Microsoft's $68.7 billion acquisition of Activision Blizzard

What kind of concept is $68.7 billion? Calculated on a $100 bill, the height can exceed 7.5 kilometers when stacked; by weight, it exceeds 7.2 tons, and this is the price offered by Microsoft's acquisition of the game company Activision Blizzard. If Microsoft can successfully acquire Activision Blizzard next year, it will be the largest acquisition in the global game industry and Microsoft’s history. Microsoft will also surpass Nintendo and become the third-largest game company in the world, second only to Sony and Tencent. Since Microsoft announced on January 18 this year that it negotiated with Activision Blizzard and formally proposed the acquisition, more than 10 months have passed, and the acquisition has reached the most challenging time.

24 years ago, Microsoft was interested in acquiring Blizzard

Microsoft has been keen on the game industry for a long time. It can be traced back to the 1980s. The first generation of Microsoft Flight Simulator was released in 1982, three years earlier than the birth of the first generation of the Windows operating system. It is worth mentioning that the "Microsoft Flight Simulator" series is still being developed and updated. It has become one of the PC game series with the longest continuous update period in history.

In 1985, the first generation of the Windows operating system was released. In order to make users familiar with the advanced GUI interface of the Windows system at that time and be proficient in mouse operation, Microsoft added the simple puzzle game "Reversi", which is also the first Windows system built-in game. Since then, Minesweeper and Solitaire have replaced Reversi as the classic built-in games for Windows version 3.0 and later.

It was in 1995 that Microsoft really regarded games as a big business. At that time, Microsoft was already a well-known IT company in the world, and its operating system and office software had already occupied an important position in the global market, but the game department was just an "embellishment" for Microsoft.

In 1995, Microsoft gradually emerged in the game field, and the game department ushered in a new head, Ed Fries, who was transferred from the Office development department. In the same year, Sony's PS and Nintendo's Saturn game consoles entered the US market one after another, but Microsoft's top priority was to ensure the smooth release of Windows 95, and games accounted for an almost negligible proportion of Microsoft's revenue.

What really made Microsoft taste the sweetness in the game industry was the real-time strategy game Age of Empires, which was unveiled in 1997. The sales of Age of Empires exceeded 2 million copies that year. In 1998, Ed Fries tried to lobby Microsoft executives to acquire Blizzard (Blizzard) or Westwood (Westwood), but failed, and was preempted by Vivendi and Electronic Arts. As a last resort, under the leadership of Ed Fries, Microsoft acquired the FASA studio that developed the Mecha Warrior series.

1999 was a turning point for Microsoft's game department. At that time, Microsoft Chairman Bill Gates extended an olive branch to Sony President Nobuyuki Idei, hoping that Sony's PS2 under development could use Microsoft's game development tools. Nobuyuki Idei rejected the proposal, and at the PS2 conference, spent a lot of time introducing the PS2's non-game features, suggesting that the PS2 could replace the PC, a move that angered Gates.

Microsoft, with strong financial resources, immediately began cooperation or acquisition negotiations with a series of game companies. However, after contacting many large companies such as Electronic Arts, Square Enix, Sega, and Nintendo, the final negotiations were fruitless. In 2000, Gates made up his mind that Microsoft should be able to develop games like Sony and Nintendo, and also have its own game consoles, so the Xbox game console development plan was fully launched.

The subsequent story is familiar to gamers. In the home game console market, after defeating a series of opponents such as Sega, Nintendo, and Arita, Sony ushered in a heavyweight opponent that has been fighting so far and has more financial resources than the previous opponents-Microsoft. In the past 20 years, Microsoft has taken a multi-pronged approach in the game market: it has continuously launched new Xbox game consoles, and Xbox, Xbox360, Xbox One, Xbox One S, Xbox One X, Xbox Series X, Xbox Series S, etc. have continued to evolve.

During this period, the Xbox Game Pass (XGP) service, which debuted in 2017, is a platform that truly demonstrates Microsoft's game industry ambition. XGP is a service for playing games through a monthly payment. After paying a certain amount of monthly fee every month, users can play all the games in the Xbox Game Pass game library. In 2019, the XGP service began to support the PC platform. The significance of XGP is that, on the one hand, it has opened up the two platforms of home game consoles and PCs, and at the same time, it allows gamers to play more games at a relatively low price, reducing the trial and error cost of games.

Before the emergence of XGP, in the home game console market, game sales basically adopted the buyout system. A 3A game masterpiece usually sells for around $60, and XGP divides different membership levels. The most basic membership level is monthly. The fee/annual fee is $9.99/$59.99. Before announcing the acquisition of Activision Blizzard, Microsoft had made several heavyweight acquisitions in the gaming field. For example, in 2001, it acquired Full Effect Studio, which developed Halo, which is the exclusive first game masterpiece of Microsoft Xbox; in 2014, it acquired Mojang, the development company of Minecraft for US$2.4 billion; in 2020, it acquired Bethesda Softworks ZeniMax Media, the parent company of ZeniMax, has included the well-known IP The Elder Scrolls series and the "Starry Sky" under development.

But the largest of these acquisitions was the purchase of ZeniMax, which cost Microsoft only $7.5 billion. From $7.5 billion to $68.7 billion, close to Microsoft's one-year net profit, is Activision Blizzard so important to Microsoft?

