Occasionally, as I sit vacant-eyed in front of a TV, video game controller hand, a sense of sheepishness creeps into my mind. I think it must be a hangover of growing up in the ’90s, when video games were still things for nerds.
At those times, I like to console myself — no pun intended — by remembering just how big a business digital games actually are.
Consider: This week, Microsoft dropped a cool $68.7 billion on Activision Blizzard, the maker of hugely popular video games including “Call of Duty,” “World of Warcraft,” and dozens more.
It is an astounding figure, and one that also completely overshadows Microsoft’s other acquisitions. Even professional powerhouse LinkedIn was worth a comparatively paltry $26 billion — barely more than a third of what was paid for Activision Blizzard.
What is it then that makes the world’s second most valuable company not only spend so much on a gaming outfit, but one like Activision Blizzard, which has recently been rocked by scandals involving a workplace culture rife with misogyny and toxicity?
As with any acquisition of this scale, the answer has both obvious and near-term answers, and slightly murkier motivations that look further out. Microsoft is betting that as its Windows brand fades in importance, its Xbox and gaming focus will become the primary mode of its consumer-facing business.
In a more immediate sense, the clearest reason for the Activision Blizzard acquisition is that Microsoft is dead set on becoming the Netflix of the video game world.
For decades, the way to play video games was to purchase them individually: first as cartridges, then as discs, and more recently, as digital downloads.
But in 2017, Microsoft introduced Games Pass, a service with a monthly subscription fee that offered a catalogue of games one didn’t own, but could play to one’s heart’s content — as long as you kept paying for the service.
Just like Netflix, the appeal lies not so much in the quality or draw of individual titles, but that one has access to so many that quality doesn’t matter as much as sheer choice.
While the service started slowly, its subscriber base has grown from 10 million users in April 2020 to 25 million subscribers in 2022. With users paying somewhere between $10 and $15 U.S. a month, a quick, back-of-the-napkin calculation reveals that Microsoft is currently pulling in about $3.5 billion in revenue a year through Games Pass — and given such growth recently, there is headroom for a lot more.
That kind of recurring, service-based revenue is what big tech lives for. Not only does it bolster quarterly results and shareholder sentiment, it also disrupts the way the video game industry traditionally worked in which companies like Sony and Nintendo sold a gaming box at below or near-cost, and then made up profit on blockbuster game sales.
Microsoft is instead aiming to simply have people subscribe monthly and play wherever — on their Xbox, on their computers, on their phones, wherever. And just as Netflix will spend billions on content creation in order to churn out material that keeps people paying their monthly fee, Microsoft’s acquisition of Activision Blizzard increases its capacity to make games people will want to play, and pay for.
It’s true, Activision Blizzard has been struggling lately, not just because of the shocking workplace scandals, but also that its core titles appear to have suffered as a result. Being absorbed into Microsoft may allow a chance for a reset, particularly if embattled — and frankly, ineffective — Activision CEO Bobby Kotick is pushed out after the deal.
So, as big as the cheque was, Microsoft sees it as a way to cement its position in the lucrative world of gaming.
Still, nearly $70 billion is an enormous sum, even if we assume Microsoft’s Games Pass service ends up dominating the gaming industry.
What is thus lingering at the edge of this acquisition is the recent fever over the metaverse — the assumed next phase of tech in which we will interact, connect, and even shop in a virtual world composed of digital avatars.
Whether or not that actually comes to pass is far from certain, but with Facebook pushing the idea hard, and much of Silicon Valley lined up behind it in some fashion, Microsoft also needs its own virtual world.
With Activision Blizzard running “World of Warcraft,” an extremely popular persistent online game that has captured users for years, Microsoft is also likely looking at the acquisition as a defensive play if the metaverse in fact turns out to be the next big thing.
It is a major risk, and until very recently Microsoft’s track record with acquisitions — think of Skype or Nokia — has been less than stellar. Still, video games and the increasing importance of their underlying technology to a more virtual world can no longer be denied. And if one still thinks games are just child’s play, the sheer size of the cheque Microsoft wrote is a sign that games are now a very grown up affair.
