What does Activision’s acquisition of King mean for everyone else?
By Jonathan Pan and Sayako Seto
Activision’s acquisition of King has made it the most dominant interactive entertainment company. It is now a force to be reckoned with across all platforms: PC (anchored by five — soon to be six — Blizzard franchises), console (Call of Duty was the #1 console game in 2014, globally), and mobile (King brings 340 million monthly active users).
A lot has been written about about the deal. Our favorite articles are from The Atlantic, The New York Times, and Bloomberg. These articles tend to focus on what the deal means for Activision. We will explore what the deal means for everyone else, especially in the mobile gaming space.
This acquisition is a reflection of the fact that we have reached “peak casual” in mobile gaming. Excluding Supercell, major Western mobile game companies have collectively dropped more than $8 billion in value over the past four years. The convergence of low growth and increasing user acquisition costs from a crowded market makes 2016 ripe for market consolidation.
King is just the start.
Furthermore, the rise of midcore (Hearthstone), hardcore (Vainglory), and eSports will shape the next generation of mobile games. Combined, these trends will result in wealthier shareholders, happier game makers, and more importantly, delighted players.
But before we talk about tomorrow, let’s take a look at how we got here today.
The journey to peak casual
Pincus, Nadella, and … Kardashian
We first heard about social (casual) gaming at a talk given by Mark Pincus, the CEO of Zynga, in 2008. Nobody in the audience seemed to understand just how big social gaming and its transition onto mobile would be. Zynga completed their Series A and B rounds that year and its explosive growth would spawn a whole host of other companies clamoring into that space.
Fast forward seven years and now there are multiple social/mobile gaming companies with market caps or valuations ranging from hundreds of millions of dollars to billions of dollars.
(Sources: Supercell: $5.5 billion, King: $4.3 billion market cap, purchased for $5.9 billion, GungHo Online: $3.38 billion, mixi: $2.58 billion, Zynga: $2.15 billion, Kabam: $1 billion, Storm8: $1 billion, SGN: $700 million*, Glu: $542 million, Rovio: $459 million*, asterisks on our estimates)
A few years ago, it would be inconceivable to think that the CEO of Microsoft would pay any attention to mobile gaming or that celebrity games could be financially viable. These are realities today. Satya Nadella has included mobile gaming as part of his transformation strategy because “the single biggest digital life category, measured in both time and money spent, in a mobile-first world is gaming.” Kim Kardashian’s mobile game made $43 million in a quarter.
“The smartphone is the new sun.”
Mobile is huge; mobile gaming is huge. We get it.
Then why are some mobile gaming companies losing so much value?
Because the low-hanging fruit of obvious game concepts have all been picked. Because it was too easy to raise money in this space and now the market is saturated. Because mobile gaming companies couldn’t figure out how to solve the timeless problem in entertainment — how to consistently create hits.
Then who is continuing to fund mobile gaming companies?
- Alibaba, China’s biggest e-commerce company, invested $120 million in San Francisco-based Kabam
- Tencent, a Chinese internet conglomerate, purchased a 14.6% stake of Glu Mobile for $126 million and a 20% stake of Pocket Gems for $60 million, two American game studios.
- SoftBank, a Japanese telecommunications conglomerate, increased it’s share of Supercell to 73.2%
- Netmarble, the top Korean mobile game publisher, invested $130 million in Los Angeles-based SGN (also 26% owned by Tencent)
- Sega, a Japanese game developer, acquired Demiurge Studios, headquartered in Cambridge, MA, and took a stake in Ignited Artists in San Francisco.
Here are a few reasons for the east-to-west migration in capital.
First, Asian companies want to sell their content in the West. Second, it wants to sell Western content into their own markets. And third, a variety of national economic reasons ranging from currency devaluation, repatriation of foreign-held cash, and low interest environments.
The third point is a major reason why Activision made the deal. The Atlantic piece we mentioned earlier describes the economic benefits of the deal: using $3.6 billion in offshore cash means a tax savings of $1 billion (if they had repatriated the cash) and the remaining $2.3 billion is financed by low-interest, long-term loans.
Since the market is pummeling publicly-traded mobile gaming companies valuations, it makes sense for cash-rich companies headquartered in a different country (tech, gaming, or otherwise) to acquire Zynga or Glu at a discount. While market consolidation happens, mobile game companies need to stand out to look attractive to potential buyers.
Three companies that are currently standing out in the market provide cues for everyone else: Glu (lower user acquisition costs), Supercell (disciplined growth), and TinyCo (licensed IP).
Navigating the crowded landscape
How three companies are standing out
1. Glu was valued at $327 million when it went public in 2007. This April, Tencent purchased a 14.6% stake for $126 million. It’s current market cap is around $570 million. Although not a breakout success, Glu has proven to be a sustainable and growing business. Glu has dealt with rising acquisition costs in an interesting way, build games with celebrities and let them market it:
Trying to mimic its success with Kardashian, Glu has inked deals with Nicki Minaj, Katy Perry, and just released Sniper X starring Jason Statham.
