Not just eye candy - Activision's ad revenue bet with King Digital

By Anya George Tharakan

(Reuters) - Activision Blizzard Inc (ATVI.O) is sweet on mobile advertising.

The new owner of King Digital could soon start displaying mobile ads in King's games as it looks to target the 463 million players who access games such as "Candy Crush" and "Farm Heroes" on their smartphones.

Activision closed its nearly $6 billion (4 billion pound) acquisition of King in February, becoming the world's biggest game network, but sparked concerns that it was overpaying for a company with just one blockbuster game series - "Candy Crush".

Now, with in-game advertising, Activision is set to tap a big revenue opportunity that should put to rest all doubts.

"Given our massive network, we do believe that advertising could be a meaningful revenue stream for King in the long term," King's Chief Executive Riccardo Zacconi said on Activision's earnings call on Thursday.

Zacconi said King's gamers were one of the "largest untapped audiences for advertisers in the world" and the company had started experimenting with advertising in two games.

He, however, said it was early days and didn't expect any impact to this year's results.

As an independent company, King used to run ads in its games until 2013. It stopped them to offer an ad-free gaming experience to better compete with "Farmville" creator Zynga Inc (ZNGA.O).

"I think one of the first things (King) will do is they'll have some type of incentive ad, where if you run out of lives it'll go hey, if you watch this 30-second video, we'll give you two more lives," Cowen and Co analyst Doug Creutz told Reuters.

If King carries video ads, that would be a huge opportunity for them, said Harish Thimmappa, senior director of social sales at marketing-technology company Kenshoo.

King, whose players are primarily female, generated just 1 percent of its 2013 revenue of $1.88 billion from advertising.

For Activision, though, the opportunity could be much bigger, at least $500 million (346 million pounds) annually, analysts said.

CALL OF OPPORTUNITY

Activision on Thursday reported first-quarter profit and revenue ahead of Wall Street expectations, helped by strong demand for its popular "Call of Duty: Black Ops III" videogame and the inclusion of King's financials.

Activision shares closed up 8.5 percent at $37.87 on Friday. The stock had risen more than 50 percent in the past 12 months.

Wedbush Securities analyst Michael Pachter said he expected King to begin advertising by the end of this year, but generate significantly higher earnings from it in 2017.

"We believe Activision Blizzard could earn well in excess of $3.00 by 2018 if it optimised King's untapped advertising opportunity and unlocks deal synergies, suggesting its stock is significantly undervalued," said Pachter who has an "outperform" rating on Activision's stock.

He raised his price target to $43 from $40 on Friday.

(Reporting by Anya George Tharakan in Bengaluru; Editing by Sayantani Ghosh)