Microsoft’s $68.7 billion, all cash deal for Activision Blizzard, one of the world’s largest video game publishers, could be an epoch-defining, Bob Iger-style land grab for C.E.O. Satya Nadella, rivaling Disney’s $71 billion deal for Fox. Gaming, after all, is under growing pressure to consolidate as the pressure to scale in a direct-to-consumer subscription market puts a premium on marketable I.P. assets. Microsoft, despite its incredible market capitalization, doesn’t actually turn a profit on its Xbox console hardware. And Activision, whose stock price collapsed amid a sexual harassment scandal, presented a ripe acquisition target. The company’s embattled C.E.O., Bobby Kotick, is expected to step down after the deal closes, ending the fevered speculation over Kotick’s fate at the company.
As a media strategy analyst, however, the Microsoft-Activision deal raises as many questions as it answers. First, what does it mean for the hundreds of millions of people who play Activision Blizzard games (World of Warcraft, Call of Duty, and Overwatch, to name a few) on Sony’s PlayStation or P.C.s? Microsoft, which owns the Xbox console system, would presumably love to leverage Activision’s beloved I.P. to create new titles that are exclusive to its platforms. Second, and most unsettled, will Joe Biden’s Department of Justice shut all this down?
The latter question is arguably the most important. Microsoft’s acquisition comes at a time when both the D.O.J. and Federal Trade Commission are looking to aggressively ramp up antitrust enforcement. So, why is Microsoft willing to spend $67.8 billion—it’s biggest-ever M&A deal—on a company that is still reeling from sexual harassment allegations, several high level executive departures, and is likely to face withering scrutiny by regulators ? Here are the three key elements of the deal.
1. Xbox Is More Than Just a Hardware Business
The most visible component of Microsoft’s gaming business may be Xbox, but the key to its future gaming strategy is its subscription platform, Game Pass, that offers on-demand access to a substantial library of games. As with Netflix, subscribers don’t own a copy of the content itself, but, for a monthly fee, they can play them as much as they like so long as they’re available. As of today, Game Pass has 25 million subscribers—a 40 percent increase over this same time last year.
Game Pass represents a paradigm shift for Microsoft, which actually loses money on the Xbox consoles it sells. With Xbox Game Pass and individual game sales, the company makes up its profits in software sales and subscription products. The latter is, in effect, the same recurring-revenue model game that has proven lucrative for Netflix, Disney, WarnerMedia, and every other company with a stake in the streaming wars and the direct-to-consumer economy. And much like traditional entertainment, in gaming, content is increasingly king. As Microsoft and competitors like Sony refocus their attention on direct-to-consumer services instead of the old, console-centric model, having the best catalog offering is more crucial than ever.
This is where Activision Blizzard comes in. Think of it this way: the biggest platforms need content to drive subscribers and usage. Studios need players but don’t have scaled distribution, and this can impact growth. Not only is it difficult, but it’s costly to create a new platform that does both. For example, Netflix is a distributor and a content provider—and spends tens of billions of dollars on content alone. Studios and publishers not tied to a platform become very appealing to distributors who are dependent on top content, talent, and I.P..
Activision checks all three of those boxes. And, much like Microsoft’s acquisition of Bethesda parent company ZeniMax, the industrial logic is premised on the potential for Activision to supercharge the Game Pass business. Activision has more than 400 million monthly players across its assortment of titles and, while not all of those players will become Game Pass subscribers, if Microsoft can convert even a fraction of the total base, it could represent a massive spike in revenue for the company.
2. Mobile is Xbox’s Weakest Spot
Remember, part of Xbox’s goal is to be everywhere for everyone at every moment of every day. Living rooms (consoles and TV sets) and bedrooms (computers) are important, but one of the most valuable pieces of real estate is phones and tablets. That’s not just me saying it either; Activision Blizzard reported that its King division (publisher of Candy Crush, and an Activision subsidiary since it was acquired for $5.9 billion in 2016) was its highest grossing vertical last quarter, bringing in more than $650 million.
Mobile is massive. Games available on, and made for, mobile devices “accounted for almost 50 percent of gaming revenue” globally, according to Statista. Mobile gaming revenue is projected to cross $100 billion as of 2023, the research firm found. During last year’s Apple vs Epic Games trial, which was about alleged anti-consumer monopolization practices but brought to light some interesting mobile gaming figures, we learned that 62 percent of the total App Store’s revenue is amassed via gaming (free-to-play and otherwise). The number of people who play mobile games in the U.S. is higher than ever, and revenue continues to grow. This also explains why just a few days before Microsoft announced it was buying Activision, the gaming publishisher Take-Two Interactive announced it was buying Farmville developer Zynga for $12.7 billion.
