Microsoft Buys Activision Blizzard

The press release image of the purchase

By now, you have heard the news that Microsoft bought Activision Blizzard. If not, read the full press release here that shook the world. The situation summarizes that Microsoft, the company behind the Xbox Series S and Xbox Series X did a buyout of Activision Blizzard for $95.00 a share, totaling $68.7 billion in an all-cash purchase, bringing their 10,000 employees into Microsoft. Activision Blizzard is one of the oldest gaming companies in the industry with a wealth of well-known franchises such as Warcraft, Diablo, Overwatch, Call of Duty, Crash Bandicoot, Tony Hawk Pro Skater, and Candy Crush.

Microsoft can initiate this purchase because they are one of the most cash-rich companies on the planet, with over $130.6 billion in cash, cash equivalents, and short-term investments (Microsoft, 2021), thanks to the incredibly successful transition to software-as-a-service (SAAS) and the Azure cloud platform. They are a duopoly of enterprise cloud services with Amazon that generates enormous cash flows (Rich, 2019).

What does this mean for the competition, specifically Nintendo and Sony?

Nintendo is in a unique position while they are reliant on third-party sales, the lion's share of sales from the console cones from first-party software where the Nintendo Switch had 36 games surpass the million mark, of which 14 were a third party (Grubb, 2021). Nintendo's storied history and the incredible internal software development house pushes sales and will elevate the Nintendo Switch to become one of the highest-selling consoles of all time. Looking at Activision Blizzard's support for the Switch; it isn’t strong, with the sales juggernaut Call of Duty completely missing the platform, and late ports of Diablo, Overwatch, Crash, and Tony Hawk rounding out their support. As with Bethesda, it takes away a gaming company that rounds out Nintendo's weakness. This weakness is the lack of an internal Western development house.

On the other hand, Sony will lose a central pillar with the loss of Activision Blizzard. Sony pivoted away from Japan by moving the PlayStation Headquarters to California in 2016, censoring games that aversely affect Japanese development, and closing a prominent Japanese development studio, Japan Studio. (Bloomberg, 2020; Webb, 2019). The company also famously pivoted to a focused western-centric lineup with games such as The Last of Us, Horizon Zero Dawn, Spiderman, and much more. It means that they cultivated an audience who buys Western games, and because of it, the gaming audience considers PlayStation as the home of the Call of Duty franchise. The loss of a significant franchise is an enormous blow to Sony and its western shift. This shift also meant a change in thinking in Japan, where Japan has shifted away from Sony long-term. It was once a rare occurrence that Nintendo would have the top 30 selling software in Japan, but it is now becoming a regular weekly occurrence (Romano, 2022). It has gotten so bad that long-term Sony-loyal game development house Nihon Falcom is bringing Switch porting in-house; rather than farming out to external developers like Nippon Ichi Software (McFerran, 2021). The shift to western development and the reliance on third-party development means that this buyout affects Sony compared to Nintendo.

Why is Microsoft on an Acquisition Spree?

Microsoft made waves in 2020 when it purchased Zenimax, the parent company of Bethesda, the company behind Fallout, Elder Scrolls, Doom, and others. Today, with the purchase of Activision Blizzard, they upped the ante with publisher acquisitions. The reason is because of their accelerated move in the Game Pass model. Directly inspired by the strategy of Microsoft Office from a one-time payment to a software-as-a-service model through Microsoft Azure, this model moves software from a perpetual license following a one-time payment to a license that demands recurring payment for access (Azure, 2022). Game Pass allows Microsoft to have a persistent, reliable monthly revenue over the traditional “hit based” model used by game makers Nintendo and Sony.

What makes Microsoft’s Game Pass system work is that all Microsoft software is on the service on release day. They also negotiate contracts with third-party companies to get the software on there temporarily or permanently. This system requires a continuous feed of new games to keep people subscribed. According to Spencer (2021), there are more than 25 million subscribers to Game Pass. The addition of Zemimax and Activision Blizzard means that they can continue to feed Game Pass with more games and continue growing.

In conclusion.....

How it plays out will depend on how Nintendo and Sony respond to Microsoft. Both Japanese companies have established good relationships with Japanese third-party companies, and this move might pressure both of them to merge or acquire companies before Microsoft does so. Sony’s pivot to the west makes this less likely than Nintendo, but it could be a point of differentiation. What happens in the next several months and years will determine whether the videogame industry continues consolidating or today's events are a historical aberration.

References

Azure. (2022). What is SaaS?. https://azure.microsoft.com/en-us/overview/what-is-saas/

Bloomberg. (2020). Microsoft sets sights on Sony’s home turf in console clash. Los Angeles Times. https://www.latimes.com/business/story/2020-11-08/microsoft-xbox-sony-playstation 

Grubb, J. (2021). Nintendo Switch has 36 ‘million-seller’ games (including 14 third-party games). Venture Beat. https://venturebeat.com/2021/05/06/nintendo-switch-million-seller/

Microsoft. (2021). Earnings Release FY22 Q1. https://www.microsoft.com/en-us/Investor/earnings/FY-2022-Q1/balance-sheets

McFerran, D. (2021). Japanese RPG heavyweight Nihon Falcom is bringing Switch development in-house. NintendoLife. https://www.nintendolife.com/news/2021/11/japanese-rpg-heavyweight-nihon-falcom-is-bringing-switch-development-in-house

Rich, B. (2019). This is why Microsoft is a trillion-dollar company. Forbes. https://www.forbes.com/sites/bryanrich/2019/07/22/this-is-why-microsoft-is-a-trillion-dollar-company/

Romano, S. (2022). Famitsu sales: 1/3/21 – 1/9/22 [Update]. Gematsu. https://www.gematsu.com/2022/01/famitsu-sales-1-3-21-1-9-22

Spencer, P. (2022). Welcoming the incredible teams and legendary franchises of Activision Blizzard to Microsoft gaming. Microsoft Xbox. https://news.xbox.com/en-us/2022/01/18/welcoming-activision-blizzard-to-microsoft-gaming/

Webb, K. (2019). Sony is reportedly changing its standards for sexual content in new PlayStation games in response to the #MeToo movement and livestreaming. Business Insider. https://www.businessinsider.com/sony-metoo-censorship-playstation-games-2019-4