Takeaways from the Microsoft-Activision deal
With emerging technology playing a crucial part in today’s gaming experience, it makes sense for Microsoft, a leading technology and gaming company, to acquire Activision, a leading game publisher. Microsoft is set to benefit from the deal to a great extent by leveraging an ecosystem composed of its products and services which complement one another. However, Activision brings many positives and negatives, and it is up to Microsoft to strategically address them. The path ahead is difficult but, if properly implemented, would prove invaluable for Microsoft’s global gaming domination.
Gaming is a multi-billion dollar industry today
From pixelated characters on screen to stunning visual graphics and player experience, the gaming industry surely has come a long way. It is a multi-billion-dollar industry currently and is expected to cross $200 Bn in 2023.
Current scenario of the gaming industry
Gaming has been an integral part of society, and as the world goes increasingly digital, the prospects of the gaming industry look even more enticing. The total gaming market is expected to balloon further as mobile penetration increases amongst the masses.
Some key gaming trends
Rise of mobile gaming
Mobile gaming has seen a tremendous rise since the advent of application stores like Google Play and Apple’s iOS store. Mobile gaming revenue reached $76.7 Bn at the end of 2020 and is expected to increase steadily. The pandemic’s negative impact on the mobile gaming section has also been largely limited since the hardware is not a limiting factor, unlike gaming PCs and consoles.
Popularity of e-Sports
Gaming is now a lucrative career option, and tournaments are watched by millions of eager spectators and sponsored by game publishing and developer companies. Esports is gaining both popularity and acceptance amongst the masses and is aided by a digital mediums like YouTube and Twitch where streamers play their favorite games and earn donations from fans.
Asia Pacific to be an important gaming region
The Asia Pacific is emerging as one of the most important geographies for gaming, accounting for almost half of worldwide gamers. The primary drivers for this leadership can be attributed to increasingly better internet infrastructure, an increase in online population, and affordable internet. Countries like Japan, China, and South Korea are the torchbearers of the Asian gaming industry.
Role of emerging technologies in gaming
Emerging technology is one of the key aspects of the gaming industry currently, as it is directly related to the overall gaming experience. Top gaming companies like Microsoft, Tencent, and Sony understand this well, and to a large part, their expertise in technology has enabled them to become leading gaming companies today.
For Microsoft, it can leverage its years of hardware experience in the form of its running Xbox consoles, its acquisition of several important gaming studios and developers, and its leadership in cloud and artificial intelligence to further strengthen its position as a go-to choice for gaming, especially when the role of emerging technologies is becoming ever so important.
What does the acquisition bring to Microsoft Xbox?
Although Xbox will have many potential advantages with the acquisition of Activision Blizzard, there are some areas of concern as well. The following pointers will strive to throw some light on them-
Benefits of the acquisition
I. Activision’s share in e-Sports
Activision has a good presence in the e-Sports industry as its subsidiary Blizzard entertainment owns massive IPs like Overwatch, StarCraft II, and Hearthstone, which are some of the best-known first-person shooters (FPS), strategy, and turn-based games respectively.
ii. Mobile gaming potential
Xbox can leverage the Candy Crush series developed by King, which Activision Blizzard acquired in 2016 to fulfill its mobile gaming aspirations. There is a huge market for cross-platform gaming, and mobile gaming is a key component of the PC-Console and Mobile trinity. Two of its highly rated games, Candy Crush Saga and Candy Crush Soda Saga each have more than a billion downloads on the Google Play store.
iii. Player base
Xbox can now use Activision’s existing player base of 400 million active players spread across 190 countries, in addition to 30 game development studios. This will also help Xbox add subscribers to its cloud-based gaming subscription service, Game Pass, which is already 25 Mn subscribers strong. The acquisition will also add around 10,000 of Activision’s experienced gaming employees to the Xbox umbrella.
iv. Popular Activision IPs
Activision owns popular games like Call of Duty, Candy Crush Saga, and World of Warcraft. Its most popular title, Call of Duty has been running since 2003 and has sold millions of copies to date. With the current subscription-type revenue model in gaming combined with Activision’s massively popular IPs, Xbox is well-positioned to benefit to a great extent.
v. Technology additions
Activision’s IW engine, created by Infinity Ward has been powering its Call of Duty franchise and is currently in its eighth version. Microsoft can make use of the IW engine for further developing large map-based first-person shooter games and combine it with XNA, a set of frameworks and tools which helps develop games.
Detriments of the acquisition
i. Declining sales
The sale of Call of Duty has dropped in recent years, with the peak sales being attributed to Black Ops which was released in 2010. In the UK, in 2021, Call of Duty: Vanguard sold 36% fewer copies compared to its previous year’s game, Call of Duty: Black Ops Cold War. Xbox will have the hefty task of reigniting public interest in the series. Maybe we will see much more marketing and perhaps several e-Sports tournaments being organized around the game in the near future.
ii. Losing brand value
Activision’s brand value has been taking a hit as it has been embroiled in scandals, specifically in 2021 when-
- California’s Department of Fair Employment and Housing (DFEH) sued Activision Blizzard for violations related to equal pay, sex discrimination, and sexual harassment in July. Former female employees of the company shared negative experiences during their term at the company, and a massive walkout and protest were organized by the employees during the same time.
