In this week’s episode, we’re looking at the gaming industry after Microsoft announced its plan to acquire Activision Blizzard for USD 68.7 billion. Joining host Julie-Anna Needham is Mark Andress, a senior insights editor at ION Analytics. Dealcast is presented by Mergermarket and SS&C Intralinks.
In this episode, you'll learn about:
- Where gaming fits into Microsoft’s new offerings strategy
- How other major gaming players are responding Cloud-based gaming trends investors are finding attractive
- The three most compelling acquisition targets right now
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JULIE-ANNA NEEDHAM: Hi, Mark.
MARK ANDRESS: Hello, Julie-Anna.
JULIE-ANNA NEEDHAM: So firstly, can we look at some of the reasons why Microsoft felt the need to splash out a whopping $75 billion on Activision Blizzard?
MARK ANDRESS: Yeah, sure. Microsoft has been trying to build out its gaming business for a number of years now through acquisitions as well. And what it's moving towards is a subscription-based service that it calls Game Pass. And part of that is something it codenamed xCloud, which allows players to play games across various devices. And that's included in the top tier of Game Pass.
So what that means is that people can be playing on an Xbox against other people playing on a different device, like a PlayStation or an iPhone. And they can play games rather like you might stream video on Netflix, but instead, you're streaming video off of the cloud and playing off of different devices. And so that's a really long-winded answer.
But really, thereafter, they want to beef up their subscription model, Game Pass, which has now got 25 million subscribers. And they like that because it does increase the quality of revenue. And that does lead to higher valuations. And so a lot of the other companies are doing that as well, are trying to do that as well.
JULIE-ANNA NEEDHAM: Well, that leads nicely onto the next question. How closely are other gaming companies watching this, and how are they likely to respond?
MARK ANDRESS: So Sony and Tencent... Tencent is the number-one gaming company in the world. Sony's the number two. And we expected companies in the gaming world to respond. And a week after that acquisition was announced, Sony announced the acquisition of Bungie, another US-based video game company.
So and Sony itself is trying to build out its version of Game Pass. It's merging a couple of old services that it has, a couple of legacy streaming services, PlayStation Plus with PlayStation Now, into a new subscription service that it's calling Project Spartacus. And so they want to add gaming content into that, that sort of that cloud-based gaming service that they're building.
Other companies like Google, I think, has Google Stadia, and Apple's got Apple Arcade. And so those are similar subscription-based gaming services that perhaps haven't had quite the success of Game Pass. But it clearly shows that some of these other big-tech companies, Google, Apple, Facebook, are all interested in gaming. Netflix as well has started going into cloud-based gaming.
JULIE-ANNA NEEDHAM: Yeah, so it's a huge, growing industry. And with the acquisition of Activision Blizzard, to what extent is that a metaverse play? And can you explain what the metaverse is?
MARK ANDRESS: Sure. So the metaverse, it's an online world, a virtual world in which people can interact through avatars. A lot of it is still to be defined, so we don't know what roles these companies will be playing. But you can imagine that maybe Facebook would be focused on the social interaction. So that's a social network. So you're going to be going there with meeting friends in this virtual world through a pair of their Oculus Rift goggles, perhaps.
Microsoft is an enterprise software company. So they might be helping companies or employees, workers interact with other-- with their colleagues through their HoloGen Lens that they have in a sort of an immersive way. And then there's other ways of-- and I think Salesforce, we could see Salesforce getting into the metaverse. They've bought Slack, which is like a chat tool. They could make that more immersive by maybe acquiring a metaverse-type technology.
But a lot of it is still to be defined. And so are you going to have these sort of corporate walled gardens run by the Facebooks of the world? Or is it going to be more decentralized, the sandbox, or Decentraland? Those are kind of Bitcoin-- those are kind of-- sorry-- blockchain-based, decentralized metaverse visions.
