Experienced Points: Activision’s $6 Billion Candy Crush Gamble

By Shamus
on Nov 9, 2015
Filed under:
Column

My column this week in all about how paying $6 billion for the Candy Crush developer was ridiculous. As others have pointed out, Disney only paid $4 billion for Star Wars. And Star Wars has a lot more staying power than the latest fad game in a long line of match-3 clones.

A couple of small points:

Most of my argument is built on the idea that the mobile / casualWe really need a better name for this. There’s nothing “casual” about the casual market. And “mobile” leaves out the web-based side of things. market is a crapshoot. We have a repeating pattern of small-fry operations hitting it big, and giant companies who were unable to replicate previous successes. We have yet to see the “Blizzard of mobiles”, where a single company turns out hit after hit. If King is miraculously that company, then this deal would start to make some kind of sense.

The other thing is that apparently Activision had a huge pile of income overseas, but they couldn’t bring that money home without paying about a billion dollars of taxes on itThis is based ENTIRELY on un-sourced comments. I haven’t looked into it yet.. So this deal kind of represents Activision trying to get some value for that money, rather than seeing it vanish.

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Footnotes:

[1] We really need a better name for this. There’s nothing “casual” about the casual market. And “mobile” leaves out the web-based side of things.

[2] This is based ENTIRELY on un-sourced comments. I haven’t looked into it yet.


2020202010There are now 90 comments. Almost a hundred!

From the Archives:

  1. James says:

    Uh, you haven’t linked the column itself. (at time of posting)

  2. Chuck Henebry says:

    Link? I’m feeling too lazy to type escapistmagazine.com into my browser. (Though, plainly, I’m totally up for typing 20x that # words to comment on your (fantastic, beloved) website to alert you of a minor error.

  3. Mistwraithe says:

    “So this deal kind of represents Activision trying to get some value for that money, rather than seeing it vanish.”

    I don’t get this type of reasoning. A company (ostensibly an American company) would prefer to waste money paying over the odds for what is almost certainly a poor investment, rather than bringing the money back to the US and giving a small portion of it to the US government, where presumably it would help with a variety of things, including the public education system which helps educate future employees.

    The world is a funny place.

    • Cerapa says:

      Never doubt people’s obsession with trying to avoid and exploit rules, even if doing so actually costs them more money than it saves them.

      • RubberBandMan says:

        I really doubt it’s to get all that money ‘american side’. The rich companies have no problem sitting on cash for five or ten years until the next ‘tax holiday’ that’ll let them save 500 million in exchange for doing nothing.

        And if they did want it moved by buying something, they could of bought something with actual comparable value. If you buy a 1 billion dollar company for 3 billion, in order to dodge a billion dollars in taxes, I think you made a bad deal.

        Hell, for 3 Billion there’s practically no limit to the number of small game companies you could buy and ruin.

        • Taellosse says:

          You’re partly right, but you’re not quite thinking like a modern corporate executive. Sitting on cash for multiple years is the same thing as losing money, whereas buying a smaller company for an overinflated price is an investment (and when it turns out to have been a bad decision, it’s a write-off). The key factor in the mindset is that long-term thinking is not attractive to stockholders – they want quarterly profits, and they want them every quarter,

          • Incunabulum says:

            That is . . . completely untrue. No private company that doesn’t invest long-term will *exist long term*.

            Its why private oil companies do so well whereas nationalized ones don’t. Private companies invest in R&D, infrastructure maintenance, and search for new resources.

            Nationalized companies extract the maximum value they can from the present stockpile, fail to spend on infrastructure maintenance (because the Generalissimo may not be in power 30 years from now – and then its the next guy’s problem).

            You see that same thing happen here – how many *new* infrastructure projects (roads/rails/etc) get opened? How many get money for ongoing maintenance and operation? A lot and very few. Because you can put your name in the paper with a new bridge, you don’t get your name in the paper for approving the maintenance budget.

            • Mephane says:

              I think your distinction private vs nationalized is a strawman. The thing you describe is true, yes, but it also happens alarmlingly often in private businesses, where a manager is hired for a few years only, and all they do in that time is increase the way the company looks to shareholders during those 4 years. The contract ends, the manager has not only their multi-million salary but also bonus for good performance etc. And the successor finds out the mess of a company they now have to deal with.

              • Ingvar says:

                And for at least one successful, majority-government-owned oil company, I present Statoil, with a profit of roughly 11 king.coms in 2012.

                And at least based on what I’ve seen with “privatising previously national infrastructure” in general is that it goes from being maintained and invested, to being under-invested, under-maintained and has all possible profit eked out of it, to the detriment of the infrastructure and those who depend on it.

