It’s been 21 months since Microsoft announced its intent to acquire Activision Blizzard but, after getting approved by British regulator CMA, the company has finally closed the deal. At $68.7 billion not only is this the most expensive acquisition ever made in the gaming market, but the biggest ever in Microsoft’s almost 50-year old history too. LinkedIn’s acquisition back in 2016 was a distant second at a mere $26 billion, while the acquisition of Zenimax in 2020 at just $8.1 billion is not even in the same ball park. This really is the kind of business move that could potentially alter the landscape of digital entertainment for years to come.
If it actually works, that is.
One wouldn’t know it based on the enthusiasm expressed by Xbox Game Pass customers (“woo-hoo… more games for our subscription money!”), but getting this acquisition approved by regulators and courts around the world was the easy part for Microsoft. The hard part is actually making this work and, ultimately, capitalizing on a bold business move in a way that benefits everyone. Which, given Microsoft’s history, is anything but certain. Here’s why.
A lot of Xbox acquisitions, not enough return on investment
One reason why anyone would be concerned about Microsoft’s latest business move is the company’s discouraging track record when it comes to M&As in general. Even a cursory glance at the long list of Microsoft’s acquisitions over the years reveals that many of them did not bring more value to almost anyone involved. Some companies were bought for their tech or intellectual properties (most of which did not turn into Microsoft products or even new functionality for existing ones), some others were bought strategically for better future market positioning (which almost never came about), some were just competition that needed to be out of the way (hello Navision), but a lot of Microsoft acquisitions have one thing in common: they ended up either offering poor return on investment or failing by any conceivable metric. This is something the tech industry has practically accepted about Microsoft long ago.
Focusing on gaming-related acquisitions in particular drives this point home. Even excluding Microsoft’s recent buying spree – which brought Ninja Theory, Undead Labs, Compulsion, Playground Games, inXile, Obsidian, Double Fine and behemoth Zenimax into the Microsoft Studios fold – over the last two decades the company has also acquired FASA Interactive, Access Software, Bungie, Digital Anvil, Ensemble Studios, Rare, Lionhead Studios, Big Park, Press Play, Twisted Pixel and Mojang. Not a huge number by today’s standards but not an insignificant one either, including some of the most respected names in the history of games to boot.
Of all those pre-2018 acquisitions, though, the only ones that actually brought something meaningful to the table after being bought by Microsoft were Bungie’s and Mojang’s – and even those did not prove trouble-free: Bungie, after a couple of misfires, got sick of being “the Halo machine” and went independent in 2007, while Mojang’s output – after all these years – is still limited to just Minecraft stuff, which is commercially successful but creatively disappointing.
It’s too early to express an opinion on the more recent acquisitions (their output is still being developed) but there’s clearly something about Microsoft’s company culture that does not help most game development studios thrive after being acquired. If this was not the case, there’d be more of them around today.
Issues aplenty with this particular acquisition too
Microsoft’s past regarding acquisitions does not inspire confidence then, but – truth be told – there’s plenty to worry about regarding this particular one too. Activision Blizzard is a huge publisher, which is a problem in and of itself: historically speaking, the larger an acquired company is, the harder it is to successfully merge into the company now owning it. Even if the two companies’ cultures are compatible there’s still a number of issues to address, related to management and logistics as well as production and creative direction. Addressing them is a process that takes time and effort. It can’t be rushed and, while it’s happening, Activision Blizzard will be operating in a less than optimal manner. It’s only natural, of course, but – when it comes to behemoths like this one – it’s also something to consider.
The type of corporation Activision Blizzard had already become before this acquisition ever happened is not helping matters either. This is a publisher that has been focused on a handful of specific highly successful products for more than two decades now, making little or no use of its numerous other brands and IP. Microsoft has more often than not led its acquisitions in the direction of maximized profitability, but if it does the same in the case of Activision Blizzard, then the latter would be driven even harder towards a strategy based on its most valuable franchises only (there’s a sizeable investment to recoup after all). It’s easy to imagine such a scenario, for all the obvious reasons.
