Microsoft’s acquisition of Activision Blizzard King reshapes the global games industry: Video Games Industry Memo, 19/10/2023
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The big read - Microsoft’s acquisition of Activision Blizzard King reshapes the global games industry
It is over. The lawyers have packed away their papers. The regulators have finally acquiesced. And the executives have stopped making inflammatory statements in the press.
Yes, Microsoft finally closed its $69bn deal to acquire Activision Blizzard King after the Competition and Markets Authority (CMA) cleared a restructured bid for approval last Friday - ending a nearly two year long cross-continent fight in the process.
But while the battle is done, the war for the industry isn’t over. And while Microsoft may have won this round, and is well placed to benefit from the acquisition, its victory could have indirectly opened up the industry to a range of superpowers ready to challenge their position.
Sealing the deal
Before we take a look at the impact of the deal, it’s worth quickly restating what has been agreed given the lengthy battle fought over it.
Microsoft has swallowed Activision Blizzard King whole. It has secured almost unfettered control of a publisher with strong positions across console (Activision), PC (Blizzard) and mobile (King), a sack load of valuable IP, studios spread across the world and an army of employees.
This has instantly put the combined company into third place in the sector in revenue terms, behind the market leader Tencent and second placed Sony.
However, the parties made two changes to the deal to get competition regulators off their backs that has slightly limited Microsoft’s grasp on the business.
First, it signed a series of deals to guarantee the presence of Call of Duty on rival platforms - including Sony and Nintendo - for the next decade to close off concerns that it might try to make the game exclusive.
Second, and more significantly in terms of the meat of the regulatory bun fight, the deal was reshaped to stop Microsoft from establishing a dominant position in the cloud gaming market.
In the European Economic Area (EEA), it offered a decade-long concession to the European Commission to provide free licenses to consumers and cloud gaming services to access Activision Blizzard content in the cloud until 2033.
And outside of the EEA, Microsoft divested the cloud gaming rights to Activision Blizzard’s content to Ubisoft for 15 years to address the concerns of the CMA who had initially - and somewhat surprisingly - blocked the deal in April 2023.
But it was won over by the newly restructured deal during the summer (and definitely not influenced by indirect Government pressure or possible defeat at the Competition Appeal Tribunal, nudge nudge wink wink), clearing the path for the acquisition to finally occur.
Crowning King
So, what does it mean for the companies involved? For Microsoft, the first thing it’ll be feeling is relief.
While neither of its concessions on Call of Duty or cloud gaming are arguably that significant (foreclosure was never much of a risk for CoD given its need for a healthy multiplayer user base, while dedicated revenue from cloud gaming subscribers is much less important to Microsoft than unlocking the infrastructure benefits of cloud for its games business), regulatory concerns over both came dangerously close to sinking the deal.
By making two comparatively low value concessions to assuage concerns, Microsoft has gained a lot in return.
It strengthens its overall position in the market significantly against its rivals. It bulks out its library of content for Game Pass, securing a range of high profile titles that appeal to core players (Call of Duty) and games that’ll broaden the appeal of its service to additional audiences (e.g. Crash Bandicoot and families).
And by bolstering its position within each major market vertical - including entering mobile decisively via King - Microsoft is better placed to succeed with its strategy of becoming a truly cross-platform, erm, platform and conquering the market by eroding barriers to play.
For the companies Microsoft has acquired, however, the implications of the deal aren’t clear yet. With the purchase concluding in the straitened circumstances of late 2023, it is likely that the value and culture fit of each studio will be interrogated closely to see if it maps against the 2022 deal valuation ahead of 2024.
In this context, King looks immediately best placed to fit in with its new parent company. Its commanding position on mobile, anchored in the $20bn Candy Crush Saga franchise, and instinctively progressive social democratic culture make it well suited to both Microsoft’s business needs and approach - positioning it well for any forthcoming restructure.
For Activision, the situation is comparatively neutral. Its ownership of the Call of Duty IP naturally puts it in a strong position within Microsoft’s warm embrace But with Bobby Kotick leaving at the end of 2023, the rest of its leadership may wonder whether the company’s famously aggressive management style will wash with its much more collegiate new ownership.
But as it stands, things look worst for Blizzard despite its historic reputation. The company’s main franchises such as Warcraft and Overwatch have had better days; a number of its senior staff were discredited in the 2021 sexism scandal that shaped the market conditions to make the acquisition possible; the collapse of its relationship with NetEase has damaged both its lucrative Chinese and esports businesses badly.
So while all of Microsoft’s new toys will be given a thorough going over by their new owners, it feels like Blizzard may have most to fear when it goes under the microscope.
Enter the external superpowers?
Finally, and probably thankfully for everyone reading this, the news poses one final question: what does it mean for the wider industry?
For a handful of companies, the deal will have some particular implications worth noting.
Ubisoft, for example, will be happy to have been given a key position in the cloud gaming landscape for the foreseeable future.