                In a perfect economy, with perfect information, and perfectly rational actors, and all…

            • Taellosse says:

              You’re failing to account for the considerable difference in behavior between private companies (here the term means a company owned by a small group of individuals, or even a single person, which does not trade shares of stock on the open market) and public companies (those that offer stock on one or more public exchanges) – the former are accountable to few in most of their decisions – if they are run by people who know their business, they’ll generally make smart decisions where possible (of course, if they’re not, they implode – private companies live and die by the decisions of their owners to an extent public and nationalized companies do not).

              The latter are accountable to shareholders, and while that can mean different things in different countries, in the United States, it means that they have to publicly disclose a LOT of their financial information on a regular basis. It also means that senior executives are largely compensated in shares of company stock, and while this is starting to change in some industries, that incentivizes them to make decisions that boost the stock price in the short term so they can cash it out at opportune moments (there are restrictions on when an “insider” – someone with foreknowledge of the business’ decisions – can sell stock, but that doesn’t mean they can’t still take advantage within those bounds). As a corollary, it also incentivizes them to not give a shit about what happens later as a result of their short-term thinking, because they’ve made their bank already, and in many cases, they’ve already moved on to another company by the time the proverbial chickens come home to roost.

              The above is especially true when an industry is fond of hiring senior executives without intimate knowledge of the particular industry in which they operate – so-called “career executives” treat all businesses as if they were interchangeable, and make decisions exclusively designed to boost stock prices regardless of whether they make sense for the particular business or industry. This is very much true of the video game industry, and is often so for industries that trend “creative” – the people that know the industry intimately rarely have both the ambition and the skillset to become senior executives.

            • Taellosse says:

              I should note, to specifically address your “No private company that doesn’t invest long-term will *exist long term*” comment, that public companies are typically VERY big – even with multiple bad decision-makers at the helm in a row, they are actually very hard to run into the ground quickly – their sheer size ensures that inertia will carry them for some time. This is even more true if they’ve got some sort of insulating factor to protect them from bad decisions, like, say, a single, incredibly profitable product that continues to bring in a steady cash flow (in Activision’s case that is World of Warcraft, even with it’s reduced subscriber numbers) regardless of what other money-losing ventures the company leaders jump into.

            • WaytoomanyUIDs says:

              Strange. It’s the opposite problem in Britain. the privatized rail operating companies are only interested in extracting money from their passengers and the government. They have to be threatened with the loss of their franchises to invest in new rolling stock, and the government usually ends up paying for most of it, anyway. Actually running a value for money, consistent, clean service which keeps on schedule is very low on their priorities. The franchise with the best service and most timely trains is one that is run by the government at present because the previous operator went bankrupt, and the other operators wouldn’t take it over. Now it’s making a profit they are suddenly interested in it.

              Likewise, RailTrack, the company that owns and maintains the rail network needed to be renationalised because the owners were uninterested in actually maintaining Britain’s rail network, leading to several fatal railway crashes. And the present government wants to sell it off again.

              • Mistwraithe says:

                Largely our experience in New Zealand too. Privatization was a disaster in a similar way for our railways and our airline (Air New Zealand) and it wasn’t much better for our telco and power companies.

            • boota says:

              i would say it’s completely the other way around. at least here in sweden.
              we have seen privatization of public infrastructure and services causing horrible deficiencies in maintenance due to private companies not investing.

              pretty much every market that was privatized and deregulated here has become worse at serving their customers, and the services has become more expensive. (the jury is still out on the privatization of pharmacies, but there are good arguments for that not everything got better, for example, while medicines for common diseases has become more available, more rare ones are sometimes impossible to get a hold of since no actor on the market keep them in stock, which was promised).

              my experience from working in IT with a large international company and having friends who worked for nationalized organizations is that private companies are way less likely to invest in infrastructure than nationalized companies.

            • Moridin says:

              The entire legal framework for publicly traded companies means that they HAVE to focus on short-term profits first and foremost. They can actually be sued by the shareholders if they don’t. This doesn’t mean that they make NO investments in the future, but it DOES mean that they can’t do too many long-term investments at the expense of short-term income for the shareholders.

            • Felblood says:

              Two Words: Golden Parachute.

              Laying aside some very weak over-generalizations regarding public versus private utilities, for which I am certain someone else will sufficiently excoriate you — the logic of corporate executives simply does not work that way.

              You don’t have to construct a fiction strong enough to survive real human scrutiny to look like a successful CEO, even when you have no real idea what you are doing. All you have to do is fool the computers that make the purchasing decisions for the Mutual Funds, and those computers are basically just day trades who operate on a monthly scale. They have no motive to consider long-term consequences when all they want to do is own stocks that they can sell for more at the end of the quarter, and sell stocks that are likely to go down.

