Take-Two acquired Zynga a little over two years ago, combining a renowned console and PC game developer with a market-leading mobile game publisher.

When the deal was announced in January 2022, the total mobile gaming industry had just capped off an impressive 21% compounded annual growth rate from 2015-2021. However, in the ensuing two years, mobile gaming saw meaningful industry headwinds and posted consecutive annual declines for the first time since smartphone adoption.

With the mobile gaming industry potentially reaccelerating in 2024, we wanted to reflect on this transaction, the operational changes made to the combined company, and how Take-Two is positioned in mobile gaming going forward.

Revisiting the Transaction

Take-Two agreed to acquire Zynga for $12.7B in cash and stock, reflecting a substantial 64% premium to the closing share price. At the time, mobile was the fastest growing segment in gaming, and Take-Two was subscale, relative to its peers. The company wanted to establish a foothold in mobile, and Zynga was profiled as an ideal target.

The combined company would be the second-largest pure play gaming company in the world, and along with operating efficiencies from simply being a more scaled business, Take-Two believed it saw meaningful growth opportunities by bringing its iconic IP to mobile platforms. The company identified $100M of cost synergies achievable within the first two years and up to $500M potential revenue synergies in the longer term. Mobile had emerged as a key market for the gaming industry, and this transaction positioned Take-Two to match that future landscape.

From a business perspective, Zynga’s portfolio of live service games offered a complementary revenue stream that was less cyclical than selling traditional console and PC games. The acquisition would increase Take-Two’s mobile bookings from about 10% to approximately 50% of total and recurrent customer spending (RCS) revenue from about 65% to about 80% of total RCS. The well-respected Zynga CEO and industry veteran Frank Gibeau would oversee the day-to-day mobile gaming operations, while T2 Mobile Games would operate as a label under the Zynga brand. The two companies would each benefit from sharing resources and operational know-how. Zynga could accelerate growth with Take-Two’s scaled marketing and distribution platform, while Take-Two could leverage Zynga’s expertise in live service operations and user monetization.

On the day of the deal’s announcement, Take-Two’s stock traded down 13%. Acquiring Zynga was a logical expansion into mobile gaming, but the transaction came with questions. Financially, Take-Two was a consistently profitable and cash flow generative business, while Zynga had just posted net losses in nine of its 10 prior quarters. Zynga’s stock was under significant pressure, declining over 40% year-over-year in 2021 and raising concerns about the high premium being paid.

There were also concerns around the strategic rationale. First, it was unclear how much cross-selling synergy there was given the separate audiences; Take-Two primarily developed games for hardcore and midcore gamers, whereas Zynga’s were casual and hypercasual. Finally, the industry was well aware that transitioning AAA IP to mobile faced fundamental challenges. Until then, it was unclear where else revenue synergies would come from.

How Have Things Gone?

In the two years following the acquisition, the gaming industry has faced numerous challenges. From the roll-off of pandemic-driven demand to inflationary pressures on consumers, spending has declined for discretionary products like video games. Additionally, Apple’s introduction of App Tracking Transparency in April 2021 allowed users to restrict the sharing of their IDFA, a unique user identifier for advertisers that tracks activity across apps. The overwhelming majority of Apple users chose to opt-out of sharing, making targeted advertising less efficient and user acquisition more costly.

Digesting a sizable acquisition in Zynga while simultaneously rightsizing the business to a depressed mobile gaming environment has proved difficult. Since closing the acquisition, the consolidated business has posted nine consecutive quarters of net losses leading up to the most recent fiscal quarter ending in June 2024. Some increased costs were expected as the company was ramping up for the launch of GTA VI in late 2025, but even so, it was clear the company had a bloated and unsustainable cost structure for this new environment. As part of this corporate rightsizing, the company would need to reshape its mobile gaming thesis and priorities. 

First, the company needed to optimize its mobile portfolio and rethink its hypercasual offerings. While hypercasual remained a core genre within mobile gaming, the business model was turned upside down by Apple’s IDFA changes. To offset these advertising headwinds, Take-Two began shifting its hypercasual efforts into a "hybridcasual" direction: games which typically have live services, updates, and other in-game events that drive in-app purchases and create more player engagement.

These efforts could be noted at Rollic, a hypercasual mobile publisher that operated as a Zynga subsidiary. The company’s top hit today, Twisted Tangle, started as a typical hypercasual game — straightforward puzzle gameplay, strong downloads, but weak monetization. However, by implementing more levels with varying difficulties, adding boosters and blockers, and providing aesthetic upgrades tied to level progression, Twisted Tangle was able to create more challenging and rewarding gameplay that made in-game progression more fulfilling to the player.

In the below charts showing Rollic downloads and revenue (according to data.ai), Twisted Tangle earnings have remained incredibly strong even though downloads have leveled off, suggesting solid monetization across the ongoing core player base.

