big moves are happening in the video game industry. Microsoft,
the tech giant behind the Xbox console announced plans in early
2022 to buy Activision Blizzard, the force behind Call of Duty
and World of Warcraft among other major titles, the $68.7
billion all cash deal is expected to close in 2023. If
approved by regulators and shareholders, it will be the
largest tech deal in history
video games are a $200 billion a year industry half of that
industry is mobile $100 billion dollar business yet Microsoft
prior to this Activision acquisition was zero. So it
definitely fills a need.
They'll always be hurdles and they're certainly going to be a
review, I think by FTC could be DOJ of the transaction. That's
that's a given. It's just a question of does it pass that
review
Microsoft isn't the only one making moves, Take Two
Interactive parent company of Rockstar Games most known for
the Grand Theft Auto series just bought Zynga, the creator of
Farmville for $12.7 billion. And shortly after the Microsoft
move, Sony announced plans to buy Bungie which was formerly
owned by Microsoft. Bungie is currently the developer of
destiny, a massively multiplayer online game that incorporates
first person shooter and role playing mechanics. Bungie is
best known for creating the original Halo, a first person
shooter that launched with the first Xbox console in 2001.
Sony's response to this was to say, hey, you know we can get a
big name property to we're going to go after Bungie. And not only
is it a nice studio that makes destiny in a game people love.
It's also kind of poking Microsoft a little bit.
What do these multi billion dollar deals mean for the future
of gaming?
There's been a consolidation wave going on in the game space
for the last several years. And, look, you've had a lot of
private equity money flow into the industry and it's highly
fragmented, so it's just natural to see consolidation. Microsoft
being a trillion dollar company, obviously, they can do bigger
deals and others.
In September of 2020, Microsoft announced its intention to
acquire ZeniMax Media the deal closed in March 2021. It brought
games like the Fallout series, The Elder Scrolls and
Wolfenstein, among others under the Microsoft umbrella, this was
a $7.5 billion all cash deal, which now pales in comparison to
the $68.7 billion bid for Activision Blizzard.
Microsoft has the Xbox platform and Sony has the PlayStation
platform. Those are both incredibly large players, and
they're the devices that people have at home to play these games
on. developers tend to release games on those platforms as
either first party which means that they are part of those
platforms are third party which means that they are independent
developers choosing which platform to develop on
the evolution of streaming services. The proliferation of
consoles, and other connected devices like smartphones has
made the video game space more lucrative than ever. In 2021.
Consumers spent $60.4 billion on video games according to NPD
Group. Sony's gaming sector made 813.3 billion yen in sales
during the last three months of 2021, which is just above $7
billion. And Microsoft made $5.44 billion off gaming in the
last three months of 2021.
Microsoft woke up to the fact that half the world's
population, nearly 4 billion people play video games and this
is a huge market for them that they only have barely begun to
scratch the surface
Historically there haven't been huge plays of big companies
buying other studios in the game space. Well, we see Microsoft
now consolidating through the acquisition of Activision
Blizzard and of course Sony looking to buy Bungie we had a
Microsoft Zenimax transaction earlier on. So they're starting
to be more plays in this space. And it's showing that Microsoft
really realizes the value longer term, both the video game
sector, the metaverse and other plays like that.
When it comes to console choice, exclusive titles are a key
driver of consumer sentiment. The original Xbox had Halo, an
acclaimed first person shooter with an immersive story. This
became the killer app that drove sales of the original Microsoft
console. According to VGchartz, more than 24 million Xboxes were
sold over the life of the console and Halo and Halo 2
combined for 12 million units and sales which is three times
higher than the next best selling title. Nintendo has
Mario, Sony has games like The Last of Us and Uncharted. Now
with the makers of Call of Duty and destiny potentially becoming
first party games, which is to say games created and owned by
the console producer, there could be a new push for
exclusives to fuel console sales and game subscriptions in years
to come.
I think subscriptions are great, too, a great way to monetize
your catalog. It allows people to try a number of different
games. And that way when a new iteration of these games come to
market, you know they're more likely to buy a new version of
that game.
One potential downside to consolidation is decreased
competition, especially among developers that make AAA titles
basically the equivalent of blockbuster movies. But for
video games,
from an industry point of view, as a game developer, it's it's
quite scary. Obviously, it's a tremendous financial opportunity
for a lot of these studios that are getting bought. But it's
also limiting the amount of competition in the space. And
that that always makes for a bit of a worrisome precedent, other
gamers have had to buy a PlayStation if you want to play
Uncharted, it's not on other consoles. So maybe Is that
really so different than what we've always historically had,
Microsoft has stated that they do not have plans to make Call
of Duty exclusive after the current contract ends. Shortly
after Microsoft announced the deal on January 18, Sony stock
began to drop from about $124 a share by February 23, the stock
had reached a year to date low of about $101 per share. But in
the long term, the acquisition of Bungie a successful developer
could help Sony in cultivating a larger consumer base,
Destiny is you know, become a very good live services game.
And that's has not been one of Sony strengths, you know, over
the last cycle. So this improves them, they're in that area. So
they're all looking to get more IP and strengthen themselves in
key areas of the industry.
I think it's easier transaction pass review, it's much smaller,
much smaller company being acquired. So I think if there's
any review there, that one's going to be pretty easy to get
across the line. I think it actually whether it's
intentional or not, throws quite a thorn into Microsoft side over
there try their transaction of activism, Activision Blizzard,
because now that transaction showing that there is
consolidation occurring in the video game space, and that there
could be anti competitive issues raised by that one of the past
maybe people weren't looking at the video game sector to say
that there's there's an issue of competition here.
It's the Microsoft deal that is really going to catch the eye of
regulators. In fact, the day Microsoft announcer is gonna buy
Activision, the FTC and the DOJ antitrust divisions came out and
said, Hey, we're gonna put out stricter guidelines going after
deals just like the one Microsoft announced. And in
fact, it's since come out that the FTC is going to be the
agency for reviewing this. And Lena Khan, the new chair of the
FCC, she's really out there to make an example. And this could
be the kind of deal she wants to blow up to say, hey, we're not
going to let these multi trillion dollar companies get
bigger and bigger and bigger.
It looks from the outside like Microsoft and Sony are
positioning themselves to stay relevant and expand their
consumer base in the years ahead.
The economical model of the games industry has been
incredibly risky for for as long as I can remember, even when I
joined the games industry, the reality is that when you make a
video game, you spend two to three years based on a
prediction of what people might like in the future. And you
spent sometimes millions of dollars making these games, some
of the larger games are hundreds of millions of dollars, and then
hope that you sell enough units enough copies that people will
like it enough in the end to actually offset those costs. And
for every big game that gets made, and that is a super hit. A
lot of studios have one or two failed projects. So they're
always dealing with a lot of risk,
subscription services and streaming continue to make
inroads there may soon come a point where consumers can
smoothly play triple A games over the cloud without the need
for consoles or gaming computers.
So instead of running out and you go buy a $500, Xbox or
whatever it costs, you can just buy a laptop, or your Smart TV
and run these games streaming over the internet and that they
see as a huge opportunity to expand the Xbox and their gaming
footprint beyond just those pricey consoles and PCs that
they already exist on