              Buying things for a lot of money creates the illusion that you bought something worth a lot of money. Ergo, you must now own assets worth a lot of money. Assets would, ideally, translate into a more valuable company and a better price per share, and surely any company that can use revenue to buy assets must be doing well right? After all, surely no company would borrow investor money, waste it on projects that produce less revenue than what they borrowed, and then spend the revenue on another doomed project, right? –Right?

          • guy says:

            The thing is, if you keep money sitting around you effectively lose all the money you could have made over that time period by spending that money. Particularly when inflation is high, that can be quite dramatic. So it really is a bad business decision to just let money sit if there’s something you can invest it in, so long as you keep enough on hand to ride out some temporary trouble. However, investments need to be compared to other investments you could make instead, and I think this one fails that metric.

            • Taellosse says:

              Eh. If a company has significant income from overseas, there’s plenty they can do with it aside from putting it in a huge offshore savings account that doesn’t involve bringing it home to subject it to US taxes. Whether it’s reinvesting it in the foreign portions of the business, or putting it into a non-domestic stock market(s), any multinational with enough resources to play tax shelter games in the first place can find ways to make it keep growing.

          • Peter H. Coffin says:

            And by the time the investment has been CONFIRMED to be bad, like King getting sold off to someone else for a pittance, the likelihood of that same executive being around to make that decision is slim. At best, slim.

            • Taellosse says:

              By and large, yes, though it’s worth noting that Bobby Kotick has been in charge of Activision for quite a while at this point.

            • Felblood says:

              They’ll never sell King now. Proving what we all already know would mean that, on the balance sheet, they managed to turn a six billion dollar asset into a worthless one, which is bad for the share price.

              They’ll do what EA does.

              Everyone who works at King will be quietly layed off in a series of restructurings, as each successively more understaffed and underfunded version of King fails to make the lightning strike twice. Most of the IP will get hustled into a vault, watched over only by the copyright trolls, while the Publisher puts on the ruse that there is totally a valuable division of their company, and not a patch of blue sky in there. By the time they actually announce that the studio has been completely shuttered (or “merged into another studio” to hide the magnitude of the failure.) it’s identity in the public eye will have been so faded that most investors won’t even make the connection.

              None of this is intended to fool people who actually understand the industry. All you have to do is fool a bunch of lazy, disinterested investors, who really do understand this as poorly as we like to think Bobby K does.

    • Except that’s still how you can “avoid” taxes: You re-invest in your company. I’m pretty sure putting $6 billion dollars into even creating your own mobile game division is completely tax-deductible.

      It’s a pet peeve of mine when people decry how “high” taxes are on bajillionaires when (1) the tax rate doesn’t account for deductions, (2) said tax rate doesn’t kick in on the money below a certain level, (3) capital gains taxes are quite low, and (4) actually building stuff/hiring people is a “deduction” that, if you’re a decent business, makes you even more money.

      It’s why the Beatles started Apple Records. They were horrible businessmen, which is why it eventually folded, but it produced some great recordings.

      • guy says:

        Admittedly, the accounting on that can be kind of funky. Depending on what you buy, you might get to deduct more money than you spent but over a period of years, during which you don’t have as much money to spend on making more money. So that could potentially put them behind.

        However, the investment still needs to be compared to spending the money in some other fashion that doesn’t involve repatriation like buying ten other companies.

      • Joe Informatico says:

        I’m not sure if the rules have changed since (and if they have, I’m sure there are ways around the new ones), but I remember over 5 years ago when some of the biggest US corporations got away with paying taxes far below the corporate rate. Some of them even got money back!

      • Incunabulum says:

        Well, you can’t. Not without repatriating that money in the first place – which then gets you the tax bill.

        You *could* use the money to make a foreign division – but if it makes money you’re still in the same boat – how do you minimize the tax bill so you can pay dividends.

        The major problem is that the US has one of the highest corporate tax rates in the world. We should lower it, at least to the point where its not worth these sorts of manipulations. This is just the Laffer Curve in action.

        • Again, that’s the rate before deductions. Not to mention that the ability to defer taxes on profits made overseas was pushed for by businesses to make them “more competitive” with overseas rivals. This also lets larger companies have the wherewithal to shovel more profits into tax havens out of the US.

          It’d take either a load of bankruptcies or an act of Cthulhu to get them to support any changes to that.

      • Felblood says:

        Yeah, even laying aside that there were much better ways to spend this money overseas. There are other tax loopholes that could have been used to (at least most of) this money of better opportunities here in the US.

        In a world where you can borrow only so many billions of dollars and there are plenty of people (in all kinds of tax regions) trying to sell profitable companies, it’s not good business to buy companies at an overvalued price.

