The holiday-shortened work week got off to a bang with news that one of the world’s biggest tech companies, Microsoft, wants to buy one of the world’s biggest video-game companies, Activision-Blizzard, in the biggest acquisition by anyone in quite a while.
That Microsoft wants to double down on gaming with a $69 billion deal isn’t surprising. It already has Windows (the dominant operating system for computer games), the Xbox game console, two-dozen development studios, a raft of huge franchises like Halo, and a hugely popular game subscription and streaming service. Adding in the company behind Call of Duty, Overwatch, and Candy Crush makes plenty of business, if not regulatory, sense.
But what happens if Microsoft also decides to move beyond games and do a Reverse Netflix, which announced a gaming division last summer to extend engagement in its many video offerings? That could create a formidable new player in entertainment with extremely deep pockets, just as it and many other companies edge toward the immersive future of the Metaverse.
Microsoft has tried to get into traditional entertainment before, a few tech generations ago, hiring notable Hollywood executives and carting them up to Lake Washington to build relationships with the industry. But it’s also had second thoughts about those ventures.
In fact, one of the first things Satya Nadella did after taking over as Microsoft CEO in 2014 was get out of entertainment, closing the entire Xbox Entertainment Studios team led by former CBS TV Studios President Nancy Tellem as part of thousands of broader layoffs. Nadella’s reasoning then: he wanted to focus on its future in cloud computing (his own area of expertise), and move away from non-core initiatives like video entertainment at a time when Microsoft was struggling.
That made a lot of sense in 2014, when the streaming industry consisted mostly of early adopters watching Netflix and Hulu running other companies’ old TV series and movies, and the early days of multi-channel networks and the influencer ecosystem at YouTube.
And Microsoft certainly needed focus after years of lost direction in the latter days of Steve Ballmer’s regime. Nadella’s renewed focus paid off; cloud services is now a huge part of Microsoft’s business (it even provides streaming services to rival Sony), as are enterprise software, immersive technology, and gaming.
It’s a different moment now, for both Microsoft and for online entertainment of all kinds.
Streaming is also a huge business, and Microsoft products already entertain hundreds of millions of connected customers and businesses. It may be time for Nadella to reconsider how to further flesh out his company’s many entertainment holdings to keep people using Microsoft products at work and at home.
Like Apple, Microsoft certainly has the resources to think bigger.
It’s the world’s second-most valuable company by market capitalization behind Apple, valued at around $2.3 trillion, and has a similarly mammoth pile of cash, as much as $130 billion. Usefully, its Game Pass family of subscription services already have 25 million customers.
The most expensive version, the Ultimate Game Pass, provides unlimited access to a rotating selection of more than100 games, including AAA new releases, indie titles and all of Electronic Arts’ separate EA Play service, which brings sports titles and more.
For $15 a month, subscribers can play those games on either Xbox or PC, play them on nearly any connected device through the cloud, and buy them at discounts. Microsoft has even taken to debuting its biggest in-house titles, like the newest version of Halo, on Game Pass the same day they’re available for purchase in stores.
Game Pass offerings were further bolstered late last year by a previous blockbuster, the $7.5 billion acquisition of ZeniMax, parent of the studio behind franchises such as Doom, Fallout, Wolfenstein, and Elder Scrolls. Game Pass is, by a long way, the best deal in games, and possibly in subscription anything.
With the Activision-Blizzard acquisition, Microsoft not only would get a passel of big franchises, but access to one of live entertainment’s hottest sectors, esports.
Activision’s pro leagues for Call of Duty and Overwatch, for instance, provided a blueprint for big, corporate-backed leagues with franchises in cities on three continents and a vast global fan base. If nothing else, adding live and scripted esports programming to Game Pass seems like an obvious opportunity.
One thing is clear: the deal already has put console archrival Sony on its heels. The industry leader had been sitting quite comfortably atop the console world, with demand for the PlayStation 5 still outstripping supply 14 months after its debut. Company coffers have been further plumped by the globe-girdling success of its latest Marvel movie, Spider-Man: No Way Home, with $1.6 billion in box-office gross, eighth all-time.
Sony shares dropped nearly 13% Tuesday, while most other big gaming stocks went up amid speculation of further deals to come in a sector already seeing record levels of mergers & acquisitions.
“The bigger worry for Sony investors is how the gigantic deal could shake up the videogame industry writ large. Sony had been leading Microsoft in the console war,” the Wall Street Journal suggested, speculating on what might happen to the PS5 if Activision titles become Xbox exclusives. “A better content library might push more gamers toward Xbox.”
Sony issued a rather tepid response to the deal, saying it expected Microsoft to honor Activision distribution deals on PlayStation, something Microsoft game chief Phil Spencer had already said the company would do.
But if you really want to ruin the day for Sony execs Kenichiro Yoshida and Tony Vinciquerra, tell ‘em Microsoft is getting into video.
Technically, it’s already partway there. That Xbox connected to your living room TV already has access to apps from just about all the major and mid-major streaming services, with the technical chops to show everyone’s programming at its best, plus access to all those games.
For all the splash of the Activision deal, though, its approval isn’t certain by any means, nor is a move into video entertainment.
Microsoft’s announcement came within hours of one from antitrust hawks in the U.S. Federal Trade Commission and Department of Justice. The two regulatory bodies jointly launched a public review of ways to clamp down on big mergers, especially in digital markets (this means you too, Warner Bros. Discovery and Amazon-MGM).
“Illegal mergers can inflict a host of harms, from higher prices and lower wages to diminished opportunity, reduced innovation, and less resiliency,” said FTC Chair Lina M. Khan. “This inquiry launched by the FTC and DOJ is designed to ensure that our merger guidelines accurately reflect modern market realities and equip us to forcefully enforce the law against unlawful deals.”
And not every tech giant is persuaded of the value of original video shows, either.
Alphabet’s YouTube may be the world’s biggest ad-supported video service, but this week backed off its six-year experiment in original programming, to focus on live shopping and Shorts, its clone of short-form video king TikTok.
Susanne Daniels, who headed original programming for YouTube, is departing the company, though YouTube will continue to honor funding commitments for children’s and Black creators and programming, for now.
Is Alphabet ’s original-programming pullback an object lesson for Microsoft about the limits of expensive original programming? Possibly.
The question is whether Microsoft and Nadella will follow the path of Apple and Netflix, diving into other forms of subscription entertainment. Or will they note the lessons of their own past and that of YouTube, and stay out?
On this, much nervousness at Sony and across Hollywood may depend.
