Acquiring Activision is Microsoft’s big bang in games
Only last week we wrote about Take-Two acquiring Zynga for $12.7 billion in what was the largest games acquisition in history. But that was last week. This week, that record is beaten more than five-fold, thanks to Microsoft acquiring Activision for an eye-watering $68.7 billion.
The news of the year happening in January? Convenient! On a serious note, this is transformational on a number of fronts including: console war dynamics, subscription adoption and distribution, Cloud wars, as well as the publisher landscape.
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- Console content war dynamics are shifting: The acquisition will take Xbox’s content proposition to a different level. The only response, content-wise, from Sony would be to buy Take-Two – but that is unlikely. The deep pockets of a tech major, such as Microsoft, are shining through. Microsoft’s market cap is $2.3 trillion. Market cap-wise, making a $68.7 billion acquisition is like Sony ($146 billion market cap) making a $4.4 billion acquisition. So, there are not many meaningful content plays that Sony can retaliate with – not without potentially overstretching itself financially, in comparison to Microsoft. With global supply chain issues in 2021, a sizeable consumer segment is still to make a decision on their next-gen console purchase. Sony has been outselling Xbox thus far, but this acquisition (though only to complete in 2023, if successful) and subsequent consumer offerings could sway console gamer decision-making towards Microsoft in the mid-term.While we do not yet know how exactly the acquisition will translate into consumer offerings, it is not hard to imagine that the Xbox experience will be enhanced against Sony in terms of value, be it through windowing, discounts, exclusive content, or outright inclusion of titles in Games Pass. Traditionally, a small handful of publishers assured somewhat of an even playing field in the console ecosystem / content wars – no matter which console consumers bought, the biggest hits have traditionally provided more or less a console-agnostic experience. The two biggest hits in this sense are ‘Call of Duty’ (Activision) and ‘GTA’ (Take-Two). They are played by 55% and 41% of console gamers, respectively. To highlight the sheer weight of this (simply through the ‘Call of Duty’ brand), Microsoft will have a touchpoint with more than half of all console gamers out there. Nothing else in MIDiA’s games tracker comes close, with ‘Fortnite’ and ‘Assassin’s Creed’ ranking next at 28% of console gamers, ‘FIFA’ at 23%, and ‘Spider-Man’ at 17%, for example. Now, Microsoft will own the most played title, and, with it, potentially shift console gamers’ content proposition deliberations in favour of Xbox. Not to mention all the other titles in Activision’s library.
- Effects on publishers: If Xbox starts getting more traction off the back of this acquisition, it could make publishers more dependent on the Xbox ecosystem over time, and, therefore, put them in a weaker negotiating position in the future.
- A big Cloud account: Cloud is an important business for Microsoft. Currently, Activision has been using Google Cloud (the multi-year deal was announced in 2020). Over time, Microsoft can bring Activision onto its own Cloud infrastructure and services. That is a big account for any Cloud services player. It also means a market share tailwind for Microsoft’s Cloud business over the next couple of years, and, simultaneously, a headwind for competitors that are being dethroned as the transition unfolds.
- Microsoft might steal market share from Steam on PC too: Besides console, ‘Call of Duty’ is popular on PC too (33% of PC gamers played ‘Call of Duty’ in Q3 2021 across the US, UK, Canada, and Australia). Microsoft could eventually take ‘Call of Duty’ off of Steam in order to usher PC gamers towards Game Pass (their key distribution channel).
- The mobile expansion: With Activision, Microsoft will also become the owner of King, the ‘Candy Crush’ mobile publisher. Adding to Minecraft, as well as now ‘Call of Duty: Mobile’, Microsoft will add more mobile gamers to its ecosystem (as there is less of an overlap with casual and puzzle games between the audiences of King and Microsoft’s current portfolio). Furthermore, King’s ad-supported portfolio means that Microsoft significantly extended its access to mobile ad inventory – a synergy for all Microsoft products (beyond just gaming).
It is possible that we will now see further consolidation in the publisher market. One, Sony will need to respond with something big here. Two, other top publishers, including Take-Two or EA, will look to cement their positioning against the competitive pressures coming from Microsoft over the next few years, if the transaction concludes.
2022 is indeed shaping up to be an unprecedented year for the games industry.