In the business world, you know you're important when your business spawns several tangential multibillion-dollar industries. Case in point: tech giant Apple (NASDAQ:AAPL).
Between iTunes, the App Store, and a number of smaller software offerings, Apple's digital storefronts garnered tens of billions of dollars in sales in its most recent fiscal year. And with the Apple Watch era now under way, game developers are eyeing this nascent device as their next great moneymaking opportunity within the "app economy."
So as the Apple Watch finally becomes available in-store in the coming days, should investors look to names such as King Digital (UNKNOWN:KING.DL) and Zynga (NASDAQ:ZNGA) as ways of tapping into the smartwatch boom? Let's see.
Apple Watch: Gaming's next gold rush?
Last year, the U.S. mobile gaming market alone generated $2.6 billion of revenue, according to eMarketer. As recently highlighted by The Wall Street Journal, game developers clearly view the Apple Watch as a significant potential growth market.
When Apple launched the Watch earlier this year, over 300 Watch-specific gaming apps were available for download in the company's App Store. For context, that is more than double the number of games that existed for the iPhone when it reached the market in 2007, according to App Annie.
Game developers are clearly licking their chops. However, developers also face a number of obstacles as they attempt to cash in on this new gaming frontier. It should come as no surprise that the Apple's Watch's diminutive 38-millimeter and 42 mm screen sizes present the primary, unique challenge for developers attempting to create highly engaging gaming experiences. However, other difficulties are abating for developers hoping to create the Watch's first big-ticket gaming hit.
At this month's Worldwide Developers Conference, Apple unveiled an updated version of its Watch software -- watchOS 2 -- that alleviates two key Watch-specific issues that developers cited as particularly problematic.
First, watchOS 2 will allow apps to run native within the Watch itself, rather than relying on the iPhone to provide the bulk of the processing horsepower. This change should increase the responsiveness of Apple Watch apps, making games that require more graphics-intensive experiences, for example, more feasible. Second, watchOS 2 will also allow apps to access unique Watch features including its Digital Crown and Taptic Engine, offering the developers the potential to create more immersive gaming experiences.
So with the Apple Watch finally beginning in-store sales, and watchOS 2 creating improved opportunities for developers, should you consider investing in publicly traded game developers such as King Digital or Zynga?
2 important reasons not to buy
Even though the Apple Watch undeniably offers game developers an intriguing incremental revenue opportunity, two issues should give investors pause before they buy into these companies.
Timing presents one important issue. Given how new the Apple Watch is, neither Zynga nor King Digital has yet captured a meaningful foothold in the gaming market for the device. In fact, King Digital and Zynga have released exactly one Apple Watch app to date, so their exposure to the platform is effectively nonexistent at present.
This number will undoubtedly increase as time passes, but their present dearth of apps negates either company's ability to monetize the Apple Watch. Investing in either Zynga or King Digital today would represent a bet on future success, which remains far from certain.
Second, and more substantively for long-term investors, achieving consistent profitability in the mobile gaming world can also prove difficult, even for giants in the space such as Zynga and King Digital. Both companies rode tremendously popular games to widely anticipated IPOs. However, their stock prices have struggled to live up to expectations on the secondary markets, and for good reason.
As the popularity of franchises like FarmVille and Words With Friends has evaporated, sales at Zynga plummeted from more than $1.2 billion in 2012 to less than $700 million in 2014. Meanwhile, King Digital's Candy Crush franchise has proven largely resilient in recent earnings reports, but there are signs of trouble on the horizon.
In King's most recent quarterly report, the company projected a 17% year-over-year decline in bookings, a key metric for projecting future revenue, for its current quarter. Success can come quickly in the gaming space if a developer releases the next big thing. However, in this hit-driven space, the durability of that success can also prove alarmingly fleeting.
It also bears consideration that it took the better part of two years for developers to land the first set of true blockbuster iPhone games, and the iPhone doesn't have as many issues to navigate as the Apple Watch. So while the Apple Watch will likely eventually yield its own hit game franchises, long-term investors might find achieving consistent success challenging. Investing in well-known game makers such as Zynga and King Digital is no sure thing.