with friends outside Finland.
It’s unlikely that IRC-Galleria can do anything competitive to regain users and traction in Finland, or internationally.
Habbo Hotel:
Habbo Hotel is a different beast.
The site claims to have “121 million Habbo characters”, whatever that means.
This link from Sulake provides us with interesting figures:
- 31 local communities
- Registered users: 126,000,000
- Unique visitors: 11,500,000 / month
- Page impressions: 990,000,000 / month
- Age distribution: 90 % between 13-18 years old
- Average visit: 43 minutes / session
(Thanks to Peter Vesterbacka for the link)
These people need to be connected in a persistent virtual world, which can also be accessed by mobile, and of course you need to make sure there are community managers to keep child predators away from the kids.
Habbo also has received large coverage in mainstream media, with abundent TV ads for example.
Unlike its Korean-based competitor Cyworld, Habbo has been successful at internationalizing.
A completely unscientific analysis:
Let’s split those 3.75M a month in 3. That’s 1.25M.
1) HR costs:
Let’s assume we pay our people 5000 euros per month (much higher than the Finnish standard).
That’s 250 people a month, to run 2 websites.
I assume their programing team cannot be higher than 60 people, and that’s being -very- generous. After all, both sites are not bringing that many new features, but there is the Habbo infrastructure to run.
This leaves 190 people to do other things.
Where are they? Let’s put:
- 70 in sales (?!)
- 50 in marketing
- 10 in legal (?!)
- 10 in management (let’s count them as 20 people if they get 10,000e / month)
That’s a total of 150 people.
That leaves another 50 people!
Who are they? They can’t all be community managers and designers.
Even when you add up all these figures that are clearly excessive, and pay these people above the Finnish standards, there’s still plenty of room left.
2) Infrastructure costs:
So now we have 1.25M in infrastructure for 2 websites.
IRC-Galleria is stagnating, has no platform, and content is mostly pictures and text.
There’s the possibility of sending content by mobile.
Habbo apprently had 10M+ visits last month, and requires heavy serverside, plus mobile support.
Both sites do not need very much storage, in comparison with sites that heavily focus on file or video hosting for example.
In addition, there’s the bandwidth costs:
- Relatively low for IRC-Galleria ( mostly photos, text, no embedding)
- Normal for Habbo
Let’s split that 1.25M in two: 625k for servers and 625k for bandwidth.
To put things in perspective, YouTube was rumoured to spend 0.8M euros on bandwidth per month before they were acquired by Google.
This is absurd. The bandwidth here is 3/4 of the YouTube figures.
Their infrastructure can’t be that expensive.
Or at least it shouldn’t be.
3) Other expenses:
Marketing costs, traveling, software licenses, etc.
At 1.25M / month, those expenses would be rather normal.
So what’s wrong then?
When you add things up, Sulake should not be spending this much money. I have a hard time finding a justification for such high expenses.
Even when you have absurd HR and tech costs, at high rates, there’s plenty of room left.
This can mean 2 things:
- Sulake has unoptimized technology
- Sulake is overstaffed
In any case, Sulake should be reporting a higher profit, and I would recommend they use their newly found money to optimize their processes.
March 31, 2009 at 12:56
I would just like to add that Sulake must put a sever millions of $ into marketing Habbo.
And Facebook has already over 1 million users in Finland, based on the Advertising interface. But very interesting to see that the account deletion in IRC-Gallery is now higher then the amount of new accounts that they are receiving.
March 31, 2009 at 15:10
Good analysis Ramine! I would still say that in short-term their “problem” is more positive than negative though :) I don’t believe for a second that this is about technology, and all of their other costs can be easily decreased quickly, as long as Habbo still grows organically without aggressive advertising.
Obviously IG has hits its saturation point in Finland, and at the same time FB has surpassed it in users and traffic. The options are a) international expansion (which I see unlikely at this point) b) new features through organic growth or acquisitions (e.g. marketplace, paid-for dating, digital content sales like music or games) or c) selling the service to a Finnish media house to get synergies in advertising sales.
With both services however, the biggest question mark is the advertising industry’s shift from premium display towards performance model (i.e. CPM vs CPC/CPA), accelerated by the current economy. How long Sulake can sustain their current business model – as we all know how bad the performance typically is from display advertising in social media sites.
How does Sulake benefit of owning both of the services? If IG would be global, the answer would be clear: To transfer users from Habbo to IG at a certain age. But as that’s not the case, the question is, who should own IG?
March 31, 2009 at 15:15
I’m just glad I’m not working in your company… since you don’t really understand corporate dynamics do you?
March 31, 2009 at 15:31
Juhani: Absolutely. I mean, making a profit and having a large user base, but probably excessive expenses is a pretty ok problem to have!
