Microsoft recently agreed to a $75 billion acquisition of gaming company Activision Blizzard, the largest deal in the technology space. The entire purchase would be made for cash – pushing up the stock price of Activision from $65 to $82 per share. Given Microsoft’s presence in gaming through Xbox and in PC games, the Activision acquisition would make it the third-largest player in the gaming space after Tencent and Sony.
Microsoft’s Differentiated Strategy
Unlike its rivals, Microsoft is looking for better content, rather working solely on the distribution component of the business – a strategy followed by other tech majors.
Activision owns wildly popular games such as Candy Crush, Call of Duty, Warcraft, Diablo and other. The deal allows Microsoft to grow in the mobiles space, which is larger than both the console and PC gaming markets today. Despite years of losses on the Xbox, and suggestions that it sells off the Xbox division, Microsoft has continued betting large on the gaming segment.
The Activision acquisition comes at a time when the gaming company has been facing internal turmoil over charges of sexual harassment, misconduct, discrimination, resulting in the exit of around 40 executives. Microsoft’s acquisition of studios allows it to offer a larger number of games through its Xbox offering, the Game Pass.
By subscribing to the Game Pass, users can gain access to a wide variety of games on the platform, rather than buying each game separately. Just a year back, Microsoft had acquired ZeniMax Media, a gaming company, for $7.5 billion – a deal that gave it access to a large game base. Apart from these, Microsoft already had been on an acquisition spree of studios such as Double Fine, Ninja Theory and Obsidian Entertainment.
A Metaverse Play?
The metaverse, a term that has grown popular in tandem with the rise of crypto, is said to have played a major role in the transaction as well. After Facebook renamed itself Meta, the space has received increasing attention from the common public.
Satya Nadella, in the past, had compared today’s Metaverse to the internet of the 1990s. He has also spoken about the $350 million developers have made by building new modifications for Minecraft – a virtual world game. While Activision is yet to make a substantial entry in the virtual reality space, it has introduced a VR version of its popular Call of Duty franchise.
“If you take Halo as a game, it is a metaverse. Minecraft is a metaverse, and so is Flight Sim. In some sense, they’re 2D today, and the question is, can you now take that to a full 3D world. And we absolutely plan to do so,” Nadella had told Bloomberg in an interview.
For Microsoft, the deal gives it access to intellectual property worth billions in a swift move. It has been unable to develop IPs in-house, resulting in the reliance on constant acquisitions. A $130 billion unencumbered cash balance makes such decisions easier for Microsoft.
Why is Sony’s Stock Down?
For Microsoft’s rival Sony, which owns PlayStation, a deal poses a new threat. Investors fear that Microsoft would ultimately make popular franchises like Call of Duty exclusive to its own platform. As a result, PlayStation might not remain as attractive for players in case of such a move.
Sony’s stock in Japan fell by almost 10 per cent during trading hours, after the deal was announced. The ZeniMax acquisition saw games becoming exclusive to the Xbox platform, a precedent that could have adverse effects for Sony. With heavy investment in content, Microsoft could potentially thwart Sony’s lead in the console space. Nevertheless, others argue that complete exclusivity immediately might have more adverse effects for Microsoft.
For Sony, the gaming segment remains an important part of the business, as it is the most profitable among the six core divisions. While its mobile and subscriptions business has not taken off, it remains a leader in the consoles business. The gaming division is the fastest growing division in the conglomerate, and intensifying competition could reduce the growth rate.
Sony and Nintendo, two leading gaming companies, do not have the financial firepower to beat Microsoft through bidding wars. Further, Microsoft’s immense financial strength makes it immune to acquisitions not working out well. Hence, investors believe that they might be unable to compete with Microsoft.
Nevertheless, some analysts believe that the reaction was knee-jerk reaction and that Sony’s own set of high-quality IPs would continue pulling in demand for PlayStation.
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