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Why Microsoft spends US$69bil for video games

You learn a lot of tough lessons as a parent, like how wrong you were to say to the kids “You’re wasting your life playing those video games!”

Just how wrong? Well, the company behind some of the gaming industry’s most popular products is being sold for US$69bil (RM288bil).

Technology giant Microsoft — perhaps best known for its Windows, Excel and PowerPoint software — is buying Activision Blizzard, a Southern California gaming pioneer. It’s an all-cash deal that not only marks Microsoft’s largest acquisition, but it’s also the biggest video-game deal in history.

Now if you’re a gamer, you get it. Microsoft also makes the Xbox game console.

If you follow Wall Street, you understand the ebb and flow of dealmaking. Microsoft, worth US$2.3 trillion (RM9.63 trillion), gobbled up a smaller player in the gamer field. You know, “synergy” in corporate lingo.

But if all you know is watching young adults — primarily males — gathered around a TV participating in some interactive activity, you likely need this Gaming 101 column.

Here’s how we got to this moment in gaming history and the thinking behind the eye-catching merger.

How much?

Let’s put the US$69bil price tag into perspective.

The deal puts Activision Blizzard’s value on par with the likes of consumer goods’ Colgate-Palmolive, the Norfolk Southern railroad, shipper FedEx, Capital One bank or the electric truck startup Rivian in Irvine.

In terms of the deal’s size, it’s loosely on par with the dollars involved in drugmaker Pfizer’s purchase of Wyeth in 2009; Dell Computers’ buy of EMC in 2013; the 2015 healthcare merger of Actavis and Allergan of Irvine; 2017’s CVS Health acquisition of Aetna; or Walt Disney Co buying 21st Century Fox in 2018.

Of course, we must also offer a real estate perspective: US$69bil would buy you nearly 88,000 existing California single-family homes at the 2021 median selling price of US$787,000 (RM3.2mil).

For what?

Microsoft wants a bigger slice of an industry that entertains 3.25 billion people around the globe, players who spend US$180bil (RM753bil) a year on video games.

So the acquirer gets to beef up its already hefty online entertainment audiences who play on computers, mobile devices or dedicated consoles. Those customers pay to play many of these games, or they spend cash on various in-game upgrades,

Look at the three key slices of Activision Blizzard.

There’s the Activision chunk of this company from Los Angeles and its war-game Call of Duty franchise, plus assorted endeavours including a new professional eSports league. There’s Blizzard in Irvine and its World of Warcraft community-gaming empire. And don’t overlook King, the mobile platform best known for Candy Crush.

All those kids playing all these addictive games — psst, many adults play, too — add up to Activision Blizzard taking in roughly US$8bil (RM33bil) in annual revenue and generating US$2.5bil (RM10.47bil) in profits.

Who’s Activision?

It’s the classic Silicon Valley story that started with guys who created games in the late 1970s for the Atari game console.

They got angry after the company was bought by Warner Communications. So, they quit and started what became Activision in 1979.

It was a pioneer of third-party game development with founders who started working on their new products in, yes, a garage! But likely many fast-growth industries, expansion was too hot — and game-making businesses suffered for much of the 1980s.

Current CEO Bobby Kotick bought the then-struggling company in 1990 and essentially started over. He added a new focus of buying content while moving the corporation to LA. Among the top-selling games bought were Call of Duty, the Tony Hawk skateboarding series, and Guitar Hero.

Oh, and the merger with Blizzard Entertainment brings the ground-breaking “massively multiplayer online role-playing game” known as World of Warcraft.

Who’s Blizzard?

What became Blizzard Entertainment was founded by three UCLA graduates Michael Morhaime, Allen Adham and Frank Pearce in 1991.

They started out authoring games for other studios and went through a series of corporate names and awkward ownership issues. That didn’t stop them from honing their specialty: Games where participants play online with and against others — building a community in the process.

In 1994, the first Warcraft online multiplayer game came out. Four years later they were acquired by French publisher Vivendi

And then in 2004, World of Warcraft was released and soon became the world’s most popular product in this genre. It was so popular, it allowed Blizzard to create the annual BlizzCon fan convention held at the Anaheim Convention Center.

Activision paid US$19bil (RM79bil) to acquire Blizzard in 2008 from Vivendi, renaming the merged entities Activision Blizzard.

What’s Microsoft’s angle?

Microsoft may be better known to us older folks for its computer operating system or its suite of office software, but it’s been a player in gaming for over two decades.

Yet Xbox — Microsoft’s entry into gaming that’s now roughly one-tenth of overall sales — was far more about playing corporate defence than any bit of entrepreneurial magic.

The Xbox brand was launched in 2001 because Microsoft saw Sony’s evolving PlayStation gaming machines as a possible threat to personal computers, which rely heavily on Microsoft software.

But what began as primarily a gaming machine effort has since grown into a lucrative online gaming platform, the Xbox Game Pass subscription service.

What’s next?

Let’s ignore all the legal formalities that will take until late this year to finish.

Gaming’s buzz is the “metaverse,” the as yet defined merging of real life, online life and entertainment that blossomed in the pandemic era.

Think of how the Internet and social media have changed communication and information sharing. There’s plenty of money to be made guessing what the next life-altering thing from cyberspace will be.

Will most office meetings someday be held in virtual reality? Might families gather around some future gaming platform to celebrate the holidays? Can the next generation of great athletes be playing eSports?

Microsoft is betting US$69bil that one important intersection will revolve around the type of community-scale gaming Activision Blizzard helped pioneer. – Los Angeles Daily News/Tribune News Service

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