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Activision Just Spent Way too Much to Buy Candy Crush

Candy Crush Game Maker King Announces IPO to List in New YorkCandy Crush Game Maker King Announces IPO to List in New York
King Digital's Candy Crush game on an iPhonePhotograph by Andrew Harrer — Bloomberg via Getty Images

From a marketing standpoint, Activision Blizzard’s $5.9 billion acquisition of King Digital, the maker of the once-popular Candy Crush gaming franchise, seems to make sense.

On Activision’s (ATVI) conference call Tuesday to explain the deal, management noted that the mobile gaming space is expected to grow from around $36 billion this year to around $55 billion by 2019. Given this explosive growth, investors have been screaming for years for the maker of the popular World of Warcraft and Tour of Duty console gaming franchises to enter the mobile space, so it could leverage its popular gaming know-how to capture some of that growing mobile mojo.

But there are a couple of reasons why Activision has been slow in making the move into mobile. First, its popular games don’t really lend themselves very well to a mobile platform. What makes its titles so popular are the intense graphics, immersive gaming experience, and interactive multiplayer modes, none of which can be easily replicated on a mobile platform. While mobile computing power has grown markedly in the last few years, smartphones remain hopelessly outgunned when compared to PCs and gaming consoles. Phones were simply not designed to deliver superior gaming performance, and thus they constantly disappoint gamers.

This leads to the second reason why Activision has been slow to go mobile—its core audience isn’t really into mobile gaming. Nothing irks a gamer more than a stripped-down version of a beloved game. These “light” versions don’t work very well and are terribly simplistic compared to their antecedents. So paying a hefty premium and delving head-first into the mobile space doesn’t make much sense for Activision when it comes to delivering any meaningful synergies, especially since King Digital’s (KING), best days may be behind it.

 

If Activision truly wanted to cater to its core customers, it would be investing in new technology to take its games off the console and into the world of Virtual Reality. That is the future of gaming, not mobile. Microsoft’s (MSFT) Hololens platform and Facebook’s (FB) Oculus Rift platform both have the potential to change the way people game forever. Activision needs to be on the forefront in this paradigm shift if it wants to stay relevant to gamers.

This doesn’t mean Activision should stay away from mobile gaming entirely. There’s a lot of money to be made there, but success in this fickle market depends almost solely on having the right game at the right time, meaning that it is terribly unpredictable. So what does it take to make a super-hot mobile game these days? If history is any judge, not much—and that’s the problem with this merger.

The most successful mobile games are all very simple and basic. There are really no major skill barriers, meaning that just about any mid-level programmer has a shot at making it big. This presents major competition issues for established mobile gaming companies since it makes defending market share nearly impossible.

Take the fate of Zynga (ZNGA). The social and mobile gaming company went public in 2011 at $10 a share while riding high on the back of its very successful Farmville gaming franchise. The company was soon worth billions of dollars, with its stock hitting $16 in March, 2012. Since then, though, Zynga has fallen on hard time as the company has struggled to come out with another hit game. While it launched a few successful Farmville sequels, the rest of its games have largely come and gone unnoticed.

While Zynga struggled, King Digital hit it big with its mobile game, Candy Crush. But since going public in 2014, King, like Zynga, has had a hard time replicating the success of its initial breakout hit. While the sequel to Candy Crush has done well, the rest of its games, around 200 in all, have largely disappointed. The company hopes it will eventually hit pay dirt, but given its success rate to date, the odds of that happening seems pretty low.

The lesson here is that just because a company hits it big with one mobile game, that doesn’t mean it’s some mobile-gaming powerhouse. It just means the company made one decent game—and that’s it. Zynga now trades at around $2.50 a share for this very reason. The difference between luck and talent in the gaming space seems best measured by time. Can a company have more than one blockbuster? As such, it seems way too early for any company, even one as big as Activision, to be making multibillion dollar bets in this chaotic space.

But Activision claims the deal goes far beyond the Candy Crush franchise—it is about access to King Digital’s massive mobile gaming community (as in people who play Candy Crush). But gaining access to the mobile gaming community isn’t hard—you just need to make a good game, something King Digital has done only once. Activision could have bought hundreds of gaming startups for a fraction of the price it paid for King Digital. It could have also easily built its own mobile gaming platform from the ground up, which would have been far cheaper than going out and buying the market leader.

While this deal catapults Activision to the top of the mobile gaming space, it can be knocked down from its perch at any time. King’s audience and its revenues are contracting as the popularity of the Candy Crush franchise declines. Given the supposedly “explosive” growth in the mobile gaming space, a decline in revenue, as well as audience, is totally inexcusable. This doesn’t bode well for the deal or for the future of mobile gaming.