        When you are overpaying for products by this margin, in what is actually a buyers market, you are just bad at buying things.

    • Incunabulum says:

      Eh, its not a *small* portion – upwards of 30% or more.

      • Mephane says:

        I fail to see how paying 30% taxes on 1 billion of cash is outrageous. *shrug*

        • Abnaxis says:

          Especially since 30% is just the base rate and most corporations wind up paying much less.

          Not only that, but I fail to see where lowering the rate itself would actually encourage corporations to repatriate assets. Whether the rate is 10%, 20% or 30%, a company is still going to avoid paying it if they can. CEOs aren’t going to say “oh 10% is reasonable, guess I’ll suck it up an pay it,” they’re going to say “If I do X I pay 0%, so let’s do that.”

          • Wide And Nerdy ™ says:

            At 10%, this deal might have been less attractive. In this case (if the Atlantic article is right) its the difference between 1.08 billion and 360 million. It might be enough in some cases for a business to decide to just repatriate the money and in this case that would be 360 million more than the U.S government is getting.

    • Wide And Nerdy ™ says:

      It would be wasted either way. We spend more than we make, public and private sectors. Give Activision at least a smidgeon of credit for even having a surplus.

  4. MrGuy says:

    The game itself is irrelevant.

    They paid the $6 billion for the (disputed) trademarks to the works “candy” and “saga” so they can demand tribute from anyone else who dares to use their owned little piece of the English language.

    It’s what all the cool developers do with their free time.

  5. Daemian Lucifer says:

    And “mobile” leaves out the web-based side of things.

    Not really.At least not today,when near constant connectivity is almost a requirement for a mobile phone.

    But I agree that calling these games “casual” is not a good label.

    • Felblood says:

      I think he’s meaning people like me who don’t have Smart phones, but play Android games in Chrome on our Desktops, just to see what all the noise is about.

  6. MrGuy says:

    I think Activision was just sick of having no one remember what a terrible game publisher they are.

    All the kids can talk about these days is what an awful company EA is.

    Bobby Kotick doesn’t take that lying down.

    • Wide And Nerdy ™ says:

      Yeah. There’s nothing casual about a game that makes some addicts spend tens of thousands of dollars.

      Hey wait a minute. You don’t think maybe Activision just got a little too addicted to Candy Crush do you? That would explain everything.

  7. Joakim says:

    One minor thing: Candy Crush wasn’t cloned from Candy Swipe. Candy Swipe isn’t a match-three-game, its gameplay consists of dragging your finger over connecting clusters of the same type of candy. Since you defined cloning as “taking the gameplay of an existing game and making a new version of it” and the gameplay is different Candy Crush cannot be considered a clone of Candy Swipe.

    Search for Candy Swipe footage on youtube for proof.

    The reason you call it a clone is probably because the developer of Candy Swipe publicly attacked King for buying the rights that would stop the distribution of Candy Swipe, but that complaint was about not being able to use the trademarked name, not that King cloned his game.

  8. Starker says:

    And here’s an article by Ian Bogost about why the things discussed in the Escapist article don’t matter: http://www.theatlantic.com/business/archive/2015/11/candy-crush-six-billion-deal/414217/

    • Xeorm says:

      Hmm, still not a very good article. Not paying tax on outside money isn’t all that big. Assuming Activision could find any other use for that, all of that money is still considered at full price. I’d be honestly surprised that King was the only thing they could ever buy with it.

      What does some of the money being loans matter? They’re a good sized, profitable company. Of course they’re going to get cheap loans right now, given current interest rates. Again, was this the only thing they could buy? Unless it is, there’s no reason devalue any of this money as being less than what it is.

      Though, I can understand the stock price argument. Much as it makes me angry having a short term deal that doesn’t do all that well result in making stats look bigger. I’d be surprised if they were valued the same though if they kept up with this sort of strategy.

      But, the last bit is good for a random reader, but seems bad when analyzing the decision. Older properties tend to be worth less because it’s harder to make extra profit out of older properties with other resources. Disney can’t just add Mickey Mouse to Star Wars and make additional money.

      Tech companies are sold for lots of money because the economy in general has very cheap credit and no one is entirely sure how much money they can make out of these things. It’s why the tech bubble burst in the 90’s, because they quickly answered the question, and that answer was “not much”. Here, Shamus is saying that the answer is fairly similar, you can’t make much out of King’s assets. But people are paying the large price anyway because we’re not all that sure on what it’s actually worth.

      • Tizzy says:

        Well, the first thing to take into account is: “Who wrote the article?”. I am interested to hear Ian Bogost’s opinion on game design and the game industry, but I’m less excited to hear his understanding of finance and investment strategies.

