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🎮 Microsoft Wins FTC Fight to Buy Activision
Analyzing the potential impact on the tech giant and the broader gaming industry
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Today at a glance:
Not quite the finish line yet.
The significance of Activision for Microsoft.
Implications for the Broader Gaming Industry.
In a decisive turn of events earlier this week, a US federal judge gave Microsoft the go-ahead for its planned $69 billion acquisition of video game giant Activision Blizzard. This ruling effectively stymies the Federal Trade Commission's attempts to obstruct the deal.
First announced in January 2022, the transaction navigated several obstacles, including a recent intervention from UK regulators.
This latest courtroom success paves the way for the acquisition's completion and has far-reaching implications for Microsoft and the wider gaming industry.
Let’s dive in.
1. Not quite the finish line yet
The Federal Trade Commission (FTC) had been keen to halt the largest gaming deal in history, arguing that it could potentially stifle competitors by denying rival console makers access to Activision’s popular game titles.
Despite these concerns regarding an unfair consolidation, the agency failed to prove the acquisition of Activision Blizzard as unlawful under antitrust law. Judge Jacqueline Scott Corley opined that the FTC didn't adequately demonstrate how the deal would substantially impede competition in the video gaming market.
Following this ruling, the UK's Competition and Markets Authority (CMA)—initially expressing reservations about the transaction—suggested that a restructured deal could alleviate its concerns.
Nonetheless, there remain a few obstacles ahead.
On Wednesday, the FTC announced an appeal against its courtroom loss. Given that any impactful reinterpretation of antitrust law would likely necessitate traversing the appeals process (potentially reaching the Supreme Court level), this step was somewhat anticipated. However, the FTC's chances of overturning the ruling seem relatively slim.
Furthermore, the CMA declared that it would only endorse the Microsoft deal after a new investigation is carried out following a restructuring of the deal terms. The timeline for this remains indefinite.
Reacting to the FTC's appeal, Microsoft President Brad Smith expressed:
"We’re disappointed that the FTC is continuing to pursue what has become a demonstrably weak case, and we will oppose further efforts to delay the ability to move forward."
Microsoft wants to dodge the hefty $3 billion breakup fee that looms if the deal with Activision fails to materialize by July 18. After this date, both companies can independently abandon the transaction unless a mutual agreement to extend the deadline is reached.
Predicting the next steps proves challenging. As it stands, the UK is the sole competition authority resisting the deal. Microsoft might proceed with a restructured deal and brace for potential challenges in the UK.
This week marked a major step forward for the deal to close. Activision Blizzard's shares soared about 10% to $90, closely approaching the $95 per share Microsoft offered, suggesting market confidence in the deal's successful completion.
2. The significance of Activision for Microsoft
Why has Microsoft's staggering $69 billion acquisition stirred the gaming world?
This isn't the tech giant's first venture into amassing talented gaming studios under its XBOX umbrella. In 2020, Microsoft absorbed Zenimax Media, the parent company of Bethesda Softworks known for smash hits like The Elder Scrolls and Fallout, in an $8 billion deal.
However, Activision represents a different scale of beast. It boasts a larger market cap than Nintendo ($53 billion) and nearly matches Sony ($116 billion).
Activision Blizzard emerged from several prominent mergers and acquisitions in the gaming realm over the years. To recap from our previous post:
2008 — Merger with Vivendi Games, the owner of Blizzard ($18.9 billion).
2015 — Acquisition of Candy Crush maker King Digital ($5.9 billion).
2016 — Acquisition of Major League Gaming ($46 million).
One key detail often glossed over is the company's revenue composition:
In-game, subscription, and other revenue: Microtransactions and downloadable content (DLC) ~78% of overall revenue in FY22.
Product sales: Full game sales (physical and digital) ~22% of overall revenue.
The primary revenue source isn't the $70 Call of Duty game purchase from GameStop or the PlayStation store. It's the subsequent in-game transactions that can total hundreds of dollars. Consequently, securing the sales of a flagship third-party game on one's platform is crucial for reaping the lucrative DLC revenue.
Microsoft has trailed behind Sony in this generation, which has dominated third-party game sales. According to Activision’s 10-K, Sony contributed 13% of Activision’s revenue, compared to “less than 10%” for Microsoft.
Revenue by platform:
📱 Mobile (Apple and Google app stores) ~47% of overall revenue.
🎮 Console (PlayStation, XBOX, Nintendo Switch) ~23% of overall revenue.
💻 PC ~22% of overall revenue.
Other platforms include distribution and esports ~8% of overall revenue.
As the fastest-growing platform, Mobile places Apple and Google as the top two customers in FY22 (20% and 18%, respectively).
Given the above, the revenue from PlayStation represents a minor portion of the total revenue Microsoft stands to consolidate. Although it wouldn't make economic sense to forfeit at this stage, this segment will eventually become expendable for Microsoft.
Revenue by segment:
⚫️ Activision: Call-of-Duty, Tony Hawk, Crash Bandicoot, and more.
🔵 Blizzard: World of Warcraft, Overwatch, Diablo, StarCaft, and more.
🟡 King: Candy Crush franchise on Mobile, and more.
Blizzard is the smallest portion of overall revenue (25% in Q1 FY23) and an even tinier portion of the operating profit (12%).
