Microsoft’s Mega Acquisition

The acquistion of Activision Blizzard is a bet on gaming as a means to win the Metaverse

Most people who read about business and tech news by now know about the potential acquisition of Activision Blizzard by Microsoft. Whether the regulators allow for this to go through or not, this move is a very intersting signal for what is to come in future of tech and gaming.

THE CONSOLE LANDSCAPE
Microsoft is currently behind Sony in gaming console sales (for both the current and past generation) of Xbox which also means the overall revenue from their gaming unit is below Playstation’s. The biggest player in the world is actually Tencent, however they make most of their money in free to play mobile games, which is why we’ll ignore them for the purposes of this analysis.

A big part of Sony Playstation’s success can be attributed to early gaming studio acquisitions (Naughty Dog, Santa Monica Studios, Guerilla Games, Insomniac, to name a few) taking a bet on teams and IP early. It therefore has a stellar stable of amazing games that are exclusive to its platform and require to buy its console to play them. Sony thereby emulated the playbook of the earlier chapter of the console wars where Nintendo and Sega owned proprietary studios which created exclusive IP. Household names like Mario, Zelda (Nintendo), Sonic (Sega) could only be played on Nintendo or Sega devices respectively (Sega is no longer a console producer and now only a second grade multi-platform software developer).

Microsoft entered the gaming market after Sony and made some strategic mistakes. They didn’t acquire many studios comparatively, their attempt to turn the console into a home entertainment box alienated gamers, they tried to compete with the Wii with their ill fated Kinect (RIP), and have no VR strategy to speak of. However, fans would say this has changed over the last few years under Phil Spencer’s leadership. One of the biggest signs of the strategic importance Microsoft is placing on gaming came with the acquisition of Zenimax in 2020. This was the biggest acquistion in gaming (until the recent deal was announced) netting them IP like Doom, Quake, Wolfenstein, Elder Scrolls, Fallout and Dishonored.

IP WINS PLATFORM WARS
It’s become obvious that the platfrom war between Sony and Microsoft has now entered a new phase. While hardware was a factor in earlier console generations, it is now all about exclusive IP. As a gamer this is very annoying. Some of the IP that Microsoft is acquiring includes the most iconic cross-platform IP on the planet - Warcraft, Diablo, Starcraft, Overwatch and Call of Duty.

While some gamers and pundits still hope that this IP will be cross-platfrom in the future, that seems like a pipe dream to me. We already have evidence of how Microsoft thinks about this sort of acquistion by looking at the Zenimax deal. The sequel to one of the most successful cross-platfrom Action RPGs ever, The Elder Scrolls, that they acquired as part of the deal will be exclusive to Xbox and PC. It feels naive to think that they would approach the new IP any differently. The argument that is made is that the revenue loss of not selling as many units on other platforms would be too steep to sacrifice. That feels like a short sighted conclusion. Microsoft can extract revenue on many fronts from the user if they are part of their eco system. This doesn’t have to only be directly tied to the game unit sales. For gamers this means in future we might have to buy two consoles or game subscriptions if we want to play the biggest triple A titles.

THE GAMES INDUSTRY 2.0
This generation of consoles is probably the last. The next phase of gaming will be much more about streaming games across platforms. Google’s Stadia is already an attempt at doing this but without any prior relationships in the gaming industry and any decent studios they stood no chance. Microsoft on the other hand looks well position for this future. Both their Azure web services platform as well as their stellar IP will allow them to create compelling games as a service subscription.

As it stands its Gamepass online game subscription is already much more exciting than Playstation Plus. All triple game exclusives and some non-exclusive triple A titles are available to Gamepass holders for free. Consider the new IP being folded into this subscription exclusively and imagine Microsoft Gaming an app that is distributed on various hardware platforms like Netflix. How would this play out? Every PC could have a Microsoft Gaming app preinstalled; every Samsung Smart TV could come with the Microsoft Gaming app; maybe even a strategic partnership with Apple would see the Microsoft Gaming app in the App Store.

This looks like the video streaming wars just with games. A notable difference is that making TV shows is easier than making triple A games. Creating a tripe A game can take up to 5 years and require more rare specialised talent. Also spinning up a video streaming service is a much more trivial endeavor on the backend hardware side than it is to do the same for gaming. Some of the game computation will require sophisticated and high powered GPUs. Latency is not tolerated in gaming where millimeter and millisecond inputs matter. Therefore high bandwidth connection and distributed data centers are paramount. This actually might become an issue for Sony down the line as they may have to partner with someone like Nvidia or Amazon to deliver a competitve streaming game service (they do have Playstation Now but it’s not very successful). All that aside, exclusive content is the only differentiating factor in the video streaming war between Netflix and Amazon so Microsoft assuming the same will be true in the future of gaming, is premptively buying itself a nice IP advantage.

GAMING = SOCIAL = METAVERSE
Billions of gamers all around the world are engaging with other gamers in social virtual worlds every day. All this talk about the Metaverse is somewhat trivial for gamers. I’ve met one of my best friends through World of Warcraft. I can still very much remember where in Ironforge we sat down and became good friends. Some moments gamers experience in virtual worlds compete with real moments in terms of their excitement and exhiliration. We gamers are already bought into the Metaverse. As big tech is trying to figure out how to gain a bigger share of wallet from our waking hours, owning engaging game like experiences in virtual social worlds feels like a smart investment.

Gaming is the highest grossing form of entertainment on the planet. Gamers are already early adopters of the Metaverse. Gaming is really the super app which can seed virtual worlds. It’s hard for Facebook to convince me to spend time in their new virtual world app Horizon Worlds but give me a Zelda Metaverse to explore and I will probably lose weeks of my life to it. Yes, this might not be compelling to everyone but seeding the early Metaverse with engaged players is going to be crucial for it to cross the chasm to the mainstream.

If you believe that online time will continue to steal more time from other media and more importantly from offline life then investing in successful gaming IP seems like a good bet. Especially if the online versus offline trend continues, we will end up with a world where everyone will own more online goods than offline goods. That means the future of digital commerce both for digital content subscriptions and goods is very bright. With this acquisition Microsoft has become one of the most formidable big tech player vying for a prominent role in the future of the metaverse and these future revenues.

WHAT'S NEXT?
With this move Microsoft has created a new landscape, which will likely lead to more of big tech buying gaming publishers. I suspect Ubisoft will be on the market and a potential buyer will be Google. They collaborated closely on Google’s streaming platform Stadia. Ubisoft has compelling IP with the Assasins Creed, Far Cry, Watch Dogs, and the Rainbow Six series (Tom Clancy). Their stock price has also taken a beating over the past months and is trading about 50% down from their all time high. Other publishers with strong IP are Electronic Arts and Take Two. Potential buyers could be Sony, Facebook, Amazon, Apple and Netflix (their pockets are probably not deep enough).

We will likely also see more partnerships in the space between some players who own different parts of the stack. While Nvidia is supplying everyone in the graphics war with weapons one can imagine that their Omniverse product could be a great way for someone like Sony to overcome their lack of server side web and graphics services competence.

One of Microsoft’s biggest weaknesses compared to Facebook and Sony is their non-existent VR strategy. They do have Hololens however that is more focused on enterprise solutions at present. I am pretty sure they will be announcing something here soon. They are really doubling down on gaming as a core pillar of their future revenue and as such not having any gaming focus VR hardware is not viable for long.

While as a gamer I am annoyed about the fact I will have to own more consoles or subscriptions to play Blizzard Activision titles in the future, the fact that Microsoft is taking such a big bet on gaming excites me about the future of the industry. Onwards!