- Microsoft to become third biggest gaming company in the world
- The deal provides an opening into the consumer metaverse
- Consolidates its position in cloud computing
Microsoft (US: MSFT) has agreed to purchase games publisher Activision Blizzard (US: ATVI) for $75bn in what would be the largest gaming deal in history. If this deal goes through, it would have huge implications across the whole technology ecosystem, affecting gaming developers, cloud service providers and the companies that have bet their future on the VR/AR hardware that will underpin the metaverse.
“This deal is going to make a huge splash in the gaming industry, but also seeps into all aspects of Microsoft's growth strategy,” said Karol Severin, senior analyst at Midia Research.
Growing demand for cloud gaming
Microsoft said this deal would make it thethird-largest gaming company by revenue, behind Tencent and Sony once it closes. The plan is to add Activision’s games into the Microsoft cloud gaming service, Game Pass. Game Pass is to gaming what Netflix is to streaming and is now used by over 25 million subscribers (although it faces competition from the latter's move into gaming).
“With Activision Blizzard’s nearly 400 million monthly active players in 190 countries and three $1bn franchises, this acquisition will make Game Pass one of the most compelling and diverse line-ups of gaming content in the industry,” said Microsoft.
Activision Blizzard is the owner of some of the world’s most popular gaming IPs, including Call of Duty, World of Warcraft and Candy Crush. Around 55 per cent of all console gamers in English-speaking markets play Call of Duty, according to Midia Research. Grand Theft Auto, owned by Take Two Interactive, is the second most popular with a 41 per cent share.
A benefit of this deal is the diversity of games Activision owns. Call of Duty dominates console gaming, while Candy Crush is one of the most successful mobile games. Over 270m people play Candy Crush once a month and Candy Crush has been downloaded more than 2.7bn times, according to Business of Apps.
“There is not a lot of overlap between the hardcore console gamers and the casual mobile games players. This deal gives Microsoft more access to the mobile market, which currently makes up more than 50 per cent of gaming revenue worldwide,” explained Severin.
This move would be bad news for Sony (JP: 6758), owner of the Playstation gaming console. A fear would be that Microsoft could make Activision Games exclusive on Xbox Game Pass. Since the deal was announced, Sony's share price has fallen 12 per cent.
Microsoft's metaverse plans involve both businesses and people
As well as rocking the game industry, this deal also suggests a change to Microsoft’s metaverse and VR strategy. Just after Facebook announced its rebrand to Meta (US:FB) at the end of last year, Microsoft said it would roll out Mesh. Mesh builds on Microsoft’s Teams product and would allow organisations to collaborate in virtual environments and mimic physical offices.
At the time, it seemed that Microsoft would target the metaverse in the workplace, while Meta would go after consumers. Microsfot's Hololens 2 VR headset was designed for businesses and has already been a big winner in the enterprise AR space. This strategy made sense given 250m people already used Teams.
However, the Activision deal suggests that Microsoft is not giving up on the fight for consumers as well. The gaming community is one space where AR and VR technology is being adopted first and this deal gives it direct access to this community.
“Microsoft has recently been talking about the enterprise metaverse, but when it comes to people, it seems like the consumerisation of the metaverse is a given. Microsoft is now going big on both,” said Thomas Bittman, an analyst at Gartner. Meta’s share price fell 4 per cent in the aftermath of the deal announcement.
Since the deal has been announced, Meta’s share price has fallen by 4 per cent.
Bittman, though, is yet to be convinced this deal would provide a killer blow in the race for the consumer VR market.
“How Hololens fits in to their consumer efforts is a big question mark. Meta is their primary competition in the consumer metaverse space and it’s concerning that there are reports of some employees leaving Microsoft in this area.”
Cloud computing another battlefield
Microsoft sells gaming and VR hardware in the form of Xbox and Hololens and is looking to expand further into content creation with the Activision purchase following earlier deals such as its $7.5bn purchase of Zenimax Media last March.
One overlooked aspect is what this means for cloud data storage services.
With gaming shifting to a cloud service, data is now stored on external servers rather than on the console. In 2020, Activision signed a deal to make Alphabet's (US:GOOGL) Google its preferred cloud provider and to use YouTube to stream its e-sports competitions. Analysts believe that Activision will switch its cloud provider from Google to Microsoft if the deal goes through.
“This is great for Microsoft as it means more revenue, while at the same time creating greater headwinds for its tech rivals,” said Severin.
A similar thing happened after Microsoft acquired Mojang, the developer responsible for the very popular Minecraft game, in 2014. In 2020, Minecraft then decided to stop using Amazon (US:AMZN) Web Service servers and moved to Microsoft's Azure.
All of this though is conditional on the deal gaining approval, however. On the day of the Microsoft announcement, the Federal Trade Commission (FTC) and the Department of Justice said they planned to revamp merger guidelines to prevent industries from becoming less competitive.
“We need to understand why so many industries have too few competitors, and to think carefully about how to ensure our merger enforcement tools are fit for purpose in the modern economy,” said assistant attorney-general Jonathan Kanter.
The US regulator has been coming down hard on vertical mergers recently. Last month, it prevented Nvidia’s (US: NVDA) $82bn acquisition of UK chip designer Arm and it is investigating genome sequencing company Illumina’s (US: ILMN) $8bn takeover of biotech company Grail (US: GRAL).
The good news for both Sony and Meta is there are still a lot of hurdles to be cleared and lawyers to be paid before this deal is complete.