There are several other scenarios where things don’t play out that way, of course, but they all seem problematic right now. If Microsoft opts for the “hands-off” approach it sometimes tried in the past (with mixed results), it’s not clear whether Activision Blizzard knows any other way to operate nowadays. But Microsoft needs its new acquisition to be more than a revenue figure in an Excel spreadsheet somewhere, so Activision Blizzard would have to go through a major restructuring and make a lot of changes in order to become more creative or daring.
If, on the other hand, Microsoft tries to fully align Activision Blizzard to its own vision of gaming as an entertainment medium – networked, platform agnostic, cloud-centric and service-driven – it’s not clear whether the latter company can adapt fast enough.
Big ships, let us not forget, are in the habit of turning rather slowly.
Incidentally, Microsoft has repeatedly claimed that this acquisition was not about Call of Duty or even Game Pass, but mostly about King, the mobile games giant owned by Activision Blizzard. Xbox head Phil Spencer seems to believe – that’s what he testified in court anyway – that King will help Microsoft get into mobile gaming, a space where the company has no presence whatsoever at this point in time. King is highly profitable but, looking at this company’s catalogue of titles, one can’t help but feel that it’s all because of the popular “Saga” games – you know, Candy Crush Saga, Farm Heroes Saga, Bubble Witch Saga etc. – which are fun, but not that easy to monetize long-term, not easy to synergize with consoles or PCs and certainly not cloud-centric or even particularly cloud-aware.
It’s not quite clear, then, what it is exactly that Microsoft is expecting out of King’s experience with these types of games in the context of Xbox and its future as a platform. One thing is certain, though: there have been quite a few examples of companies that tried to get into the mobile gaming space in the past, only to find out that it’s unpredictable, highly volatile and extremely hard to make a profit in. Spencer and his executive team are right to think that Microsoft can’t afford to not have a presence in the mobile gaming market. But betting almost 70 billion dollars on King as a way in is a very risky bet that – as things stand right now – looks unlikely to pay off. Especially given Microsoft’s previously mentioned track record of mismanaging acquired assets.
Could this acquisition, against all odds, still work?
There’s no doubt in anyone’s mind that the Activision Blizzard acquisition is one of the most interesting business moves in the history of modern gaming: Microsoft gains access to rich library of AAA titles, a chest of popular brand names and franchises based on which it can build modern remakes or entirely new series, as well as a presence in the mobile games market, all in one fell swoop. Whether these are actually worth $68.7 billion may be up for debate, but future value based on current business potential has never been easy to put a number on, so – for now – let’s just call it what it undoubtedly is: a bold, potentially costly bet.
It’s obviously easier to appreciate the consumer impact this deal will have short-term: Xbox fans are understandably excited about the prospect of enjoying many Activision Blizzard titles on Game Pass and, come 2024, they will. It’s when all the excitement dies down, a few short months later, that Microsoft will have to prove that this was more than the capstone of a very expensive spending spree. That there was an actual plan behind it all and that the company means to work hard so as to execute on it in a timely fashion.
There’s a number of analysts that are keen to bring attention to other potential problems regarding this acquisition, such as Activision’s toxic work environment cases and investigations or Blizzard’s damaged reputation and lack of creativity during the last few years – all of which now become Microsoft’s problems. Those are all valid concerns but, at the end of the day, they are also issues that can be fixed if there’s a will to do so and a long-term plan to help both Activision and Blizzard evolve.
What, crucially, remains in question is Microsoft’s ability to make the most out of the huge opportunity this acquisition affords it. Based on the company’s embarrassing track record, it’s easy to see why. This is the kind of M&A that will not be considered a success if Activision Blizzard just continues to be profitable – that’s something the newly acquired company would probably be able to achieve on its own anyway. Nor will it be considered a success if it just helps Game Pass gain a few million subscribers faster. It will be considered a success if it actually affords Xbox specific competitive advantages that will help it face PlayStation from a position of strength in 2028. Which is just four short years away.
For that to happen, Microsoft must do something it has never done before, certainly not in this context or in this market: make a number of smart choices in a relatively short amount of time, executing on an ambitious business plan without any backtracking or any significant delays. Based on what we’ve all witnessed during the last two decades, does that sound like Microsoft? You decide.