The King is Dead! All Hail the King!

I remember visiting a senior strategy executive at Activision HQ 3 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 framed on his office wall. Posters of Diablo, Starcraft, Warcraft, and Call of Duty). 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. It seems that 3 years after my Santa Monica meeting, 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 cashflow that has operated in a largely under-tapped market for Activision. They were already several years behind their west coast rival, Electronic Arts, who had several successful mobile hits (e.g. 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. To me, that sounds like quite an awkward party when you put both groups in a room together.

Does mobile make sense anymore?

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 (e.g. 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 casual mobile game producer, 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 $6bn 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 an old school console publisher is arriving late to the party.

Sunny Dhillon is a partner at Signia Ventures, an early stage VC fund in San Francisco. He was previously a corporate strategist at Warner Bros in LA, the first business development employee at a VC-backed spin-off of New Line Cinema, and a former entrepreneur, having launched one of the App Store's first social-local-mobile apps (named BarStool) in 2011. Follow him on Linkedin and on Twitter (@SigniaVC).

Sandeep Dhillon