The Developer Of Candy Crush Seeking To Expand Despite Recent Setbacks

Jun.24.14 | About: King Digital (KING)

Summary

King Digital Entertainment is the largest developer of games on Facebook.

Despite having a disappointing IPO, it looks at expanding its revenue potential through focusing on alternatives to Candy Crush.

It is also planning to diversify its operations by tapping the market of China through a partnership with Tencent.

King Digital Entertainment (BATS:KING), which is the largest game developer on Facebook (NASDAQ:FB), and owner of the popular game Candy Crush recently had its IPO in February 2014. This was the largest IPO for any computer game company after Zynga Inc (NASDAQ:ZNGA) went public in 2011, however the IPO was a big disappointment and the stock is currently trading at $16.86 after being priced at $22.50 at its IPO. The stock did recover in May and passed the $19 mark, however it dwindled down again. The company is thinking of carrying out a number of measures to improve its standing in the market and to diversify its operations.

The most important step is to reduce its dependence on Candy Crush which contributes around 80% of its revenue and to try to come up with newer and more engaging games. Secondly, it has come into an agreement with the internet firm Tencent (OTCPK:TCEHY) in order to launch a local version of Candy Crush all over China, which can play an important part in raising its profit potential.

Despite the fact that Candy Crush had a record number of sales in 2013, and topped the charts as the most downloaded game, its gross bookings have started to show a decrease as users seek other alternatives, and newer games. King's total gross booking have shown an increase of 1 percent in the first quarter of 2014 as compared to 2013, but the bookings for Candy Crush have decreased and now only account for 67% of the total gross bookings as compared to 78% in the last quarter.

It is being speculated that unless King comes up with more hits in the gaming industry, it might face the same fate as Rovio did in the case of Angry Birds, and Zynga in the case of its "Ville" franchises. The two main alternatives to Candy Crush are Pet Rescue Saga and Farm Heroes Saga, with 129 million and 59 million daily game plays as of 2013.

Britain's most valuable gaming company with a net worth estimated at around $5 billion now plans to get rid of their one hit wonder impression and work on more alternatives. Recently, their game Farm Heroes Saga has been doing well and has helped them to achieve a better than expected first quarter revenue figure of $606 Million in 2014, which was three times better than that of 2013, but a little less than the previous quarter.

King's has expanded from one game studio to six now in only 24 months, and two of these studios have produced Pet Rescue Saga, and Farm Heroes Saga, which are the most popular games among users after Candy Crush. Therefore, through expansion of its studios and focusing more on innovation, King can further improve popular gaming franchises which can keep its popularity high with the users.

King Entertainment seeks to launch its game in Tencent's Mobile QQ and Weixin game platforms. The Weixin platform had over 225 million active users in January 2014, which shows the extent of its popularity among the Chinese population. Both these platforms of Tencent are popular with the smartphone users in China, and this perfectly aligns with the business model of King which generates 73% of its gross bookings from mobile audience. The news alone of the collaboration between Tencent and King, made King's stock go up by 3%. Tencent has the largest mobile social network in China and is China's largest Internet firm.

This, coupled with the fact that China has the largest number of Internet users in the world, estimated at around 642 million, shows how much the company can gain in the region. Making the most popular game of 2013, available to the largest internet population in the world through the most frequently used mobile platform is speculated to generate massive revenues for King Entertainment in the future. The popularity of the game in the region has already been proved, with King's earlier launches in South Korea and Japan, where its most popular game Candy Crush has featured in the top 10 highest grossing games in the country.

Tencent itself has a very successful gaming development experience, with worldwide famous games like League of Legends and CrossFire earning $624 million and $1 Billion respectively. It also holds a significant portion of Activision (NASDAQ:ATVI) which is the developer of one of the most popular games in the gaming industry, "Call of Duty." Therefore, the expansion into China would help King to expand its business outside of North America and Western Europe, and help it to attract more customers, as well as to provide it with potential opportunities to collaborate with other game developers and come up with more popular hits in the gaming industry.

More Future Prospects

Recently, there has been a growing trend of smartphone users towards casual games, and according to one estimate, out of the top 100 games installed on iOS platform 67 belong to the genre of "Casual Games." If King manages to fight away the monotony in its games, it stands a good chance to make further inroads in the gaming industry. King continues launching a new game on its mobile and social media platforms once every six months since 2011, and it has expanded itself on gaming platforms. Apart from Google Play, App Store and Facebook, King's games have now started featuring on Amazon Appstore and Kakao talk which is a mobile messenger with over 100 million users.

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