A crowd waits for a video presentation at the Activision booth during the Electronic Entertainment Expo, known as E3, in Los Angeles, California.
Jonathan Alcorn | Reuters
There were head-scratchings in the big tech and gaming worlds in January when Microsoft announces agreement to buy Activision Blizzard, a leading video game publisher, for $68.7 billion. Microsoft CEO Satya Nadella has touted his biggest-ever acquisition as a boost to the company’s growing metaverse strategy, even though Activision is best known for hit games such as Call of Duty, World of Warcraft and Candy Crush, but not the mix of AR/VR and other tech that underpins the nascent metaverse.
On closer inspection, however, Microsoft may now be in a better position to become a leader in the metaverse and gaming arenas. “Microsoft is extremely well positioned for the metaverse,” Bernstein analyst Mark Moerdler recently told CNBC. “But I don’t think that [acquisition] was purely a metaverse reader. They were also looking for bigger ways to gain depth and breadth in the game.”
Moerdler foresaw that Microsoft might buy smaller game studios, but ultimately “decided it was best to make a big one [purchase] against a lot of little ones,” he said.
The proposed deal still requires U.S. and international shareholder and regulator approval, which is expected to push closing to June 2023.
Microsoft has been pushing the metaverse concept in its acquisition messaging, and by the time the deal closes, Microsoft is talking in terms of a two-track model. “Gaming has been key to Microsoft since our beginnings as a company,” Nadella said in an email to its roughly 181,000 employees about the acquisition. “Today it is the largest and fastest growing form of entertainment, and as the digital and physical worlds come together, it will play a vital role in the development of metaverse platforms.”
There is no doubt that gambling is an attractive and lucrative industry. the The global gaming market generated $180.3 billion in 2021according to market research firm Newzoo, which forecasts gaming revenue to reach $218.8 billion by 2024. eMarketer estimated that 2.96 billion people worldwide played digital games last yearwhether through console, computer, or mobile device, and that number will reach 3.09 billion in 2022, or roughly one-third of the planet’s population.
Microsoft first launched into video games in 2001 with the release of the Xbox console, now in its fourth generation and whose sales jumped 14% in the third quarter. Today, the Microsoft Gaming division, led by CEO Phil Spencer, includes 23 game and software design studios and hundreds of games. The division’s Game Pass subscription service has more than 25 million customers, while nearly 10 million people have streamed games on the Xbox Cloud Gaming service.
While Activision isn’t considered a player in the metaverse – which remains a work in progress with varying definitions – one of its video games offers a good example of how it works. Blizzard released World of Warcraft in 2004, when it was the game studio that later merged with Activision in 2008.
“It’s a virtual world [your avatar] could walk with friends, found a tribe and raid together. It’s the metaverse,” said Mike Sepso, a former executive at the merged entity who is now the CEO of Indexan esports infrastructure platform.
Sepso points to several other games that incorporate metaverse elements, such as Roblox, fortnite, second life and Microsoft Minecraft. On these platforms, players can teleport between millions of games, create virtual social spaces, and even attend concerts, all while purchasing virtual items to enhance the experience. Most of these types of games require VR headsets and consoles, which favors Microsoft, with its HoloLens and Xbox hardware.
The virtual worlds of these games may not live up to those predicted by metaverse proponents, where users are immersed via mixed reality in business meetings, doctor visits, vacations and all types of e-commerce. This is where Microsoft’s software, cloud computing, games and virtual technologies position the company well. And the addition of Activision’s gaming capabilities only improves its prospects.
“I see [the metaverse] as an extension of what the game did,” Spencer told Kara Swisher of The New York Times on her Sway podcast about a week before the deal was announced. For example, he said, Microsoft game developers are imagining virtual workspaces and some of them. the things they learned in video games about people coming together to cooperate to complete tasks.
However – and whenever – the metaverse materializes, it will be populated primarily by Gen Z and beyond, who will have grown up exclusively in the digital world, especially games. According to a recent study Gen Z gamers by Razorfish and Vice Media Group, they spend twice as much time hanging out with friends in the metaverse as they do in real life. More than half said they would like to experience making money in the metaverse; 33% would like to experience building a career there; and 20% of their entertainment/leisure budgets will be set aside for in-game purchases over the next five years.
As the tech sector experiences a correction, Microsoft remains one of its strongest players after its third quarter resultsand high demand for its cloud services and software capabilities – two core components of the metaverse and gaming business – are factors in its operational strength.
Activision reported dull first quarter resultshurt by falling demand for its latest Call of Duty games, but its most notable new investor Warren Buffett of Berkshire Hathaway increased his company’s stake, a merger arbitrage gamehe told Berkshire Hathaway shareholders at the recent annual meeting, betting that Microsoft’s proposed acquisition of the video game company will close.
Berkshire now owns about 9.5% of Activision shares.
As tech crashed, Activision’s stock price fell 20% below Microsoft’s bid of $95 per share.
MoffettNathanson analyst Clay Griffin said the weaker-than-expected Call of Duty numbers are bad for the fundamental story behind Activision. If the deal were to fall apart and Activision were to go it alone, the stock would likely be valued somewhere in the mid-$60s, but Griffin doesn’t expect that to happen.
“Once in a while I’ll see an arbitration agreement and I’ll do it,” Buffett said. “Once in a while it looks like the odds are in our favor, but we absolutely could lose money on this company, quite a lot of money, depending on what would happen if the deal blows up.”
“We don’t know what the Department of Justice will do, we don’t know what the EU will do, we don’t know what 30 other jurisdictions will do. One thing we do know is that Microsoft has the money,” Buffett said. added.
Microsoft and Activision declined to comment.
In the meantime, the fate of current Activision CEO Bobby Kotick is uncertain. It is part of two separate federal investigations launched last year, by the Securities and Exchange Commission and the Department of Justice, into the company’s handling of allegations of sexual misconduct and workplace discrimination by employees. In November, The Wall Street Journal reported that Kotick had mishandled sexual misconduct allegations.
The issue caught Spencer’s attention before the deal was announced. Last November, as the headlines soared, Bloomberg reported that he told employees he was “disturbed and deeply disturbed by the horrific events and actions” at Activision Blizzard and that Microsoft was “evaluating all aspects of our relationship with Activision Blizzard and making ongoing proactive adjustments” accordingly .
In fact, it was around the same time that Spencer and senior Microsoft officials started discuss a deal with Activision.
“When that [Activision] transaction ends, Microsoft Gaming will be the world’s third-largest gaming company by revenue, behind Tencent and Sony,” Spencer said during the post-announcement webcast with analysts in January. [then]Activision Blizzard and Microsoft Gaming will continue to operate independently,” he wrote in a blog post that day. “Once the agreement is reached, Activision Blizzard’s business will report to me.”
“In most acquisitions, senior management leaves,” Moerdler said. “In that case, it’s more likely.”
Given not only Activision’s vast cache of proprietary gaming IP, but also the nearly 400 million monthly active gamers, many of whom are already spending money in virtual worlds, and there’s no so many head-scratching over the acquisition, or the ambitions that Spencer will oversee.
“This deal solves a few issues for Microsoft,” Sepso said. “One, it adds a lot of IP and playerbase to their Game Pass service in the short term. Longer term, that IP can be extended to this overriding metaverse. It puts them in an enviable position as to who will own the metaverse.”