Why Activision Blizzard’s Deal is Important to Microsoft

The EU competition authority approved a 68.7 billion USD deal between Microsoft Corporation (NASDAQ: MSFT) and Activision Blizzard Inc. (NASDAQ: ATVI) on 15 May 2023, which the companies announced in January 2022. The UK and US regulators had not supported this acquisition earlier. Today we will look at the regulators’ concerns and the main benefits Microsoft Corporation could gain from this deal.

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Microsoft’s key business segments

• Cloud computing. One of the corporation’s main products in this segment is the Microsoft Azure service. It helps build, scale, and manage cloud applications and services. In terms of revenue, it is the second largest in the world after Amazon Web Services
• Products and business processes. For example, Microsoft 365, Windows, Dynamics 365, LinkedIn, Power Platform, and other products that help users become more productive. The number of active Microsoft 365 users per month exceeds three hundred million
• AI technologies. A new division, Microsoft AI and Research Group, was created in 2016 for the development of artificial intelligence projects. In addition, the corporation signed an exclusive agreement with OpenAI that developed the popular GhatGPT chatbot. As at May 2023, Bing was the only browser with a built-in AI-based chat function 
• Devices. The company produces Surface PC, Lumia smartphones, Surface Pro tablets, Surface Book laptops, Surface Studio hybrid devices, Xbox consoles, HoloLens augmented reality headsets and other devices. The number of Xbox Game Pass active users per month is over twenty-five million

Microsoft’s gaming portfolio

Microsoft Corporation’s gaming portfolio is one of the largest in the industry, spanning a wide range of genres and platforms. According to April 2023 data, the corporation is the owner of twenty-three studios that develop exclusive games for Xbox and PC. After the deal with Activision Blizzard Inc., this figure could rise to thirty-two. Note that the closest competitor, Sony Group Corp., owns thirteen game development studios.

Listing some of Microsoft Corporation’s studios: 

• Mojang Studios – develops Minecraft and Minecraft Dungeons
• Playground Games – works on Forza Horizon and Fable
• Ninja Theory – develops Hellblade: Senua’s Sacrifice, Senua’s Saga: Hellblade 2, and Project: Mara
• 343 Industries – creates and develops the Halo franchise
• Obsidian Entertainment – develops The Outer Worlds, Grounded, and Avowed

Microsoft Corporation is the owner of ZeniMax Media, which is the parent company of Bethesda Softworks and other studios developing games such as The Elder Scrolls, Fallout, Doom, Wolfenstein, Dishonored, and The Evil Within.

Activision Blizzard’s gaming portfolio

To name the most famous studios owned by Activision Blizzard Inc.:

• Blizzard Entertainment – develops the series World of Warcraft, Diablo, Hearthstone, Overwatch, and StarCraft; and works on Diablo 4 and Overwatch 2
• Treyarch, Infinity Ward, and Sledgehammer Games – develop the Call of Duty series of video games
• Toys for Bob – develops Spyro the Dragon and Skylanders series
• Vicarious Visions – develops Tony Hawk’s Pro Skater and Crash Bandicoot series

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Benefits of the deal for Microsoft 

• Probable revenue growth
• Expansion of the gaming portfolio
• Increase in the number of users of Xbox game consoles and Xbox Game Pass subscription service 
• Strengthened position in the competition with Sony Group Corp (NYSE: SONY), Tencent Music Entertainment Group (NYSE: TME), Nintendo Co., Amazon.com Inc. (NASDAQ: AMZN), and Alphabet Inc. (NASDAQ: GOOG)
• Increasing competitiveness in the rapidly growing cloud-based gaming market
• Collaboration with experienced and highly skilled specialists in the gaming industry
• Diversification of income sources and reduced dependence on Windows and Office products

Microsoft’s main competitors in the gaming market

• Sony Group Corp. – develops PlayStation consoles
• Nintendo Co. – produces Nintendo Switch consoles and owns the Nintendo Switch Online subscription service
• Alphabet Inc. – the owner of the Stadia cloud gaming platform and Stadia Pro subscription service  
• Amazon.com Inc. – owns the Luna cloud gaming platform and Luna+ subscription service, and game developer Amazon Game Studios   
• Tencent Holdings Ltd. – develops the WeGame platform and Tencent Cloud service and has stakes in gaming companies such as Riot Games, Epic Games, Supercell Oy, and Activision Blizzard Inc. Note that the Chinese tech giant has approved the acquisition of the latter 

Regulators’ concerns and actions

The European Commission approved the deal on 15 May with the condition that Microsoft Corporation grants licences to release games owned by Activision Blizzard Inc. on various cloud platforms. The corporation has committed to neither compromise the quality nor restrict the contents of its games available on competing platforms. Moreover, the games owned by Activision Blizzard Inc. will be available to European users on any gaming services for 10 years.

On 20 May, it became known that the State Administration for Market Regulation of China (SAMR) has also approved the deal, but without any conditions.

However, the Competition and Markets Authority (CMA) blocked the purchase. According to officials of the UK regulator, Microsoft Corporation already has an advantage over its competitors in cloud gaming and the deal could significantly strengthen this position, thereby enabling the company to negatively affect its competitors.

The US Federal Trade Commission (FTC) has filed a lawsuit to block the deal, referring to concerns over reduced competition and development of the gaming industry. The FTC is interviewing representatives of this segment and trying to find out how the deal will affect their business and access to popular games owned by Activision Blizzard Inc. The hearing is scheduled for 2 August 2023.

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Summary 

The deal between Microsoft Corporation and Activision Blizzard Inc. could be one of the biggest and most significant in the history of the gaming industry. The IT giant could become one of the world’s top three gaming corporations in terms of revenue, giving way only to Tencent Holdings Ltd. and Sony Group Corp. 

It should be noted, however, that the acquisition is still an open question and the likelihood of it happening is difficult to determine. EU and Chinese antitrust regulators have approved the deal while the UK and US regulators have not yet. Nevertheless, market players are actively buying Microsoft Corporation shares. Consequently, the quotes recorded a rise of more than 40% since the beginning of the year and are heading to an all-time high.

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The material presented and the information contained herein is for information purposes only and in no way should be considered as the provision of investment advice for the purposes of Investment Firms Law 87(I)/2017 of the Republic of Cyprus or any other form of personal advice or recommendation, which relates to certain types of transactions with certain types of financial instruments.