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King Digital Entertainment PLC Has What Activision Blizzard Inc. Needs

By Adam Levy - Nov 18, 2015 at 12:20PM

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Investors must understand why Activision agreed to pay $5.9 billion for a company with just one hit on its hands.

Source: King Digital

The best mobile games are remarkably simple: 2048, Candy Crush Saga, Angry Birds. It doesn't take a team of programming geniuses to put together a hit mobile game. But that simple fact actually makes it harder to create a popular (and profitable) mobile game. There's so much competition that it's easy to get lost in the crowd.

Such is the challenge that Activision Blizzard (ATVI 1.04%) faced, entering the mobile gaming market. Its popular console titles don't translate well to mobile, and it found itself falling behind competitors such as Electronic Arts (EA -0.04%) when it comes to mobile game development. That's why the $5.9 billion offer it made to acquire King Digital (KING.DL) became necessary for Activision to make a real impact on the growing mobile games market, even though the Candy Crush maker saw a 7% decline in revenue last quarter.

A King maker
Activision's primary reason for buying King Digital is for access to the company's 474 million monthly active users. King has been able to leverage the popularity of Candy Crush to promote its other games, including its sequels, Candy Crush Soda Saga, Farm Heroes Saga, and Pet Rescue Saga. Overall, King has three apps in the top 25 grossing iOS apps and five games in the top 50 grossing iOS games in the United States.

Activision can use King's popular games to springboard some of its own creations. So far, Activision's only hit mobile game has been Hearthstone. The company has made a bigger push into mobile recently with the release of a Skylanders game and Guitar Hero Liveon the same day as their more robust console counterparts. Still, Activision is well behind EA's much larger portfolio of exclusive mobile titles.

King's user base is not only much larger than Activision's, but it also spans a much broader geographic region. That situation opens up opportunities for Activision to cross-promote its own titles within King's user base, particularly in the rapidly growing region of Asia, as Activision COO Thomas Tippi pointed out on the company's recent earnings call.

But revenue is falling
It's always dangerous to acquire a company with declining revenue, especially one that's a supposed leader in a high-growth market. The mobile games market is expected to grow from $36 billion this year to $55 billion by 2019.

The biggest driver behind the decline is the maturation of Candy Crush Saga. A decrease in gameplay is to be expected as any title ages. Still, the game has been remarkably resilient compared with other mobile games that hit the top of the mobile charts, and it still ranks as the third-highest grossing app in the U.S. on both iOS and Android.

If you discount Candy Crush Saga's gross bookings, King's gross bookings continue to climb as its portfolio of games expands. Last quarter, gross bookings from games not called Candy Crush Saga increased 14% year-over-year. So even though the company hasn't made another hit on that scale, it's not completely failing to grow its business outside its most popular game.

Home runs are few and far between in the mobile game space. The best way to hit one is to take lots of swings.

Keeping up with Electronic Arts
Just 5% of Activision's net revenue comes from mobile gaming, including mobile consoles. Comparatively, Electronic Arts generates 15% of its revenue from mobile games.

Electronic Arts doesn't have any particularly outstanding mobile hits to its name, but it has capitalized on its Madden franchise and the acquisition of PopCap to drive growth. It also has a huge portfolio spanning over 50 titles. In other words, it has taken a lot of swings. And while it doesn't have any real home runs to its name (Plants vs. Zombies was released before EA's acquisition of PopCap), it has a couple of doubles. As a result, mobile has become an increasingly large piece of Electronic Arts' top line.

With the acquisition of King, mobile will start to make up a significant portion of total revenue. King generated $414 million in gross bookings from mobile last quarter, compared with $904 million in total net revenue for Activision. Activision's console and PC gaming business lengthens the runway for King to continue taking swings even as Candy Crush revenue continues to fall. At the very least, King seems to be able to make profitable games due to its existing user base.

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Stocks Mentioned

Activision Blizzard, Inc. Stock Quote
Activision Blizzard, Inc.
$77.96 (1.04%) $0.80
King Digital Entertainment plc Stock Quote
King Digital Entertainment plc
Electronic Arts Inc. Stock Quote
Electronic Arts Inc.
$122.83 (-0.04%) $0.05

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