When Microsoft announced its plans to buy video game company Activision Blizzard for $69 billion in January 2022, the tech industry drew attention: As the largest acquisition in Microsoft’s nearly five-decade history, the deal was a bold move by CEO Satya Nadella, noting The path to the future of computing in immersive virtual worlds.
The deal isn’t closed yet, but a lot has changed in the ensuing 18 months.
For one thing, the hype around the so-called metaverse has faded and died. Facebook parent Meta’s bet on the concept looks like a douchebag and the future of Microsoft’s HoloLens augmented reality headset — the company’s ambitious and wildly expensive bet to provide a gateway into these brave new digital worlds — is uncertain, as Microsoft lays down thousands of workers and seeks to cut costs in an economy Uncertain.
Instead of a metaverse, AI has emerged as the next game-changing technology, sucking up all the industry excitement and investment dollars. And as it turns out, Microsoft is very well positioned for this next wave thanks to its partnership and investment in OpenAI, the massive artificial intelligence maker ChatGPT, and DALL-E.
All of this raises an obvious question: Why is Microsoft still trying to acquire Activision?
Given that antitrust regulators in Britain and the United States have stated their intentions to block the deal, the question is even more relevant. On Wednesday, Microsoft sued to challenge UK efforts to block the deal, and the company’s trial with the US Federal Trade Commission is set to begin in August. Is this the battle Microsoft must be fighting at this time, and is it worth all the cost in capital and interest required to win? Perhaps this is a golden opportunity, albeit with a $3 billion breakup fee, for Microsoft to jump right in?
The answer to all of these questions is simple and says a lot about Nadella’s priorities. Microsoft can’t afford not to go through with the deal. Why? Because Microsoft needs gamers – probably more than gamers need Microsoft.
Microsoft needs a dose of credibility
Dollar for dollar, gaming has never been Microsoft’s biggest business: Although Microsoft didn’t release specific revenue numbers for its gaming-related business, its latest earnings report showed a slump in Xbox revenue, even as revenue for Xbox content and services posted modest gains. Dollars and cents aside, gaming is one of the most important businesses of Microsoft’s strategy, and it’s an area where the tech giant desperately needs a win.
It’s no secret that Microsoft’s Xbox console has lagged far behind Sony’s PlayStation for more than a decade now. Microsoft’s chief game officer Phil Spencer himself acknowledged in a recent podcast appearance that there’s currently no realistic way for Xbox to overtake Nintendo or Sony in terms of console sales.
A big part of the problem is gaming: Where Sony has had one hit after another with PlayStation exclusive titles like “God of War: Ragnarok” and “Horizon Forbidden West,” Microsoft has struggled.
Certainly, there have been bright spots like “Forza Horizon 5” and the continued success of Microsoft-owned “Minecraft.” But it’s been overshadowed by failures like the once-supposed blockbuster “Halo Infinite,” which saw its star quickly fade after a promising launch. Recently, Microsoft suffered the embarrassment of the overtly hostile reception of the Xbox exclusive “Redfall” title.
Not to mention, Microsoft has no core presence in smartphone gaming, aside from the continued success of Minecraft. Microsoft will instantly become a power player in mobile games, thanks to the lucrative titles published by Activision Blizzard such as “Candy Crush Saga” and “Diablo Immortal”.
Speaking of smartphones, Microsoft is also investing heavily in its Game Pass subscription service, which allows users to stream a wide and growing selection of Xbox games to almost any device with a web browser, including computers, phones, and tablets. Adding Activision Blizzard’s slate of games to this catalog would only further this initiative, and thus Microsoft’s reach outside the core console market.
However, while the terms of Microsoft’s recent agreements with other platform holders mean that you’ll be able to find “Call of Duty” elsewhere, you can expect that if the deal goes through, some future Activision Blizzard titles will only be available on Xbox. .
In other words, a successful merger with Activision Blizzard would give Microsoft a shot of credibility in the video game market at a time when it could really use some of it, and ensure it retains a strong position in the gaming market despite its Xbox console’s problems. This, in turn, is important because of the quietly critical role games play in the bigger picture for Microsoft.
For Microsoft, games are not a game
Even as the overall PC market continued to decline, Microsoft Windows remained the platform of choice for a large portion of serious gamers. Given Microsoft’s well-documented failures to build its own mobile operating system, this makes gamers an important audience in the company’s quest to make sure Windows remains relevant in a world increasingly dominated by Apple iOS and Google Android.
The purchase of Activision Blizzard is a signal to this market that Microsoft takes gaming seriously. It’s likely that under Microsoft’s oversight, major games from the publisher will continue to run on PC alongside consoles like the Xbox, ensuring that the platform remains vibrant. It’s an expensive investment, and one that hurts given the legal and regulatory issues, but Microsoft has a vested interest in making sure gamers continue to choose Windows.
Windows Business can use help. According to a recent earnings release, Windows OEM revenue — the licensing fees that PC manufacturers pay Microsoft to pre-install Windows on their devices — fell 28%, contributing to an overall decline of 9% in Microsoft’s most personal computing business segment, to $13.3 billion. . If Microsoft has any hope of turning things around, it likely lies in large part with moving Windows to tap into the gaming market, which PwC estimates will be $321 billion by 2026.
There’s an old adage in the computer industry: People buy computers for productivity, but upgrade for gaming. Gamers are generally more likely to buy software on their platform of choice, more likely to stick with that platform in the long term, and more likely to be highly engaged users.
In the medium term, Microsoft sees Windows as the gateway to its services such as the Microsoft 365 productivity suite, the Bing search engine, and the Edge browser. The more gamers associate themselves with Windows, the broader Microsoft’s path to these services becomes. In the long run, Microsoft has to build a significant level of loyalty that may serve it well whatever comes next in tech.
There’s also a forward-looking component to this investment as well. While Mark Zuckerberg at the Meta seems to have backed away from the hype around the metaverse, it’s important to remember that Nadella is also a huge supporter of the concept. And while the full virtual world predicted by books like “Ready Player One” is still a long way off, online video games like “Fortnite” or “Roblox” are the closest things available today.
In buying Activision Blizzard, Microsoft is also buying games like “World of Warcraft” – one of the first truly successful virtual worlds, which in its nearly two decades of existence still sees over two million players logged on every month.
The game isn’t exactly a business-focused metaverse Nadella has embraced before. But if Nadella wants to meet users — especially younger ones — where they are at as they spend more time and money in virtual worlds, then “World of Warcraft” and other Activision Blizzard properties are a good start.
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