Gaming has been booming as the pandemic has kept people at home more. The mobile video game market in particular has been flourishing. More than 2.5 billion people played a mobile game in 2020, according to one source, 12% more than in 2019.

And the mobile gaming industry is changing as quickly as it is growing. In late April, Apple began rolling out changes to its Identifier for Advertisers (IDFA) that will limit the data advertisers will have about iOS users that do not opt-in to allow their data to be tracked. This caused gaming companies like Zynga (NASDAQ:ZNGA) to rethink how they approach advertising.

Zynga in early May announced its plan to acquire mobile ad company Chartboost for roughly $250 million in cash, a deal likely motivated by changes to Apple's mobile targeting rules. Let's look at what this deal could mean for the company and its investors.

Some background

San Francisco-based Zynga was founded in 2007. The company has over 65 mobile games and 164 million monthly average users (MAUs) and is responsible for some of the world's most popular games, including FarmVille, Draw Something, and Words with Friends.

Chartboost is an advertising behemoth that has been around since 2011. Its platform has over 700 million users and runs 90 billion monthly advertising auctions. What makes Chartboost attractive to Zynga is that it provides the company proprietary advertising tech that can help differentiate Zynga's ability to acquire users for its games and generate more advertising revenue within its games.

Chartboost does this through a demand-side platform (DSP) and a supply side platform (SSP) that connect advertisers with ad inventory. All this is mediated through a software development kit (SDK) that connects apps directly to Chartboost's ad network for seamless integration and analytics. This essentially means that Zynga is purchasing a complete advertising powerhouse with a ginormous user base.

Zynga agreed to acquire Chartboost for $250 million in cash. The deal, expected to close by the end of the third quarter, positions Zynga to take a page out of mobile game company Applovin's playbook. Applovin also operates an advertising network and owns several mobile game studios that it promotes with its proprietary advertising technology and network reach. However, most would consider Applovin an advertising company first while Zynga is still primarily a gaming company. Zynga will have a new line of revenue in the form of advertising for other video game companies within the Chartboost network, but the company's advertising business will be a very small portion of the company's overall revenue mix.

Smiling person looking at their smartphone.

Image source: Getty Images.

Unlocking the data advantage

Chartboost brings some interesting things to the table. Most notably, it may be able to help Zynga improve the monetization of its games with better advertising technology.

More efficient monetization means less advertising expenses. Instead of having to pay third-party fees to access an advertising network, Zynga can simply utilize the one it will own. Advertising fees are one of the largest costs, so this will surely be a big win for the company and boost margins.

In an interview with Ad Exchanger, Zynga CEO Frank Gibeau said: "There will always be other viable networks and there will always be Facebook and [Alphabet's] Google. But the more of our business we can push through the Chartboost platform, the more money we save in fees -- and if you think about that over the long term, the fees alone pay for the Chartboost deal and then some."

The second key synergy this deal unlocks is the ability to improve Chartboost's algorithms with Zynga's own mobile game data. Zynga can leverage the data drawn from engagement with its games in order to make Chartboost's monetization more effective.

Other gaming studios would not be keen on providing Zynga with direct information on its competition, therefore, access to Zynga's first-party data will be compartmentalized away from Chartboost's third-party ad business.

The third benefit of the deal is the added value for future studio acquisitions. For mobile game consolidators like Zynga, offering added value to target studios would increase the deal's attractiveness for both parties.

By improving advertising efficiency, better leveraging data, and adding more value to acquired studios, the Chartboost deal has the potential to significantly enhance Zynga's earnings power once fully integrated.

Looking forward

Acquiring Chartboost marks an exciting turning point for Zynga. And it appears to be only the beginning.

In the Ad Exchanger article, Gibeau was quoted as saying "Chartboost is a good chess move for us, but this is just our opening gambit." With the wave of change brought about by the IDFA removal, investors should certainly pay attention to how this deal impacts Zynga.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.