- Activision Blizzard in September agreed to settle a lawsuit by the U.S. Equal Employment Opportunity Commission (EEOC) which alleged discrimination and harassment in the workplace. Activision, as a result, will create an $18 Mn fund to compensate and fund claimants, and any remaining amount will be divided between charities
iii. Revenue performance
Although Activision seems to have performed well in recent years, its revenue growth dropped steeply from ~25% in 2020 to 8.9% in 2021 with periodic crests and throughs throughout, suggesting which is an area of concern. In its Q4FY21 earnings, its quarterly earnings fell by 10.3% as compared to last year driven by low sales in its Call of Duty franchise.
iv. Lack of new games
Activision has essentially not put a new game on the market since Overwatch, in 2016. Although, in late January this year, it announced via Twitter it is building a new survival game which would be the studio’s first survival game. Time will tell how this would compare with the best out there in this category, namely The Forest, DayZ, Subnautica, and of course, Minecraft.
Microsoft’s strategy to become the gaming market leader
Key acquisitions by Microsoft in the past
It should be noted that Microsoft’s acquisition of Activision Blizzard is not the first gaming-related acquisition; it has been busy acquiring gaming studios for the past few decades. However, this acquisition, in monetary terms, is more than 8 times its next most expensive gaming acquisition, that of Zenimax Media.
- Although the Rare deal happened decades ago, it set into motion Microsoft’s subsequent game studio acquisitions. It is also one of the major deals for Microsoft right after it started Xbox. It is the market consolidation, in terms of adding exclusive present and future titles and active players that Xbox has aimed at with these acquisitions. Brand value plays an important role in this aspect as well as adding well-known titles will translate to better Xbox subscriptions and console sales.
- Another important aspect is the fact that Microsoft has allowed several of its acquired studios to function as independent bodies under the Xbox banner. This has allowed the studios creative freedom and enabled them to make their own decisions for their respective game titles. It remains to be seen whether Microsoft will function independently as well.
The Metaverse angle
Metaverse is now much more than just a buzzword, and the gaming industry is uniquely aligned with the metaverse concept. Interaction and digital worlds are at the very heart of the metaverse, and the gaming industry provides just that. Minecraft, developed by Mojang studios already has a huge digital world in place with in-game player interactions in the form of combat, base building, and exploration. Another important aspect is digital transactions, and because of micro-transactions already being a major revenue-driving force in the gaming industry, the synergy between gaming and metaverse is greatly increased. Microsoft has already put in place a metaverse technology stack that makes use of its present ecosystem of products and services, and the gaming component will act as an experience layer with which the user will interact.
What does the future look like for Microsoft?
From Xbox to Microsoft Gaming
Microsoft wants to position its Xbox ecosystem (including Xbox Game Studios, Game Pass subscriptions, and gaming consoles) to be an overarching destination for all things related to gaming. Since 2018, Microsoft has combined all its Xbox hardware and software services comprising Xbox Live subscriptions, advertising and transactions, video games, and third-party video game royalties into a condensed section called gaming. Microsoft also appointed Phil Spencer as the CEO of Microsoft Gaming in January 2022, after the acquisition. This strengthens the reason that Microsoft is viewing Xbox not solely as a game console division but as a one-stop destination for all things gaming.
Xbox’s revenue has been continuously on the rise in the past couple of years, and with this acquisition, it is only expected to increase as loyal Activision fans will be added to Xbox’s player numbers who in turn will get involved with micro-transactions inside the game.
Xbox has been battling Sony’s PlayStation for many years now in the console games market, and this acquisition is aimed at strengthening its position in the console and games market. The scale of Microsoft’s Activision acquisition can be appreciated much more when we consider that at $ 68.7 Bn, it is only $ 1.3 Bn short of the combined value of its next 5 biggest acquisitions. The addition of Activation games into the subscription services will help Microsoft further position its subscription service as a preferred alternative to Sony’s PlayStation Plus.
With the acquisition, Xbox will most probably become the third biggest gaming company by revenue after Sony and Tencent. This trend of acquisitions is expected to continue for Microsoft as they will always be on the lookout to acquire popular gaming titles for their Xbox portfolio.
To conclude, Microsoft, with this acquisition will not only strengthen its gaming portfolio but will also be able to fortify its place in the metaverse race with the help of its already flourishing ecosystem of products and services. Microsoft is well on the path to making use of this ecosystem in the increasing trend of cloud-based cross-platform gaming that is being observed across the industry. This acquisition is thus a key move made at a strategic time when the importance of emerging technologies and an ever amalgamation of the physical and digital world is becoming increasingly prevalent.
For Activision, aligning with a technology giant will allow it to have the crucial assets it needs to become future-ready. Additionally, its brand will definitely get a much-needed boost. For Microsoft, it gained strong steps toward realizing its aspirations of becoming a gaming market leader by adding Activision’s huge player base, popular I.P.s, and employees. What matters next is how the integration will be done as it is key for Microsoft to reap the intended benefits which in turn will dictate the return on investment.