Microsoft Gaming: Key Takeaways (Premium)

Microsoft’s planned acquisition of Activision Blizzard is big news, but there are a lot of other changes happening. Let’s dive in.

First, let’s start with the numbers: this $67.8 billion acquisition isn’t just the biggest in Microsoft’s history—and by far—it’s the biggest in tech industry history. The next closest was Dell’s (and Silver Lake’s) acquisition of EMC for $67 billion in 2015. To date, Microsoft’s biggest acquisitions are LinkedIn ($26.2 billion, 2016), Nuance ($19 billion, 2021), Skype ($8.5 billion, 2011), GitHub ($7.5 billion, 2018), Bethesda ($7.5 billion, 2021), and Nokia ($7.2 billion, 2014).

If/when the transaction closes, Microsoft will become the world’s third-largest gaming company by revenue, behind Tencent and Sony(!).

It is perhaps notable that, assuming the Activision Blizzard deal goes through, four of Microsoft’s top five acquisitions have occurred under Satya Nadella: this man does not mind spending money to improve Microsoft’s competitive advantages. And that this new deal also dwarfs the mammoth $44.6 billion that the software giant had offered for Yahoo! back in 2008. Looking just at gaming, it also makes the $7.5 billion Bethesda acquisition look like pocket change.

From an organizational perspective, Phil Spencer, who was added to Microsoft’s Senior Leadership Team in 2017, now runs a new business within Microsoft called Microsoft Gaming. He also has a new title, CEO, Microsoft Gaming. Previously, his title was the more frivolous sounding “Head of Xbox,” a title I always thought of as “invent your own.” But Xbox has evolved in major ways under Spencer, so this title and this new business name make sense.

But this also says something about the Xbox brand. Today, most people still associate Xbox with the four generations of Xbox consoles that Microsoft has released over the past 20 years. But Xbox is much more than that today. Thanks to Spencer’s unprecedented game studio acquisitions and an associated renewed push into PC gaming, and with its Xbox Game Pass and Xbox Cloud Gaming services providing a way forward, Xbox is now more diverse in every way. So Microsoft Gaming makes sense as an umbrella business for that.

That said, I don’t think that Xbox, which is a terrific brand, will ever get deemphasized (as happened when Office 365 became Microsoft 365, as an obvious example). And it is important to remember that Microsoft previously renamed its Microsoft Game Studios to … wait for it … Xbox Game Studios. The Xbox brand isn’t going away.

Activision Blizzard is an enormous company with many hugely successful game franchises, many thanks to acquisitions and mergers of its own. Because of the timing, we don’t have a handle on the firm’s 2021 revenues yet, but it earned a net income of $2.2 billion on revenues of $8 billion in 2020.

Many probably know that Activision Blizzard owns the iconic Call of Duty franchise, for example, but other top titles include Candy Crush Saga, Crash Bandicoot, Diablo, Guitar Hero, Hearthstone, Heroes of the Storm, Overwatch, StarCraft, Tony Hawk’s, Spyro/Skylanders, and World of Warcraft. It also owns incredible game studios like Activision Publishing, Blizzard Entertainment, Beenox, Demonware, Digital Legends, High Moon Studios, Infinity Ward, King, Major League Gaming, Radical Entertainment, Raven Software, Sledgehammer Games, Toys for Bob, Treyarch, and others. Microsoft already dominated the game studio space, but this acquisition effectively puts them out of reach.

As with the Bethesda acquisition before it, one might naturally wonder if Microsoft will suddenly stop making this studio’s games available across platforms to focus solely on the Xbox platforms. And this is where things get interesting.

When Microsoft announced that its acquisition of Bethesda was final, Mr. Spencer said that while Bethesda will continue to publish games to rival platforms, “Xbox … will be the best place to experience new Bethesda games, including some new titles in the future that will be exclusive to Xbox and PC players.” But with Activision Blizzard, Spencer only says that Microsoft “will offer as many Activision Blizzard games as we can within Xbox Game Pass and PC Game Pass, both new titles and games from Activision Blizzard’s incredible catalog,” once the deal is closed. He doesn’t mention other platforms.

Two things there.

It’s possible that things will change if the deal is finalized and that some future Activision Blizzard titles will likewise “be exclusive to Xbox and PC players.”

And it’s also possible that Spencer and Microsoft are wary of regulatory intervention, because Sony, EA, or some other massive gaming conglomerate could ask antitrust regulators in the U.S. or abroad to block the acquisition. Microsoft keeping the firm’s games open to other platforms would play a role in any future regulatory decision.

Microsoft also revealed that there are now 25 million Xbox Game Pass subscribers. We know that that is below its internal expectations, but this acquisition will absolutely drive the subscriber numbers. And could result in price hikes across the board. Regardless, Xbox Game Pass is suddenly in “no brainer” category now, again, assuming the acquisition goes through.

If you follow game industry news, you may also know that Activision Blizzard is complicated by a series of Bill Gates-style sexual discrimination and workplace behavioral issues. To date, Spencer’s response to these problems as Head of Xbox has been somewhere between noncommittal and unimpressive, but perhaps this was because the acquisition was underway at the time as well. I suppose it’s also possible that Activision Blizzard’s internal troubles also played a role in triggering this acquisition, and that Microsoft’s recent disclosure about being more transparent and effective with its own sexual harassment and gender discrimination policies played a role.

We don’t know yet. And in any event, Spencer only refers to these issues in passing.

“As a company, Microsoft is committed to our journey for inclusion in every aspect of gaming, among both employees and players,” he wrote. “We deeply value individual studio cultures. We also believe that creative success and autonomy go hand-in-hand with treating every person with dignity and respect. We hold all teams, and all leaders, to this commitment. We’re looking forward to extending our culture of proactive inclusion to the great teams across Activision Blizzard.”

That’s the right language and the right direction. And that may itself play a role should regulators examine this deal: Activision Blizzard might be so broken on its own that it can’t continue as an independent entity.

Anyway, I’m sure there’s more, but this deal was just announced and my head is still spinning from the sheer scope of it all. What an incredible event.