Since September, the share price of Ubisoft, a major France triple-A game manufacturer, has fallen continuously, and its current market value is only about 1.48 billion euros (about 11.6 billion yuan), which is equivalent to about one-tenth of Mihayou. In fact, two years ago, Take-Two, another 3A company, also experienced a big plunge in its stock price.

In May 2022, Take-Two announced the acquisition of mobile game maker Zynga. Take-Two's stock price fell 13% on the same day, but it has its own mobile game publisher.

It's worth mentioning that the deal happened at a time when the mobile gaming industry ended its 21% CAGR from 2015 to 2021, and in the following two years, the industry began to enter a downward channel.

In 2024, mobile games are likely to usher in a new upward development, and foreign media Naavik gave an in-depth interpretation of the transaction and the changes in the company's operation after the merger, as well as Take-Two's future positioning in the field of mobile games.

Big bet: The strategic considerations and market risks behind the acquisition of Zynga

In 2022, Take-Two agreed to acquire Zynga for $12.7 billion in cash and stock, a 64% premium to its closing price at the time. At the time, mobile gaming was still the fastest-growing gaming segment, and Take-Two was looking to gain a foothold in the mobile gaming market with its relatively small size, and Zynga was seen as an ideal acquisition target.

The combined company becomes the world's second-largest pure-play company. In addition to the operational efficiency gains from the increased scale, Take-Two believes that the company will have significant growth opportunities by bringing its well-known console game IP to the mobile platform. Take-Two expects to realize $100 million in cost synergies over the first two years after the merger, with potential revenue synergies of $500 million over the long term. Mobile gaming has become an important market for the industry, and this deal allows Take-Two to better adapt to the future market landscape.

From a business perspective, Zynga's online service-based games provide Take-Two with a stable and complementary revenue stream that does not rely on cyclicality compared to traditional buyout games. With this acquisition, Take-Two expects to increase its share of mobile game bookings from approximately 10% to 50%, and its share of continuous player engagement (RCS) revenue from 65% to 80%. Zynga's CEO, Frank Gibeau, will oversee the day-to-day operations of the mobile game, while Take-Two's mobile division, T2 Mobile Games, will continue to operate as a brand under Zynga's umbrella. The two companies will be mutually beneficial in terms of resources and operations, with Zynga able to accelerate growth with Take-Two's scaled marketing and distribution platform, while Take-Two will be able to leverage Zynga's expertise in online operations and user monetization.

Although Take-Two's stock price fell 13% on the day it announced its acquisition of Zynga, the acquisition is still seen as a reasonable expansion into the mobile space, although the deal itself has its own problems. From a financial standpoint, Take-Two is a consistently profitable, cash-flow company, while Zynga has posted a net loss in nine of the last 10 quarters. Zynga's share price fell more than 40% year-over-year in 2021, which also raised concerns about high-premium trading.

From a strategic point of view, there are also some misgivings. First, it's unclear how much of a cross-sell synergy will be due to different audiences, with Take-Two's games primarily targeting heavy and mid-life players, while Zynga's titles are dominated by casual and hyper-casual games. Secondly, adapting the IP of triple-A games to mobile platforms also faces significant challenges, and the industry is well aware of this. Therefore, the exact source of revenue synergies is not yet known.

Survive in turmoil and profit in change

In the two years following the acquisition, the gaming industry faced a number of challenges. From the gradual decline in demand during the pandemic to the subsequent inflationary pressures, consumers are spending less on entertainment products such as games. In addition, in April 2021, Apple launched an "app privacy" policy, which also led to an increase in user acquisition costs.

In such a downturn, Take-Two faced difficulties in adjusting its business after digesting a large acquisition of Zynga. Since the completion of the acquisition, the combined business has posted nine consecutive quarters of losses, with the latest fiscal quarter ending in June 2024. Although the company has increased its budget for GTA VI, which will launch at the end of 2025, the resource structure is still too bloated to adapt to the new environment. As a result, Take-Two needed to optimize its mobile gaming strategy and reshape its direction and priorities.

First, optimize its mobile portfolio and revisit the hyper-casual space. While hyper-casual games are still one of the mainstreams of mobile gaming, the IDFA changes have affected this business model. In response to these advertising headwinds, Take-Two began transforming hyper-casual games into hybrid monetization—games that incorporate online services, updates, and in-game events to encourage in-app purchases to drive engagement.

Zynga's subsidiary, Rollic, is a case in point. Its most successful game, Twisted Tangle, started out as a typical hyper-casual game: simple puzzle gameplay coupled with strong downloads and limited profitability. But by adding a variety of levels, boosters, and visual reward mechanics, Twisted Tangle creates a more challenging and rewarding gaming experience that successfully drives players to pay.

