Microsoft's Activision acquisition is a bet on Gaming and Metaverse

Microsoft announced its intention to acquire Activision a few days ago, for $68.7 billion. This was just a few days after, the largest deal in the video game market, till then, was announced of Take-Two Entertainment buying out Zynga for $12.7 billion (maker of Farmville, remember farming poinsettias a few years ago on Facebook?)  
 
Let us look into the reasons why this is a very smart move by Microsoft against Sony. 
 
Activision is the second largest game studio in the world, with revenues of around $8 billion last year. Comparatively, Microsoft made about $16 billion from games. But Activision does have bestselling titles like Call of Duty, World of Warcraft and Candy Crush. 

Candy Crush is a best seller on the mobile platform. Additionally, the Call of Duty user base is around 400 million gamers from about 190 countries. And, in 2020, their largest customer was Sony, followed by Apple and Google. 

Also Read: How Indian software exporters are tapping the $8 trillion Metaverse opportunity
 
The global video game market is a $200 billion market, which got a bump during the pandemic, as people stayed home, and played video games. The Video game market is divided into three segments, Consoles, (those high-end expensive gaming devices), Computers and Mobiles. 

Mobile gaming is rising, away from expensive gaming consoles, like Microsoft's Xbox and Sony's PlayStation. Sony PlayStation has sold many more consoles than Microsoft due to its high-end graphic capabilities. Nintendo, the other gaming console rival, has a fan following due to its brand and games like Mario.  
 
Microsoft hopes to push the gamers to play games on the cloud (like watching a movie on Netflix or Amazon Video, but for games). This would need a very heavy infrastructure at the backend, but Microsoft already has built up this capability, ever since Satya Nadella took over at Microsoft as CEO. 

Their cloud platform, Azure, is being used to convince corporates to migrate to using their office software on the cloud, which has been pretty successful. 

Also Read: People to spend 1hour per day in metaverse by 2026: Gartner

Now they hope to do the same for games. Sony has preferred to go with Amazon Web Services. Fair enough, but now, Amazon has also announced that it is looking at the gaming market. (For the record, even Netflix is hosted on Amazon Web Services). 
 
Microsoft chose to compete on another dimension, by offering exclusive games on the Xbox. Sony did this also with the games, Spiderman and Last of Us. And now Sony may be worried that they may lose their top-selling games on the PlayStation if Microsoft makes these games exclusive to Xbox. 

But Microsoft has indicated, that they would honour the next three-game contracts. But after that, the options are open. And these are loyal gamers who would be very disappointed that their game is not available on their console. 

Microsoft is not too concerned, as it is actually visioning that they would like to offer a monthly subscription service, where they can offer a host of games. 

They already have a service called Game Pass, with about 25 million users. (Sony's online service has 47 million). The 400 million user base of Activision is an attractive audience. 

And once, the gamers migrate to the cloud, then the device does not matter, as they can then play on any device, not just the competitors' devices. 

The market is not too concerned about anti-trust regulators not permitting this acquisition, as the combined revenues would be less than 14% of the total global video revenues, supposedly far less to influence the market. 
 
Sony may be in trouble. Its stock price dipped, as the investor concerns grew on news of the acquisition. Sony would be worried about the exclusivity of content, should Microsoft exercise this option for the Xbox, thus locking Sony out of the Activision games repertoire.

On the other hand, Sony Group had been following the "arms dealer" approach, where it sold its movie and tv content to multiple streaming partners for distribution, including the decade running hit tv series, "Seinfeld" to Netflix. 

This would have implications for the video content space also. The market trends towards mobile would remove the need for expensive consoles, thus removing Sony's monopoly on the gaming console market. 
 
Sony would have to consider acquiring another big-ticket game company, but the share prices of all the other video companies had also risen at the time the acquisition had been announced. Microsoft had got Activision at a discount, but this was something that Sony may not get the opportunity.

Activision share prices had been depressed due to several investigations carried on by various authorities, on allegations of sexual harassment, discrimination issues and complaints of a 'frat-boy" culture. 

Some of the employees had gone on strike and yet others were considering organising into a union. There were concerns that these facts may have been hidden from the Board, raising governance issues. 

Activision was on the list of ESG compliant firms, and also on various ESG and Sustainability funds. These funds had stated that they would be reviewing this in light of these findings. 
 
Activision leader, Bobby Kotick denied all the allegations and stated that Activision had maintained the highest standards and had taken steps towards resolving these issues. However, the doubts remained on the effectiveness of these steps. Bobby was admired by the investors due to the great financial performance of the company over the years.  
 
But these reasons also gave an opportunity for Microsoft to step in, which they grabbed. Activision's developers will also be an asset for Microsoft's early steps into the metaverse, a concept that has shot into significance since Facebook announced it as their next initiative. (Facebook also renamed itself into Meta Platforms Inc.)  
 
Metaverse is a virtual world, where one can do anything that one does in the real world, including socialising, purchasing digital goods, having meetings, attending concerts and so on. 

And this is stated to be the next big phase for the internet. These will be just like video games, to start with, and having video game companies in-house, will be an added asset. 

The first adapters to the metaverse? Gamers! And if you couple these 425 million gamers, with the cloud infrastructure, Azure, along with Teams collaboration software, and the GamePass subscription service, Microsoft has got all the initial components in place to be a dominant player in the Cloud Gaming and metaverse arena. This is one game definitely worth watching. 
 
(The author is Professor - General Management & Strategy, Group Head - Strategy at Bhavan's SPJIMR.)