Microsoft's Acquisition of Activision Is Record for Monopolized BigTech's Power
Consolidation is out of control in the Fed stimulus Era
Microsoft will buy video game giant Activision Blizzard in a $68.7 billion all-cash deal.
Microsoft’s agreement to pay almost $69 billion for Activision Blizzard would market the highest price ever paid by a U.S. tech company in an acquisition. The biggest prior deal came in 2016, when Dell purchased EMC for $67 billion.
Sony’s stock has slid on the 'monumental challenge' from Microsoft gaming deal. Microsoft instantly becomes the 3rd biggest Gaming company with the deal. It turns out, you can buy your want to Metaverse dominance. We have to talk about if BigTech is hurting free-market capitalism.
People don’t realize how big the Gaming industry has become. Bigger than the combined music and move entertainment industries. Microsoft is leveraging its Cloud superiority and B2B Enterprise software monopoly to unfairly gain strength in newer industries.
Microsoft has added $1 trillion in market cap in the past year, so even the record price accounts for a small piece of the company’s valuation. However the system was flushed by the Fed with around 30% more liquidity. The main beneficiaries are the ultra rich and BigTech.
Microsoft still has to win approval from Activision’s shareholders and, more importantly, from regulators. Activision Blizzard's sheer size is daunting, and this purchase represents more money and industry power than Microsoft's previous gaming acquisitions combined. Phil Spencer of Xbox has been given more than half of Microsoft’s total cash pile to beef up its Gaming sector. They now have Call of Duty, Candy Crush, World of Warcraft, Diablo and so many more titles.
I’m not actually sure how the likes of Tencent, Sony and others can compete with this move. How does Nintendo, EA or Take-Two even survive such a massive consolidation in the industry?
Activision Blizzard could have acquired Zynga instead and tried to live on amid very bad press regarding its management’s conduct. Instead, Take-Two got the massive deal for the mobile game maker and Activision is no more.
This would be Microsoft’s largest acquisition to date, followed by its purchase of LinkedIn in 2016 for $26.2 billion. Microsoft is approaching the monopoly abuse we saw all those years ago with this massive move. With China regulating the gaming sector in a big way, it’s unclear if the likes of Tencent or ByteDance will be able to keep up.
You can read Xbox box Phil Spencer’s blog post about the acquisition here. Back in the day, video game makers earned their money a quarter at a time, through coin slots at arcades in malls across America. How times have changed. What will gaming be like in the Metaverse? Facebook, Apple and Microsoft seem practically in a collusion to build it and shut out rivals. Of course their friend Google is included in that BigTech dominance.
This deal will make Microsoft the third-largest gaming company in the world by revenue, per their own press release, falling behind Tencent and Sony. Activision Blizzard is home to mega-franchises like “World of Warcraft,” “Call of Duty” and “Candy Crush,” while Microsoft Gaming produces Xbox consoles.
So how big is the scale of this for Microsoft’s subscription revenue in gaming in the future? Well let’s add things up. Microsoft says it will include Activision Blizzard games in its cloud gaming subscription Game Pass, which recently reached 25 million subscribers. Meanwhile, Activision’s games boast nearly 400 million monthly active users.
Microsoft has gotten more aggressive with gaming over the past several years. It bought Minecraft maker Mojang for $2.5 billion in 2014. And last year, Microsoft completed a $7.5 billion acquisition of game maker Bethesda. Now another nearly $69 Billion. That’s $80 Billion Microsoft has thrown at the future of gaming. Only Apple could do that in terms of cash piles, in the entire world. That’s the power of BigTech, a winner-takes-all capitalism is appearing in the Metaverse.
By February 2019, Microsoft had 13 studios and publishing organizations under the banner of Xbox Game Studios. In September 2020, Microsoft revealed it was buying ZeniMax Media, the parent company of Bethesda, id Software, Arkane Studios and Tango Gameworks. These studios were a big deal – the stewards of Fallout, Doom, Dishonored, Wolfenstein, Deathloop, Starfield and Elder Scrolls – and they were being added to Microsoft’s substantial pile of medium-sized companies, more names in a growing list.
Now with Activision Blizzard IP, Microsoft is putting all of these gaming franchises and subscribers in the bank of the Metaverse. Shareholders of Microsoft rejoice. At the time of the LinkedIn announcement, Microsoft was valued at about $400 billion, so the purchase amounted to roughly 6.5% of its market cap. Today, Microsoft has a valuation of almost $2.3 trillion and is paying just 3% of its market cap for Activision. Thankfully it never bought Yahoo for that $50 Billion which would have represented 20% of its market cap.
