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Microsoft’s Activision Blizzard deal is set to bolster its Netflix-of-Gaming hopes

Microsoft Corp.'s MSFT 2.61% acquisition of Activision Blizzard Inc. THAT WE 0.02% aims to shake up the gaming industry by expanding the software giant's library of blockbuster video games and strengthening its efforts to lure consumers to their cloud gaming service.

The planned $ 75 billion deal would be Microsoft's largest ever and its most ambitious investment to date in its plan to turn its Game Pass subscription service into Netflix by gaming. Once the acquisition is complete, Microsoft said it would be the world's third-largest gaming company in terms of sales, with 30 game studios under its belt, including the developers of popular franchises Call of Duty, World of Warcraft and Candy Crush.

About a decade ago, Microsoft switched to bringing its enterprise customers to subscription-based cloud services. The move has helped raise its market value to $ 2 trillion and maintain its status as one of the world's leading technology companies. The Activision acquisition puts Microsoft in a position to use the same tactics on consumers by persuading players to abandon their expensive hardware and play on the cloud.

"Together with Activision Blizzard, we have an incredible opportunity to invest and innovate to create the best content, community and cloud for players to build significant new value for our shareholders," said Microsoft CEO Satya Nadella in an investor and media call. Tuesday. .

With more players playing on smartphones instead of expensive game consoles and computers, companies are driving around the world to develop services to stream advanced games to all kinds of devices in the same way that movies and TV shows are streamed. Amazon.com Inc., Alphabet Inc.'s Google, Sony Group Corp. and a host of smaller players are trying, but Microsoft has taken a big early lead in the new cloud gaming space by spending billions of dollars on acquisitions and infrastructure, analysts said.

"Microsoft has high hopes for gaming," said Mark Moerdler, a Bernstein Research analyst. "Microsoft has bought a number of studios because of what they're trying to build with Game Pass and subscription games."

If the company can convert some of Activision's nearly 400 million monthly active users into subscribers, it could significantly strengthen their cloud gaming business, said Mr. Murderer.

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Subscribers to Microsoft's Game Pass have increased 39% in the past year to 25 million, the company said. A billboard in New York showing Activision's 'Call of Duty: Vanguard'.

Photo: Richard B. Levine / Zuma Press

Cloud gaming is a new technology that allows people to stream games using almost any Internet-connected device with a screen, just as they stream videos on Netflix, Hulu and other platforms. However, streaming games is more challenging because games are interactive and require much more data to run smoothly. While Netflix moved into mobile gaming last year, so far it has only offered a handful of games that subscribers need to download to an Android or iOS device - not games that can be streamed via the cloud.

Consumer spending on cloud gaming services reached $ 3.7 billion last year, with Microsoft's Game Pass accounting for 60%, according to research firm Omdia, which predicts that total revenue from cloud gaming will hit $ 12 billion by 2026.

Along with the announcement of its planned acquisition, Microsoft said on Tuesday that subscribers to Game Pass - which includes cloud games, online multiplayer support and access to a large, rotating library of games - have risen 39% in the past year to 25 million.

Mr. Nadella said Microsoft plans to bring as many Activision games as possible to the Game Pass. As it has done with games from developers it has previously purchased, Microsoft can make future games from Activision exclusive on Game Pass and Xbox consoles, analysts said.

"We believe our investment in the cloud creates a unique opportunity for triple-A content to reach any screen on any device," said Microsoft game manager Phil Spencer after the Activision deal was announced.

Expanding its cloud gaming business will help Microsoft further diversify into consumer-oriented businesses. It could narrow the lead of Sony's PlayStation over Microsoft in gaming hardware and Amazon's in cloud services. Mr. Nadella's broader strategy for Microsoft puts cloud computing at the heart of a collection of different businesses, from enterprise software and enterprise data storage to social media and digital advertising.

Microsoft's commitment to gaming and the cloud has been underway for many years. Since the acquisition in 2014, Mr. Nadella relied heavily on offering corporate enterprise customers cloud computing services to run their businesses. This strategy has been the primary driving force behind Microsoft's progress to become the world's second most valuable company behind Apple Inc., with a market value of nearly $ 2.3 trillion.

Wu, a target for the GamerGate scandal, says Activision Blizzard's CEO led a culture of irresponsibility during an interview at WSJ's Women In: The Tech Industry event.

For years, games came in the back seat at Microsoft, where consumer-oriented businesses received less attention, past and present employees said. The Xbox team was located under the Windows operating system and did not report directly to the CEO when Mr. Nadella focused on selling the Office 365 business software package and developing the cloud computing business. The Xbox group struggled to find its place in this structure, employees said, as the device always competed with Windows investment priorities, typically without success, they said.

"Under Windows, we had to strike a balance between investing in great gaming initiatives and features for Windows enterprise customers," said Richard Irving, who spent 12 years working on the Xbox before leaving Microsoft in 2016. "That was the challenge. by being in the Windows division. "

A Microsoft spokesman declined to comment on the company's previous management of its gaming business.

A few years ago, Microsoft decided to become more aggressive in expanding its cloud use for gaming, its main point of contact with consumers. Internally, there has been concern that Microsoft is too dependent on the company for growth, said people with knowledge of the company's strategy. The decision to do more in gaming came after Microsoft looked at the possibility of buying consumer-oriented companies, including TikTok, Pinterest and Discord, the people said.

It started acquiring game makers and spent more than $ 10 billion on buying game studios and building a large library. The company has added popular titles such as the Doom franchise, acquired last year.

Microsoft is not alone. The global video game industry has been on a wave of consolidation and investment in recent years. Expenditure on mergers and acquisitions nearly tripled to $ 26.2 billion in 2021 from $ 8.9 billion in 2020, according to data from PitchBook. And venture capital agreements nearly doubled to a record $ 11.2 billion from $ 6.4 billion, according to the private market data firm.

Write to Aaron Tilley at aaron.tilley@wsj.com and Sarah E. Needleman at sarah.needleman@wsj.com

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