Microsoft Spends $69 Billion on the Video Game Publisher Activision: A Thoughtful or Crazy Decision?
World Bank President David Malpass was dumbfounded after it was revealed that the US software giant Microsoft has acquired the video game company Activision Blizzard.
Commenting on the deal announced on January 18, 2022, Malpass said: “I was amazed this morning by Microsoft's $75 billion investment in a video game company, compared to just $24 billion in donations from 48 rich and middle-income countries over three years to help the poorest countries.”
On that day, Microsoft announced that it would acquire, for $68.7 billion, the American video game company Activision Blizzard, which owns widespread games, including Candy Crush and World of Warcraft, as well as Call of Duty, the best-selling military-themed games around the world.
Motives for the Deal
Microsoft's acquisition of the company is the largest ever acquisition in the history of the global video game industry, and its value is more than twice the amount that Microsoft paid to buy the popular social platform LinkedIn in 2016, according to The Economist magazine.
The magazine said in a report dated January 22 that for even a major company that boasts a huge capital of about $2.3 trillion, the $69 billion figure is a lot of money to spend on video games.
“This process may represent a big bet on the future of entertainment, but it is not a crazy decision,” it added.
It attributed this to the fact that the gaming industry was growing rapidly even before the Corona pandemic, which inflicted and continues to inflict painful blows on various economies of the world.
However, the closures have made video games more attractive, with more time available and some wanting to break boredom.
In 2020, global video game revenue increased by 23 percent, to reach $180 billion, according to international statistics.
Microsoft is already a big player in this sector, and this deal is a step towards the integration it seeks, where it owns the video game system Xbox, which already has popular games such as Minecraft and Halo.
It also has 25 million subscribers to its game service Game Pass, known as Netflix of video games, and it gives its subscribers access to a huge collection of games from various producers for a monthly subscription.
By purchasing Activision, Microsoft will control the mobile game studio King, the maker of Candy Crush, one of the most popular mobile games ever, while Microsoft did not have any presence in mobile games, which is the fastest growing segment of the sector.
“Once the transaction procedures are completed, Microsoft will become the third largest video game company in terms of revenue, after the Chinese Tencent and the Japanese Sony, the owner of the PlayStation system,” the magazine indicated.
“The video game industry has already been witnessing a lot of consolidation activity lately, with five deals worth $1 billion or more,” it explained.
On January 10, 2022, American video game company Take-Two Interactive spent $13 billion to buy mobile game production company Zynga.
Major companies such as Amazon, Apple and Netflix have entered the field of video games in recent years, and any of them may work on a new acquisition, following in the footsteps of Microsoft, as well as Sony, which is also their opponent, and the deal is a huge blow to it, according to the magazine.
Industry History
The American The Wrap website defines video games as an interactive entertainment technology that can be used across multiple tools, including virtual reality devices, Xbox, PlayStation, computers, or smartphones.
Video games officially appeared for the first time in the 1970s, when the American company Notting Associates released the first commercial video game called Computer Space in 1971.
Only a year later, the famous American company, Atari, appeared, and soon launched its first game, Pong, which was a huge success at the time.
Games followed later, but they were technically limited, until 1977 when Atari developed the first home gaming device that allowed players to play many games, which made a big leap.
Then, the games settled for a period of time, until 1985 when the Japanese company Nintendo developed a new entertainment device, based on buttons instead of the handle.
It began selling the device at cheap prices and making a profit by selling games, and this system that exists so far, which is credited with the revival of the video game industry.
Later, the devices developed to include consoles and multiple games, and companies specialized in home games such as Sony and Sega appeared.
Sony launched its first PlayStation in 1995, while Microsoft launched its Xbox in 2005.
The emergence of social networks, smartphones and tablets in recent years has given rise to new categories such as mobile games and social games, which offer graphics that look like reality and simulate reality to an amazing degree in many cases.
According to the German platform Statista, for data and statistics, the video game industry has achieved global record profits during the past three years, with total revenues exceeding $300 billion.
The Corona pandemic contributed to stimulating the sector’s growth by 46%, as the profits of the cinema and music sectors exceeded globally.
The American MarketWatch website revealed that the profits of the video game industry will reach $180 billion in 2020, exceeding those of the sports and film sectors together, by $75 and $100 billion, respectively.
It is expected that the sector’s profits will exceed $190 billion by the end of 2021; the video game market has more than 2.7 billion players in the world and is expected to attract 400 million players by the end of 2023.
Battle of the Metaverse
Satya Nadella, CEO of Microsoft, described the acquisition when announcing the deal at his quarterly earnings conference on January 18, as a step towards Metaverse, which is a term referring to the virtual world promoted by major technology companies as an extension of the current internet world.
“We feel we are in a good position to engage in the next wave of the internet and build the world of Metaverse shaping the future of the digital map. The video games are paving the way for that,” he added.
Between October and December 2021, Microsoft generated $51.7 billion in revenue, and it recorded a net profit of $18.8 billion, which exceeded expectations.
Commenting on this, British media advisor Michael Wolf said that “big tech companies are well aware that video games are a growing field and related to its ambitions related to the virtual world on a larger scale.”
“As the virtual worlds of video games expand into places where players can do things like make purchases or watch movies, we'll be able to do everything we do in the real world within games,” he told the Financial Times on January 21.
Therefore, video games are set to become the main battleground for tech companies that want to maintain their central role in the future digital lives of billions of users.
“Some of the largest technology companies, already owning large stakes in the world of video games, even if they did not go far in trying to produce them themselves,” the newspaper pointed out.
These shares include Apple and Google's mobile app stores, through which the largest single segment of the video game market runs.
Amazon's Twitch and Google's YouTube are attracting huge audiences to watch video games.
With Oculus Quest headphones, Meta (formerly Facebook) has the largest share in the emerging virtual reality market.
Kathryn Rudie Harrigan, a professor at Columbia University, describes Microsoft's move toward Activision as a preemptive strike to wrest the lead away from Meta in building Metaverse.
Harrigan told the Financial Times: “Meta stole the sparkle by switching to virtual reality, and Microsoft's acquisition of Activision will give it a chance to at least have a priority in the decision before Meta.”
