Here's Why Activision Blizzard Paid Nearly $6 Billion for Candy Crush

Activision Blizzard's nearly $6 billion offer for King Digital was more than double the price Microsoft paid for Minecraft. Why?
By Dylan Love ,

Computer and console gaming company Activision Blizzard (ATVI) - Get Report bought mobile game studio King Digital (KING) in a gigantic $5.9 billion deal.

But what does the entertainment behemoth, responsible for blockbuster gaming titles like World of Warcraft and the Call of Duty franchise, want with mobile mainstay Candy Crush?

Its reasoning is twofold. With this huge acquisition, Activision Blizzard simultaneously sweeps up some very desirable customer demographics while making itself into a multi-platform company. It's a step toward future-proofing itself while also priming it to generate revenue in the lucrative mobile market. The gaming business is no longer about ruling the desktop nowadays; the best-adapted gaming companies are those that have offerings for mobile phones as well.

The move will handily round out Activision Blizzard's revenue stream. Despite generating $2.3 billion so far this fiscal year, just 5% of that comes from mobile games; the lion's share, 54%, comes from its console offerings, and its profit margin sits at just over 12%. Meanwhile, King Digital shows a profit margin nearly twice that -- 24.03% on $490 million in revenue for the second quarter alone. That money comes from King's 474 million monthly active mobile users, who pay real cash for virtual in-game goods.

David Lord, President and CEO of L.A.-based gaming company JumpStart, highlighted the fact this helps Activision by not being so dependent on consoles.

"Choosing [mobile or console] is no longer acceptable," he said. "You can't be one or the other anymore. Everyone is in a massive battle to win it all." Whereas desktop games might require a high-performance PC or console that only more committed gamers are willing to spend for, mobile games only require the multipurpose smartphone that so many people already carry with them everywhere.

This jibes with the thinking of Jordan Minor, a junior software analyst for PCMag who hosts a mobile games video series called Games to Go. "[Big-budget] console games, which is all Activision mostly made prior to this purchase, are huge risks," he said. "Each one has to be a massive success to justify the time and costs sunk, so companies become wholly dependent on a single title and upselling players after the fact. That's bad! Instead of taking the risk of trying to dominate the profitable but volatile mobile market, they just bought the company that already figured it out."

King Digital's games are free to play. Rather than make money off the sale of a title, it makes money when players spend to unlock features or powerups within a game. This means that over a single player's course of gaming, the company can stand to profit much more in this manner than from the pay-once-and-go paradigm that generally rules the desktop gaming world. Consider the extreme examples of one player who spent nearly $500 playing Kim Kardashian's own free-to-play mobile game, and another who spent more than $100 while playing Candy Crush.

King Digital has a huge user base of 474 million monthly active users, and Activision Blizzard CEO Bobby Kotick said 60% of them are female, a demographic perhaps not commonly thought of as game-hungry. This means Activision Blizzard adds roughly 300 million female gamers to its stable in the wake of the deal.

"Women as casual gamers are new to this marketplace," said Lord. "Having that demographic is trendy and tough to get."

Ed Zitron, a former games journalist now managing PR for a variety of tech startups, confirms the wisdom of bringing a new class of gamer into the company's fold. "At first I was a bit confused as to the move, as King's stock hasn't done particularly well. That being said, Activision Blizzard acquired one of the strongest and most sustained mobile titles, one that's broken a cultural wall in gaming such that casual gamers play it," he said.

Post-acquisition, the company can lay claim to serving both hardcore gamers -- consider war franchise Call of Duty and fantasy roleplaying game World of Warcraft -- as well as the lower-key gamers who regularly play Candy Crush, one of the predominant casual gaming franchises.

"I could see Activision keeping King profitable," continued Zitron. "This is one arm of Activision now vs. the core business. It's smart."

It ought not to be surprising that the deal was executed, but the vast amount of money that changed hands for it -- again, $5.9 billion -- is jarring.

Previous gaming company acquisitions have been markedly smaller. Electronic Arts (EA) - Get Report paid $750 million for PopCap, the developers behind Plants vs. Zombies.Amazon (AMZN) - Get Report paid just under $1 billion for livestreaming community Twitch. Even Microsoft's (MSFT) - Get Report $2.5 billion purchase of Mojang, the studio responsible for Minecraft, is less than half of the price paid for King.

Adding a mobile gaming company to its ranks gives Activision Blizzard access to loads of new customers and a new platform with which to reach them. And where there are more customers to be accrued, there is more money to be made.

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