BY:
Eric De Grasse
Chief Technology Officer
PROJECT COUNSEL MEDIA
18 January 2022 (Paris, France) - Streaming, gaming and algorithms are eating home screens and the battle has moved to a fever pitch. For purposes of this post I'll just focus on Microsoft's $68.7 billion acquisition of Activision Blizzard. The following is a reduced version of our analysis that went out to our TMT (Technology, Media & Telecommunications) paid subscribers earlier today - the 8 levels where this deal makes sense:
1. Microsoft desperately needed more games. The most obvious reason for the deal is that Microsoft’s ambitions of building its Game Pass subscription service into a mega success were going to be much harder to achieve without such a deal. While Microsoft has convinced some outside publishers to let it include their titles as part of Game Pass, many publishers have told it to pound sand, at least when it comes to their most lucrative games. Other publishers simply don’t see any financial upside to making games that sell for $60 as stand-alone products available as part of a Game Pass subscription service that costs $15 a month. Activision’s Call of Duty franchise, for example, isn’t part of Game Pass. That hesitation is why Microsoft paid $7.5 billion last year to acquire ZeniMax Media - the company that owned Bethesda Softworks, publisher of the Doom and Fallout franchises.
2. Microsoft cares about the consumer - really. Microsoft’s stunning comeback over the last eight years under CEO Satya Nadella has been all about its relentless focus on cloud and enterprise computing. But even as Microsoft dramatically dialed back its ambitions in key categories like internet search and mobile, Nadella held onto Xbox - its most powerful remaining connection to the consumer market. Over the past couple years, the company has been quietly sending signals that it wants a bigger role on the consumer side of the tech industry. Remember, it was in the running to acquire TikTok, Discord and Pinterest. Why would Microsoft mess with its model when it has a good thing going? As good as the cloud market has been to Microsoft, the company could use stronger offerings in the huge consumer market to keep growth strong and to lessen its dependence on spending by corporate IT departments. Plus …
3. Consumer tech propels innovation in the enterprise. Hardly anyone remembers that the Microsoft applications that became the foundation for the company’s Office franchise - Word and Excel - started out in the 1980s as consumer products. It wasn’t until years later that businesses started buying PCs and software in big numbers. Similarly, Microsoft believes its game investments will benefit its broader Azure cloud business. For example, Microsoft is experimenting with an early effort to stream games to its Game Pass subscribers from the cloud, without requiring them to download those games onto their devices. Cloud gaming is a technically demanding service that requires significant investments in Azure. Building that technical capacity could over time help Microsoft deliver other computing-intensive applications for other Azure customers.
4. Loser No. 1 from the deal: Sony, but not for the reason you might think. Whenever a game hardware company buys a game publisher, the deal sets off a tremor of anxiety among fans. One big worry is that the hardware company will make the publisher stop developing popular games for competing hardware platforms. In the case of the Microsoft-Activision deal, the biggest casualty of such a decision would be Sony, Microsoft’s most direct rival in the console business. However, it would be financially foolish for Microsoft to stop publishing Call of Duty for Sony’s PlayStation consoles because of the huge gusher of revenue it gets from selling the title to those gamers, at least for now. A more realistic concern is that Microsoft may not allow Call of Duty to be a part of any other game subscription services besides its own, including Sony’s. That could put a crimp in Sony’s ability to successfully expand its game subscription business.
5. Loser No. 2 from the deal: GameStop. Putting aside the meme-stock-driven, roller-coaster performance of GameStop’s stock over the past year, the Microsoft-Activision deal is a reminder that the sale of physical copies of games will eventually go away. Just as Netflix helped bring about the death of Blockbuster video stores, the growth of a service like Game Pass is bad news for a physical retailer like GameStop. The retailer's shares fell about 7% on Tuesday following the announcement of the acquisition.
6. Activision’s Bobby Kotick needed a graceful exit. The past year has been absolutely brutal for Activision’s reputation, with a wave of bad headlines about its “frat boy” corporate culture. The U.S. Securities and Exchange Commission is investigating the company’s disclosures about the allegations of sexual misconduct within its ranks. The Microsoft acquisition gives Kotick an opportunity to sell the company at an attractive premium to its current share price. And while Microsoft is saying Kotick will stick around after the deal closes, people who know Kotick don’t see him working as a Microsoft employee for long.
7. Microsoft is daring regulators to care about it again. Microsoft has avoided the white-hot glare of antitrust regulators, currently directed at Facebook, Alphabet and other rivals in big tech. That may be due partly to the fact that Microsoft’s business is much less visible than its peers’, or because some feel Microsoft had already been punished for its misdeeds in the early 2000s. The sheer size of the Activision deal will test the company’s ability to stay out of that spotlight.
8. Your move, Amazon and Google. The online retail and internet search giants have
both launched their own cloud gaming services, neither of which has been a hit with consumers. Both services suffer from more severe versions of the lack of top-notch games that have been an issue for Game Pass. If Amazon and Google are serious about their cloud game businesses, they’ll most likely have to make big acquisitions of their own. Potential targets could include Electronic Arts, Take-Two Interactive Software and Ubisoft. But it’s doubtful the government will let either company make such a major acquisition without challenging them.
