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Mobile Gaming: A Promising Growth Story

By Johan Seijkens - Feb 20, 2014 at 3:37PM

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Which company could be the next one to be bought out?

The market for mobile games offers investors several choices. The industry has experienced tremendous growth in recent years as growth in smartphone use has led gamers to switch from PC-based games to mobile games.

According to a report from Dutch-based research firm Newzoo, mobile-games revenue will expand at a compound annual growth rate of 27.3% until 2016, when it will reach a worldwide total of $23.9 billion:

Revenue growth for mobile games is fueled by an increase in the number of players, as well as higher average spending per mobile gamer. Right now, mobile gamers spend a monthly average of $2.70 on mobile games. By 2016, this number is expected to reach $3.07. The average monthly spend per paying mobile gamer is the highest in Western Europe at $4.40.

Newzoo also gives a detailed breakdown of the mobile-gaming market by region, including a series of infographics (link opens PDF). With 48% of global revenue, the Asia-Pacific region is by far the biggest market for mobile games. It has almost three times as many paying mobile gamers as the next-biggest region, North America. Western and Eastern Europe will continue to grow fast, with compound annual growth rates of more than 33%. Within the APAC region, China and Southeast Asia boast comparable growth figures. Japan has always been a huge mobile games market, even before the arrival of smartphones and tablets.

The biggest name in the mobile game
One mobile-gaming company that was in the news recently is Zynga (ZNGA -2.04%). At the end of January, it was announced that Zynga purchased NaturalMotion, a U.K.-based start-up, for $527 million. The company is the maker of the well-polished mobile game Clumsy Ninja.

Zynga is paying $391 million in cash for the company, plus 39.8 million shares of Zynga stock. NaturalMotion was a middleware company before it got into game development, making engines to power fluid body animation and artificial intelligence, which it licenses out for console and PC games. Among the most prominent licensees of that technology is Rockstar Games, which has used NaturalMotion's Morpheme and Euphoria gaming engines in a number of its biggest titles, including Grand Theft Auto V, Max Payne, and Red Dead Redemption.

The company does not license out that same technology on mobile, however, instead holding on to it for its own use in games like My Horse and Clumsy Ninja. This could potentially be a big competitive advantage for Zynga in the coming years, as Zynga also wants to capture a piece of the growing mobile-games market.

King is crushing it
King Digital Entertainment, the company behind Candy Crush Saga, said last week that it plans to raise $500 million from an initial public offering on the New York Stock Exchange.

The company's profit grew more than 7,000% last year, according to the filing . In 2012 the company's revenue was $164.4 million, and its net profit $7.8 million; in 2013 those figures rose to $1.88 billion and $567.6 million, respectively.

King's fortunes are currently closely tied to the continued success of Candy Crush: The game accounts for 78% of King's total gross bookings, according to the filing.

The most attractive buyout candidate
Glu Mobile (GLUU) announced its fiscal-year 2013 results with a bang. Glu's fourth-quarter numbers were extraordinary: Sales were up 32% to $34.8 million, while its net loss was $3.7 million compared to a loss of $7.1 million a year ago. The key game for this success has been the shooter Deer Hunter 2014, which has performed remarkably well. It has been downloaded 71 million times, generating $27.4 million during the fourth quarter .

Glu is also working with Kim Kardashian on a celebrity-lifestyle game, it has released a tie-in with the RoboCop movie, and it has signed a strategic deal to develop a game with top-grossing Japanese publisher Colopl.

Game on
The mobile-gaming growth story continues, and many companies are aiming to benefit from it.

For companies such as King, Zynga, and Glu, continued growth will depend on their ability to regularly develop new games and enhance their existing games in ways that improve the gaming experience for players while encouraging the purchase of virtual items within their games.

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Zynga Inc.
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