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Why is Candy Crush like cigarettes?

Candy Crush maker King Digital's ( KING ) shares are getting pummeled Wednesday morning after the company said revenue fell from the first to second quarters by about $30 million and the company also cut its forecast for gross bookings for the full year.

Most interestingly, the company also declared a special dividend of $150 million, or about 46.9 cents per share, while also announcing that many of its early investors agreed to extend a lock-up period into 2015. The dividend could be seen as a payment to those early investors in exchange for not dumping their shares on the market. In fact, that's exactly how some people are characterizing it .

I see it differently though, King rose to prominence on the back of Candy Crush, a highly addictive mobile game. The game's popularity has already started to slide, as always happens with mobile games… remember Farmville? The company is spending money to try to develop other games, but all of its non-Candy Crush games combined accounted for about 41% of revenue in the second quarter, with Candy Crush producing the balance. Meaning the biggest part of the company's business is in decline.

The company could keep pouring all of the money it makes from Candy Crush back into development as it tries to find another hit game, but at this point, it seems impossible to know what the next hit game will be... again, remember Farmville? Zynga ( ZNGA ) has been working feverishly to find a follow up and hasn't done much in the years since the company went public.

So King is essentially company that seems to have a limited window in which to make a lot of money from a product that is already in decline, and with relatively limited prospects from spending to develop new products.

To me, that makes King Digital look a lot like a tobacco company. Big tobacco is also essentially just making the most of a shrinking market, and while there are new products being developed, like e-cigarettes and new smokeless tobacco products, it seems unlikely that the market for those products will ever be as big as the traditional cigarette market is, and used to be.

So tobacco companies return a lot of their earnings to shareholders in dividends, because there just isn't much chance that they could successfully use that cash to find a hot new product.

That's basically what King Digital seems to be doing. They aren't giving up on new products, but they are recognizing that shareholders' best chance to see a return on their investment is through dividends now, as opposed to spending all that money chasing another hit game that may never take off.

Bobby Raines is the Managing Editor of the Market Intelligence Center. He has degrees in Mass Communications and History from Emory & Henry College. Bobby worked at a mid-sized daily newspaper before making a switch to covering the financial industry full time in the years leading up to the financial crisis. He has been a member of the Fresh Brewed Media team since 2011 and has served as a writer and analyst. You can write to him at braines@marketintelligencecenter.com or follow him on twitter @BRatMICenter.

This article was originally published on MarketIntelligeneCenter.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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