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The King Is Dead. All Hail the King!

A gaming investor's skeptical perspective on Activision's recent $5.9 billion acquisition of Candy Crush company

I remember visiting a senior strategy executive at Activision headquarters years ago and being told, “We don’t believe in mobile; it doesn’t have the same franchise potential as this, this or this.” He was pointing, in succession, to movie-esque promo posters for Diablo, Starcraft, Warcraft and Call of Duty, framed on his office wall.

Clash of Clans was dismissed as a fad; my (then) recent investment in Super Evil Megacorp was found perplexing and mobile as a platform was deemed to have little longevity in creating repeat hits from a single developer. At this point in time, understanding mobile gamers (and the acquisition, retention and monetization data around them) wasn’t a high priority at Activision. The company produced one billion-dollar hit after another, to a large, highly monetizing console and PC player base.

On Tuesday, Activision Blizzard bought King Digital Entertainment, creator of mobile smash hit Candy Crush Saga, in a deal worth $5.9 billion. Now, years after my Santa Monica meeting, it seems that mobile has become a more serious priority for Activision CEO Bobby Kotick. The mobile gaming industry now has publishers with a diversified portfolio of hit games, and Activision sees King as a strategic bolt-on to expand its mobile footprint.

Rationalizing the deal has been covered at length in the press the past couple of days; it made sense financially from a DCF, EPS, EBITDA and price perspective. We have a giant public company acquiring a smaller business with solid cash flow that has operated in a largely under-tapped market for Activision. They were already several years behind their West Coast rival, Electronic Arts, which had several successful mobile hits, including Simpsons Tapped Out. Activision’s audience is largely hardcore, playing on console and PC, across a portfolio of sci-fi and fantasy titles, whereas King has half a billion mobile gamers who are largely female and casual players. Sounds like quite an awkward party when you put both groups in a room together, right?

I’ve written in the past about why I don’t invest in new mobile gaming studios anymore (you can read it here. Mobile game marketing costs are too high, gamers churn before breaking even from a monetization perspective, and distribution is controlled by celebrity brands (Star Wars, Kim Kardashian) and app store featuring from Cupertino and Mountain View.

That said, a relatively mature mobile gaming incumbent making casual games is a little different. Candy Crush is addictive, and the barriers to adoption are very low — a baby could understand how a Match 3 game works. Virality is part of the game’s DNA, encouraging players to share with their Facebook friends to get in-game boosters.

For a producer of casual mobile games, churn is always going to be a problem. There is no engaging storyline, character development or immersive world lore in Candy Crush. Players are hooked on an addictive Match 3 game mechanic, and eventually they will get bored (or frustrated) and quit playing. King will have to prove its ability to produce new hits, independently, or by “synergistically” embedding its mobile chops within Activision.

I find it doubtful that the existing mobile team behind Activision’s in-house mobile hit, Hearthstone: Heroes of Warcraft, think similarly about game design or user community as King’s mobile gaming team does. King has been rumored to be working on midcore titles since its acquisition of midcore gaming studio Z2Live earlier this year. Z2 had not produced mammoth hits, and was lost among a sea of mobile gaming noise at the time of acquisition, however.

There are other hardcore mobile studios out there that would have made more strategic sense, allowing Activision to build on its deeply entrenched hardcore and midcore gaming expertise. It has some of the most hardcore brands on the planet, for Medivh’s sake! An aggressive $6 billion move into mobile, by acquiring perhaps the most casual gaming company out there, leaves me scratching my head a little.

From my short stint as a banker in my former life, I could have rationalized the acquisition in my Excel spreadsheets to a bunch of earnings-accretion-seeking corporate development guys. But as a gamer, I see a short-termist attempt to show Wall Street some growth, but not much in the way of real innovation on a platform where they are a little late to the party.

Sunny Dhillon is a principal and co-founder at Signia Venture Partners, an early-stage fund in Menlo Park and San Francisco. He invests in gaming, virtual reality, Esports and consumer mobile apps, and he’s a board observer with Signia’s investments in gaming companies Super Evil Megacorp and Artillery, in virtual-reality company 8i, and in consumer mobile GIF company, Riffsy. Reach him @SunDhillon and @SigniaVC.

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