        You can’t pretend you’re taking on the assets and not the liabilities, especially on a large deal like this. Imagining that Activision’s stock will continue to trade at the same multiple of earnings is simply wishful thinking. Not that he doesn’t have a point, but his level of confidence feels excessive.

        What he wrote may reflect how the people in control think, by the way, but that still doesn’t guarantee this is what will happen.

        PS – one of the basic rules of finance is that you can’t place yourself in a position to make a massive profit without taking on board a lot of risk.

        • Starker says:

          Note that he isn’t saying that this will pay off for Activision necessarily. He just highlights the logic behind a move like this in a way that has little to do with the success of Candy Crush or King.

          • Tizzy says:

            I agree. That’s why I wrote that he may reflect how the decision was reached.

            but even then, the emphasis is on *may*. I don’t know that he has inside knowledge on the discussions that take place in Activision’s boardroom.

            • Starker says:

              Eh. I personally see the article less of a “this is definitely what happened” and more of a “here’s another way of looking at this deal” and I thought that he made it clear in the article — “if the street is willing to sustain”, “hypothetical offshore premium”, etc

              Obviously, people like Shamus and Ian Bogost aren’t privy to the finer details of the deal or the boardroom dicussions, so they can only speculate. And as much as I’d like to entertain the prevalent theory that Activision simply made a dumb decision, there might be a lot more to the deal than it appears.

              • guy says:

                Even from that perspective, it strikes me as terribly unwise. It’s basically treating a derived statistic as a driving statistic; it assumes that the profit to share price ratio is an inherent property of Activision and the share price is generated from the profit and the ratio, when the ratio is instead generated from the profit and the share price. The ratio is only meaningful in that it reflects the logic investors are using when deciding how much a company is worth; in this case it most likely means that investors think Activision has better long-term prospects than King.com, and they’re going to reevaluate that based on the new purchase. There’s no way of telling what the new ratio will be. And if it were a magic number, they aren’t turning a profit this quarter because they bought King.com.

      • Loonyyy says:

        “Not paying tax on outside money isn’t all that big. ”

        You should go back over the article.

        As mentioned, Activision paid 3.6 billion in offshore assets, and it would have cost them around 1 billion to repatriate that. We are talking a lot of money, almost a third of the sum. To do what everyone else is doing, we’re talking 25% of the cost of Star Wars (It kills me to type that).

        That article explains to you, business-wise, stocks wise, why this works. The most important factor has never, ever been the products involved. That isn’t the world we live in, we haven’t lived in that world for decades. It’s stocks, prices, and the perception of their worth. Profit isn’t the most important factor, stock price is often far more important.

        We shouldn’t jump to the conclusion that businessmen and accountants are stupid, especially when our expertise is being entertained by videogames. We will often disagree with their decisions, but it’s very important to remember that they have very different priorities. It’s easy to dismiss this as stupid, or wrong, and do some armchair accounting, usually by appealing to what we feel is the absurdity of the price. To do so would be to be completely wilfully ignorant of what we’re talking about. At least the EA’s and Activisions of the world don’t care about the perspective of gamers when they’re disregarding them(Like here). Gamers don’t care about business, when they’re discussing business.

    • guy says:

      Admittedly, doing something stupid on the theory that investors are even stupider has proven a winning strategy.

    • Abnaxis says:

      So to paraphrase the article, it doesn’t matter how much King.com is actually work, on paper acquiring will increase Activision’s income on paper by 50% immediately, which translates into an immediate jump of 50% for their company valuation (a 12-billion dollar jump, which is even more ridiculous than the $6 billion price tag for King), and who gives a fuck if this is actually real because no stockholder looks more than next quarter into the future.

      In other words, screw making games or serving customers, this is how you really make mega-billions while contributing nothing useful to society

      • guy says:

        Well, it’s also assuming that the investors will decide to value King.com’s profits at the rate they presently value Activision and not the other way around.

        • Wide And Nerdy says:

          Even if they only value the increase roughly 40 percent as much, Activision breaks even (vs repatriating). Even I will admit its kind of ridiculous that this might work. I thought Shamus argument was rock solid.

          • guy says:

            I’m pretty sure Activision doesn’t actually get 100% of the profit when stock changes hands.

            • Abnaxis says:

              This is the part where I admit I don’t really understand how increasing a company’s valuation actually benefits the company itself.

              I mean, I see how it benefits investors, and how it benefits Chief Officers with stock options, but how does higher Activision stock price = more games being made?

