The Economist - USA (2022-01-22)

The Economist January 22nd 2022 Business 57

Videogaming

High score

E

venforMicrosoft,whichboastsa mar­

ket  value  of  $2.3trn,  $69bn  is  a  lot  of

money.  On  January  18th  the  firm  said  it

would  pay  that  sum—in  cash—for  Activi­

sion Blizzard, a video­game developer. It is

by far the biggest acquisition in the video­

game  industry’s  history,  and  the  largest

ever by Microsoft, more than twice the size

of its purchase in 2016 of LinkedIn, a social

network  (see  chart).  The  move,  which

caught  industry­watchers  by  surprise  and

propelled Activision Blizzard’s share price

up by 25%, represents a huge bet on the fu­

ture of fun. But not, perhaps, a crazy one.

Gaming  was  a  big,  fast­growing  busi­

ness  even  before  the  pandemic.  Lock­

downs  bolstered  its  appeal—to  hardened

gamers with more time on their hands and

bored neophytes alike. NewZoo, an analy­

sis firm, reckons revenues grew by 23% in

2020, to nearly $180bn. That growth has at­

tracted  the  attention  of  other  tech  titans,

including  Apple,  Netflix  and  Amazon,  all

of  whom  have  dipped  their  toes  into  the

market in recent years. 

Microsoft  has  been  in  the  business  for

two  decades.  It  earns  $15bn  a  year  from

games, mostly thanks to its Xbox console.

It has made a string of gaming acquisitions

since  2014,  when  Satya  Nadella,  its  chief

executive,  took  the  reins.  Assuming  it  is

not blocked by regulators, who are watch­

ing  big  tech  with  a  beady  eye,  this  deal

wouldcementitsposition.Oncecomplet­

edin2023,it willmakeMicrosoftthethird­

largestvideo­gamingfirmbyrevenue,be­

hindonlyTencent,a Chinesegiant,andSo­

ny,Microsoft’sperennialrivalinconsoles.

Bigacquisitionsarealwaysrisky.Like

mostcompanies,Microsofthasa spottyre­

cord.ActivisionBlizzard’ssharepriceslid

byaround40%betweena peaklastFebru­

aryandthedeal’sannouncement,asit was

embroiledina sexual­harassmentscandal.

Playernumbershaveslippedfrom530ma

monthin 2015 to390m,andsomerecent

gameshavehadmixedreviews.Pessimists

couldarguethatthecompanyisoverval­

ued.Optimists,whoseeannualrevenues

of$8bnandnetprofitmarginsofaround

30%,mightcounterthatit ischeap.

Mostimportant,ActivisionBlizzardhas

lotsofcontent—andinvideogames,asin

allofmedia,contentisking, saysPiers

Harding­RollsofAmpereAnalysis,anoth­

erresearchfirm.Likethemoviebusiness,

where“StarWars”films,evenbadones,are

reliablemoney­spinners,videogamesrely

increasinglyon“franchises”—popularset­

tingsorbrandsthatcanbesqueezedfor

regular instalments. Activision Blizzard

offers,amongothers,“CallofDuty”,a best­

selling series of military­themedshoot­

’em­ups,“CandyCrush”,a popularpattern­

matchingmobilegame,and“Warcraft”,a

light­heartedfantasysetting.

ThedealmayhelpMicrosoftbroaden

itsreachbeyond consoles,saysJulianne

HartyofNewZoo.King,a mobile­focused

unitofActivisionBlizzard,boastsaround

245mmonthlyplayersofitsgames,most

ofwhomtapawayat“CandyCrush”.Itis

also a strike againstSony, whose share

pricefellby10%onnewsofthedeal.If

Microsoft controlstherights to “Callof

Duty”,it candecidewhetherornottoallow

thegamestoappearonSony’srivalPlay­

Stationmachine.WhenMicrosoftbought

ZeniMaxMedia,anothergamingfirm,for

$7.5bnin2020,itsaiditwouldhonourthe

terms of ZeniMax’s existing publishing

agreements with Sony, but that Sony’s

accesstoZeniMax’snewgameswouldbe

considered“ona case­by­casebasis”.