You bring an interesting point about the mismatch between IG and Habbo. One is stagnating and based on ads, the other is a thriving community driven by micropayments.
Elmeri: Thank you for posting this from your IP at the Sulake office. In particular, I appreciate the fact that you:
- did not provide any counter point
- insulted me for no reason
- hide your name and email
- defend your company using sneak tactics.
Way to go!
March 31, 2009 at 16:05
Hope they save for a rainy day!!
March 31, 2009 at 16:17
[...] Sulake has a problem (updated with more figures) is a post by one of my twitter followers who pointed out some potential issues with the recent grandstanding by Sulake. I have never heard of these guys before but was impressed with their figures that they were doing tons in revenue. It was a topic of conversation on Twitter recently. Today, Sulake, owner of virtual world Habbo Hotel and Finnish social network Irc-Galleria, announced that they have made 50 million Euros, leading to a 4.8 million profit. Congratulations. [...]
March 31, 2009 at 18:35
how’s mysites doing btw?
March 31, 2009 at 18:46
Pretty good. We have our own problems too, of course, and we’re working on solving them. I’ll write about them this week.
We also have some very good news, and the announcements are coming very soon.
If you wanna know, I’m not happy with the usability we have on the site at the moment, so I’ll be explaining some stuff in that sense.
Thanks for the interest.
March 31, 2009 at 20:05
Interesting post. Most certainly is ;). IRC-Galleria’s front page for today shows “507349″ users. Back in early February I asked the question:
http://tane.li/2009/has-irc-galleria-growth-hit-wall
And it quite evidently has done just that…
As TehcCrunch kind of pointed out in their post: There are very few better examples of consumer online services out there that would be based on direct revenue from the users… except of course: World of Warcraft, which “only” posts a profit of over half a billion per year – and is in a completely different planet (or a different galaxy) from everybody else. (I would argue any day btw that WoW is as much of an active social online community as it is a game).
So, that still makes Habbo and Sulake one of the most successful cases in their category.. Despite all the number and what they may or may not indicate..
Good stuff, keep on it!
March 31, 2009 at 20:45
As far as I know, Sulake is spending a lot of money trying to make IRC-Galleria global.
You can search for IRC-Gallery and notice it hasn’t been as easy as making Habbo Hotel a global brand.
I guess it’s very expensive for a small company to build business worldwide. There’s less competition in the pre-teens and teenagers community sites than of those of young adults and IRC-Galleria.
March 31, 2009 at 22:28
Good speculation, but you’re missing the cost of running the different offices in multiple countries – these guys aren’t under the same roof.
Furthermore, there’s the cost of kicking these new businesses off – I’m guessing quite a bit of money goes into starting up new countries as well as running these countries.
Furthermore, if you count 5k per person – that must include social costs, etc so that would be in gross salary just around 3.5k which could be very much the average for people working in this industry (including the execs and others alike).
But nevertheless, good speculation :)
October 6, 2009 at 14:55
[...] entrepreneur, of French origin, Ramine Darabiha did a very non-scientific analysis into this in his blog post last March. It may not seem a big thing, but once you break the numbers down – a lot of money is going [...]
October 6, 2009 at 17:53
[...] Sulake managed to create a one million Euro profit with their €50 million revenue last year. Some bloggers are wondering where that €50m is now going to end [...]
October 7, 2009 at 03:21
Interesting analysis, even while there might be some problems with the numbers. :)
October 8, 2009 at 05:36
[...] we don’t know the exact reasons for the layoffs, one analysis from last March suggests that Sulake either had unoptimized technology or was overstaffed, or [...]
October 9, 2009 at 11:47
Thanks. I know the numbers are a bit rough. I was just trying to get some thoughts out there :)
October 27, 2009 at 20:35
It is probably going to be a lot more than the 40 reported at HQ. Each ‘property’ has moderators.
For example. Habbo.ca has Canadian based paid part-time staff who help to keep the hotel safe. They watch for bad language, lewd behaviour, attempted luring of kids by adults, etc. So do Habbo.com, Habbo.co.uk, etc. Usually the ‘mods’ live in the country in which they work, although there is sometimes cross-over.
Generally there 1 or 2 persons in such a role per 4 hour shift, and on a few busy sites, there are 2 or 3. Many of the habbo sites are open 24 hours, so that’s 6 shifts. Over the past few years, Sulake has been cutting back on mod staff, including making 1 person do the work of 2, or 2 people do the work of 4. I know because I used to work at Habbo.ca so I saw it first hand.
Now, almost all the moderation jobs are being outsourced and will be done from one country, not in North America. Either Singapore or the Philipines. It’s uncertain how foreign language hotel moderation will be handled from such locations.