Microsoft to buy Activision Blizzard in $68.7 billion deal
Image: Microsoft/Courtesy

Analysis: The upsides (and headaches) of Microsoft's $68 billion deal with Activision Blizzard

The acquisition is the newest (and largest) example of Microsoft's verticalization strategy that has just put the company in a different kind of market battle

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In November 2021, amid the massive scandal involving allegations of sexual harassment and misogyny at Activision Blizzard, Microsoft President of Gaming Phil Spencer told Bloomberg that the company was “evaluating all aspects of our relationship with Activision Blizzard and making ongoing proactive adjustments.”

Cut to January 2022, or two months later, for what appears to be the definitive readjustment: on Tuesday (18), Microsoft announced the purchase of Activision Blizzard, still immersed in scandals, for $68.7 billion.

The deal makes Microsoft the world’s third-largest gaming company by revenue, behind only China’s Tencent and Japan’s Sony (owner of PlayStation), which felt the thud – the company’s shares plummeted 13% after the announcement, evaporating $20 billion in market value.

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Activision Blizzard has been going through a rough patch since mid-2021, when an internal culture of misogyny and countless cases of sexual harassment came to a head. In November, the Wall Street Journal revealed that Bobby Kotick, its longtime CEO, was aware of the problems and did nothing to fight them. The negligence led to employee uprising — they even marched to the company’s headquarters to ask for Kotick’s head — and all that chaos was reflected in Activision Blizzard’s share price, which has been falling ever since.

However, none of this changes the fact that Activision Blizzard is an industry titan. Founded in 1979, it is as old as the industry in which it operates and has popular and highly profitable franchises such as Call of Duty, World of Warcraft, Overwatch, and Candy Crush. In 2020, the company earned $8.1 billion and posted a profit of $2.2 billion.

For its part, the acquisition matches Microsoft‘s current strategy, which since 2014 has been trying to consolidate this market. That year, already under the authority of Satya Nadella, the company paid $2.5 billion to Mojang, a one-game studio, but a game not to be missed: Minecraft. In 2020, it was time to snap up ZeniMax, owner of the famous Bethesda, owner of renowned titles such as Fallout, Doom, and The Elder Scrolls, for $7.5 billion.

It is at this point that the fates of Microsoft and Activision Blizzard intersect.

It’s not strange for game platforms to acquire and maintain their own studios. In a somewhat homogeneous market, where video games are similar and the most coveted third-party games are released on every possible platform to maximize revenue generation, exclusives become a key factor when consumers decide which video game to buy. The easiest and safest way to have exclusive productions is to make or finance them yourself.

What distinguishes Microsoft‘s latest acquisition is the scale of the acquired company. Activision Blizzard is the largest in the history of the technology market, eclipsing the $67 billion amount that Dell paid for EMC in 2015.

That much money has a reason. Although not strange, verticalization has been accentuated at Microsoft in recent years, thanks to one of the company’s differentials: the cloud.

In 2017, Microsoft launched a subscription service called Xbox Game Pass. It’s almost like a Netflix of games: the subscriber can download and play all the titles in the catalog, more than 100 already at launch, for a fixed and relatively cheap monthly fee. In addition to old games, new ones from Microsoft‘s own franchises – such as Halo, Minecraft, Gears of War, and Forza Horizon–, and others from smaller/independent studios are now available at no extra cost, at launch, to service subscribers.

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In Brazil, Game Pass costs BRL 29.99 per month or BRL 44.99 in the Ultimate mode, which gives access to Electronic Arts games – another force in the industry – and Xbox Cloud Gaming, a version even more similar to Netflix launched in Brazil and Mexico in September last year.

In it, the games run on powerful remote servers and are “streamed” via the internet to the player’s device, which doesn’t have to be a costly video game — it can be a weak computer or even a cell phone.

Between Microsoft‘s own good games and lesser indie titles, Game Pass gained significant momentum in late 2020 with the ZeniMax/Bethesda game backlog. Suddenly, subscribers gained access to all of them and the promise that future releases would be available on day one at no extra cost. Although ZeniMax continues to release titles for rival platforms – Sony’s PlayStation and Nintendo‘s Switch –, they have to pay the full price of the game, which is much less advantageous for the consumer.

Activision Blizzard should make Game Pass even more appealing, not just now. The company owns several award-winning studios worldwide, which employ around 10,000 employees. It’s an enormous creative potential that adds to Microsoft‘s army of programmers and creatives working in favor of Game Pass.

Activision Blizzard shareholders must have greeted the good news with a sigh of relief, and not just for the ~30% premium Microsoft paid on top of the company’s stock price, even taking advantage of the acquiree’s delicate moment.

After the transition, it is speculated that the troubled Bobby Kotick could leave the company’s helm. Instead, Phil Spencer, CEO of Microsoft Gaming, would be responsible for Activision Blizzard and would have a lot of work ahead of him to clean up the environment and restore the internal culture, which has been heavily shaken in the last year by the numerous cases of abuse neglected, which led to lawsuits and loud protests from officials.

On the eve of the acquisition announcement, Activision Blizzard said it had fired 37 people and warned 40 more since last July, according to the Wall Street Journal.

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The antitrust risk

Microsoft also risks explaining itself to US regulators, increasingly sensitive to the thirst for acquisitions of the country’s technology giants and who need to approve the deal.

It’s not that Microsoft is unaware of the subject — in the late 1990s, it faced heavy antitrust lawsuits over Internet Explorer — but it has so far kept itself out of the controversies in which the other big techs in the country are immersed.

The press release has subtle hints that it was written to also serve as a defense against monopoly charges. This is the case of the mention of the infamous “metaverse,” which takes Microsoft out of the arena of purebred games, where it fights with the Japanese Nintendo and Sony (the latter, bigger than Microsoft in games) and puts it on a collision course with Facebook and a multitude of startups in an incipient space and, it is believed, more open to competition.

It’s a tough defense, though.

The fact that Sony’s shares have absorbed the impact of the news immediately reveals an atmosphere of consolidation in the air. In the same vein, other major publishers such as Capcom, Square Enix, and Ubisoft have seen their shares soar, thanks to shareholders hopeful that they are Microsoft‘s following targets.

Sony is lagging behind in the “play everywhere” logic, which decouples games from dedicated video game devices, allowing them to be played on any device, and offering a complete, unified subscription that is more affordable but less profitable than the single selling games.

Analysts polled by Reuters said Microsoft‘s purchase of Activision Blizzard adds pressure for Sony to go shopping as well before Microsoft snaps up yet another major publisher.

Rumors indicate that Sony is preparing a revamp of its PlayStation-branded subscription services, unifying them and approaching parity with Microsoft‘s Game Pass, to be released in the middle of this year.

Translated by Fabiane Ziolla Menezes