Tencent will reflect that while its minority stake in Activision Blizzard has been purchased, it has a position in Ubisoft: allowing it to retain an interest in its content through the cloud agreement and potentially helping to open up the company’s route back into China.
Nintendo and PlayStation, meanwhile, will assess the deal’s impact differently, with the former happily gaining Call of Duty for its platforms for the first time since the DS days and the latter indirectly losing its President and CEO Jim Ryan - likely in part due to the international travel load imposed by jet-setting to oppose the acquisition.
However, the deal’s biggest impact may be right at the top of the market. In particular, it could narrow the path for industry players to acquire the biggest businesses.
Although Microsoft and Sony will likely continue to acquire companies lower down the ladder, the surly approach of competition regulators and the cost of concluding another deal of this scope - which, for context, was nearly three times what Microsoft paid for LinkedIn - will make them think carefully about whether a titanic acquisition is worth the hassle.
This may close the door to a company within the industry making a move to acquire, say, an EA or a Take 2 in the near future.
But as that door closes, it may open the door to three categories of external behemoths who have had their eyes on games and could see value in buying up a big beast.
First, entertainment conglomerates such as Walt Disney may think about making an aggressive move back into games by buying a seat at the top table - something Bloomberg teased in regards to its reported interest in EA last week.
Second, games-adjacent big tech players such as Apple, Meta or Alphabet could weigh up the cost of running the regulatory gauntlet against the value of acquiring a major publisher to extend their positions in games beyond storefronts, discovery and service provision.
Third, and perhaps most interestingly, it does raise the possibility that a sovereign wealth backed player might consider a move. The Saudi supported Savvy Games could consider an eye-catching landmark acquisition for its portfolio as a way to accelerate the games aspect of the country’s Vision 2030 strategy - provided it doesn’t fear potential geopolitical repercussions for making such a bold move.
In short, this acquisition isn’t just important for its impact on the structure of the industry in the short to mid-term; it creates a long-term incentive for the biggest businesses in games who are considering cashing out to look beyond the sector’s borders for investment.
And if this occurs, and a big adjacent player enters the sector through an acquisition, expect the dynamics of the industry to change potentially quite considerably in the years ahead.
News in brief
(Virtual) Rings around the World: The International Olympic Committee has confirmed that it is exploring the creation of an Olympics Esports Games in an effort to retain the interest of half a billion players aged under 34. It continues the IOC’s gradual reversal on the idea of esports from strong resistance to begrudging acceptance.
Shooting from the dip: GI.Biz pulled Graeme Struthers, COO at Devolver Digital, aside for a chat about going public and the state of the industry today. His comments about doing well in a soft market and waiting for the tides to shift is one of the more rationally optimistic takes on where the sector stands.
Just stop, Just Stop Oil: Just Stop Oil disrupted a Tekken 7 tournament at EGX on Sunday. Given that the tournament was organised by the keen but cash poor fighting game community and took place at an event principally attended by younger people who sympathise with the climate cause, the move was deeply unproductive.
Indian games market on the up: Niko Partners has reported that India’s games market is set to hit $868m this year, up 21% year on year. The market, which is almost entirely dominated by mobile, is also set to nearly double in size between now and 2027 where its forecast to hit $1.5bn in value.
OKRE Computing: Wellcome Trust backed charity OKRE, which hooks together academics and people with interesting lived experiences with the creative industries, is looking for games peeps to fill out a short survey about the social impact of entertainment content. Take five minutes to answer so the feedback isn’t all left to people working in film & TV, please…
Ins and outs
The new voice of Mario has been revealed as Kevin Afghani, replacing Charles Martinet…Pete Hines has announced his retirement after 24 years at Bethesda…ex-journalist, author, PR expert and all round nice person Mike Diver is out at Premier and looking for a new role…Lily Rimington has been promoted to Operations Manager at GamesAid with Gina Lourenco appointed as the charity’s Operations Coordinator…XR Games is hunting for a new Head of Art.
Events and conferences
Scottish Games Week, Across Scotland - 30th October - 3rd November
Paris Games Week, Paris - 1st November - 5th November
Golden Joysticks, London - 10th November
The Game Awards, Los Angeles - 7th December
Games to watch this week
Marvel’s Spider-Man 2: Sony’s Spidey swapping sequel leads a big week for game releases.
Super Mario Bros Wonder: First Martinet-less Mario game in decades heads to Switch for side scrolling platforming fun.
The Jackbox Party Pack 10: Jackbox is back for more party game fun and, crucially, IT HAS A TEE-KO SEQUEL.
Before you go…
While working on redacted, I was fortunate enough to read Lulu Yilun Chen’s 2022 book Influence Empire.
It’s about the rise of Tencent and China’s approach to tech and is brimmed with insight about its games business. Get it here.
Got a tip for our ins and outs, events and conferences or games to watch sections? Or do you just fancy a chat/gossip? Drop me an email here.