By buying Candy Crush Saga creator King in a $5.9 billion cash and stock deal, gaming mega publisher Activision Blizzard is placing two related bets. The first bet is that mobile games will become increasingly important to the overall gaming industry and that Activision needs to gain a foothold in that industry if it is to continue to grow. That’s a relatively safe bet, all things considered.
The second bet is that King represents a solid investment in the mobile market and is well positioned to be a robust, diversified and consistent leader in the segment. This bet could turn out to be much riskier.
Get mobile or die trying
After years of making only token efforts in mobile gaming, King’s acquisition is Activision’s admission that smartphone and tablet gaming is becoming too big to be safely ignored by the industry’s biggest players. “We believe now is the right time to engage with mobile gaming in a meaningful way,” Activision CEO Bobby Kotick said in an earnings call this morning.
Kotick’s statement is at least a year or two late. While console and PC games (the “traditional” gaming sector) still rake in the majority of the money in the global gaming market, the growth rates of mobile games revenue have made it clear that this is not likely to continue for too long. From 2012 to 2015, traditional gaming slowly inflated from $44 billion to $50 billion in global revenue, according to Activision’s own analysis. In that same time, mobile gaming exploded from $12 billion to $36 billion. Activision sees those trends continuing at least through 2019, when the two market segments will be about the same size: $57 billion in global revenue for consoles and PCs, and $55 billion for mobile games.
You can already see this coming parity on the horizon when you look at the overall reach of mobile and traditional gaming companies. King currently claims 474 million monthly active users (players who play at least once a month) for his titles. Activision says the newly formed company will have a total of 547 million monthly users after the merger (this does not account for overlap, so a player using both King and Activision games will be counted double).
You can bet that Activision only controls 14 percent of King’s market, measured by the total number of monthly players. Sure, a large number of King’s players – perhaps close to 98 percent – will literally never bring in a penny of revenue for the company after downloading a free-to-play game. Still, King’s extremely wide reach is the kind that any company worth its salt would try to turn into more profit.
King’s mobile reach is also becoming increasingly global compared to Activision’s traditional market. In its earnings call, the company acknowledged it only had “few capabilities” in emerging markets such as Brazil, Russia, India and China. These markets have billions of potential players who don’t have much to do with an ingrained culture focused on connecting expensive consoles or high-end PCs to a big screen for living room gaming.
What these countries do have are smartphones. They also have more and more free time and disposable income to devote to easily accessible, easy to understand and fast-paced popular entertainment like King’s. While ‘traditional’ gaming will remain the main driver in Europe and North America for some time to come, mobile gaming has the potential to reach the billions of people around the world who have barely touched the electronic games market in the past.
In short, the acquisition of King means immediate diversification for a company that wants to put its eggs in a few less traditional baskets. Currently, Activision derives 47 percent of its revenue from console gaming and only 12 percent from mobile gaming. Combining with King puts both sides of that split between console and mobile in at an even 33 percent overnight (PC and online gaming and distribution remain largely unchanged for the rest). That’s a much healthier split in a world where, as Activision COO Thomas Tippl said during the call, “mobile franchises are now seeing results comparable to established console franchises.”
The once (and future?) King
Even if mobile gaming becomes a critical part of Activision’s new diverse gaming monolith, it’s still questionable whether King is the right company to gain a foothold in that market. The current balance certainly suggests that it could. King already brings in $900 million in annual EBTIDA revenue, not so shy of the $1.6 billion Activision itself brings in. At a profit multiplier of about 6.7, $5.9 billion seems like a fair price for a company that generates that much profit.
The question, of course, is whether King can sustain that kind of performance. Candy Crush Saga, the core of King’s small gaming portfolio, may seem like a fashionable match-3 puzzler that probably won’t hold an audience for long. Even so, the game still manages to consistently rank in the top five earners on the iOS and Android App Stores as it approaches its third birthday on mobile platforms (and fourth if you count Facebook). It’s a franchise that also seems somewhat expandable; Candy Crush soda was launched last year and has now ranked alongside its predecessor in the top five earners for nine months in a row.
Part of the series’ longevity is King’s treatment of it Candy Crush as a service more than a static game. Candy Crush as it exists today bears only superficial resemblance to the game launched so many years ago. Through constant updates, King has added hundreds of new levels (there are now nearly 2,000), new types of puzzles, new items to purchase, and plenty of strategic gameplay varieties that will keep players engaged and coming back for more.
The slow influx of new content has led to an average of 92 million people continuing to play 1.4 billion games Candy Crush daily. It’s that kind of constant attention from players that makes a game that costs nothing to download in a money factory that generates years of micropayments from its most devoted fans.
Outside Candy CrushHowever, King’s portfolio looks a lot weaker. While titles like Bubble Witch Saga and Animal Rescue Saga do well in the App Store rankings, none of King’s dozens of non-Candy Crush games have caught on all around Candy Crush has, despite heavy promotion including many international TV commercials.
It is possible that Candy Crush in itself can be a long-term platform for profit, in the form of regularly updated franchises like Activision’s Duty. But many casual game makers have struggled after failing to follow up an initial hit with further success.
It’s not hard to remember that Facebook game maker Zynga was at the top of the world with hundreds of millions of monthly users for games like Farm village, City villageand Zynga Poker. But the company was unable to build a sustainable business as interest in its brand of busy-work games waned, and it quickly became a has-been in the gaming world. Rovio similarly drove the success of Evil birds to massive growth, but the company has seen a few waves of job cuts over the past year as that cash cow dried up (with no sign of a real replacement on the horizon).
King hasn’t given up on trying to grow beyond his Candy Crush core; the company emphasized on Activision’s earnings call that 2016 will see the launch of its first “non-casual” game. But when it came time to talk about “near-term opportunities” during the call, Activision was able to list well-known and heavily hyped games, such as Guitar Hero Live, heroes of the stormand Overexpected. King could only vaguely refer to “plans to launch a mid-core title and three games from existing franchises by the end of 2016.”
Kotick seemed concerned about King’s lack of depth and harked back to the 2007 merger between Activision and Blizzard. When others rejected Blizzard’s incredible ability to innovate [at the time], we insisted that patience be rewarded. And that’s the case,” Kotick said.
But at the time of that merger, Blizzard had a decades-long successful track record in the game business and a portfolio that stretched far beyond a single casual game. World of Warcraft was and is Blizzard’s crown jewel, but the company was supplemented by franchises like Starcraft and Diablo in its catalog. Even with 1,600 employees working across 12 studios to find the next successful franchise, there’s much less guarantee that King will be anything more than a one-trick pony.
The version of King that Activision is buying today – the one with $900 million in annual revenue and two of the hottest games in the most popular segment of the market – looks like a bargain at $5.9 billion. The open question is whether the king of tomorrow will look just as attractive, or whether he will follow in the rising and falling footsteps of so many other fashionable casual game companies.