🕹 Unpacking Microsoft's Acquisition of Activision Blizzard
Overlooked #99
Hi, it’s Alexandre from Eurazeo (ex. Idinvest). I’m investing in seed & series A consumer and consumer enablers startups all over Europe. Overlooked is a weekly newsletter about venture capital and underrated consumer trends. Today, I’m unpacking Microsoft’s massive acquisition of Activision-Blizzard.
On January 18th, Microsoft announced its intention to acquire Activision Blizzard in an all-cash deal for $68.7bn (7.6x EV/Sales multiple, 20.2x EV/EBITDA multiple). Activision Blizzard is a video game developer and publisher which has 10k employees, 400m MAUs which generated $9.1bn in sales (18% YoY growth) and $3.4bn in EBITDA (38% margin) in the the last twelve months.
Activision Blizzard is behind well-known franchises such as Call of Duty, Candy Crush, World of Warcraft, Diablo, Destiny, Guitar Hero, Starcraft, Crash Bandicoot, Hearthstone, etc. It was created in December 2007 when Activision (a conglomerate of gaming studios following multiple acquisitions led by Bobby Kotick who is current Activision Blizzard’s CEO) merged with Blizzard (owned at the time by Vivendi and developer of massively multiplayer online game World of Warcraft) and in November 2015, it entered the mobile gaming segment by acquiring King (Candy Crush's developer) for $5.9bn.
In Feb. 21, Activision Blizzard's share price reached an all-time high at $104 (vs. $95 for the acquisition price) driven by the positive impact of covid on the gaming sector. Since then, the stock has plummeted and reached a trough of $56 in Dec. 21 following several allegations of sexual harassment and employment discrimination within the company, also involving Activision Blizzard's CEO Bobby Kotick.
The deal is expected to close by Jun. 2023 and Activision Blizzard will be integrated as a subsidiary of Microsoft Gaming which is Microsoft's gaming division led by Phil Spencer (cloud gaming, hardware with the Xbox, content with gaming studios and subscription with Xbox GamePass). Before the acquisition, Microsoft Gaming had already c.25 video game studios (e.g. 343 Industries behind Halo, The Coalition behind Gears of War, Mojang Studios behind Minecraft or Playground Games behind Forza et Fable).
For Microsoft, this acquisition is a way to double down on its gaming strategy. More specifically, it will unlock synergies including: (i) expand the distribution reach of Activision Blizzard’s titles, (ii) add a tremendous value to Microsoft’s gaming subscription offering called Gamepass by adding Activision Blizzard’s titles, (iii) develop a mobile gaming expertise leveraging King’s expertise and (iv) generate incremental Microsoft Azure’s cloud revenues with Activision Blizzard’s operations being migrated to Azure. It will also contribute in solving existing cultural issues at Activision Blizzard with probably a new top management to be brought in post acquisition’s closing.
In this post, I will highlight 3 main learnings from this acquisition:
Microsoft is a serial acquirer and is the top Western tech company in terms of M&A activity
Microsoft Gaming is a vertically integrated gaming giant and has one of the best positioning in the gaming industry
With this acquisition, Microsoft Gaming has massively adopted the two main business model shifts that are happening in the gaming industry: (i) content subscription à la Netflix and (ii) game-as-a-service à la Fortnite or League of Legends
1/ Microsoft is a serial acquirer and is the top Western tech company in terms of M&A activities
In the past decade, Microsoft has leveraged its ability to generate cash from its core activities (cloud, Microsoft Office and Windows) to fund an ambitious M&A strategy. It acquired both iconic business (Linkedin, Nuance, Skype, Github) and consumer (Activision Blizzard, ZeniMax, Mojang, Nokia's phone business unit) companies.
This strategy is closer to what we see in China with Tencent than what we're used to from tech giants in the West (e.g. Apple, Amazon, Google, Facebook, etc.).
2/ Microsoft Gaming is a vertically integrated gaming giant and has one of the best positioning in the gaming industry
Gaming has become a key segment within Microsoft. With the acquisition, Microsoft will become the 3rd worldwide gaming company in terms of revenues behind Tencent (1st) and Sony (2nd).
Over the past decade, Microsoft has launched many initiatives to strengthen its consumer presence (e.g. acquiring Nokia's phone division) but gaming is the segment in which it has been the most successful.
I think that Microsoft is the best positioned player in the gaming industry today because it has a vertically integrated approach combining hardware (HoloLens, Xbox), cloud capabilities (via Microsoft Azure), content (with leading gaming studios and IPs) and a subscription (Game Pass). In comparison, Sony has no cloud capabilities and no subscription. It has hardware but lags behind Microsoft when its comes to proprietary IPs.
This position gives Microsoft unique edges:
No dependency towards large gaming studios or hardware manufacturers thanks to its internal studios and the Xbox
Less pressure to publish AAA hits to drive revenues because they also rely on massive subscription revenues thanks to Game Pass
Ability to provide a cross-platform experience and to democratize gaming beyond dedicated hardware thanks to cloud gaming
3/ With this acquisition, Microsoft Gaming has massively adopted the two main business model shifts happening in the gaming industry
With Activision Blizzard's acquisition, Microsoft will now be a leader in the new two business models that are dominating the gaming industry:
Game as a service with Call of Duty Warzone: it's a battle royale à la Fortnite. It's a free to play and cross-platform game which monetizes via micro-transactions that do not affect your level in the game. You can buy skins or experience accelerators. In this model, you don't sell the game for $50-70. You give it for free which will attract a super large audience that you can monetize for several years with micro-transactions.
Subscription with the Game Pass: in exchange of a monthly fee between $10 and $15, players get access to 100+ games with new games released very often, with games developed by Xbox gaming studios available from day 1 and the ability to play games across platforms. Microsoft is the only player in the gaming industry which has successfully launched a subscription à la Netflix with 25m GamePass members (vs. 18m members 1y ago). With Activision Blizzard IPs to be added to Game Pass, it will become a no-brainer for the vast majority of gamers and I won't be surprised to see Game Pass reaching 50m members in the next 3 years.
"We will bring as many Activision Blizzard games as we can to our Game Pass subscription service across the PC, console and mobile, including both new games, as well as games from Activision Blizzard’s incredible catalogue, offering even better value and more choice for our gamers." - Microsoft
Thanks to Julia for the feedback! 🦒 Thanks for reading! See you next week for another issue! 👋