Three years ago, a group of senior Activision executives led by CEO Bobby Kotick met with Stephane Kurgan and Riccardo Zacconi, the heads of mobile gaming company King. It was, says Kotick, a social engagement, two powerhouses of the global games industry shooting the breeze in a fancy restaurant.
During an investor call this week, however, Zacconi talked about the “mutual fear and respect” at the table. Executives don’t meet like this for fun. They were sizing each other up.
On Monday, Activision announced that it would be acquiring King, creator of the massively successful Candy Crush Saga game – as well as other more modest smartphone hits – for $5.9bn. Predictably, the revelation sent shockwaves through the industry: it’s a hefty sum – more than Disney paid for legacy entertainment companies Marvel and LucasFilm. What was Activision thinking?
Of course, the basic strategy was obvious. Although Activision is big in console games with its Call of Duty, Destiny and Skylanders brands, and has might in PC gaming thanks to the Blizzard titles (Diablo, Starcraft and Warcraft), it has largely failed to make an impact in the explosive smartphone gaming sector. Purchasing King would bring it an experienced workforce, plenty of proven IP, and a vast global audience, stretching far beyond the traditional “hardcore” gaming demographic.
But analysts were quick to question the deal. King shares have consistently traded below the asking price set at the company’s disastrous IPO in March 2014. The latest accounts showed an 18% year-on-year fall in revenue. Candy Crush Saga has probably peaked, and although titles like Pet Rescue and Farm Heroes have performed well, they’re not doing well enough to replace Candy Crush Saga as the sugar rush fades.
In a coruscating article on the deal, the journalist Rob Fahey wrote: “In all likelihood, Activision has just paid a huge premium for a company which is past the peak of its greatest hit title and into a period of managed decline, not to mention a company with which its core businesses simply don’t fit in any meaningful way.”
The IHS Digital analyst Piers Harding-Rolls added: “The mobile games market is highly unpredictable, even with a strong set of games franchises and brands success is far from guaranteed.”
So what does Bobby Kotick make of all this? Activision’s boss, the pantomime villain of gamers everywhere, is the longest-standing CEO in the tech industry. In 1991, he took control of a fading games company and over the next 25 years turned it into an entertainment giant with a brand – Call of Duty – that could dwarf Hollywood box office takings. Unsurprisingly, he has a different view on the deal.
“Look, here’s my immodesty,” he says via a phone call from Activision’s HQ in Santa Monica, “but if you look at the growth in operating profits and the return on invested capital that we’ve generated for our shareholders, we are really good at prioritising opportunities. We have now gotten to a place where we’ve seen mobile as an opportunity. We’ve prioritised it, evaluated a variety of alternatives, both building and buying, and we came to the conclusion that King does the best job of any team that we’ve come across in the creation of franchises, in sustaining those franchises, in commercialising those franchises and thinking about new franchises. Today, mobile is a $36bn market. King supports audiences in 196 countries. We felt very confident that they were the right partner for us.”
But then, traditional game publishers have floundered in the past when they tried to buy their way into the mobile industry. Electronic Arts paid $680m for Jamdat in 2005, $300m for social gaming specialist Playfish in 2009 and $750m for Bejeweled creator PopCap Games in 2011. While the latter still exists as a brand, the others have faded and disappeared. Is this not a stark lesson in how the gears grind when very different development cultures meet?
“Well, if you look at the history of our company, we don’t do a lot of acquisition,” says Kotick. “The reason is, we need to see that people are culturally and philosophically aligned with the way that we approach the business. At the end of that first meeting with Riccardo and Stephane I said to the other Activision participants, ‘That team is aligned with the way we operate the business. If we can someday figure out how to do something with them we should’. It’s very rare that you find people who have the same commitments, and the same commercial instinct.”
Kotick also shrugs off concerns about King’s reliance on Candy Crush. “They had product concentration, and so Mr Market looks at that and says, ‘Hey, you know, is that a one-trick pony?’ But when we looked at King, we saw four great franchises with lots of potential, one super franchise, and a fantastic pipeline. That got us really excited.”
From King’s point of view, the deal makes sense in that it gives them Activision’s proven IP with which to build new smartphone titles. But again, there’s another question: is the world ready for Call of Duty Saga? Destiny Soda? Skylanders Rescue? The latter is the most obvious brand for re-thinking into the casual smartphone space, and Call of Duty should be a useful asset in the growing “mid-core” sector of more challenging mobile gaming experiences.
But is that what this is about? “Just reskinning games with our intellectual property is not an appealing prospect for opportunity,” assures Kotick. “That isn’t something that creates long-term value for shareholders.”
Indeed, you get the sense that what really interests Activision – or at least its CEO – is sheer numbers. “We now have 500 million players in 196 countries around the world,” he says with barely contained zeal. “In the past, our business was largely concentrated around middle-class consumers who could afford $300 or $400 for a dedicated game console or $1000 for a PC. Now, with the introduction of high-quality mobile devices, we’re looking at everybody being a consumer. And one of the things I love about King is 60 percent of their consumer base is female. There are more opportunities now than we’ve ever had before.”
That’s the thing really. Over the last five years the console games industry has grown to resemble its younger smartphone sibling. The future is about what he calls “perpetual franchises”: the old model of annual boxed copy iterations is coming to an end. Call of Duty with its scheduled DLC drops, Destiny with its endless feed of new content – it’s about building communities and engagement now; it’s about finding new models for a growing audience that now thinks about games in a different way. King was able to rise up within the densely crowded smartphone space with an “audience first, revenue later” approach that Activision now covets.
“From Activision’s point of view the relatively slow burn of this generations console market and the transition towards increasingly digital delivery is major risk for their business – like any traditional publisher – so it makes sense to consolidate their position by acquiring one of the giants of mobile gaming,” says smartphone industry veteran Oscar Clark, now at Unity. “Leaving King as a separate entity is a smart move but if Activision is to really benefit they have to really learn from them and be willing and able to adapt themselves.”
One thing’s for sure, Kotick is never off duty. He has drawn the ire of core gamers with Activision’s endless cycle of money-spinning brands, the DLC packs, the vast number of Skylanders toys, the expense of keeping up to date with Destiny, but the monster rolls on regardless. You can bet when he sat across the table from those King executives three years ago, he wasn’t seeing two guys, he was seeing a new audience of many, many millions, in parts of the world even Call of Duty never reached. And right now, according to him, that’s all he cares about.
“Look, the way we see it, this audience is investing in our content right now,” he says. “Whether they’re paying for it or not is not really relevant. They’re investing a significant amount of time in our content. At some point, commercial opportunities will materialise for greater percentages of that audience.”
Time will tell if the numbers convert into revenue. But for Activision, whatever you think of the company, the numbers usually do.
This article was written by Keith Stuart, for theguardian.com on Wednesday 4th November 2015 11.55 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010