Activision-Blizzard just acquired Candy Crush maker King Digital for almost $6B. That's a lot of money. In fact, that is a bigger price tag than the equity values of marketplaces such as Lending Club, Zillow, GrubHub, as well as most high growth enterprise SaaS businesses! There is a lot of news out there on the acquisition and my friend Sunny Dhillon from Signia Venture Partners did a great write-up on the topic, but I thought I would use this opportunity to examine the current state of affairs in the public markets for traditional game companies and emerging mobile studios.
Let's Start With The Traditional Gaming Publishers...
The two main public gaming publishers are Activision-Blizzard and Electronic Arts. Both are worth roughly the same amount and trade similarly. Activision-Blizzard has a market cap of $25B and trades at 5.1x 2016 revenue. EA on the other hand has a market cap of $23B and trades at 4.3x 2016 revenue. Per the stock chart below, both companies have performed exceptionally over the past 5 years. In the past year alone, ATVI and EA are both up over 80% as they capitalize on the new console cycle and milk their core franchises. Take-Two is also worth mentioning but they are much smaller at $3B of market cap and a 1.3x forward revenue multiple.
EA's has a slew of key franchises such as Madden, FIFA, Mass Effect, Battlefield, The Sims and Need For Speed to name a few. Activision on the other hand has focused on building mega-franchises such as Call of Duty, Destiny, and Blizzard's Warcraft and Starcraft. Take-Two has some impressive franchises like Grand Theft Auto and Borderlands, but they have always struggled to grow and generate profits like those of ATVI and EA.
...So What About Mobile Publishers?
Mobile gaming on the other hand is an entirely different story. Glu Mobile, the oldest running public company on this short list, was public back in 2007. However, they focused on feature phone games back then before following the freemium trend year later. Zynga basically pioneered the freemium model in the US and went public in late 2011 at a $9B valuation. However, growth immediately sputtered out of the gates and it has been a tumultuous ride ever since. Glu Mobile, a small underdog at the time, actually developed some brilliant franchises like Deer Hunter, as well as the Kim Kardashian game which was a smash hit rivaling games from developers like Supercell and King. The lackluster performance from Zynga and the surprising performance from Glu Mobile is evident in the stock chart below. Along the way, King went public in early 2014 and chugged along through 2015 until they were acquired by Activision-Blizzard.
So Why Are Mobile Companies Faring So Poorly In The Public Markets?
We can spot an obvious disconnect based on the two stock charts above - traditional publishers have been much more successful in the public markets than mobile game publishers. One would think that mobile publishers would be in a great spot considering that they are capitalizing on the fastest growing area in the game industry (much more so than EA and Activision). Just look at the top grossing iOS games:
The top two game publishers on the US charts, Machine Zone and Supercell, are still private. King is next, and then EA managed to grab the fifth spot with it's Madden title. Supercell has a second title at the sixth spot, and then interestingly there are three social casino apps that are owned by actual casinos. Kabam rounds out the rear in the tenth spot with its Marvel game. As you can see, Activision is nowhere to be found - even the casinos are beating them! So why aren't mobile publishers faring better?
Mobile Game Revenue Is Volatile And Valuation Multiples Reflect That
My interpretation of the data above is that public market investors wanted to believe in the mobile growth story. Several years ago, the #1 gross spot on iOS was worth a few hundred thousand dollars a day. A few years later, that same spot is worth a couple million dollars a day. Thus, it's really hard to predict who is going to have a hit game and ultimately how much that hit game can be worth. This confusion is evident in the valuation multiple trends for Zynga and Glu. When it seemed like Zynga was going to the moon, the company traded well above EA and Activision. When that turned out not to be the case, the public markets punished them. When Glu Mobile had a surprise hit with their Kim Kardashian game, their multiple skyrocketed for a short period of time.
It has become clear that a well diversified, cross-platform game publisher yields the better business model. Pure play mobile publishers are risky and volatile and thus do not seem suitable for public market scrutiny. While Activision and EA are worth 4-5x forward revenue, mobile game publishers get just 1-2x. The outcome for King is a terrific one - even with their declining growth they were still able to garner 2.5x forward revenue, a number they probably would not have achieved by hanging around in the public markets.
So Did Activision Make A Good Purchase?
With a $6B price tag, Activision is buying 450M monthly active users in 196 countries and a $2B revenue base generating 39% EBITDA margins. The deal is easy for Activision to rationalize - rather than create their own mobile game unit from scratch, they took the shortcut and acquired one. Even though King has flat to negative revenue growth, they have the potential to produce another hit like Candy Crush and get Activision on the map. However, with a $6B price tag, or a quarter of Activision-Blizzard's market value, they were clearly pretty desperate.