‘Candy Crush’ maker gives Activision a route to mobile gaming

Size matters to Bobby Kotick, whose US video games group Activision Blizzard is paying $5.9bn to acquire the European leader in mobile gaming, King Digital.

When Call of Duty — perhaps Activision’s best-known franchise — achieved launch-day sales records in successive years, Mr Kotick hailed the feat as the biggest entertainment launch in history, comparable with blockbuster movies.

The price he has paid for the maker of Candy Crush Saga, one of the most popular games of all time, is also one of the biggest sums paid for any entertainment franchise in recent years. Walt Disney’s acquisitions of comic-character juggernaut Marvel and Lucasfilm were cheaper at $4bn each.

The deal will be a windfall for King’s founders. Riccardo Zacconi, King chief executive, Melvyn Morris and Sebastian Knutsson, the company’s chief creative officer, own a combined 26.7 per cent of the company worth $1.6bn at the acquisition price.

Mr Morris’s 11.3 per cent stake is worth about $666m, Mr Zacconi’s 9.9 per cent of the company about $584m and Mr Knutsson’s 5.5 per cent represents about $324m.

Like Hollywood, the games industry is grappling with a shift from the big screen to the small. Mr Kotick is not too big to admit that Activision has fallen short.

“We really haven’t had success in mobile, nor have we made investments in it,” he says.

There are some small exceptions: Hearthstone, a mobile spin-off of Blizzard’s multiplayer online game World of Warcraft, has seen some success since its launch in April. But while Activision has tried to bring Call of Duty and Guitar Hero to smartphones and tablets, nothing else has really caught on.

“One of the things we really respect about [King’s] business is it’s a different business,” Mr Kotick says. “We could have continued to invest in exploring this as an opportunity. But as much as we might have done so, I don’t think we could have ever caught up to the experience and capability that Riccardo and his team have.”

That runs from the way games are designed and players are attracted in the overcrowded app stores to the way they make money.

King is highly profitable, generating $119m of profit on $490m in revenues. But because most of its games can be downloaded and played for free on smartphones or the web, a tiny minority of King’s huge audience is responsible for much of that income. Just 7.6m, or 2.2 per cent, of King’s 340m monthly unique users made purchases of in-game upgrades or extra lives, in its second quarter.

Each of those paying players spends a lot more than the typical 99 cent price of an app Store download: average monthly spending per paying user was $23.26 in King’s most recent quarter. However, that is still far below the $50 that Activision’s customers spend to buy a new console game such as Destiny or Call of Duty for PlayStation 4 or Xbox One.

Combined, the two companies will have a 500m-strong network of active users. That scale, Mr Kotick boasts, is topped only by Facebook and Google.

Yet some analysts were puzzled by Activision’s move. Candy Crush remains a dominant force in mobile gaming but it hit its peak two years ago.

King’s user numbers are edging downwards. Mr Zacconi said in Monday’s announcement that the company had 474m monthly active users in the third quarter of 2015, a 5 per cent decline from the previous quarter.

“The challenge with mobile games is turning one major hit into a sustainable stable of games,” says Dan Cryan, digital media analyst at research group IHS.

Activision’s hope is that it can lure gamers with new twists on Candy Crush and King’s other formats, this time featuring its own brands and franchises, which date back to the earliest computer games on the early Atari, Commodore and Nintendo consoles.

“We bring 35 years of intellectual property creation,” Mr Kotick says. “We have more IP that will be available to Riccardo than any other source.”

Yet some analysts believe that today’s Activision games have more in common with the fantasy worlds of Machine Zone’s Game of War and Supercell’s Clash of Clans — so-called “mid-core” games that attract a smaller yet more dedicated audience than the casual gamers attracted to Candy Crush’s sugary treats.

But Mr Zacconi, a former “entrepreneur in residence” at Benchmark, the Silicon Valley venture capital firm, insists that is more important than thematic affinity.

“We have one of the largest networks and in my old Benchmark times, I learnt that it’s better to have access to a really wide audience and from there segment the audience and work out the different opportunities, than having a business that is very large in terms of revenues with a very narrow audience,” he says.

If there is one Activision number that is not quite as big as it seems, it may be the price it paid for King.

Michael Pachter, games analyst at Wedbush Securities, said that excluding King’s $900m in cash, Activision is paying about seven times operating cash flow.

That is “not very expensive” given it will add 60-75 cents a share to annual earnings. Furthermore, it is partly paid for using Activision’s offshore cash pile, thus avoiding paying tax that would have been incurred by repatriating it to the US.

At $18 per share, the offer is also a 20 per cent discount to King’s $22.50 initial public offering price a year and a half ago.

“I compliment Activision for being introspective enough to realise they can’t do it on their own,” Mr Pachter says of the effort to use King as a way to move from console to mobile. “I compliment King for realising they are not a great standalone business. So together they have a chance.”

Additional reporting by Robert Cookson in London