Microsoft is trying to shake up the gaming industry by buying Activision Blizzard for $68.7 billion. The deal, which was announced last year, is still being reviewed by regulators and may or may not come to fruition. However, even if the deal gets approval, does the acquisition actually make sense for Microsoft? Or would Microsoft be better off without the acquisition? Does the acquisition really even matter that much?

Background

Activision Blizzard is one of the largest gaming companies in the world, generating over $7.5 billion in revenue in 2022. Activision owns many popular titles such as Call of Duty, Overwatch, Diablo, and Warcraft. The company makes games for consoles, PC, and mobile devices.

Microsoft’s rational for the deal breaks down to wanting to become a major player in the mobile gaming market and wanting to strengthen its video game subscription service, Xbox Game Pass.

Regulators in the United States, United Kingdom, and the European Union, however, have been concerned that Microsoft could make games exclusive to Xbox, hurting consumers. The biggest focus has been on the incredibly popular Call of Duty franchise. Microsoft, for its part, has said that it doesn’t plan on making Call of Duty exclusive and has indicated its intention of making Call of Duty more widely available. Microsoft has come to agreements with Nintendo and rival cloud gaming service provider Nvidia to ensure that Call of Duty will be available on those platforms for at least 10 years if the merger with Activision Blizzard is completed. PC gaming distributor platform Steam was offered a similar deal but has said it doesn’t believe it is necessary since it trusts Microsoft, and Sony has also been offered a similar deal but hasn’t reached an agreement with Microsoft, potentially because Sony has been trying to get regulators to block the acquisition.

Mobile Gaming

Microsoft has indicated that wanting to become a major player in the mobile gaming market is one of the primary reasons for the acquisition. Microsoft is planning on trying to create a game store for mobile devices that would compete with the current app stores run by Google and Apple. Microsoft seems to believe that, with the help of the mobile games offered by Activision Blizzard, it will be able to entice consumers to switch from the Google Play Store and Apple App Store to their rival gaming storing.

In order for this to come to fruition, Microsoft is hoping that Google and Apple will be required to change their policies with regards to mobile apps to allow for greater amounts of competition. For example, Apple doesn’t allow third-party app stores currently but is reportedly planning on doing so at least in Europe to comply with upcoming European Union regulations.

Even if Apple does allow third party app stores in Europe, Microsoft may still face major challenges. Apple may try to implement requirements which put competing app stores at a disadvantage. We will not know for certain until the regulations come into effect and Apple actually does permit third party app stores. Furthermore, Microsoft’s plan will not work unless regulators in other parts of the globe also follow suit and require similar changes.

Even assuming that third party app stores are permitted worldwide and given an equal playing field by both Google and Apple, Microsoft still faces a difficult challenge to make their own gaming store a success. Many consumers will likely stick with the Apple App Store and Google Play Store simply because it is already installed on their phones and because they are used to it. Consumers will need to be incentivized to switch app stores. Yes, Activision Blizzard does have a catalog of mobile games that may entice some consumers to switch app stores, but many consumers might choose to just play other mobile games that are available on the Apple App Store and Google Play Store.

Apple and Google are behemoths in the mobile world. So far no one has been able to successfully challenge them in the mobile world. Amazon and Microsoft have both tried and failed in the past to challenge Apple and Google with regards to smartphones. Given the entrenched position Apple and Google have in the mobile world, it is very ambitious of Microsoft to think that they will be able to challenge the Apple App Store and Google Play Store via offering mobile games. I personally am very skeptical that Activision Blizzard’s mobile games are a big enough draw to convince a large number of consumers to switch to a competing app platform.

Furthermore, since mobile gaming has a bigger user base than either consoles or PC, Microsoft is hoping that they can boost revenue by appealing to a segment of gamers that Microsoft has largely ignored up to this point. While the desire to get into mobile gaming makes sense, there are certainly cheaper ways for Microsoft to do so than by spending $68.7 billion. Microsoft could have attempted to acquire smaller mobile game studies and/or built their own studios to make mobile games.

Xbox Game Pass

Microsoft is also hoping to bolster its streaming service, Xbox Game Pass. Game Pass allows subscribers to access a large catalogue of video games for a monthly fee, currently $9.99 or $14.99 per month depending on the plan. New games are added monthly, and some of the games are day-one releases, meaning that the games are available to play via Game Pass on the same day that they are released for sale.

