Activision Blizzard Price Target Raised to $42.00 (ATVI)

4 Nov 2015 | Author: | No comments yet »

‘Call of Duty’ maker buys ‘Candy Crush’ company for $5.9B.

Three years ago, a group of senior Activision executives led by CEO Bobby Kotick met with Stephane Kurgan and Riccardo Zacconi, the heads of mobile gaming company King. Last night, Activision Blizzard announced in a press release that they have bought King for $5.9 billion, an acquisition that has created the biggest games powerhouse in the Western world, second only to Tencent on a global scale.In a surprise move, Activision Blizzard on Tuesday shelled out $5 billion to buy King Digital, the maker of the ubiquitous Candy Crush Saga and Candy Crush Soda mobile franchises. “The combination increases Activision’s scope and scale, but more importantly gives the company another top-quality [intellectual property] creator,” the Cowan analysts wrote. Today, if we add H1 revenues of Activision Blizzard and King together, this would give the new mega-company $3.4 billion in half-year revenues, jumping over Microsoft ($2.7 billion), Sony ($2.4 billion) and EA ($2.4 billion) to take second place behind Tencent ($4.2 billion). “People who think the $5.9 billion valuation is too high are wrong,” comments Newzoo CEO Peter Warman, “One key value element is a complementary pipeline in terms of games in development.

And that customer base is one reason the acquisition “makes a ton of sense” said Mr Mark Pincus, who founded the social gaming pioneer Zynga. “There’s no question women like competition,” said Mr Pincus, whose company’s titles include Farmville and Words With Friends. “They just don’t like blood and guts and gore.The game industry has had that wrong.” Women have represented almost half of the gamers in the US for the past few years, according to the research firm NewZoo BV. And it’s bound to add new players to Activision’s ranks, such as women, who haven’t been especially interested in the company’s violent games up to now.

And while “Candy Crush” is notoriously addictive, it has waned in popularity for some time, and it’s unclear when or if King Digital’s next hit mobile game will come. Having King’s experience in running and monetizing mobile games as a service will be a priceless asset to a company that is still on the learning curve when it comes to mobile.” What is most appealing about the acquisition is how complementary the companies are. An even larger share of female customers end up spending money on the games, which are free to start but earn their keep through in-game purchases, according to Mr Riccardo Zacconi, King’s chief executive officer. “If you then look at the paying side, it’s much more accentuated toward a female audience,” he said on a conference call yesterday (Nov 3). “And this is where one of the big opportunities here is.” The combined company will be the second-largest game-maker in the world, behind China’s Tencent Holdings Ltd.It will bring together Activision titles that are played on computers or consoles with those made mostly for mobile devices from King, including Pet Rescue and Bubble Witch.

It’s becoming increasingly important for video game companies to make their products accessible in both console and mobile formats, making Activision’s move an expensive but necessary one, said David Lord, CEO of JumpStart, a Torrance, California, company focused on educational mobile games for kids. “This gives them access to the mobile market at a time when the console market has had a tremendous year,” Lord said, “but we’re not sure where it’s going to go.” And it’s not just console games that are moving over to mobile devices; mobile games are being played on consoles, too. Predictably, the revelation sent shockwaves through the industry: it’s a hefty sum – more than Disney paid for legacy entertainment companies Marvel and LucasFilm. Some critics have lambasted publishers for games that include overly sexualised female characters or that write sexist behaviour into the play, or omit women altogether. Activision said it sees tremendous potential in the mobile gaming market, predicting it will generate more than $36 billion in revenue by the end of 2015 and grow more than 50 percent by 2019.

Although Activision is big in console games with its Call of Duty, Destiny and Skylanders brands, and has might in PC gaming thanks to the Blizzard titles (Diablo, Starcraft and Warcraft), it has largely failed to make an impact in the explosive smartphone gaming sector. Last week, the organisers of next year’s South by Southwest Interactive conference in Austin cancelled two panels, one featuring Ms Wu, that would focus on such harassment and on women in gaming, because of threats of violence. Purchasing King would bring it an experienced workforce, plenty of proven IP, and a vast global audience, stretching far beyond the traditional “hardcore” gaming demographic. The organisers did an about-face after a public outcry and announced that there would be a full-day summit to discuss the issue. “You are seeing more women in video games, but it’s coming slowly,”said Ms Bonnie Ruberg, a postdoctoral scholar at the University of Southern California who studies gender and sexuality in video games. Ubisoft Entertainment SA’s Assassin’s Creed, created in 2007, this year included a female main character for the first time, and Electronic Arts put female football players into its popular Fifa game, including stars Alex Morgan and Christine Sinclair on the cover.

None of King’s other games have been able to replicate the success of “Candy Crush.” King’s adjusted profit fell 18 percent to $155 million in the second quarter. In a coruscating article on the deal, the journalist Rob Fahey wrote: “In all likelihood, Activision has just paid a huge premium for a company which is past the peak of its greatest hit title and into a period of managed decline, not to mention a company with which its core businesses simply don’t fit in any meaningful way.” The IHS Digital analyst Piers Harding-Rolls added: “The mobile games market is highly unpredictable, even with a strong set of franchises success and strong IP brands. ” So what does Bobby Kotick make of all this? While those kinds of games don’t traditionally appeal to women, Activision CEO Robert Kotick told CNBC on Tuesday that about 60 percent of King’s audience is female. The boards of both companies have approved the deal, but King shareholders must still vote on it, and regulators in Ireland, where King is based, must also sign off. We’ve prioritised it, evaluated a variety of alternatives, both building and buying, and we came to the conclusion that King does the best job of any team that we’ve come across in the creation of franchises, in sustaining those franchises, in commercialising those franchises and thinking about new franchises.

We felt very confident that they were the right partner for us.” But then, traditional game publishers have floundered in the past when they tried to buy their way into the mobile industry. Electronic Arts paid $680m for Jamdat in 2005, $300m for social gaming specialist Playfish in 2009 and $750m for Bejeweled creator PopCap Games in 2011. It’s very rare that you find people who have the same commitments, and the same commercial instinct.” Kotick also shrugs off concerns about King’s reliance on Candy Crush. “They had product concentration, and so Mr Market looks at that and says, ‘Hey, you know, is that a one-trick pony?’ But when we looked at King, we saw four great franchises with lots of potential, one super franchise, and a fantastic pipeline. That got us really excited.” From King’s point of view, the deal makes sense in that it gives them Activision’s proven IP with which to build new smartphone titles.

But is that what this is about? “Just reskinning games with our intellectual property is not an appealing prospect for opportunity,” assures Kotick. “That isn’t something that creates long-term value for shareholders.” Indeed, you get the sense that what really interests Activision – or at least its CEO – is sheer numbers. “We now have 500 million players in 196 countries around the world,” he says with barely contained zeal. “In the past, our business was largely concentrated around middle-class consumers who could afford $300 or $400 for a dedicated game console or $1000 for a PC. He has drawn the ire of core gamers with Activision’s endless cycle of money-spinning brands, the DLC packs, the vast number of Skylanders toys, the expense of keeping up to date with Destiny, but the monster rolls on regardless. And right now, according to him, that’s all he cares about. “Look, the way we see it, this audience is investing in our content right now,” he says. “Whether they’re paying for it or not is not really relevant.

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