Of course, building longer lifecycle games isn’t new for most of Zynga’s portfolio. Peak Games, now Take-Two’s largest mobile contributor, is making its mark here. Its top game, Toon Blast, has seen consistent year-over-year growth going back to mid-2023 through the addition of new in-game events and updates, and it now represents roughly half of Take-Two’s app store revenue, according to data.ai.

Peak’s recently launched Match Factory! is similarly off to a strong start with 50% net positive bookings growth quarter-over-quarter. The team continues to aggressively ramp marketing support on user acquisition for Match Factory!, despite the broader business remaining in cost-cutting mode.

Of course, the emphasis on profitability has meant Take-Two as a whole needed to downsize and cut long-shot projects. In April 2024, the company announced its third cost-cutting program in two years, laying off approximately 5% of its employees by year end and eliminating several projects in development. Many of the company’s mobile studios were impacted by these layoffs, given the high volume of games in the pipeline. The company went studio by studio to identify the titles with the highest potential to focus on, while deprioritizing the others. In some instances, such as with Playdots, the profitable games were ported over to be operated by Zynga, while the full team was laid off. By concentrating their efforts in the mobile portfolio, the company could prioritize spending for its most successful games and drive profitability.

In addition to internal changes, Take-Two has been seeking external IP partnership opportunities to reach a wider audience and provide user acquisition advantages. The company’s biggest mobile releases for 2024 are NFL 2K Playmakers, Star Wars: Hunters, and Game of Thrones: Legends, all of which share this partnership approach. At Rollic, the company recently announced a partnership with Mattel to release a Barbie mobile game later this year.

Despite these brand-focused initiatives, the company has put a pause on its original goal of bringing its own AAA IP to mobile. Management has said this remains a long-term vision, but it would require substantial upfront investment, and it still comes with a meaningful risk of failing. The biggest mobile hits tend to be mobile-native, so bringing legacy IP to mobile has proven to be incredibly challenging.

In the meantime, there were lower hanging fruits to drive profitability. One of the company’s more successful initiatives has been leveraging Take Two’s direct-to-consumer platform for mobile games, which lets customers purchase in-game virtual currency directly from web stores. As a result of avoiding the high Apple or Google app store fees, the immediate margin accretion from direct-to-consumer transactions is significant. The company is hoping to roll out these DTC efforts across all mobile titles with in-app purchases over time. Additionally, Take-Two has seen success from simply expanding ads to games that previously didn’t have them and introducing different advertising products, such as skip-its.

The Business Today

In the latest fiscal quarter ending June 2024, mobile performance exceeded management expectations with 6% revenue growth year-over-year, outperforming the console and PC businesses. In the below charts (according to data.ai), Take-Two’s mobile IAPs have seen strong results far outpacing downloads since late 2023, suggesting positive engagement and monetization among the core players.

As expected, the hypercasual business declined year-over-year, and this impact could be noted in the overall advertising revenue, which was down 36% year-over-year. Despite this, strong growth in Toon Blast and Match Factory! more than offset those declines for the overall mobile business. Given Zynga’s market leading position, much of the results can be tied to stabilization in the broader mobile industry, but the company’s specific efforts have proven fruitful, as evidenced by its top games. In the company’s forecast for next quarter, the company expects mobile to continue outperforming with low-double digits RCS growth expectations.

After a few difficult years for mobile gaming, it appears the industry has stabilized through the first half of 2024. At a macro level, consumer spending is improving, inflation is abating, and gaming penetration across the world continues to grow.

For Take-Two specifically, CEO Strauss Zelnick has noted the mobile division is profitable and looking to invest in growth. Following the corporate rightsizing, its mobile arm is more efficient with a stronger foundation to grow from. With a strong slate of new mobile game releases, an improved sense for how to engage players in today’s era, and easier comparison periods year-over-year, management reiterated its expectations for high single-digit mobile RCS growth for FY25. The company has additionally guided to sequential growth in FY26 and FY27, and while a bulk of this will naturally be driven by the release of GTA VI, mobile will continue to be a key contributor.

With the benefit of hindsight, it’s clear Take-Two timed its acquisition of Zynga poorly — the stock price today is still down from when the company originally announced the Zynga transaction. However, as we look forward, Take-Two is justified in exposing itself more to the mobile industry. While Take-Two continues to ramp costs to support the much-anticipated release of GTA VI next fall, the company will need to look to Zynga to drive profitability in the near term. With strong YTD results from the reaccelerating mobile business, Take-Two appears to have put the industry’s biggest challenges behind it.

In the coming quarters, these mobile initiatives and cost-cutting actions should continue driving margin expansion and profitability for the overall business. Armed with one of the strongest IP portfolios in the industry and an established presence across platforms, Take-Two has laid its foundation to be a winner in mobile gaming — and the interactive entertainment industry as a whole.

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