One of the things management at Activision Blizzard (NASDAQ: ATVI) has touted about its ability to grow revenue is its massive user base. More than 300 million people play its games every month, and players have consistently spent about 50 minutes per day in its games over the last few years. This is, potentially, a very lucrative asset, because the company has direct control over every aspect of its intellectual property, which allows Activision Blizzard to pursue whatever means it can to monetize its gaming audience.
We've seen the company push into esports and consumer products to develop additional revenue streams besides game sales. But this year, in-game advertising has started to emerge as a real growth driver. It's expected to generate $100 million in net bookings (or non- GAAP revenue) by the end of 2019, and it's growing fast.
Activision's King division currently has dozens of job openings in advertising, which illustrates the investment the company is making in this initiative. Here's what you need to know.
IMAGE SOURCE: GETTY IMAGES.
Unlocking the real value in King's mobile games
Over the last few years, Activision Blizzard's King mobile game segment has been testing in-game ads for Candy Crush . Activision acquired King Digital Entertainment in 2016 for $5.9 billion, and it's becoming clear that the mobile game maker's ability to make money from ads was likely a key factor in the decision to buy King.
King was interested in advertising long before Activision came calling. King was testing ads through 2013, before the company cancelled those plans in favor of ad-free games to compete with other titles at the time. But since Activision acquired the Candy Crush maker, King has built a sophisticated ad platform to allow advertisers to get their brands in front of the 258 million users who play Bubble Witch and Candy Crush every month.
A few years ago, analysts pegged King's advertising opportunity at $500 million in annual revenue, but that was when King had more than 400 million monthly active users (MAUs). King's user base has dropped significantly from those highs over the last three years, as less-engaged players leave the base. The important thing is that revenue per user increased by 13% in 2018, despite lower King segment MAUs. This means players are still engaged enough with King's mobile titles to make advertising a lucrative opportunity.
King is already highly profitable without ad revenue
King has been a very profitable addition to Activision Blizzard. Between 2016 and 2018, King contributed a cumulative total of $1.987 billion in operating income, as you can see in the table.
|King Segment Operating Results|
|Metric||2016||2017||2018||TTM Through Q2 2019|
|Revenue||$1.586 billion||$1.998 billion||$2.086 billion||$2.078 billion|
|Operating income||$537 million||$700 million||$750 million||$739 million|
Data source: Activision Blizzard. TTM = Trailing 12 months.
In just three years, King has already paid back nearly half of Activision's purchase price, and that's without advertising revenue. Activision Blizzard CEO Bobby Kotick has made some incredible value-enhancing deals over the last decade, starting with the Blizzard merger in 2008. But the King deal could prove to be the biggest game-changer of them all.
The value that King brings to the whole company won't stop with in-game ads in Candy Crush . On the recent conference call, Kotick stated, "With the foundation for advertising initiatives now in place, we're actively exploring opportunities to leverage these capabilities across other parts of the business, especially with our esports content."
Esports is a significant money-making opportunity, with Goldman Sachs estimating the market to triple in size to about $3 billion by 2022. Brand investment for advertising and sponsorship makes up most of the revenue in the esports industry, so it's good to see Activision's flagship esports events gaining momentum. Activision Blizzard has seen growth in viewership year over year for Overwatch League and is seeing growth in Call of Duty esports, too. Major brands recently joined as sponsors for Overwatch League, including Anheuser-Busch InBev and Coca-Cola . While those are impressive accomplishments, it's just one piece of the long-term strategy to make advertising a significant revenue driver.
Why advertising in video games is a big deal
Some investors may wonder if in-game ads would disrupt the gaming experience for players and suppress player engagement.
This is where the advertising opportunity is so huge in video games. For traditional media, ads can be a nuisance. It's one thing that explains the phenomenal success of Netflix . You pay a small fee each month for the right to watch ad-free TV shows, and millions of consumers love it.
Video games are unique in that advertising can actually deepen player engagement. For example, the ad products that King has been testing are known as rewarded videos. Instead of asking players to spend money on in-app purchases to unlock the next level, players can watch a short video ad in exchange for an in-game reward. It's clever, and most importantly, players like it.
If King can generate half a billion from in-game ads, imagine what this opportunity could be as Activision expands advertising to other franchises, perhaps the upcoming Call of Duty Mobile . We're starting to see the tremendous value Kotick saw in King when he dropped nearly $6 billion on the Stockholm-based mobile game maker.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard and Netflix. The Motley Fool recommends Anheuser-Busch InBev NV. The Motley Fool has a disclosure policy .
This article was originally published on Fool.com