              • guy says:

                Not entirely clear on that myself; I do know that it means that if the company opts to issue some more stock they can obviously sell it for more money, but I don’t know if the company itself benefits from the price going up. I guess it means they can spend less on salaries by offering more stock options, but beyond that I don’t know of anything of direct use.

                Of course, the stockholders obviously benefit from the price going up, and they do sort of own the company.

      • Bropocalypse says:

        Ah, got it, it’s a move to rob investors at best.

      • Starker says:

        “In other words, screw making games or serving customers, this is how you really make mega-billions while contributing nothing useful to society”

        Yup, that’s about it. Financial speculation FTW.

  9. Lanthanide says:

    “Blizzard of mobiles”

    Imagine waking up one morning, going outside and discovering massive drifts (piles) of cell phones blanketing your yard.

  10. Shamus, I find it interesting you mention the Popcap “tone” of mobile games, but not the disastrous fate that befell Popcap after it was bought by EA.

    • MrGuy says:

      Agree. Popcap is a really good point of comparison here.

      Popcap was successful independently (Bejeweled was their big hit). They were acquired by EA for about $650 million, which seemed like a massive chunk of change at the time in 2011 (which, you will note, is 1/10th of what Activision is spending here…) Popcap is still around, but they haven’t had a big hit in awhile.

      Paying massive premiums on the expectation that “their next hit” will make it worth your while is a strategy with bad historical precedent.

      • Shoeboxjeddy says:

        Popcap is behind a seemingly successful shooter franchise (Plants Vs Zombies on consoles is getting a sequel, therefore it must have made money) and a successful freemium game (Plants Vs Zombies 2 is still receiving regular updates, so it must be profitable). They also had a high profile console near-launch title in Peggle 2. I think they’re doing much better than many of their mobile contemporaries.

        • guy says:

          That’s an indication that they’re doing okay, not fantastically. They might be doing well enough to be a good investment, but probably not so well EA would have paid that much if they knew how it would go in advance.

          • Shoeboxjeddy says:

            Unlike a bunch of these other mobile devs who have completely burned out (Draw Something guys, Zynga) Popcap is riding high I’d say.

            • MrGuy says:

              Right. “The new Popcap” is probably the best case scenario for Activision’s investment here.

              Would EA say today their investment in Popcap ($650 million) was a good investment? Not clear. It’s not a complete bust, but do returns justify that price tag?

              And Activision’s paying 10x as much. Even if we assume the numbers said Popcap was a reasonable investment for EA, are Activion betting they’ll get 10x that return?

  11. EmmEnnEff says:

    Eh… Facebook bought WhatsApp for 20 billion dollars – at this point, what’s six billion for King?

    Seriously though, I assume that their userbase justifies the valuation.

    • That kind of capital expenditure also says they could afford to not be quite such huge jerks to their employees and devs.

    • Tizzy says:

      Someone on the Escapist mentioned that King’s research into what makes a game addictive might be a valuable asset.

      I don’t buy it. There is no evidence that they managed a particular breakthrough on that front (as evidenced by distinctive the lack of deluge of successful King games).

      But the data, on the other hand… That might be worth something. You user base is not something you own, but whatever you know about them is valuable, whether or not they stick around.

  12. Grenaid says:

    It’s funny, I think the established term “minigame” is closer than “casual.”

    I think they are described as casual more exactly when that means they can be picked up or dismissed casually (not gripping story or gameplay, lasts as long as a bathroom break.) The people who play them aren’t casual about it though.

  13. It is in the nature of a “casual” market (casual in the sense of interest in gaming in general, not in the sense of interest in a PARTICULAR game) that there’s no brand loyalty. These are not people who even notice who made the game that they’re playing any more than I recognize who made the shirt I’m wearing (because I’m totally casual about my clothing). Most of them pick out games the way I pick out clothes–by browsing. Once they hit on a game they may play it exhaustively, but two big hits from the same studio are an accidental proposition because a large mass of people who don’t follow gaming getting interested in the same game is accidental.

    Heck, most of the people who play big AAA titles don’t follow gaming to any appreciable degree.

    • Daimbert says:

      I disagree. The real hallmark of casual gaming — and pretty much casual anything — is the amount of time spent directly and deeply immersed in it. With respect to this point, it means that casual gamers don’t spend a lot of time researching things before they buy it. On the one hand, that does mean that they don’t have that much brand loyalty because they have less name recognition — they aren’t going to buy the brands that everyone says are cool — but it DOES mean that for the name recognition they have it will make a stronger impact. For example, it’s perfectly reasonable for a casual gamer to notice that they’ve bought a couple of Atlus games that they really, really like, and so grab an Atlus game from the shelf because, hey, they liked it the last time. It’s also likely that they will buy a Sony Playstation console because they’ve had that before rather than grab something else off the shelf. They don’t notice names as much, but when they DO notice names the impact is far more massive than it is for non-casual gamers.

