Making a dramatic move to dominate the Metaverse race from the outset, Microsoft on Tuesday announced the acquisition of the game developer Activision Blizzard in a deal valued at $68.7 billion.
The significant move in the gaming sphere rekindles memories of Microsoft’s big-dollar push into cloud computing over a decade ago. The company’s cloud business, led by Azure public cloud, SQL Server and GitHub, brought in $17 billion out of total revenue of $45.3 billion in Q3 2021. The company’s Q3 revenue from the Surface line of products, in the same quarter, declined by 17%.
Aside from doubling down on cloud services in the hot pursuit of AWS, Microsoft has renewed its focus on commercial and consumer products over the years, and the results are evident. Productivity and Business Processes consisting of Office Commercial products (including Office 365), Office Consumer products (Microsoft 365), LinkedIn, and Microsoft Dynamics (Dynamics 365) fetched $15 billion in Q3 2021Opens a new window . LinkedIn also delivered a 46% growth.
Clearly, investment in cloud services and consumer digital technology is paying off. Microsoft even contemplated buying the popular video-based social media platform TikTok (1 billionOpens a new window monthly active users or MAUs), user communication platforms Discord (150 million MAUsOpens a new window ), and image sharing service Pinterest (478 million MAUsOpens a new window ), denoting a consumer-focused outlook.
The takeover of Activision Blizzard would more or less serve the same purpose, i.e., further its position as a solid consumer-centric player. “Gaming is the most dynamic and exciting category in entertainment across all platforms today and will play a key role in the development of metaverse platforms,†saidOpens a new window Satya Nadella, chairman and CEO, Microsoft.
My alarm didn’t go off this morning, but I see this bomb did. Things are getting interesting in the gaming space 👀
— The Black Hokage (@TheBlackHokage) January 18, 2022Opens a new window
“We’re investing deeply in world-class content, community and the cloud to usher in a new era of gaming that puts players and creators first and makes gaming safe, inclusive and accessible to all.†Activision Blizzard is one of the several big-ticket gaming acquisitions by Microsoft in recent years preceded by ZeniMax Media (parent: Bethesda Softworks) for $8.1 billion, Mojang (Minecraft fame) for $2.5 billion, Rare for $375 million, and Ninja Theory, Undead Labs, inXile Entertainment, Obsidian Entertainment, etc for undisclosed amounts.
As of 2022, Activision Blizzard owns some of the biggest game franchises with 400 million players in total. This includes Call of Duty, Warcraft, Candy Crush, Diablo, Overwatch, Tony Hawk’s, etc. Its annual revenue for 2020 stands at $8.086 billion. The studio is yet to publish its Q4 2021 numbers, although it generated an income of $9.053 billion in the 12 months that ended on September 30, 2021, meaning it is well on its way to posting healthy Q4 results. For comparison, Microsoft Gaming’s revenue stands at $15+ billion.
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However, the company has been in the limelight for all the wrong reasons since mid-2021. In July, Activision Blizzard was sued over allegations of sexual harassment, discrimination and cultivating a frat-boy culture. This led to an investigation by the SEC as the studio shed nearly 40 employees and punished dozens of others. The scandal also prompted employees to demand Bobby Kotick step down as the chief executive while the company settled for $18 million with the U.S. Equal Employment Opportunity Commission.
Microsoft’s acquisition of Activision Blizzard is HUGE, especially with the positive direction Spencer has been steering the Xbox ship. First order of business: take out the trash. Bobby and all of those leaders that enabled the abuse and worked to cover it up NEED TO GO.
— Liana Ruppert (@DirtyEffinHippy) January 18, 2022Opens a new window
Yet, Kotick will reportedly continue as Activision Blizzard CEO and report to Phil Spencer, CEO of Microsoft Gaming. It is unclear whether Activision Blizzard will continue to operate independently in the future or if Kotick will continue to lead the studio after the deal closes sometime in the fiscal year 2023 (before June 30, 2023).
Microsoft currently has Doom, Age of Empires, Halo, the highly popular Minecraft, and others in its kitty. The possibility of improving Call of Duty and Halo based on one another or of World of Warcraft and Age of Empires is an exciting prospect.
