Why Microsoft is spending $69 billion on video games

ECOME FOR Microsoft, which claims a market value of $2.3 trillion, $69 billion is a lot of money. On January 18, the company announced that it would pay this amount in cash for Activision Blizzard, a video game developer. This is by far the largest acquisition in the history of the video game industry, and the largest ever made by Microsoft, more than double its 2016 acquisition of LinkedIn, a social network (see graph) . The move, which surprised industry watchers and sent Activision Blizzard’s stock price up 25%, represents a huge gamble on the future of entertainment. But not, perhaps, a madman.

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Gaming was a big, fast-growing business even before the pandemic. Lockdowns have boosted its appeal – for hardened gamers with more free time and for bored neophytes. Newzoo, an analytics firm, estimates revenue grew 23% in 2020, to nearly $180 billion. This growth has caught the eye of other tech titans, including Apple, Netflix and Amazon, all of which have dipped their toes into the market in recent years.

Microsoft has been in the business for two decades. He earns $15 billion a year from gaming, mostly through his Xbox console. It has made a series of game acquisitions since 2014, when Satya Nadella, its chief executive, took the reins. Assuming it isn’t blocked by regulators, who keep a close eye on big tech, this deal would solidify its position. When completed in 2023, it will make Microsoft the third-largest video game company by revenue, behind Chinese giant Tencent and Microsoft’s perennial console rival Sony.

Big acquisitions are always risky. Like most companies, Microsoft has a spotty record. Activision Blizzard’s share price fell about 40% between a peak last February and the announcement of the deal, when it was embroiled in a sexual harassment scandal. Player numbers have increased from 530 million per month in 2015 to 390 million, and some recent games have received mixed reviews. Pessimists might argue that the company is overvalued. Optimists, who see annual revenues of $8 billion and net profit margins of around 30%, might counter that it’s cheap.

More importantly, Activision Blizzard has a lot of content — and in video games, like all media, content is king, says Piers Harding-Rolls of Ampere Analysis, another research firm. Like the cinema, where even bad “Star Wars” films are reliable sources of money, video games increasingly rely on “franchises” – sets or popular brands that can be in a hurry for regular payments. Activision Blizzard offers, among other things, “Call of Duty”, a series of hit military-themed shoot-’em-ups, “Candy Crush”, a popular pattern-matching mobile game, and “Warcraft”, a light- fancy decor at heart.

The deal could help Microsoft expand its reach beyond consoles, says Newzoo’s Julianne Harty. King, a mobile-focused unit of Activision Blizzard, has around 245 million monthly players for its games, most of whom listen to “Candy Crush.” It’s also a strike against Sony, whose share price fell 10% when the deal was announced. While Microsoft controls the rights to “Call of Duty,” it can decide whether or not to allow games to appear on Sony’s rival Play Station machine. When Microsoft bought ZeniMax Media, another game company, for $7.5 billion in 2020, it said it would abide by the terms of ZeniMax’s existing publishing deals with Sony, but that Sony’s access to new ZeniMax games would be considered on a “case by case” basis. based”.

It also aligns with Microsoft’s long-term ambition to become the dominant player in a gaming market that it hopes still has plenty of room for growth. (Mr. Nadella, inevitably, raved about the virtual reality “metaverse.”) The company is aggregating content and pushing the “Game Pass” subscription service, which offers consoles and computer players have access to a rotating library of titles, which typically cost between $40 and $60 each, for $10 a month. Adding Activision Blizzard’s catalog to the service could boost its appeal.

In the longer term, Microsoft hopes to use its cloud computing arm Azure to do for video games what Netflix did for movies and TV. In 2020, it launched a game streaming add-on for Game Pass that streams high-end games over the internet to a phone, TV or office. Running a game’s code in the cloud eliminates the need for a powerful and expensive console or computer. Technology is tricky. Still, Microsoft hopes that as it matures it will attract more gamers, especially in middle-income countries where smartphones are common but consoles rare. Although other companies, including Sony, Amazon and Nvidia, offer similar services, none seem as well positioned as Microsoft. The software giant combines a solid library of content and decades of gaming experience with the world’s second-largest cloud operation behind Amazon.

Microsoft’s big bet could persuade rivals that they, too, need to grab content while they can. The gaming industry was already experiencing a lot of merger activity. Last year, five deals worth $1 billion or more were signed. On January 10, Take-Two Interactive, a game developer and publisher, spent $13 billion on Zynga, a mobile game maker. Sony will feel vulnerable after Microsoft’s deal. Amazon, Apple, or Netflix might decide the time is right to show they’re serious about the business. Consolidation sounds like the name of the game.

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

John C. Dent