Microsoft + Activision Blizzard: Show Me the Money! (Premium)

Like many, I’m curious how Activision Blizzard will impact Microsoft’s financial results going forward. And so I did some math. And then some outright guessing. And then some more math.

More to the point, I looked at the company’s quarterly revenues for the past four sequential quarters and then compared them to Microsoft’s results in the same time period. And then to those of PlayStation and Nintendo. And other gaming firms. And the broader games market.

Down the rabbit hole we go.

Note: Since starting this write-up, Activision Blizzard released a new quarterly earnings report, for the calendar quarter (CQ) 2023-02. But because Microsoft won’t release its own results for this quarter until next week, I do not include that in this discussion. –Paul

Compared to More Personal Computing

First, let’s look at how Activision Blizzard would have impacted Microsoft’s More Personal Computing business unit, as this is the business unit responsible for Xbox. This is about as granular as we can get, because Microsoft does not call out Xbox earnings separately, let alone individual Xbox products and services.

More Personal Computing delivered revenues of $14.4 billion, $13.3 billion, $14.2 billion, and $13.3 billion, respectively, over the previous four quarters sequentially. And so with revenues of $1.64 billion, $1.78 billion, $2.33 billion, and $2.38 billion, respectively, over the same period, Activision Blizzard would have raised this business unit’s revenues to $16.04 billion, $15.08 billion, $16.53 billion, and $15.68 billion, respectively, or by an average of 12.83 percent.

More Personal Computing is the smallest of Microsoft’s three top-level business units, and this change would have improved its standing against the other two businesses. But in only one quarter, calendar quarter 2022-04, the holiday quarter, the addition of Activision Blizzard would have been enough to land More Personal Computing in second place, but just barely, ahead of Productivity and Business Processes.

Compared to Microsoft overall

Compared to Microsoft overall, Activision Blizzard doesn’t even rate as being in the same general industry. With revenues of $51.9 billion, $50.1 billion, $52.7 billion, and $52.9 billion in the previous four quarters sequentially, Microsoft’s average revenues during this time period were $51.9 billion. Activision Blizzard’s? Just $2 billion. And so the addition of Activision Blizzard to Microsoft would have improved the latter’s revenues over this time period by an average of just 3.85 percent.

Compared to the other console makers

Some people see Microsoft’s Activision Blizzard acquisition as the software giant buying its way out of last place in the console market. I don’t—it is, instead, an attempt to better its position in gaming overall, especially in mobile where Xbox has no position—but I do see the value of comparing Activision Blizzard with Xbox and its game console competitors, PlayStation (which is part of Sony) and Nintendo. Sadly, a direct comparison is not available because Microsoft doesn’t break out Xbox revenues.

Perhaps we can guess. But first, let’s look at Sony and Nintendo.

Sony’s fiscal year also ended at the end of March, and since that maps to the time frame discussed here, we can use that data for comparison. The firm reported that its Game & Network Services (G&NS) business unit, or what we think of as PlayStation, recorded annual revenues of $26.9 billion.

Nintendo’s fiscal year also ended in March, so we can look at that full year, too, as it’s also comparable to the data used in this article. And on that note, Nintendo, which is at the tail end of its Switch-era sales boom, recorded revenues of (roughly) $11.9 billion.

Moving back to Xbox, we know that this business is part of More Personal Computing, and that it is likely the second-biggest part of this business by revenue, behind Windows and ahead of Surface/HoloLens. But the exact breakdown is unclear.

Sony sold 19.1 million PlayStation 5 consoles in this time period, while Nintendo sold 15 million Switch units in the same time frame. (PS5 sales were on the way up while Switch sales were on the way down.) And in February, a third-party analyst estimated that Microsoft had sold 18.5 million Xbox Series X|S units overall since late 2020, compared to 30 million for the PS5, or a bit under one-third as many consoles as did Sony. Assuming nothing changed, and it did, we can conservatively guess that Microsoft sold 10-12 million consoles during the time period we’re discussing in this article. (I believe that Sony console sales have actually accelerated. Also, the average selling price of an Xbox is less than that of a PS5, impacting revenues.) And then we can even less accurately use console sales as the stand-in for overall sales and guess that Xbox revenues were … I don’t know. $17.75 billion?

I want to be clear here. This is not accurate or in any way data-based. It is almost certainly nonsense. But in some magical world in which these numbers are real, Xbox accounted for about 32 percent of More Personal Computing’s revenues over this time period, which I have to say sort of makes sense to me. And so all of Xbox is thus about twice the size of Activision Blizzard, by revenues. That’s interesting. Nonsense. But interesting.