Send charcoal in the snow, or take advantage of the fire to rob?

Activision Blizzard today can be seen as a collection of three companies: Activision, Blizzard, and King. The oldest of these is Activision, founded in 1979. The early development of Activision was not smooth, it even transformed into a database developer at one time, and was on the verge of bankruptcy several times. It was not until 1997, after merging several small game studios, that it gradually emerged from the crisis.

In 2007, after the acquisition of Blizzard, the 28-year-old Activision has become the world's second-largest third-party game production publisher (after Electronic Arts). On December 2, 2007, Activision and Vivendi Games announced their merger and changed their name to Activision Blizzard, further consolidating their market position. In 2015, seeing the prospects of the smartphone game market and the rise of casual games, Activision Blizzard acquired King for US$5.9 billion, bringing the famous Match 3 game, Candy Crush Legend into Activision Blizzard's extended family.

At present, Activision Blizzard owns many famous IPs such as Call of Duty, Guitar Hero, World of Warcraft, StarCraft, Diablo, Hearthstone, Overwatch, Candy Crush, and so on.

However, Activision Blizzard has not been operating satisfactorily in the past two years, and the development progress of its masterpiece games has not been smooth. Its stock price dropped from its highest point of US$103.81 in February in 2021 to US$57.28 in December of that year.

Activision Blizzard shares jumped 25.88% from $65.39 to $82.31 on the day the acquisition was announced. In comparison, the purchase price of US$68.7 billion, converted to Activision Blizzard's share capital, is equivalent to US$95 per share.

As for the acquisition, the current industry generally believes that Microsoft and Activision Blizzard will achieve a win-win situation. The addition of a series of famous IPs has added a heavy weight to Microsoft's XGP. With the help of Microsoft, Activision Blizzard's games have a stable channel capability, the market cost can be reduced, and the development and personnel costs are also expected to decrease.

The counterattack of the opponent

Regarding the progress of Microsoft's acquisition of Activision Blizzard, most of the big players in the global game industry who have become accustomed to dividing and combining are on the sidelines. Tencent and Nintendo have never made a public statement on this matter. EA CEO Andrew Wilson said at a recent event that Activision Blizzard's Call of Duty continues to be Sony's PS platform exclusive game, which is also good news for EA's cross-platform similar game Battlefield series.

The only one with clear and fierce opposition is Sony. The reason given by Sony is that the current PS exclusive game Call of Duty: Modern Warfare 2 will be adversely affected by the acquisition, because Call of Duty is the best-selling game IP in PS history, with an annual sales volume of 25 million copies. A major contributor to Sony's PS ecology. It is precisely because the Call of Duty series of games have such a strong influence that Sony is worried that Microsoft's acquisition of Activision Blizzard will be bad for itself because Microsoft is likely to incorporate the Call of Duty series of games into its own XGP platform so that PS platform Attractiveness will drop.

Phil Spencer, the head of Microsoft's Xbox business and the boss of the game business, promised Sony in public that the Call of Duty series of games will still be released on PS, and the length of time will exceed the current time of Sony and Activision Blizzard. There is a time stipulated in the contract. But obviously, such a verbal guarantee is not very convincing in the situation of full-scale competition between Microsoft and Sony.

The attitudes of anti-monopoly agencies in various countries are different

In addition to Sony, antitrust agencies in various countries also need to be persuaded by Microsoft and Activision Blizzard. According to the latest news, some FTC reviewers of the US Federal Trade Commission responsible for the acquisition are concerned that the deal will allow Microsoft to undermine the competitive fairness of the gaming market.

In addition to the FTC, regulators in Europe and the UK have also launched in-depth investigations. The UK Competition and Markets Authority (CMA) also released a debate document between Microsoft and Sony on Microsoft's acquisition of Activision Blizzard at the end of October. In the document, Microsoft revealed several interesting points and evidence. Sony has more exclusives than Xbox: 280+ exclusive first-party and third-party titles on PS in 2021; Sony's own first-party and exclusives are 'better quality': Sony's top 20 in 2021 The average score for exclusive games is 87/100, compared to 80/100 for the Xbox; sales of Sony's PS game console were twice that of Microsoft's Xbox during the same period.

But not all antitrust agencies "Say No" to Microsoft and Activision Blizzard. National regulators in Saudi Arabia and Brazil have approved the deal. Saudi Arabia, which has recently invested heavily in the global game market using state-owned capital, is the first country to approve the acquisition.

Brazil is the second country to acquire Activision Blizzard through Microsoft. In October, Brazil's Administrative Council for Economic Defense (CADE) approved the merger without restrictions. In response to Sony's concerns, CADE's response was that Sony's loss of Call of Duty exclusivity would exacerbate Microsoft's gaming platform. CADE believes that "Call of Duty" does not appear on Steam and Switch, but these two gaming platforms have developed rapidly in recent years. Therefore, CADE believes that no matter how much the Microsoft-Activision Blizzard deal threatens Sony's position, it is only a risk to one company, not a threat to the entire Brazilian gaming market.

According to the plan, the acquisition will be completed by July 2023. If it is unsuccessful, Microsoft will also pay Activision Blizzard $3 billion. So now this acquisition case is "halfway", and the good show is yet to come.