 Microsoft's planned purchase of Activision will make it the third-largest gaming company by revenue. |
Microsoft Corp. is looking to significantly expand the reach of its burgeoning cloud and subscription gaming services with its planned acquisition of Activision Blizzard Inc.
The deal, which was announced a week after Take-Two Interactive Software Inc.'s proposed offer for Zynga Inc., would significantly bolster Microsoft's portfolio with Activision's valuable gaming intellectual property, allowing the software giant to target a wider range of gamers across all platforms, analysts said.
"This deal has some parallels to Take-Two's acquisition of Zynga, in that it greatly expands Microsoft's audience on both mobile and casual-gaming terms," said George Jijiashvili, principal analyst at market research firm Omdia. "With the Activision Blizzard acquisition, however, Microsoft also will increase its clout in PC gaming."
The proposed deal — with an announced deal value of $68.7 billion and a gross transaction value, including debt, of $79.23 billion — will be Microsoft's largest by far. It will expand the company's gaming studios to 30 and make it the third-biggest gaming company by revenue, behind China's Tencent Holdings Ltd. and Japan's Sony Group Corp. The transaction will also make Microsoft a top 5 mobile gaming company and the second-largest publisher on PC, based on pro forma revenue estimates compared to Kagan's quarterly gaming revenue tracker.
The acquisition is expected to close in fiscal 2023, after which the Activision Blizzard business will report to Phil Spencer, whom Microsoft appointed to the new role of Microsoft Gaming CEO.
Content is king
At the forefront of Microsoft's gaming strategy is its Game Pass subscription service, which gives members access to a revolving slate of games from a wide variety of developers, including Electronic Arts Inc. The games can be downloaded onto Xbox consoles and Windows PCs or streamed via the cloud on those devices. Game Pass also supports Android smartphones and tablets.
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However, the primary selling point of the service is that it offers first-party games developed by Microsoft's internal studios on the day of their commercial launch. Upon close of the acquisition, Microsoft will include Activision's games in Game Pass, which now has more than 25 million subscribers, Spencer said in a statement.
The addition of Activision's games to Game Pass will continue Microsoft's goal to establish an all-encompassing, cross-device games ecosystem, said Jijiashvili.
"While Microsoft will remain committed to its Xbox console business as its main focus for at least the first half of this decade, we will likely see higher prioritization of cloud and subscriptions towards the second half," Jijiashvili said.
While Game Pass' availability on mobile is a good start, it is not where most of Microsoft's games were made to be played, said Neil Barbour, an analyst for Kagan, a media research group within S&P Global Market Intelligence.
"The long-term goal here is to make Game Pass a streaming service available on connected TVs," Barbour said. "When it's available on all major platforms such as Roku and Android TV, then Microsoft can say gaming is for everyone."
While the acquisition will undoubtedly add very valuable content to Game Pass, the bigger benefit will be Microsoft's entry into free-to-play and mobile gaming, which are the fastest-growing parts of the industry, said Michael Pachter, managing director of equity research at Wedbush Securities.
"That's something Microsoft has never done before, and the opportunity for Activision to take some of Microsoft's mobile IP and turn it into something is pretty big; that's where the synergy is going to come from if the deal does go through," Pachter said.
Antitrust implications
Given the size and scope of the acquisition, analysts expect regulators to swoop in to scrutinize the deal's impact on the industry and Microsoft's competitors such as Sony, which offers most of Activision's titles on its PlayStation consoles.
Microsoft has said it plans to increase the availability of Activision content across all platforms. However, the company maintained a similar stance initially when it first announced its acquisition of ZeniMax Media and then later decided to keep future Bethesda titles it inherited from that acquisition exclusive to the Xbox and Windows ecosystems.
"I think the plan is to take games off of PlayStation to the extent they are allowed to do so, but regulators will weigh in on whether they consider that it is anti-competitive" said Pachter. "Microsoft prefers to own the IP and make it exclusive, but that will badly hurt Sony and regulators are likely to raise that as a concern."
Sony's shares were 12.8% lower by the end of trading in Tokyo on Jan. 19, as investors reacted to the possibility of the PlayStation potentially losing lucrative franchises such as Call of Duty if the deal goes through.
From a regulatory perspective, Microsoft is not under the same level of scrutiny as its Big Tech companions — Amazon.com Inc., Apple Inc., Meta Platforms Inc. and Alphabet Inc. — said Wedbush analyst Dan Ives.
"[Microsoft CEO Satya] Nadella saw a window to make a major bet on consumer while others are caught in the regulatory spotlight and could not go after an asset like this," Ives said, adding that he ultimately expects the deal to clear regulators.
The scandal's aftermath
Although the deal value is a 45% premium on Activision's closing price Jan. 14, it is a bargain compared with the video game publisher's stock in the first half of 2021. However, Activision's share price plunged following a July 2021 lawsuit by the California Department of Fair Employment and Housing alleging discrimination and sexual harassment against women at the company.
Legal issues continued to mount against the company in the following months, following a lawsuit by the U.S. Equal Employment Opportunity Commission and an investigation by the U.S. Securities and Exchange Commission, which also subpoenaed several current and former employees, including Activision CEO Bobby Kotick.
An investigative report by The Wall Street Journal in November 2021 about Activision's handling of workplace issues led to nearly a fifth of the company's approximately 10,000 employees to sign a petition calling for Kotick to resign.
Despite the scandal, Microsoft has said Kotick will continue to serve as CEO of Activision at close of the transaction and report to Spencer. However, sources told the Journal that Kotick will leave the company after the deal closes.
Microsoft declined to comment on any leadership changes and said it has reviewed Activision's culture commitments in the lead-up to the deal announcement and supports efforts to prioritize safety and inclusion.
Wedbush's Michael Pachter is convinced that Kotick will eventually avoid scrutiny because he is joining Microsoft, which has a very well-earned reputation of being a good employer.
"He personally hasn't been implicated in harassing anybody," Pachter said, adding that he believes Kotick will stick around after the acquisition closes.
However, Kotick has been the sole leader at Activision for over three decades, so there is "no way he's going to be some divisional manager for the remainder of his career," said Joost van Dreunen, a lecturer on the business of games at the New York University Stern School of Business.
"Once the transaction is completed, I expect him to announce his retirement, get on one of his superyachts and sail into the sunset," van Dreunen said.