Why Sulake Loses Money

Since Sulake, publishers of HABBO and developers of IRC Galleria announced its modest profit of approx 1 million euro http://www.arcticstartup.com/2009/10/05/sulake-enjoys-a-slight-profit-for-2008/ followed by its dramatic layoffs of 20% of its workforce http://www.arcticstartup.com/2009/10/06/sulake-to-lay-off-20-of-helsinki-employees/, many pundits have speculated where all the cash and VC funds are going http://ramine.net/2009/03/31/sulake-has-a-problem/
So what the hell is up with this seemingly booming virtual world success story?

Well, to cut to the chase, Sulake, with HABBO alone or its brand extensions (mobile, merchandise, TV, animation etc...) and new products (IRC Galleria) has never made money in its history. This is old news to PG http://paymentguy.blogspot.com/2008/07/100-million-habbos-still-losing-money.html So it should come as no surprise to my Dear Readers Sulake has always, ALWAYS lost money.


Here is why:

1. Fat Operations - HABBO launches most of its hotels in foreign countries the old fashioned way meaning it actually rents offices and hires expensive teams of people to run the local "Hotel". This results in large and excessive operational costs which could be avoided through regional or HQ operational consolidation;

2. Expensive Marketing - Sulake normally partners with a local media concern in international markets (e.g.; Sulake and TTG Group JV in The Netherlands http://www.sulake.com/contact/local_offices and failed partnerships in Russia, Japan and South Korea for example). This means the "local partner" takes about 50% of the revenue generated from the local Habbo Hotel. Some of these deals were so lopsided they actually share revenue (not profits / EBITA based) without deducting expenses so the local partner turns a profit while Sulake Group eats a loss;

3. Failed Advertising - Sulake has for many many years believed in the money making power of online advertising but through inept Advertising deals http://www.allbusiness.com/marketing-advertising/4151158-1.html and "partnerships", despite innovative campaigns (there are many http://www.ebrc.fi/kuvat/hynynen.pdf) has not realized the advertising power of such a large community of Teens, Tweens and young kiddies world wide;

4. Freemium HABBO is a Loser - Despite what its long-term CEO says, HABBO's freemium model bites and loses money year after year http://www.arcticstartup.com/2009/03/30/sulake-corporation-reports-e-48m-profit/ Sulake has never been able to boost its member buying % through a compelling subscription based membership / premium membership plan ala Club Penguin etc... They even know this http://www.pafis.shh.fi/~henjan06/v17.pdf The % of HABBOs that actually spend money in HABBO Hotel is less than 3% globally according to inside sources. It needs a subscription model asap http://paymentguy.blogspot.com/2008/09/sulake-must-offer-monthly-subscriptions.html;

5. Payment Commissions - Sulake with HABBO and IRC suffers crushing payment commissions. Sulake has to eat huge losses from its over reliance on micro-billing / telco (i.e. premium SMS) billing fees. Despite generating 75 million+ micro payment transactions, its average profit margin is less than 60% Sulake's inability to move to card, prepaid and other is FATAL (think interactive toys ala Webkinz) http://paymentguy.blogspot.com/2008/09/virtual-world-payment-trends-2008.html


6. Mediocre Management - Sulake has an insular "veteran team" of homogeneous managers (read "all Finns") running the business which has grown and expanded http://www.sulake.com/company/management?navi=1.3. But after a decade of losing money and delayed IPO's http://paymentguy.blogspot.com/2007/04/sulake-eyes-ipo-in-2008.html they need new blood. HABBO was and still is a Golden Goose. But it needs new leadership and better faster execution of an adaptive strategy if it will ever realize its potential. Why fire all these employees without a management change?