Microsoft’s Game Pass now has 25 million subscribers across Xbox consoles (Xbox Cloud Gaming), Android, iOS, and PCs. However, this is a fraction of the 3 billion global players, with the entire gaming market currently worth nearly $200 billion. Microsoft expects players to surge to 4.5 billion by 2030.
So there’s a lot of scope in the sector. An additional perk is that Activision’s games across the Xbox platform can also help Microsoft close the gap with Sony PlayStation, the dominant console since the launch of the PlayStation in 1994. Microsoft Xbox has been challenging Sony PlayStation since 2001 but hasn’t usurped the latter.
Even though gaming, a sector wherein Microsoft already has a thriving base, presents a tremendous growth opportunity, the Windows-maker will be keen on exploring a new avenue that has emerged in recent years.
This is where the metaverse comes into play. Nowadays, gamers and even the average user spend time on games that allow them into a virtual universe of sorts. Multiplayer games such as Roblox, Minecraft, Fortnite enable the creation of virtual environments and shared experiences.
For instance, Fortnite grew to 350 million registered playersOpens a new window by 2020, just four years after being released in 2017. The upsurge resulted from the addition of the Fortnite Battle Royale as a gaming genre/mode wherein 100 players battle each other to win by being the last person standing.
Epic Games, Fortnite’s developer and publisher, created Party RoyaleOpens a new window following the success of the Battle Royale, except this one doesn’t feature guns or any other weapons, and by extension, any multiplayer combat. Instead, it is a socializing space wherein players can meet other players, hang out, watch movies, attend concerts without being eliminated.
See More: Microsoft’s Experienced Techies Are Defecting to Meta in Large Numbers
This is what the metaverse essentially is. It explains why Microsoft believes the acquisition of Activision Blizzard “will provide building blocks for the metaverse.â€
“The gaming industry is evolving quickly and player empowerment is at the heart of the next wave of innovation,†App Annie noted in its end-of-year predictions report for 2022. “Play-to-earn models — games that allow players to monetize in an open economy — combined with metaverses which emphasize players’ self-expression will be the biggest drivers of mobile gaming innovation in 2022.â€
It usually involves players/users immersively interacting in real-time through virtual avatars, digital goods, possibly cryptocurrencies, and made possible by virtual reality headsets such as Oculus.
Zuckerberg believes that the metaverse should be a collective effort that delivers interoperability instead of each company branching out independently. Considering the metaverse is still in the early stages of development, whoever delivers it first will dominate the industry in the years to come.
In this regard, Meta has a head start. In AR/VR hardware development, it is ahead, but certainly not ready, compared to Microsoft’s HoloLens. Other resources such as 10,000 employees, plus 10,000 upcoming in Europe, are dedicated to its metaverse ambitions. The company also launched Horizon Workrooms for work collaboration, which offers a glimpse into the next-gen concept.
But Microsoft is taking a different approach that is largely based on gaming. Here, Microsoft is ahead by miles. It will be interesting to see if an interoperable metaverse will be viable from a gaming-driven development approach.
Indeed. A good litmus test for me is be able to go & forth from one WebXR experience into another domain & be able to stay with the people I was with, & eventually maintain a persistent avatar identity.
Some of this loop is already possible today. See:— Kent Bye VoicesOfVR (@kentbye) December 31, 2021Opens a new window
Valued at $68.7 billion, the deal to acquire Activision Blizzard would propel Microsoft Gaming as the third-largest game development company trailing Sony and Tencent, according to Microsoft. The proposal to acquire Activision Blizzard is $95 per share, which is over the current market price of ~$82 per share.
This will be Microsoft’s biggest acquisition to date, eclipsing the $26.2 billion one of professional networking service LinkedIn in 2016 and the $19.7 billion purchase of artificial intelligence player Nuance Communications in 2021 for its healthcare division. The deal is pending regulatory approval.
With a metaverse plan of its own, it remains to be seen if employee defections from Microsoft to Meta continue into 2022.
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