Conversely, Microsoft hasn’t really managed to infiltrate the mobile market through its Xbox division. The company has tried. Minecraft, which Microsoft acquired for $2.5 billion in 2014, has performed well as a mobile title, for example. But other attempts, most notably the augmented reality-based Minecraft Earth, failed. Microsoft was in mobile gaming, but not really. “We’re bringing content and intellectual property to offset the distribution capabilities we don’t have on mobile devices,” Xbox C.E.O. Phil Spencer acknowledged on CNBC yesterday morning. “It’s an incredibly vibrant space right now.”
Activision would represent a massive shift to the other end of the spectrum. The publisher ranked third in global mobile game publishing revenue in 2020, behind Chinese giants Tencent and NetEase, according to a report from AppAnnie. Alongside Candy King, which reportedly brought in more than $1 billion in revenue in 2020, the publisher also has popular Call of Duty mobile games. Part of Activision’s strategy is to bring as much of its I.P. as possible to mobile, increasing the potential player base and growing demand for its franchises beyond P.C. and console gamers.
A move into mobile gaming would represent an entirely new demographic of potential casual and daily gamers for Microsoft. Whether it’s an older female base (Candy Crush’s player base is primarily women over the age of 35, according to a study from the Business of Apps), or millions of people who play games on their phone but don’t want to spend hundreds of dollars on a console, Microsoft coming into the mobile market ahead of much of its competition is lightyears ahead of where the company currently stands. Not only is Microsoft going to broaden its content offering (all of those Activision Blizzard franchises), but it will also widen its platform revenue.
3. Microsoft Is Kicking the Hornet’s Nest
The gaming industry, like Hollywood and Big Tech, is already caught up in a wave of mergers and acquisitions. There were more than 1,150 transactions closed in 2021, totaling $85 billion—triple the dollar value of deals closed in 2020, according to a report published last week by Drake Star Partners.
Depending on how federal bodies like the Department of Justice and the Federal Trade Commission view these types of mergers and acquisitions in the gaming space going forward, we’re likely to see much more of it. This also applies to companies that aren’t headquartered in the U.S. but that have ownership or major stakes in U.S. games companies, like Tencent. The regulatory questions for Activision, however, are twofold. First, are there enough monopoly pressures or other antitrust concerns for the FTC to step in? And second, if the acquisition gets approved, what does it mean for competitors like Sony?
With the proposed acquisition, Microsoft would become the third largest gaming corporation behind Tencent and Sony. Aware of concerns that may come out of regulatory scrutiny, a Microsoft source told Bloomberg that while some games will go exclusive to Xbox and Game Pass, others will still be available to consumers on other platforms and devices. (This is the same language Microsoft used regarding Bethesda games following Microsoft’s acquisition of ZeniMax.) Microsoft’s lawyers will likely articulate the view that, far from posing a monopolistic threat, the tech giant is merely trying to compete in the crowded gaming space. We’ll see whether that reasoning passes muster. But Microsoft could also feasibly argue that its biggest competitors in the rapidly growing mobile space are Apple and Google, which have even bigger regulatory targets on their backs.
Obviously, Microsoft has a high degree of confidence that the acquisition will go through. The deal, which was kept confidential through its strategic leak, is likely buttoned up—and Nadella wouldn’t stick his neck out over a combination that will get bogged down for years and implode. AT&T’s much-delayed acquisition of Time Warner, which it is now spinning back out as Warner Bros. Discovery, is a recent reminder of how a litigated-and-delayed-and-approved deal can be even worse than a kiboshed one. But it won’t be a smooth ride. As Wedbush Securities analyst Daniel Ives said in a note yesterday, “There is a $3 billion breakup fee and while we expect this deal to ultimately clear regulators, however there will be some inherent speed bumps navigating both the Beltway and Brussels on a tech deal of this size.”
Wall Street is hedging its bets. While Microsoft offered $95 per share, Activision Blizzard is now trading around $82, a reflection of the market odds that the deal falls apart. Biden’s F.T.C., after all, has signaled that it will be far more aggressive than it was in previous years, when “Big Tech” M&A mostly got a pass from Washington. The best case scenario for Microsoft is that the Biden administration is so busy going after its rivals—Amazon, Apple, Facebook, or Google—that the Activision acquisition gets a pass. Ironically, if the acquisition does go through, it will light a fire under similar sized competitors like Sony to go on buying sprees of their own. There are still many high profile studios that aren’t vertically integrated into a bigger platform distributor. Square Enix (Final Fantasy), a beloved developer with deep ties to the PlayStation player community, is one that comes to mind. If Microsoft doesn’t do it, other competitors will try.
Julia Alexander is a senior strategy analyst at Parrot Analytics, a global analytics firm that measures cross platform demand for content, where she analyzes trends and shifts in streaming entertainment. Prior to joining Parrot Analytics, she was a reporter at The Verge, Polygon, and IGN.