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Business Jan 22nd 2022 edition

High score

Why Microsoft is splashing $69bn on video

games
The tech giant’s acquisition of Activision Blizzard is its biggest-ever deal

Jan 22nd 2022 Give this article

E ven for Microsoft, which boasts a market value of $2.3trn, $69bn is a lot of
money. On January 18th the firm said it would pay that sum—in cash—for
Activision Blizzard, a video-game developer. It is by far the biggest acquisition in
the video-game industry’s history, and the largest ever by Microsoft, more than
twice the size of its purchase in 2016 of LinkedIn, a social network (see chart).
The move, which caught industry-watchers by surprise and propelled Activision
Bli d’ h i b % t h b t th f t ff B t
Blizzard’s share price up by 25%, represents a huge bet on the future of fun. But
not, perhaps, a crazy one.

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Gaming was a big, fast-growing business even before the pandemic. Lockdowns
bolstered its appeal—to hardened gamers with more time on their hands and
bored neophytes alike. Newzoo, an analysis firm, reckons revenues grew by 23%
in 2020, to nearly $180bn. That growth has attracted the attention of other tech
titans, including Apple, Netflix and Amazon, all of whom have dipped their toes
into the market in recent years.

Microsoft has been in the business for two decades. It earns $15bn a year from
games, mostly thanks to its Xbox console. It has made a string of gaming
acquisitions since 2014, when Satya Nadella, its chief executive, took the reins.
Assuming it is not blocked by regulators, who are watching big tech with a beady
eye, this deal would cement its position. Once completed in 2023, it will make
Microsoft the third-largest video-gaming firm by revenue, behind only Tencent,
a Chinese giant, and Sony, Microsoft’s perennial rival in consoles.
Big acquisitions are always risky. Like most companies, Microsoft has a spotty
record. Activision Blizzard’s share price slid by around 40% between a peak last
February and the deal’s announcement, as it was embroiled in a sexual-
harassment scandal. Player numbers have slipped from 530m a month in 2015 to
390m, and some recent games have had mixed reviews. Pessimists could argue
that the company is overvalued. Optimists, who see annual revenues of $8bn
and net profit margins of around 30%, might counter that it is cheap.

M ti t t A ti i i Bli dh l t f t t di id
Most important, Activision Blizzard has lots of content—and in video games, as
in all of media, content is king, says Piers Harding-Rolls of Ampere Analysis,
another research firm. Like the movie business, where “Star Wars” films, even
bad ones, are reliable money-spinners, video games rely increasingly on

“franchises”—popular settings or brands that can be squeezed for regular

instalments. Activision Blizzard offers, among others, “Call of Duty”, a best-
selling series of military-themed shoot-’em-ups, “Candy Crush”, a popular
pattern-matching mobile game, and “Warcraft”, a light-hearted fantasy setting.

The deal may help Microsoft broaden its reach beyond consoles, says Julianne
Harty of Newzoo. King, a mobile-focused unit of Activision Blizzard, boasts
around 245m monthly players of its games, most of whom tap away at “Candy
Crush”. It is also a strike against Sony, whose share price fell by 10% on news of
the deal. If Microsoft controls the rights to “Call of Duty”, it can decide whether
or not to allow the games to appear on Sony’s rival Play Station machine. When
Microsoft bought ZeniMax Media, another gaming firm, for $7.5bn in 2020, it
said it would honour the terms of ZeniMax’s existing publishing agreements
with Sony, but that Sony’s access to ZeniMax’s new games would be considered
“on a case-by-case basis”.

It also fits Microsoft’s long-term ambition to become the dominant player in a

gaming market that it hopes still has plenty of room to grow. (Mr Nadella,
inevitably, gushed about the virtual-reality “metaverse”.) The firm is bundling
content and pushing the “Game Pass” subscription service, which offers console
and pc gamers access to a rotating library of titles—which usually cost $40-60
each—for $10 a month. Adding Activision Blizzard’s catalogue to the service
could boost its appeal.

In the longer term, Microsoft hopes to use its Azure cloud-computing arm to do
for video games what Netflix did for films and tv. In 2020 it launched a game-
streaming add-on to Game Pass that beams high-end games across the internet
to a phone, tv or desktop. Running a game’s code in the cloud removes the need
to own a powerful, pricey console or pc. The technology is tricky. Still, Microsoft
hopes that as it matures, it will draw in more players, especially in middle-
income countries where smartphones are common but consoles rare. Although
other firms, including Sony, Amazon and Nvidia, offer similar services, none
looks as well-placed as Microsoft. The software giant combines a strong content
library and decades of experience in gaming with the world’s second-largest
cloud operation behind Amazon.

Microsoft’s big bet may persuade rivals they, too, need to snap up content while
they can. The gaming industry was already seeing plenty of merger activity. Last
year five deals worth $1bn or more were inked. On January 10th Take-Two
Interactive, a game developer and publisher, spent $13bn on Zynga, a maker of
mobile games. Sony will be feeling vulnerable after Microsoft’s deal. Amazon,
Apple or Netflix may decide that now is the time to show that they are serious
about the business. Consolidation looks like the name of the game. 7

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This article appeared in the Business section of the print edition under the headline "High score"

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