2. Supercell on the other hand, has been a breakout success, a company that VC’s dream about. Supercell has gone from raising a $12 million Series A round in 2011 (~$50 million valuation) to raising $1.2 billion from SoftBank at a $5.5 billion dollar valuation this year.
Besides making awesome games, Supercell has been very disciplined with hiring. Most companies with such explosive growth can’t help but hire if not overhire. Supercell generated $1.7 billion in revenue with 152 employees in 2014. As a comparison, King generated $2.26 billion in revenue with 1,200 employees the same year. That’s roughly $11.2 million in revenue per employee vs. $1.8 million in revenue per employee.
Perhaps Supercell is taking a page from Valve, which is estimated to only have 330 employees, but creates awesome games on par with companies twice or thrice its size. Smaller development teams have proven to be quite successful in the past few years. One of the best examples being Hearthstone, a game built by a core team of fifteen.
3. TinyCo is the only mobile game company we found through our research that focuses exclusively on licensed IP. Last year, it published Family Guy: The Quest for Stuff. This week, it announced that Marvel Avengers Academy, a game were teenage versions of Marvel superheroes navigate the trials of superhero school, will launch in the first quarter of 2016.
Licensing IP is a smart move because the mobile game market will begin to look a lot like the films market. M.G. Siegler writes, “nearly every movie is a sequel or the hopeful launch of a new franchise or a spin-off from another franchise.” And the data backs him up. Based on Sriram Krishnan’s research, 53 of the 80 top grossing movies from 2007–2014 are part of a franchise and 46 of the 80 are sequels.
While Activision has the strongest portfolio of original video game IP, Disney has the strongest portfolio of IP that can be licensed for video games (Pixar, Marvel, Star Wars, Disney). Activision’s huge cross-platform user base is appealing to an IP-rich company like Disney.
Disney may have the aspiration to do this all themselves. After all, they already have a strong IP portfolio and a revitalized mobile and console gaming department (Disney Interactive). They just need a strong PC gaming arm. Geographically and culturally, the best bet would be a partnership with or acquisition of Riot Games. You heard it here first folks :)
We, for two, welcome our Magic Kingdom overlords.
The aftermath of peak casual
More midcore, more hardcore, more eSports
A great cocktail party conversation starter (yes, these types of cocktail parties exist) is whether or not team mobile-based eSports will be a thing. Our position is yes. The success of any team-based eSports game (mobile or not) largely depends on three criteria: hardcoreness, complexity, and having a large audience.
Playing a hardcore game is like reading an entire book series like Harry Potter or Game of Thrones. If you start on book three, you would be lost. If you want to be a legit Game of Thrones fan, you have to commit to reading the entire series from start to finish. The same level of commitment exists in games like League of Legends or Dota 2. The learning curve increases every month for new players because there are ever-evolving skill trees, masteries, strategies, champions, etc. These games also require high actions per minute (APM) that are enabled by a mouse and keyboard. It is the hardcore and complex nature of these games that helped them gain an estimated 100+ million monthly active users combined.
Vainglory meets all of our criteria for a successful, team-based eSports game. It is without a doubt, the most successful hardcore mobile game to date. There are 18 heroes to master — a far cry from the 100+ champions/heroes in League of Legends and Dota 2 — but the most we’ve seen in a mobile game. As a sign of its complexity, the average game sessions last 75 minutes long; 110 minutes in Japan. The game launched on iOS in November 2014 (and on Android in July 2015) and has since gained 1.5 million monthly active users.
Vainglory is setting the boundaries for team-based mobile eSports and hardcore mobile gaming. In 2015, the estimated global installed PC base is slightly under 900 million and growing around 2%. Smartphone subscriptions are estimated at 2.1 billion, growing around 20%. Vainglory has the potential to be three times larger than the biggest PC eSports game — League of Legends — in a few years.
On the other hand, playing a midcore game is analogous to reading a great book. You can pick it up and read it for fifteen minutes or hours. It’s up to the individual. The best example of a midcore game is Hearthstone. When Hearthstone comes out with a new expansion, it’s like players have to read a new book that is loosely related to the first one, but you can read it without reading the first book first. Also, there is a low to medium level of APM required. Blizzard makes an estimated $240 million per year from Hearthstone. Activision-Blizzard has a whole portfolio of IP that the King division can partner or build games on.
The success of Hearthstone and the potential of Vainglory is a strong argument for why the aftermath of peak casual is more midcore, more hardcore, and more eSports.
The King acquisition wraps up a banner year for Activision: Hearthstone was released for iOS and Android, Activision hires a former CEO of ESPN and president of MLG to start an eSports division, Overwatch opens closed beta, and today, on the first day of Blizzcon, Activision announces a film and TV studio — Activision Blizzard Studios.
Activision is starting to look a lot like Disney, with game IP at the center of its expanding universe.
Thoughts? Agree? Disagree? We would love to hear from you. Leave a comment or a response.
Thanks to Deanna Nguyen for the graphics, Aleena Byrne for reviewing, and Haruo Nakayama for his analysis on the Japanese companies.
