Activision Moves Deeper Into Mobile Games With King Digital Deal

3 Nov 2015 | Author: | No comments yet »

Analysis: King gives Activision big mobile boost.

Since making Candy Crush, Britain’s King has struggled to follow its cash cow, with games such as Bubble Witch and Farm Heroes not quite hitting the spot in the same way Candy Crush has. The game giant’s core rationale for snapping up King Digital Entertainment in a $5.9 billion pact was to dive into the fast-growing mobile game space. But Activision CEO Bobby Kotick believes that King, besides throwing off lots of cash, will serve as an engine for the company to launch new mobile-content franchises down the road. Activision attempted a handful of endeavors to attract smartphone and tablet users, including a version of its popular Zombies mode created for the lucrative Call of Duty franchise.

Kotick, on a call with Wall Street analysts Tuesday, said Activision Blizzard has an intellectual-property portfolio stretching back 35 years that could be adapted for mobile gameplay. “With mobile, we now have the opportunity… to take a lot of that content we’ve built over 35 years and leverage that against this new opportunity,” he said, but did not provide examples of titles that may be poised for new mobile incarnations. Console versions of the toys-to-life game Skylanders were also launched on mobile devices, complete with controllers aimed at mimicking the core experience. After an initial drop Tuesday, Activision’s stock soared to all-time highs as the company solidly beat third-quarter 2015 revenue and profit expectations and raised guidance for the full-year 2015.

The mobile game market is increasingly lucrative, with revenues having more than tripled from $1.47 billion in 2011 to more than $5 billion in 2014, according to SNL Kagan. And they get a business that they couldn’t replicate soon organically.” By acquiring King, Activision is able to springboard into a strong mobile leadership position, versus Facebook’s bet on the future with Oculus.

For the first six months of 2015, King reported revenue of $1.06 billion, down 12% from the same period a year earlier, and profit of $283 million, a decline of 3% year over year. King had 340 million monthly unique users for the second quarter of 2015 (down from 350 million a year earlier). “At first blush, we suspect investor debate on the deal to focus on King’s growth prospects,” UBS Securities’ Eric Sheridan wrote in an investor note. The deal “enables Activision to tap enormous scale of the mobile games market and overnight seize a significant double-digit share of mobile games,” says IHS games analyst Piers Harding-Rolls. “King has annual revenues of $2.2 billion of which approximately 80% are from mobile games.” “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,” Harding-Rolls said. Another possible reason for the high price tag is that Activision didn’t want to find itself in the middle of a bidding war with another cash-rich publisher.

King’s inability to top its IPO price and its failure to produce a follow-up on the same scale as “Candy Crush Saga” had raised speculation about whether it was a takeover target. “We suspected the company was prepared for an acquisition, although we believed Take Two would be a more natural candidate,” said Mike Hickey, an analyst with Benchmark. Activision Blizzard said it expects the King acquisition to be accretive to 2016 adjusted revenues and earnings by approximately 30% while significantly boosting free cash flow. Activision has been slow to embrace mobile, a deliberate move to ensure that consumer enthusiasm in the space was not a short-term spike, like Facebook gaming proved to be in 2010. Sure, Activision’s current games skew to males and Candy Crush to females. “To me this sounds very expensive,” he said. “Activision must be trying to diversify its customer base.

Its four key game franchises are “Candy Crush,” “Farm Heroes,” “Pet Rescue” and “Bubble Witch.” On the call with analysts, Zacconi said King plans to launch three new games from existing franchises by end of 2015, with a brand-new title to launch in 2016. Activision Blizzard expects the acquisition of King to be completed by the spring of 2016, pending approval by King shareholders and regulatory clearances.

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