Microsoft’s gaming M&A takes it to the next level

Activision Blizzard

27/09/2023 06:27

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Oliver Taslic
       LONDON, Sept 27 (Reuters Breakingviews) - Microsoft’s
 MSFT.O  gaming master plan is slowly coming together. It’s
three years since the $2.4 trillion group paid $7.5 billion for
ZeniMax, owner of video-game studio Bethesda, and over a year
and a half since it splashed out $69 billion for chunkier peer
Activision Blizzard  ATVI.O . Despite major regulatory bumps
along the way, the latter deal now looks likely to go through.
Hence the question is how these M&A gambits affect the wider
sector, and Microsoft’s position in it.
    In 2023, consumers will spend $188 billion globally on video
games, according to Newzoo. Of that, about half will go to games
played via mobile phones, while a fifth will be spent on titles
experienced via personal computers. The remaining 30% will go to
games on consoles like Sony’s  6758.T  PlayStation and
Microsoft’s own Xbox. In effect, Microsoft boss Satya Nadella’s
Activision purchase acts as a series of hedges against potential
disruption to this final segment posed by a currently modest
fourth silo that could become huge: cloud gaming.
    On the face of it, the console part of the gaming market is
not so different to the heyday of Nintendo’s  7974.T  iconic but
clunky NES in the late 1980s. Even if the Xbox and rivals are a
quantum leap in terms of sophistication, gamers still need the
hardware. They also need to spend up to $70 a pop on new games,
or have a Netflix-style  NFLX.O  subscription like Microsoft’s
“Game Pass”, which grants access to a library of titles for
around $10 a month. In 2022, Ampere Analysis reckons Sony
accounted for 45% of the console market, with Nintendo and
Microsoft evenly splitting the remainder.
    Cloud gaming flips the script. Just as consumers can watch
Netflix on any old device, cloud gaming uses powerful servers
far removed from players to process the game at hand and stream
it to them over the internet. Gamers could procure an
inexpensive dongle, say, and plug into any lounge TV. They could
then play games in their front rooms, bedrooms, or on the move.
That could spell trouble for the Xbox, PlayStation and the like.
    For console gaming’s big hitters, the problem isn’t so much
lost revenues when punters no longer want to buy their plastic
boxes – these only accounted for less than a third of total
console revenues in 2022, according to Ampere. Instead, it’s
that consoles act as content gates. Just as viewers have to sign
up to Netflix to watch “Stranger Things”, players using consoles
can only access popular games like “The Last of Us Part I” on
Sony’s PlayStation. Of the 20 best-selling titles in the United
States between January and August, two have their console
availability limited to the PlayStation, while zero are playable
exclusively on Microsoft’s Xbox.  
    In a worst-case scenario Sony, Nintendo and Microsoft’s
oligopoly over 30% of the gaming market would wither to nothing
as cloud gamers get access to content direct from other
developers offering better games – Amazon  AMZN.O , for example,
already offers cloud-gaming services. That would particularly
hit Sony: the unit that includes gaming accounted for 31%, or
$24 billion, of the Japanese group’s top line in its latest
financial year. But Microsoft’s gaming revenue was still around
8% of group sales, or $15 billion, for the year ended June 2022.
    Given these risks, it makes sense for Nadella to grow his
exposure to those parts of the gaming market which are less
likely to be upended by cloud gaming. It also makes sense to
make his games as good as they can be if the industry tips into
a cutthroat Netflix-style content war. Activision ticks both
boxes.
    The deal means Microsoft bulks up in mobile gaming, where it
has a very modest presence, and where games are often simpler
than console counterparts. Activision subsidiary King, creator
of the wildly popular “Candy Crush”, reported net revenue of
$2.8 billion last year. As well as King, other big incumbents in
the mobile space include Big Tech behemoths like Alphabet
 GOOGL.O  and Apple  AAPL.O , who charge developers as much as
30% of the money they make from selling their games and related
add-ons, and Tencent  0700.HK , which like Microsoft also
produces its own games.
    The other appeal of both ZeniMax and Activision is that they
make it more likely Microsoft can hold its own in the
forthcoming content wars. The former’s “Starfield” was released
exclusively for Microsoft’s Xbox and Windows, scoring more than
10 million players and contributing to a 76% week-on-week jump
in UK Xbox sales for the seven days ending Sept. 2,
GamesIndustry.biz reported. Microsoft has admittedly agreed not
to make Activision’s flagship “Call of Duty” franchise, the
best-selling game in the United States last year, exclusive to
Xbox for at least 10 years. But having Activision content
available to “Game Pass” subscribers will still make it more
attractive to gamers.
    It remains possible that cloud gaming is a dog that doesn’t
bark – or at least not for some time. Unlike Netflix TV content,
complex games require constant feedback from players on a
millisecond-by-millisecond basis and, therefore, a strong
internet connection. Before it shut down, Alphabet’s
cloud-gaming service recommended speeds of 35 Mbps – out of
reach for around a fifth of UK households, the country’s
telecoms regulator reckons.
    Tell that to Britain’s Competition and Markets Authority,
though. Even though Activision games cannot currently be cloud
streamed, the CMA blocked the Activision deal in the UK on the
grounds that Microsoft might make them exclusive to Xbox Cloud
Gaming. That’s why Microsoft announced it would transfer the
cloud-streaming rights for current Activision games – and new
ones for the next 15 years – to France’s Ubisoft Entertainment
 UBIP.PA , which should have a commercial interest in licensing
them widely across multiple cloud-gaming services.
    Without knowing the financial terms, it’s hard to know
whether Nadella has struck a good deal. Still, Ubisoft has
agreed to compensate Microsoft through a one-off fee and a
separate pricing mechanism, which means that if cloud gaming
takes off then the U.S. giant will get some of the upside. The
CMA also reckons Microsoft already has a 60%-70% share of the
nascent cloud-gaming market. As a result of the Activision deal,
Nadella has a hedge of sorts against cloud gaming happening too
fast. Even with the regulatory pound of flesh, it still takes
Microsoft to the next level.
    Follow @olivertaslic on X
    

 (Editing by George Hay and Katrina Hamlin)
 ((For previous columns by the author, Reuters customers can
click on  TASLIC/ 
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS https://bit.ly/BVsubscribe
 | oliver.taslic@thomsonreuters.com))