      With respect to this purchase, if in order to play Candy Crush you have to go to King.com, then any new game that gets put there will have a huge advantage with casual gamers, because they are definitely going to look there and aren’t likely to look on other sites until someone tells them to. They just need to get them out there before the interest dies down.

      • Loonyyy says:

        You don’t have to go to King.com.

        They’re mobile games.

        Do we now call your lack of research casual?

        But seriously, making these distinctions between “Casual” and “Hardcore” gamers is kind of pointless and self-congratulatory. Your definition only matters to you, and is only designed to either praise yourself, or insult someone else.

        I play a hell of a lot of games, and I’ve sunk some time into casual games. Overwhelmingly, mobile games, which I’ll be using as my benchmark for casual games, are made differently. They have a different style of gameplay. To get anything out of Mass Effect, Call of Duty, Counter Strike, Skyrim, Fallout, you have to make a serious investment in time, for each session, and over time. Completing these games takes between 6 and hundreds of hours, or they’re never ending. Each session takes a fair time investment, you can’t just play 5 minutes of them.

        Casual games are made to fill a much shorter time space. Angry Birds (And it’s variants), Fruit Ninja, Candy Crush, Peggle, Bejewelled, all play over a relatively short time. Or they even enforce short rounds with timers. Games like Farmville, Cityville, or any of the millions of variants which use a bunch of timers don’t take long to play, you utilise all your options very quickly. They try to get you to come back.

        If we want to make real distinctions, I think as gamers, it would behoove us to actually look at the games (And maybe do a little research into games occassionally), rather than playing at the game of labeling people and creating in and out groups.

        Activision will now control in game advertising in King Games, and I’m sure that we’ll see some ads for their other titles there, but I don’t expect we’re going to see a massive transfer from the casual to core titles. A lot of core games already mess around with casual games, and they already know about the titles, and I think it’s unlikely that you’re going to sell someone playing on their phone on buying a new console to buy a game, or work out if their computer is capable of running a game, and then pick it up for $100 AU.

  14. Cordance says:

    I believe it was Tested.com where the guys threw out the idea that it is actually a market grab. Paying 6 billion to get advertising to 550 million people willing to play a game (somewhat targeted rather than a TV add). Including suckers (whales) whom sink a lot of cash into something that is marketed to them as free now pay later (DLC). It makes a lot more sense than looking just at Candy Crush. You only need to convince 1% of that to buy a AAA title to shift an extra 5.5 million units on your next game (assuming no overlap from people already buying the game). Those kind of numbers are nothing to be sneezed at.

    Not that Im saying it was a good buy just a lot easier to see why they accepted such stupid numbers in the deal.

    • Trix2000 says:

      Selling 5.5 million copies (at, say, $60 per) versus $6 BILLION is still a pretty substantial gap to cover, though. It’s a few orders of magnitude more money, which is much of why people are concerned about that number.

      Even at $60 per game, you’d need 100 million purchases… in a market where AAAs are happy to get 5-10 million. I know that’s not the whole story (King’s still going to make some profit on its own regardless, and I’m not considering the extra operating costs/profit margins) but it’s hard to expect Activision to make an actual profit on this deal in the long run… at least not without something completely unexpected.

  15. The Mich says:

    This acquisition originally didn’t make sense to me, especially with that “million dollars a day” figure, but then I found out that maybe that estimate is incorrect? On this article of four days ago on the Financial Times, it says that “last year, it drove revenues of $2.2bn” for King Digital, and on this one they mention “$1.88 billion in revenue in 2013 along with $1.98 billion in gross bookings”. That is way more than a million a day! So it may be more likely that Activision is working on the (probably still wrong) assumption that Candy Crush is going to perform just as well in the next 2 – 3 years.

    • Daimbert says:

      It might be the distinction between revenue and profit. They could bring in that much revenue and after expenses and the like only “clear” a million a day.

      That being said, that’s NOT a good ratio if true …

      • guy says:

        Apparently their total profit over the last year was ~500 million across a number of games of which Candy Crush is the largest. That puts them at a perfectly respectable 20-25% profit margin. Mind, their profitability has begun falling.

        At the merger, Blizzard had a staggering 49% profit margin, but I am not certain they aren’t using the Philosopher’s Stone.

        • Trix2000 says:

          That does make it more reasonable… from a certain perspective. But that still relies on them maintaining (or exceeding) profitability for 5-10 years or more, when precedent/trends would tell us they’re probably approaching the downturn.

          I do feel like we might not know every detail… that perhaps there’s some other thing that will make them more money off the deal than we know… but with that number ($6 billion!) being so high it starts to strain credibility for me.

