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The real story behind the Activision-Blizzard acquisition drama

Sony has a lot to fear from the Activision-Blizzard acquisition, and it has little to do with Call of Duty

A business move has dominated gaming news for the last month. Not new game announcements, or a new console, or tech or a service. We’ve been caught up in the drama around a business deal and the fallout from it. We’ve been caught up in a new saga of Xbox vs PlayStation, with Activision-Blizzard as the newest wrinkle. Microsoft offered almost $70 billion buy Activision-Blizzard in January of 2022. Activision-Blizzard is made up of three game publishers: Activision, Blizzard and King. Activision has been one of the biggest and most consistent game publishers for over thirty years. They own Call of Duty, the biggest console-gaming franchise in the world. King dominates on mobile. You may have heard of Candy Crush, which King produces. Candy Crush has been a top-ten grossing mobile game for years running. Blizzard rounds out the three. Blizzard has had a rough few years, but they still own World of Warcraft, Diablo and Overwatch. Overall, Activision-Blizzard owns the most valuable third-party game catalog in the world. Microsoft wants to own that.

Microsoft may have jumped the gun a little bit on their promo graphics.

Blizzard accepted Microsoft’s deal. Microsoft announced the deal with fanfare and talked about all the things they would do with the Activision-Blizzard catalog. Not all were pleased.

Government Intervention

The deal has not gone off as smoothly as Microsoft had hoped. Microsoft is a global company, and so they are subject to scrutiny in many countries. Some countries, like Brazil, have already cleared the deal. However, others are holding it up. Most of the news around the acquisition right now centers on the Competition and Markets Authority (CMA) in the United Kingdom. The CMA won’t approve the acquisition until they finish their investigation. Microsoft is taking the CMA seriously. The CMA recently required Meta to sell Giphy, a GIF sharing website it owned. They reasoned that Meta could restrict access to GIFs from other social media sites, gaining an uncompetitive advantage. They hold the power to cancel the Activision-Blizzard acquisition as well.

The CMA building in London

The CMA has called into question a lot of things regarding Microsoft and Sony’s position in gaming. Why Sony? Sony has been talking openly to the CMA about the perceived harm that Microsoft would inflict on the industry. They brought up the power of Call of Duty, and called it an “essential game”. The CMA entertained that argument. Microsoft countered by bringing up Nintendo’s success. The Nintendo Switch doing great without even having Call of Duty on their platform. Then, Sony pivoted, and brought up the danger of Microsoft making Activision-Blizzard games exclusive. They stated with console exclusivity, and then pivoted again to the dangers of Microsoft putting Call of Duty on Game Pass. Microsoft CEO Satya Nadella argued that Xbox is in third place in the console wars. Sony, in his estimation, is winning. “So if this is about competition, let us have competition,” Nadella said.

All of this can come off as childish. Maybe Sony is being a sore loser, or Microsoft is deliberately misrepresenting their strength as a company to get the acquisition to go through. It runs deeper than that, and the arguments to this are revealing a lot about Microsoft and Sony’s business models and views on gaming.

Microsoft’s Long-Term Strategy with Xbox

Xbox is prioritizing the cloud. Photo by Muha Ajjan on Unsplash

Xbox struggled during the Xbox One era. The Xbox One underperformed in sales, losing both to the PlayStation 4 and the Nintendo Switch. Microsoft had to cancel or delay big exclusives like Scalebound and Halo Infinite, and the exclusives that did come out didn’t compete well with PlayStation exclusives. With all this in mind, Microsoft decided to shift their focus. They stopped focusing on selling consoles, and instead focused on building the Xbox brand outside of consoles

They created Game Pass, a game subscription service similar to Netflix. They moved in 2018 to put all their first-party games on Game Pass day one. At the time, you could buy a year’s subscription to Game Pass for $60. For the price of one game, you could have access to every new Xbox release and a library of other games, too. They launched Game Pass on PC the next year, at the same introductory price point. Microsoft decided to make a long-term investment. They pivoted away from the traditional console strategy. 

