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Acquiring King Was Worth It for Activision Blizzard

IMAGE SOURCE: GETTY IMAGES.

Activision Blizzard (NASDAQ: ATVI) is a company known to strike when the opportunity arises. That's exactly what it did with the acquisition of King Digital Entertainment -- the mobile-game producing company responsible for Candy Crush. Activision payed $5.9 billion for the company on Feb. 23.

However, a company worth $30 billion shelling out $6 billion in acquisition fees raises a question: Is King worth the price tag?

Monetizing Candy Crush

The Wall Street Journal reports that in the first quarter of 2016, King produced 23% of Activision's adjusted revenue. Given that Activision reported $908 million in revenue, King contributed approximately $200 million. If this trend continued, King would provide approximately $800 million in revenue each year.

The acquisition could easily appear too expensive from this angle. It'd take approximately seven years for King's revenue to equal its acquisition costs, without considering expenses that must be factored out.

But this quarter's numbers don't consider how King can further monetize. One strong possibility: implementing ads. Currently, King's games are free to play. The company makes money through users purchasing in-game content. With almost 500 million monthly active users, however, King could earn approximately $1 billion in yearly revenue if it could squeeze $2 out of every player in ad revenue. This number isn't unreasonable, either. A chart posted in Business Insider revealed that many large companies earn at least $2 per user in ads -- if not as much as $8.

Utilizing ads is also something King is open to implementing. Riccardo Zacconi, King's CEO,  mentioned the possibility in a May earnings call. While he clarifies that King "first and foremost" prioritizes a great player experience, he says the mobile-game maker's currently experimenting with ads.

"We do believe that advertising could be a meaningful revenue stream for King in the long term," Zacconi says.

So if King proceeds to develop and implement ads, it can squeeze much more juice out of Candy Crush in the long term. It also has another huge monetization potential: creating new games.

King of the Activision Blizzard franchise castle 

One of King's largest downfalls was its inability to create successful new games after Candy Crush. That's part of Activision's intuition for acquiring the company. Now King has access to the video-game brands Activision has spent years creating and cultivating, and the former plans on producing content based on the latter's brands.

"We have now new opportunities to create even greater games for our massive player network by combining Activision Blizzard's top-performing IPs on console and PC with our mobile expertise," Zacconi said in the May conference call. "We have started conversations with both Activision and Blizzard to explore those opportunities."

King's producing a successful game could score serious profits. In 2013, a year after the Candy Crush hype began, the game earned the company $1.54 billion in revenue. With popular video games such as Call of Duty, World of Warcraft, and Hearthstone now at the company's fingertips, there's potential to produce multiple billion-dollar revenue generators. 

Plus, Nintendo's (NASDAQOTH: NTDOY) smash hit Pokemon Go indicates there's interest in the mobile-gaming market for renowned brands. The game has already earned $35 million in revenue and 30 million downloads, says intelligence firm Sensor Tower, according to VentureBeat.

With the 15 current top-grossing mobile games earning between around $105,000 and $1.86 million in revenue each day, according to Think Gaming, popular mobile games have potential to bring in large sums of money. Plus, some high-revenue generators still bring in cash years later. Game of War: Fire Age was released on July 25, 2013, and still brings in $1.16 million each day. Over four years after release, King's own Candy Crush Saga still brings in $653,287 of daily revenue. Combining this long-term revenue-generation model, a successful mobile-game producer, and a plethora of renowned brands equals the potential to generate hundreds of thousands -- even millions -- of dollars each day in the long term.

The proof is in the potential

King's current value to Activision is hard to put a definitive number on, but relying solely on the current quarter's revenue mitigates the billions of dollars the Candy Crush creator has the potential to provide over the business' lifetime. And with the mobile-gaming industry expected to grow by $15.6 billion between now and 2019, it's a great time for Activision to have King in its pocket. 

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Michael Schramm has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.