(And perhaps closer to the truth than I’d imagined. While researching something else, I came across an article claiming that Microsoft’s overall gaming revenue in 2023 was $16.2 billion. My number is in that ballpark.)

What about the broader games market?

Back to the math.

According to one estimate, the global video game market delivered total revenues of $184.4 billion in 2022, and so Activision Blizzard’s $8.13 billion in revenues of a (sort of) comparable time period represents just 4.4 percent of the total. This is another example of Activision Blizzard being a big company, yes, and Microsoft’s biggest acquisition, but also a tiny slice of the overall gaming pie.

Of that $184.4 billion, mobile gaming is the biggest part of the market by far, with its $92.2 billion in revenues representing 50 percent of the total. It’s also the fastest-growing part of the market, at 6.4 percent. This explains one of Microsoft’s main interests in Activision Blizzard: overall, about 43 percent of Activision Blizzard’s revenues, or $943 million, in the most recent quarter came from mobile. (Its King mobile gaming business is responsible for about 37 percent of its revenues, plus Call of Duty Mobile just surpassed $3 billion in revenues over its lifetime.)

Console gaming was the second biggest segment in 2022, with $52 billion in revenues, though this part of the market is shrinking. But console gaming is behind PC gaming at Activision Blizzard, where it earned $556 million in revenues, roughly half that of mobile gaming. (This is revenues associated with consoles overall, not just hardware sales.)

The PC gaming numbers are likewise shifted between global sales and Activision Blizzard. Globally, PC gaming accounted for $38.2 billion in 2022, for about 41.4 percent of the market overall, with revenues rising. But PC gaming is number two at Activision Blizzard, which reported revenues of $594 million in the most recent quarter, better than the figure for console gaming, and 27 percent of all revenues.

Globally, PC web browser games delivered $2.3 billion in revenues in 2022 for a distant fourth-place finish. This part of the market is irrelevant to Activision Blizzard and this discussion.

Other gaming companies

According to multiple sources (like this one, which is where these numbers are from), the top 10 video game companies in the world by revenue in 2023 (2022, really) break down like so:

1. Sony, $28.2 billion
2. Microsoft, $16.2 billion
3. Tencent, $13.9 billion
4. Nintendo, $13.8 billion
5. Activision Blizzard, $7.4 billion
6. Electronic Arts, $7 billion
7. Epic Games, $5.8 billion
8. Take Two Interactive, $3.5 billion
9. Bandai Namco, $3.1 billion
10. Ubisoft, $2.5 billion

Microsoft and I have both made the case that acquiring Activision Blizzard will not change the overall dynamics of the video game market, and while that’s true in so many ways, it’s true with revenues as well: yes, adding Activision Blizzard’s $7.4 billion in revenues to those of Xbox will get Microsoft a lot closer to Sony—and distance it further from #3 Tencent—but it doesn’t change their relative positions. Xbox is still number two by revenue.

It’s hard looking at this list, and thinking of other major players in this space like Capcom, Konami, and Sega, and wondering whether there isn’t future consolidation coming. Surely, an acquisition the size of Activision Blizzard will set off panic-mode buying and merger sprees elsewhere in the industry. And while I don’t see Sony, say, trying to acquire EA, I could see companies like Sony and EA each acquiring smaller firms to bolster or improve their relative positions.

Final thoughts

Based just on revenues, Activision Blizzard is exactly what Microsoft says it is. It will improve its overall standing in the console and PC gaming markets, via Call of Duty and other popular franchises and games. And it will give Microsoft a healthy position in mobile gaming, a market in which it today has no position. It will improve Xbox’s and Microsoft’s financials overall.

From there, we must speculate.

Activision is unlikely to help with console sales, but then that’s another discussion, and there’s a great argument to be made that Microsoft would be better off exiting its profitless console hardware market over time and moving Xbox fully into the software + services world.

Pushing Activision Blizzard titles into Xbox Game Pass and Xbox Cloud Gaming will achieve Microsoft’s stated aim of getting these games into more gamers’ hands. But it’s unclear how this will impact revenues, as these offerings to date are “value destructive,” according to Sony’s Jim Ryan, meaning that these subscriptions may not be the best landing place for new AAA games from a revenue perspective. Plus, the operational costs of Cloud Gaming are prohibitive and introduce user experience problems related to bandwidth, lag, and latency.

My simplistic shifting of Activision Blizzard revenues into Microsoft’s More Personal Computing business unit for illustrative purposes may thus be undermined by what Microsoft actually does with Activision Blizzard and its games, at least in the console and PC space. This is an open question and perhaps what I’m most interested to learn after the acquisition is complete.

Needless to say, there’s a lot more to examine here, and there will be for some time to come.