The chart below shows Rollic's downloads and revenue performance (data from data.ai). Despite the steady pace of downloads, Twisted Tangle's revenue continued to grow strongly, indicating a growing willingness to pay and monetization across its core user base.

Creating games with longer life cycles isn't a new challenge for Zynga companies. Peak Games, the largest mobile game developer owned by Take-Two, excels in this regard. According to data.ai data, Peak Games' flagship product, Toon Blast, has seen continued annual growth since mid-2023 with new in-game events and regular updates, and now accounts for half of Take-Two's total app store revenue.

Peak Games' latest title, Match Factory!, also had a strong performance, with quarterly net bookings up 50% year-over-year.

While the overall business is still cutting costs, the team continues to invest significant marketing resources in user acquisition for Match Factory! and maintain aggressive marketing efforts.

The strategy of emphasizing profitability has forced Take-Two to make layoffs and cut some long-term projects. In April 2024, the company announced its third cost reduction plan in two years, planning to lay off about 5% of its workforce by the end of the year, and canceled some projects under development.

As the company was developing a large number of games at the same time, many mobile studios were affected, and the company began to focus its resources on the most promising projects and abandoned some others. For example, the profitable Playdots game was ported to Zynga management, but its original development team was eliminated. In this way, companies can allocate resources more efficiently and focus on the games with the most potential for success, increasing overall profitability.

While pursuing internal change, Take-Two also actively seeks to collaborate with external well-known IPs to reach a wider audience and reduce user acquisition costs. In 2024, the company released key mobile games NFL 2K Playmakers, Star Wars: Galaxy Hunter, and Game of Thrones: Legends, all of which benefited from external IP collaborations. In addition, Rollic also announced a partnership with Mattel to launch a "Barbie"-themed mobile game later this year.

Despite some success, Take-Two has put on hold its long-term goal of moving its triple-A gaming IP to mobile platforms. Management noted that while this is the company's long-term vision, it requires significant upfront investment and a high risk of failure. At present, most of the most popular games on mobile platforms are native mobile games, which brings great challenges to the mobile of traditional IPs.

At the same time, companies have found some shortcuts to improve profitability. For example, Take-Two began selling virtual currency directly to players through its own platform, bypassing the high cuts from Apple's and Google's app stores, a move that immediately boosted profits. The company plans to expand this direct-to-consumer model to more mobile games in the future. In addition, Take-Two has successfully introduced advertising features in some games that would otherwise have no ads, and launched innovative products such as paid skip ads, which has further increased revenue.

The mobile business rebounded, and "hybrid monetization" showed the power of revenue growth

Fast forward to the latest fiscal quarter in June 2024, Take-Two's mobile business exceeded management expectations, with revenue up 6% year-over-year, outpacing the console and PC businesses.

The chart below also shows that Take-Two's mobile in-app purchases (IAPs) have performed strongly since the end of 2023, far outpacing the download growth, reflecting the high level of engagement and monetization efficiency of core players.

Despite a decline in hyper-casual performance and a 36% year-over-year decline in ad revenue, Toon Blast and Match Factory! The strong growth of the mobile business was more than enough to compensate for the decline in the mobile business as a whole. Zynga's performance is largely in line with the solid trend across the mobile industry due to its market leadership, but the company's specific strategy has proven to be effective, especially in the top games.

In future forecasts, mobile is expected to continue to outperform, with double-digit growth expected for RCS (Persistent Player Spending).

After a rough period, the gaming industry seems to be stabilizing in the first half of 2024. At the macro level, consumer spending has improved, inflationary pressures have eased, and global gaming market penetration continues to increase.

Strauss Zelnick, CEO of Take-Two, said the mobile division is already profitable and the company plans to invest further to boost growth. As the company expands, the efficiency of the mobile business has improved, and the foundation for development has become more solid. Management reaffirmed its expectation for high-single-digit growth in the 2025 fiscal year and set out the goal of sequential growth in the 2026 and 2027 fiscal years. While GTA VI will be the main driver, mobile will remain a key factor.

Looking back, Take-Two's acquisition of Zynga doesn't seem to have come at a good time, and the current share price is still below what it was at when the deal was announced. However, looking ahead, the mobile industry remains a strategic focus for Take-Two. In the short term, the company will need to rely on Zynga to maintain stable profitability while supporting the release of GTA VI next fall. With the resumption of mobile business growth and the support of strong multi-platform gaming IPs, Take-Two has gradually overcome the challenges within the industry.

In the coming quarters, mobile growth and cost-cutting initiatives will continue to drive the company's margins and profitability.

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