Nintendo sells their first party games for full price years after release. Mario Kart 8: Deluxe has been a top-10 seller for boxed games since its release in 2017 and it hasn’t seen a price decrease. PlayStation games don’t hold that much value, but as we’ll talk about soon, they still rely on first-party AAA game sales at $70 apiece. They’ve released a few first-party games in the top-ten grossing for the year. Microsoft has released zero. Microsoft still sells their first-party games standalone, but they have shown that they don’t plan to win in gaming the same way as Sony or Nintendo.

Microsoft is trying to play the long game on the console wars. The Xbox Series S has the worst specs of current generation consoles, but it runs Game Pass games just fine. With cloud streaming, Microsoft could also extend the life of the Series S beyond when its hardware falls too far behind. They sell both the Series X and the Series S at a loss, but the Series S is sold at a higher loss. With chip shortages, both Microsoft and Sony have a hard time producing enough premium consoles to meet demand. The Series S gives Microsoft another way to push their platform even when they face supply constraints. 

Xbox as a platform makes most of its revenue digitally. AAA games sales don’t matter as much to Microsoft as they do to Sony. However, they do care about subscription revenue. The Brazilian investigation of the acquisition forced Microsoft and Sony to report how much they make from subscription services. Microsoft made approximately 20% of their revenue on Game Pass alone. The exact number for PlayStation Plus hasn’t been released publicly, but we know that it is lower. These numbers only take console data into account, so Game Pass is outperforming PlayStation Plus by even more if you take PC into account.

In this light, the Activision-Blizzard acquisition is just another step in a long-term plan. Microsoft could put Activision-Blizzard games on Game Pass and get their subscription revenues up. They could also sell the games on other platforms, like they already do with Bethesda. Over time, the percentage of their revenue that they make selling Xbox consoles and games will drop, and they will make more money from subscriptions and sales on other platforms.

Sony’s strategy with PlayStation

Photo by Kerde Severin on Unsplash

Sony’s strategy with PlayStation is closer to the traditional console strategy. They make more money than Microsoft on console sales, and they make more money on AAA game sales. They also make more money on boxed game sales than Microsoft. They have higher revenue and profit from gaming right now than Microsoft does. 

For these reasons, Sony wants to maintain the status quo in gaming. As long as consumers are buying their AAA games for $70 and buying them multiple times a year, Sony will maintain and build on their lead. They have more first- and second- party AAA IP, and these games have sold better than Xbox exclusives. They lose these advantages if they have to follow Microsoft. They don’t have enough IP or cash-flow to buy IP to make PlayStation Plus compete with Game Pass on value. If they started releasing games on PC the same day as on PlayStation, they would cannibalize their console sales and their full-price AAA game sales. They cannot compete on infrastructure, either, so cloud gaming and subscription services are not going to be as viable for them.

The Sticking Point: Game Subscriptions and Cloud Gaming

Photo by C Dustin on Unsplash

All of this comes back to cloud gaming and subscription services. The CMA agrees. The two points of competition that they keep coming back to are cloud gaming and subscription services. Here’s how they laid it out in their issues statement

“The Merger gave rise to a realistic prospect of an SLC [substantial lessening of competition] as a result of vertical effects arising from:

A: Microsoft withholding or degrading Activision’s content — including popular games such as CoD [Call of Duty] — from other consoles or multi-game subscription services; and

B: Microsoft leveraging its broader ecosystem together with Activision’s game catalogue to strengthen network effects, raise barriers to entry and ultimately foreclose rivals in cloud gaming services.”

They worry that Microsoft could leverage Activision content to force other multi-game subscriptions and cloud gaming services out of business.

Microsoft created a rebuttal, arguing against both points. On cloud gaming, they argued that the technology is still new, and that they only advance cloud gaming in general through innovation. On multi-game subscriptions, they argued that “Multi-game subscriptions are a means of payment — not a market.” You can find the full arguments here, as they are too extensive to quote.

Whether subscriptions are an innovation or just a different means of pay, they are changing the gaming landscape as we know it. Microsoft is hitching their future in gaming to Game Pass. Sony sees that as a threat, and so they are trying to convince the CMA to shut the acquisition down. If the deal goes through, we will see if Sony adapts to the subscription landscape, or if the gaming ecosystem becomes more stratified. We could see a world where Xbox, PlayStation and Nintendo do not directly compete with one another at all in gaming.

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