ItalsofitsMicrosoft’slong­termambi­

tiontobecomethedominantplayerina

gamingmarketthatithopesstillhasplen­

tyofroomtogrow.(MrNadella,inevitably,

gushed about the virtual­reality “meta­

verse”.)Thefirmisbundlingcontentand

pushingthe“GamePass”subscriptionser­

vice,whichoffersconsoleandpcgamers

accesstoa rotatinglibraryoftitles—which

usuallycost$40­60each—for$10a month.

AddingActivisionBlizzard’scatalogueto

theservicecouldboostitsappeal.

Inthelongerterm,Microsofthopesto

useitsAzurecloud­computingarmtodo

forvideogameswhatNetflixdidforfilms

andtv. In 2020 it launcheda game­stream­

ingadd­ontoGamePassthatbeamshigh­

endgamesacrosstheinternettoa phone,

tvordesktop.Runninga game’scodein

the cloud removes the need to own a

powerful,priceyconsoleorpc. Thetech­

nologyistricky.Still,Microsofthopesthat

asitmatures,itwilldrawinmoreplayers,

especially in middle­income countries

wheresmartphonesarecommonbutcon­

solesrare.Althoughotherfirms,including

Sony,Amazon andNvidia, offersimilar

services,nonelooksaswell­placedasMi­

crosoft. The software giant combines a

strongcontentlibraryanddecadesofexpe­

rienceingamingwiththeworld’ssecond­

largestcloudoperationbehindAmazon.

Microsoft’sbigbetmaypersuaderivals

they,too,needtosnapupcontentwhile

theycan. Thegamingindustrywasalready

seeingplentyofmergeractivity.Lastyear

fivedealsworth$1bnormorewereinked.

On January10th Take­TwoInteractive,a

gamedeveloperandpublisher,spent$13bn

onZynga,a makerofmobilegames.Sony

willbefeelingvulnerableafterMicrosoft’s

deal.Amazon,AppleorNetflixmaydecide

thatnowisthetimetoshowthattheyare

seriousaboutthebusiness.Consolidation

lookslikethenameofthegame.n

Microsoft places a $69bn bet on the

future of entertainment

Acquisition blizzard

Sources:Bloomberg;companyreports;pressreports *Devices& servicesbusiness †Patent portfolio

Microsoft,biggestacquisitions,$bn Top video-game firm acquisitions, $bn

Acquirer/target (announcement date)

0 20 40 60 80

Zynga/Peak (2020)

Facebook/Oculus VR (2014)

Electronic Arts/Glu Mobile (2021)

Microsoft/Mojang (2014)

ByteDance/Moonton (2021)

Activision Blizzard/King (2015)

Microsoft/ZeniMax Media (2020)

Tencent/Supercell (2016)

Microsoft/Activision Blizzard (2022)

Take-Two Interactive/Zynga (2022)

0 20 40 60 80

Skype(2011)

NuanceCommunications (2021)

LinkedIn (2016)

Activision Blizzard (2022)

Nortel† (2011)

aQuantive (2007)

Nokia* (2013)

ZeniMax Media (2020)

GitHub (201

)

Informatica (2015)

hands  on  advanced  computer  chips.  That

is  because  virtually  all  such  microproces­

sors  are  either  American  or  made  with

American  equipment.  As  such,  they  are

subject to restrictions on exports to China

put in place by Donald Trump and extend­

ed by his successor as president, Joe Biden.

It will take years for Chinese companies to

catch  up  with  the  global  cutting­edge,  if

they can do it at all.

These  challenges  will  continue  to  be­

devil all of China’s high­tech industries for

years  to  come.  It  could  leave  its  aibusi­

nesses stuck in a rut—successfully rolling

out  relatively  unsophisticated  products

while trailing Europe and America in para­

digm­shifting  developments  of  greater  fi­

nancial  and  strategic  value.  Consider  Wu

Dao  2.0.  Although  it  was  a  huge  improve­

ment on gpt­3, it did just that—improve an

existing technology rather thanbreak new

ground.  No  amount  of  Chinesetaxpayers’

money is likely to change that.n