Entertainment

Microsoft’s Activision Blizzard acquisition will reshape the game industry

Microsoft just bought one of the world’s largest third-party game publishers. What now?

Squares from Microsoft games

The nearly $70 billion acquisition gives Microsoft access to some of the most valuable brands in gaming.

Image: Microsoft Gaming

Just one week after Take-Two took the crown for biggest-ever industry acquisition, Microsoft strolled in Tuesday morning and dropped arguably the most monumental gaming news bombshell in years with its purchase of Activision Blizzard. The deal, at nearly $70 billion in all cash, dwarfs Take-Two’s purchase of Zynga, and it stands to reshape gaming as we know it.

The deal raises a number of pressing questions about the future of Activision Blizzard’s workplace culture issues, exclusivity in the game industry and whether such massive consolidation may trigger a regulatory response. None of these may be easily answered anytime soon, as the deal could take up to 18 months to close. But the question marks hanging over Activision Blizzard will loom large in the industry for the foreseeable future as Microsoft navigates its new role as one of the three largest game makers on the planet.

What happens to Bobby Kotick and Activision’s labor movement? Microsoft’s announcement this morning explicitly says Bobby Kotick will remain Activision Blizzard CEO during the transition period and after the deal closes. You can, however, read a bit between the lines here.

  • The embattled Kotick has been fighting to keep his job for the last six months, since California’s explosive sexual discrimination lawsuit blew the doors wide open on Activision Blizzard’s horrendous workplace culture.
  • His refusal to step down has led to employee protests and unionization efforts, and the company has tried to placate employees by firing more than three dozen people and reprimanding more than 40 others. But nothing short of Kotick’s removal may help turn around the company’s reputational issues and extreme internal dysfunction.
  • Kotick will now report to Xbox chief Phil Spencer, who is officially in charge of Activision Blizzard as the newly appointed CEO of Microsoft Gaming. Whether Kotick departs quietly with a hefty severance package or stays on at the company is a central question that speaks to Microsoft’s apparent commitment to a "culture of proactive inclusion,” as Spencer put it.
  • Kotick declined to tell The New York Times whether he’ll stay on as CEO after the deal closes, but sources told The Wall Street Journal that he would in fact step down. Even Kotick’s message to employees is full of ambiguity about his future at the company.

Will Call of Duty become an Xbox exclusive? A chief question in conversations about game industry consolidation is how this affects players and the products they can or cannot buy. Game makers, like media streaming services, increasingly acquire content to drive ecosystem growth and deprive their competitors of access, and that’s especially true for Microsoft, given Xbox Game Pass.

  • Microsoft’s acquisition of Bethesda parent company ZeniMax raised a similar question, and we now know a large majority, if not all, of ZeniMax’s properties will indeed become Xbox exclusives. It’s not immediately clear whether that’s the case here.
  • Call of Duty is far and away the biggest and most lucrative Activision franchise, but it holds a unique position in the game industry as an annually updated series now equipped with a free-to-play companion game.
  • Depriving PlayStation fans of the ability to play Call of Duty may cause more harm than it’s worth, especially considering Warzone and new mainline entries in the franchise are closely intertwined.
  • Bloomberg reported Tuesday that Microsoft “plans to keep making some of Activision’s games for PlayStation consoles but will also keep some content exclusive to Xbox,” though it may likely be months before the company feels compelled to reveal which ones.

What will this mean for Xbox Game Pass? Microsoft’s most defining strategic goal for the future of its gaming business is driving subscriptions to Game Pass, which now has 25 million monthly customers.

  • Those subscriber numbers are only up 7 million from last year, so big acquisitions are clearly designed to help boost the value of Game Pass and drive more signups. And the only way Microsoft can do this without demanding its studios crunch to produce faster is to increase the overall size of its studio organization.
  • Microsoft now has 30 internal studios with tens of thousands of employees, nearly all of which will be pumping out new games that will be added to Game Pass the day they release.
  • Adding more titles to Game Pass makes it more attractive as a cloud gaming service, while also expanding Microsoft’s presence on mobile.
  • “The fantastic franchises across Activision Blizzard will also accelerate our plans for Cloud Gaming,” Spencer wrote Tuesday morning, “allowing more people in more places around the world to participate in the Xbox community using phones, tablets, laptops and other devices you already own.”

What might Microsoft buy next, and how will regulators react? Microsoft has shown its willingness to buy its way to more exclusive games and a larger and more diverse customer base. With the purchase of ZeniMax in 2020 and now Activision Blizzard, this may not be the end of the company’s acquisition ambitions.

  • With Activision Blizzard and Zynga out of the picture and M&A in the game industry reaching record levels of activity, the market for independent game makers is dwindling fast.
  • Tencent remains the world’s largest, and that is unlikely to change. But Electronic Arts and Ubisoft now seem like potential targets, as do Epic Games and engine competitor Unity.
  • Regulators have been putting pressure on Big Tech for the past few years, though Microsoft and the broader gaming industry have escaped scrutiny. As some astute observers have said online, a deal like this may not raise red flags because Microsoft will still only be the third-largest game maker by revenue after Tencent and Sony.
  • But it still may involve concessions from Microsoft, like releasing some games on PlayStation, to get the deal closed in a timely fashion.

How will Sony and the rest of the industry respond? Microsoft’s rival in the game industry won the last decade of console gaming by focusing on first-party exclusive games. And with the PS5 and a stronger focus on building out a services business, the PlayStation platform is stronger than ever.

  • Yet Sony now faces substantial competition from this new generation of Xbox, as well as serious complications to its third-party library now that Microsoft owns not one, but two of the largest formerly independent publishers.
  • The PlayStation maker is working on its own Game Pass competitor, and it also has a cloud gaming service and virtual reality business, too. The question now for Sony is whether it has to acquire a major publisher of its own to execute on its ecosystem vision.
  • Sony has close ties to Fortnite maker Epic Games, including two major rounds of investment totaling nearly half a billion dollars in recent years. But few game makers may be as willing to become PlayStation exclusive developers, whereas Microsoft releases all of its first-party titles on PC in addition to console. Sony is now following suit, but at a much slower clip to avoid undermining hardware sales.
  • Other small to medium-sized game developers may now be eyeing the market with trepidation, wondering whether a sale to one of the large console makers or acquisition-hungry conglomerates like Tencent, NetEase or Embracer Group may be the only way to survive a future dominated by subscription platforms, cloud gaming and an increased focus on mobile.
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