How much cash did the Fed pumping give Microsoft? As of Sept. 30, the company was sitting on $130 billion in cash and equivalents, with 85% of that in the form of short-term investments. Spending about half of it on Blizzard is not a difficult decision since revenues are so bright for such a monopoly that nobody can compete against.
If there had not been a pandemic with such a radical Fed reaction, BigTech would not have gotten so much more powerful in so short a time.
Microsoft’s purchase price is a 45% premium over Activision’s closing price on the day of the announcement. How would Activision shareholders not like that? The Xbox ecosystem might one day be the only ecosystem (though I prefer Steam). Long live Spencer in the Metaverse.
If Apple will likely own the device, Facebook the platform, Microsoft might want the software in the Metaverse. This is clearly an inside fencing of territory in that future Metaverse. The deal also plays into a long-term vision for Microsoft as it competes with Meta (formerly Facebook) to build technologies to create a virtual world called the metaverse. What competition? There is no competition in BigTech, since they have such magnificent monopoly and duopoly moats.
The children of the Metaverse will not care who owns what. Antitrust regulations haven’t been taking seriously in the United States in decades.
Analysts say that Nadella has a proven success in integrating previous acquisitions, including LinkedIn and GitHub, which Microsoft bought for $7.5 billion in 2018. In 2022, I’m not sure that’s actually the case. Skype was made obsolete pretty fast as many other acquisitions by Microsoft did not turn out well. It’s monopoly of OpenAI’s technology is also very worrisome.
Microsoft’s entry in the Metaverse seems to be focused on Cloud, digital transformation, gaming, cybersecurity and artificial intelligence. That’s a pretty smart diversification of services.
Gaming and advertising represent two segments that combined represent an incremental $1 trillion share gain opportunity for Microsoft longer-term. Microsoft’s gaming could fuel their digital advertising growth in the 2020s as where eyeballs are changes fundamentally with the generations. The Cloud and Advertising are widely seen as the cash cows of the nascent Metaverse era.
Microsoft is also taking advantage of a regulatory environment that has been pressuring Big Tech but has mostly left Microsoft alone. This is a bit odd since historically Microsoft has been the biggest offender of antitrust since the advent of the Internet and software computer services.
Other analysts and journalists point out that the Microsoft deal shows how tech has disrupted media companies as well in this deal. The $68.7 billion deal may be too rich for legacy media companies, including Comcast and Disney, who don’t have the firepower of Microsoft. Even Netflix is entering the gaming market to improve retention as it raises prices.
BigTech is expanding unchecked and the Metaverse will pay a steep price for it and a future generation of consumers will be literally gamified. Today, virtual worlds are dominated by gaming, but the hope is they expand to cater to other demographics and replace a lot of traditional social networking activity online. Microsoft failed to acquire Discord, which at least would have been a solid acquisition. In terms of talent retention the Activision Blizzard deal has a pretty low probability of working out for Microsoft. But for shareholders it’s all about subscribers, revenue and IP.
So what is Microsoft’s CEO thinking with the move? Nadella sees an opportunity for many software makers to create many different virtual worlds in the future, instead of one dominant company controlling most of the activity. I don’t actually think gaming in VR is the future. So much around the Metaverse is actually very speculative, about Silicon Valley controlling a narrative and about driving profit out of moats and platforms that haven’t been innovative for quite some time.
The Metaverse sound like an instrument of BigTech’s centralization towards even greater centralization of power. The only thing distributed about it might be the employees lucky enough to work at Microsoft and other BigTech companies. This poses a number of ethical, legal and regulatory questions about the future of work and entertainment in the Metaverse.
Legacy media has largely stayed away from video gaming because it isn’t the core competency of companies such as Comcast and Disney. Disney hasn’t done too well in the pandemic, while digital transformation companies like Microsoft have thrived. It’s not clear when Microsoft realized the future was gaming, perhaps when it acquired Minecraft in 2014. Nearly ten years later, Microsoft has achieved monopoly status in the future of gaming.
This is just the beginning for BigTech and Microsoft’s acquisitions to lock down the Metaverse.
The Metaverse won’t be free, you will pay with your time. Not to mention subscriptions, gear and the addictive immersion it will wreck on your life. We’ll have to pay it forward to companies such as Microsoft, Facebook, Apple and Google with our futures. The Metaverse will be a dystopian place where BigTech will have upgraded its ability to retain your attention.