  16. wswordsmen says:

    Just to let you know you are wrong about the break even time for Activision. It is actually much longer than that.

    If we assume inflation is 2% per year (fed target for inflation) it would mean every day inflation reduces the value of a dollar by .02/365 or .00548. At a fixed $1 million per day income the inflation will increase the discounted pay back period to ~19.5 years. If I owned Activision stock I would seriously sue over this deal it is that bad. Of course it isn’t even that good, because as you point out there is no way for it to keep the cash flow that steady over such a long period of time.

  17. Chris says:

    How about “Light Games” or some equivalent? That mostly seems to be the defining aspect of the mobile/casual genre. Light on mechanics and tone.

  18. Decius says:

    Everybody realizes that if you want the talent, it’s probably cheaper to pay to hire the talent than buy the company, right?

    Especially since buying the company doesn’t keep the talent from quitting, so if they are rational actors you have to pay to hire them anyway.

    • guy says:

      That might actually depend; lots of places have a noncompete clause in their employment contract. The extent and enforcability of those varies, but they’ll often more-or-less prevent people from going to work for another company to do the exact same job for some period of time.

      But the primary reason to buy a company is to snag its IP.

      • Richard says:

        Or its customers.

        It’s reasonable to assume that the majority of current customers will remain customers, at least for a few years.

        I really do not think this pricetag is possible to justify – it’s clearly going to get written off.

        If they hadn’t borrowed any of that money, the payback period would still be ridiculously long.
        Even if they somehow double the King division’s revenue with no increase in costs (hah!) it’s still a decade or so.

        Given that they borrowed much of it, it’s really even longer than that.

        There are any number of ways to make far more money with the same cash outlay – heck, buying Government bonds has a greater yield.

        And that’s before looking at the detail – 40% of King’s revenue is from the original Candy Crush Saga, and they’ve not had any other hits.

        • guy says:

          Admittedly, this very moment is an excellent time to borrow money; the Federal Reserve has zeroed out the base interest rate but may opt to raise it shortly. Private loan interest rates generally parallel the base interest rate, so the loans will be lower-interest now than almost any point in the future. They’ve likely got a low-single-digit or even under 1% interest rate and it probably won’t extend the repayment period by much.

      • Decius says:

        Sometimes the price of hiring someone is paid for with lawyers.

  19. Loonyyy says:

    I don’t quite agree.

    I know conventional wisdom says that game publishers are stupid, but that’s not quite true. They’re businessmen who are creatively risk averse. Here, the story is being listed as “Activision buys Candy Crush (Or King, developer of CCS)”. That’s not quite the whole of it. King already has a long list of IPs. CCS is the breakout, but others there have a certain level of success. And most of them are rip-offs or “similar to”s.

    It’s very much a case of point 2. The audience for these games is huge, and they control the advertising there, and can prioritise their other products. And I don’t think it’s an unlikely bet, considering both companies, that we’re going to see more CCS stuff getting pushed out.

    And yeah, Activision can afford it. This is a small fry to them.

    For them, it represents a diversification of interests and acquiring popular, profitable IP.

    I do think you raise a very good point, for that sum, they could have acquired a lot of much, much smaller companies. Which would be better diversification, and better investment in IP. There’s two main problems I see there though-a lot of smaller developers aren’t going to be Activision material. As much as I’d like to see a lot of indie devs with an Activision budget, I don’t think they’re interested in the restrictions of Activision. Activision is going to want to own their IP, and many indie devs are going to want to retain that. And additionally, Activision are, as I said, creatively risk averse. Risking on lower-profile, new IP, doesn’t sound like getting in on something popular. It is, taking a risk on developing something new.

    Obviously, I’d rather they picked up smaller devs, and worked on that, but I don’t think we’d see that from a company like Activision.

    And these comparisons to the price of Star Wars are getting ridiculous. Can we please stop this? Games aren’t movies-games are very often more profitable, bigger business than movies. We don’t need to prostrate ourselves before the might of film. Star Wars, as a property, requires a massive investment in film or animation to be profitable. It’s not the sure money thing people are making out, people will shell out for the newest Star Wars stuff, but it’s going to have to BE Star Wars, and that’s going to take major film money. Games and books bring in some money, but it’s the films that people are after. Look at the interest that Battlefront has managed to gain, by combining interest in an existing IP, and timing the release to coincide with the new film. And we can’t pretend that Star Wars coming out from under the shadow of Lucas is really that bad a thing. There’s an awful lot of hate still floating around for the prequels. If they’re really as bad as people say (They aren’t), then surely Disney OVERpaid for Star Wars?

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