Activision’s ~$8 billion annual revenue run rate equates to 4% of the global games market ($92 billion in 2022, according to Newzoo).
It could boost Microsoft’s existing “More Personal Computing” segment (which includes XBOX) ) by roughly 15%, based on its current run rate, with a similar operating margin profile of close to 30% of revenue.
However, the advantages of consolidating Activision Blizzard extend far beyond the existing financials.
Activision gives Microsoft an immediate footprint across all gaming platforms, particularly on Mobile, where Microsoft has completely missed the train, particularly relative to Apple and Google. However, King remains just a publisher. So its long-term potential remains attached to the longevity of its Candy Crush franchise.
The true jackpot lies in integrating several coveted franchises into Microsoft GamePass from Day 1. The value proposition from Microsoft will be increasingly hard for gamers to resist.
Here is how it could work.
Microsoft will maintain leading Activision Blizzard IPs available on other platforms, as illustrated by its 10-year commitment to bring Call of Duty to Nintendo platforms. However, nothing will prevent Microsoft from offering the same game at no additional charge on the GamePass service.
What used to be platform exclusivity will be subscription exclusivity.
The shift from platform exclusivity to subscription exclusivity means gamers could either pay $70 to play the new Call of Duty on PlayStation or Switch or access it at no extra cost as part of a $10/month Game Pass subscription.
Making Call of Duty available on Sony’s store equates to Netflix offering Stranger Things on Amazon Prime Video for $29.99 per season. The preferable choice becomes clear: subscribing to Netflix—or, in this case, becoming an XBOX GamePass subscriber user.
The consumer, focusing on price and value, emerges as the winner. Gamers will have the opportunity to play more games than ever before for a monthly subscription fee. The catch? Owning multiple, costly systems. An XBOX Series X retails for $499, and most gamers cannot afford two systems.
Sony's fervent opposition to the deal derives from this risk. While games may still be available on PlayStation, they will position Microsoft Game Pass as the Netflix of gaming—dominating in content. The parallels with how Netflix outpaced its competitors in the SVOD arena are uncanny. However, I must admit we are still a long way from seeing this market dynamic materialize.
3. Implications for the Broader Gaming Industry
The advancement of Microsoft's acquisition of Activision Blizzard this week potentially opens up a floodgate for more M&A deals within the gaming industry.
Tuesday’s decision was another blow to the FTC following the dismissal by a federal judge of its plea to halt Meta’s purchase of Within, a small VR gaming studio.
Setting aside US Big Tech and Tencent, which sit on the "acquirer" end of the spectrum, numerous gaming corporations could unleash greater value and create synergies through consolidation.
Manufacturers of first-party consoles, like Sony and Nintendo, usually engage in long-term partnerships with studios before contemplating acquisitions.
Sony’s Gaming & Network Services segment, which includes PlayStation, accounted for approximately a third of Sony's FY22 revenue, totaling ¥3.6 trillion or ~$28 billion (+33% Y/Y). However, it's noteworthy that this segment operates with a relatively slim 8% margin.
Nintendo recently completed a prosperous hardware cycle with the Switch and saw the Super Mario Bros Movie hit $1.4 billion in global box office revenue. Despite these successes, Nintendo's current revenue is a mere fraction of its 2008 peak when the Wii and Nintendo DS reigned supreme. The company's inability to capitalize on the transitions to Mobile and free-to-play has positioned it closer to a toy company, with digital sales only comprising 25% of its revenue.
NetEase has mirrored Tencent's strategic approach by investing outside China, as evidenced by its acquisition of Quantic Dream in 2022 and a $100 million minority stake in Bungie in 2018.
Other prominent US publishers like Electronic Arts and Take-Two Interactive are prime targets for ecosystem owners, offering similar advantages as Activision Blizzard with their multi-platform games. These opportunities have been made possible through a string of M&As.
Take-Two acquired mobile gaming giant Zynga for $12.7 billion in 2022
EA acquired Glu Mobile for $2.4 billion and Playdemic for $1.4 billion in 2021.
Roblox has forged its unique path in the industry, which we detail in a separate article.👇
Unity, meanwhile, has been on a buying binge, purchasing Weta Digital (known for visual special effects and animations) for $1.6 billion in 2021 and ironSource (renowned for app monetization and distribution technology) for $4.4 billion in 2022.
There are many other gaming companies worth discussing:
Epic Games (privately held with 30% ownership by Tencent).
Mobile giants like Playtika (PLTK) and Savvy Games (private).
Japanese publishers like Bandai Namco, Capcom, Konami, and Square Enix.
South Korean leaders like Krafton, Kakao Games, Netmarble, and NCSoft.
The list goes on!
One thing is certain: If Microsoft's acquisition of Activision Blizzard is any indicator, the gaming industry could be on the precipice of further consolidation.
That's all for today!
Stay healthy and invest wisely!
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Author's Note (Bertrand here 👋🏼): The views and opinions expressed in this newsletter are solely my own and should not be considered financial advice or any other organization's views.
Disclosure: I am long NTES, RBLX, TCEHY, and U in the App Economy Portfolio. I share my ratings (BUY, SELL, or HOLD) with App Economy Portfolio members here.