eKey points:
- Mobile games spending will total $32bn in 2015, according to IHS Technology.
- Mobile games are the largest mobile content category and also now represent the largest games audience.
- Activision's strategic acquisition of King for $5.9bn enables Activision to tap enormous scale of the mobile games market, where spending will total $32bn in 2015.
- Activision opts to acquire rather than build newest $1bn games IP - Candy Crush - allows it to rapidly mitigate any shareholder anxiety over competition to, and performance of, Call of Duty and Skylanders
- Activision's move mirrors its previous latecomer deal to merge with Blizzard: it gives the company access to new audience, content, markets, platforms and expertise.
- With King's audience stagnating as Candy Crush Saga declines, maintaining the scale of the business will be the key challenge during the next 6-12 months.
- Long term, Activision must address declines in King's business and create synergies between the two companies.
Our analysis
While Activision has a strong track record of building games properties that generate revenues over $1bn, it has failed to build any such scale games for mobile. Mobile games spending will total $32bn in 2015. Mobile games are the largest mobile content category and also now represent the largest games audience.
Activision's strategic move to acquire the maker of the Candy Crush franchise, King, enables Activision to tap enormous scale of the mobile games market and overnight seize a significant double digit share of mobile games. King has annual revenues of $2.2bn of which approximately 80% are from mobile games.
Buying King, also provides Activision access to a large audience of over 340m unique gamers across mobile and PC platforms. IHS believes most of this new audience will not overlap with Activision's existing customers. By contrast, Activision has opted to build its most recent franchises -- Hearthstone, Destiny and Skylanders -- from the ground up, unlike this acquisition.
Declines in existing franchises mean Activision needs to add mobile revenues to mitigate any shareholder anxieties. Activision is facing increased competition to the Skylanders franchise from Disney, Nintendo and Lego, and is experiencing declining sales of its annual release of Call of Duty.
Short-term Activision gains a significant mobile revenue stream
Activision will seek to address both short term revenue growth and longer term profitability targets. But King is past its peak success. The company has seen its revenue decline for both the last two quarters. However, King remains highly profitable which will significantly boost Activision's overall margins and will give Activision immediate access to a new $1bn+ franchise, which is anchored in the mobile market where to date it has modest exposure.
Activision acquisition strategy is in line with past Blizzard deal
This approach mirrors Activision's last major strategic deal when it merged with Blizzard, which gave it access to new audiences (online gamers, gamers from Asia), platform expertise (PC) and new market segments (subscription massively multiplayer online games) but at a significant price having entered the segment at a more financially stable stage.
In this case King will allow Activision access to mobile and tablet platforms and its operational and monetisation expertise, a much broader global and female-heavy audience and a new portfolio of casual gaming content.
Activision also plans to run King in a similar fashion to Blizzard - as a separate division and at arm's length. While this autonomy has allowed Blizzard to flourish, the ability for Activision to leverage King's mobile expertise and audience will be hampered by this light integration.
Post close, Activision must make changes to secure long term success
Activision needed to build its exposure to the highest growth sector in the games market. IHS forecasts mobile and tablet game spending will grow from $32bn in 2015 to $40bn in 2019. IHS estimates that almost 70% of King's daily active users are still linked to Candy Crush franchise-related games and with that audience declining, King faces an uphill challenge maintaining its commercial scale even with new games coming to market.
Activision has engaged the family audience successfully in the console sector, but has left it characteristically late to broaden its opportunity into the mobile sector. It aims to leverage King's expertise and audience to expand its own intellectual property (IP) into these new opportunities and to generate long term revenue and profitability benefits.
The mobile games market is highly unpredictable, even with a strong set of franchises success and strong IP brands. With King's audience stagnating as Candy Crush Saga declines, maintaining the scale of the business will be the key challenge for the next 6-12 months.
Potential synergies to help drive success:
- Use King's 'mid-core' titles to bridge the two companies audiences. King has a handful of 'mid-core' titles in its content pipeline which in mobile are games targeted at enthusiast gamers that play for longer and monetise more strongly, but are generally enjoyed by smaller audiences. These align more strongly with Activision's current portfolio of content and may help bridge the gap between both companies' audiences.
- Build on King's expertise in the skill gaming sector. King has long held expertise in the skill gaming sector where consumers compete online in casual games for cash prizes. This area should be aligned to Activision's competitive gaming initiatives, including but not limited to Hearthstone.