Game Pass has been a major focus for Xbox. Microsoft seems to see a subscription model as the future of the gaming industry and as their way to compete against Sony, which has the much more popular PlayStation console. Game Pass has been well-received by gamers, and to compete, Sony has created a rival subscription service called PlayStation Plus. However, Microsoft seems to be much more dedicated to the subscription model than Sony. Sony generates huge profits from selling games and seems hesitant to challenge the status quo.

The logic behind the Activision Blizzard acquisition is more straightforward and clear with regards to Game Pass than it is with trying to create a mobile app store. Via acquiring Activision Blizzard, Microsoft will be able to offer more games on Game Pass, including very popular games like Call of Duty, and subsequently hopes that the additional games will entice more gamers to subscribe to Game Pass.

Acquiring Activision Blizzard should help Game Pass gain more subscribers. Activision Blizzard does have a very large and popular catalogue of games. However, even in this area, Microsoft’s acquisition doesn’t provide as much benefit as some might think. Many gamers choose PlayStation because Sony is generally considered to have a better catalogue of first party exclusive games. If gamers want to play popular games like Marvel’s Spider-Man or The Last of Us when they are released, they need to have a PlayStation. While Xbox does already have their own first party exclusives, such as the Halo and Forza series, Xbox has been criticized for not having the same quantity of high quality, very popular first party exclusives as Sony. The Activision Blizzard deal should help Microsoft to a degree to rectify this problem. However, by planning on keeping Call of Duty multiplatform, Microsoft still will likely struggle to be able to match PlayStation in terms of first party exclusives. If Call of Duty remains on PlayStation, many gamers who either already have a PlayStation or are leaning toward buying a PlayStation rather than an Xbox will likely choose to just buy Call of Duty for the PlayStation rather than deciding to buy an Xbox and subscribe to Game Pass. While having Call of Duty on Game Pass makes Game Pass more enticing, it doesn’t move the needle enough to the point that gamers in large number are going to abandon PlayStation for Xbox Game Pass. In other words, despite spending $68.7 billion, Microsoft still might struggle to match PlayStation in terms of first party exclusives, and unfortunately for Microsoft, first party exclusives are one of the most important factors that gamers consider when choosing a console.

Does It Matter?

Microsoft is a huge company, with a market capitalization of over $2 trillion as of the time of writing. Microsoft has the second largest cloud computing service, Azure, and its 365 (more commonly known as Microsoft Office) productivity suite is used widely in the business world. Microsoft has been focusing lately on improving and showcasing their artificial intelligence capabilities, most notably introducing a generative AI chat feature for their search engine Bing. In other words, Microsoft is a very large and profitable business.

Buying Activision Blizzard requires a significant amount of Microsoft’s time, attention, and money. The opportunity cost for Microsoft of buying Activision Blizzard is significant. Microsoft is dedicating a large amount of resources to an acquisition which is not central to the most profitable or fastest growing components of its business. While, for sake of length, I am not going to go into detail in this article about the alternatives that Microsoft could have spent their money on, suffice it to say that Microsoft had a lot of alternative uses of their resources. Investments to expand their advertising business, further investments into artificial intelligence capabilities, and even smaller deals in the video game industry are all just some of the alternatives that they could have chosen to pursue instead of trying to acquire Activision Blizzard.

There are a lot of reasons why someone may be bullish on Microsoft. Microsoft is a leader in artificial intelligence and cloud computing, two areas that I believe will be major drivers of growth for Microsoft over the next decade plus. However, video games are probably not the main reason why most Microsoft shareholders invest in Microsoft. Xbox is only a relatively small part of Microsoft’s business. Regardless of whether Microsoft is able to complete the acquisition or not, I don’t think it makes a huge difference for the future of the company as a whole one way or the other.

Conclusion

I am not trying to say that the acquisition of Activision Blizzard will not help Microsoft at all. I think it, assuming it is approved, will help them be able to compete better than they currently are with Sony. However, I don’t think that the deal fundamentally changes anything with Microsoft. I am of the view that the acquisition will not be a major success but won’t be a major disaster either. I think Microsoft would have been better off not pursuing the acquisition and instead using their resources elsewhere. Nonetheless, in my opinion, Microsoft still has a bright future, and the fundamental story of Microsoft over the next decade will be about artificial intelligence and cloud computing, not Xbox or a mobile game store.

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