So it's really not-- we're in the early innings of this. And clearly, gaming, gaming has a 20-year head start on the metaverse because we had all the devices around gaming, these-- the headsets and the infrastructure around the online sort of ability to interact with other people around the world. That's all been developed in the gaming world for the last couple of decades.
So it really is a good entryway into the metaverse, and that's potentially why Microsoft is also splashing out so much money on Activision Blizzard. Because not only does it give it the content to add to its Game Pass subscription service. It may help-- it may become its content creation tool that it doesn't-- because that's one area that Microsoft lacks.
It doesn't have-- it's very strong in the infrastructure of it because it has the Azure cloud-based platform on which it can build these metaverse applications. It also has the HoloGen's 3D immersive lens that could be used by participants in the metaverse. And it also has software development tools that developers can use. But it doesn't have the content creation tool. So it's possible that Activision Blizzard becomes that.
JULIE-ANNA NEEDHAM: And so what role will Microsoft play in the metaverse? And what areas does it need strengthening within that?
MARK ANDRESS: Microsoft is an enterprise software company, so that's probably where they're going to stay. Will Microsoft have its own platform in the metaverse? Or will it be a provider of applications and tools to other metaverse platforms? That's still to be decided, I think.
But and where does it need strengthening? Well, I mentioned the content creation tools that it doesn't really-- that it kind of lacks. So for example, a company called Unity Software focuses on 3D content creation. That is a company that potentially Microsoft could look at and think, oh, maybe we can bring that in-house through an acquisition. Right now, at the moment, it works with-- it has a partnership with Adobe for its content creation. It seems to be that's the way it's going at the moment through that partnership. But that can change.
Other areas Microsoft could strengthen in would be ecommerce. It's not so strong there. And social media, so it's not so strong there either. I mean, clearly, it's got LinkedIn, which is social. It's like a social media network or for professionals but not really for nonprofessionals. So that's another area.
JULIE-ANNA NEEDHAM: And was this a big surprise that Microsoft made this acquisition?
MARK ANDRESS: I think what was surprising was just the sheer size of it. $75 billion, that is more than double its last biggest acquisition, which was the LinkedIn deal a few years ago now. LinkedIn was a 20-- I think it was a $28 billion deal. This is more than two times, two and a half times that transaction. And it dwarfs any other of the deals that any of the other big-tech companies have been doing.
Now, clearly, a lot of those other big-tech companies have challenges, regulatory challenges. They're under the microscope in Washington at the moment, Facebook, in particular, Google as well. And so can those companies come back with a big deal themselves? I think the jury's out on that. I think that would be very tough.
JULIE-ANNA NEEDHAM: So what kind of gaming presence does Microsoft have already? They're obviously well known for their professional services, technology with the OfficeSuite.
MARK ANDRESS: Yeah, but don't forget, Microsoft has a really big gaming business or had a very big gaming business before. It has its Xbox console. It bought Minecraft in 2014. It has been building out a really strong portfolio of games. Minecraft is kind of a social network in itself because you have a lot of kids sort of that's the way they interact with each other, through Minecraft.
Another company that does that is Roblox, a very similar sort of world-building game that's-- kind of has intimations of the metaverse there. So could someone acquire Roblox? I mean, it's a really richly valued company at the moment. But, yeah, that's also a possibility. But, yeah, Microsoft has made a big deal about gaming. I mean, it's not like it's come out of the blue, Microsoft has suddenly come into gaming. They had a really strong business in gaming before.
JULIE-ANNA NEEDHAM: So can you tell us about some of the most compelling targets out there, either in gaming or in the metaverse or a combination of both?
MARK ANDRESS: So really, in gaming, you have-- and some of these gaming companies kind of transverse into the metaverse somewhat. But the three most compelling gaming targets, I would say, would be Electronic Arts, Take-Two Interactive and Epic Games.
Now, I'll start with the last one. Epic Games is probably the one that has the biggest kind of overlap with the metaverse because they have done these concerts on their Fortnite game. And so you have all these gamers, they come to play Fortnite. There's a big community around that. And then they pay money to watch a concert. So you had Marshmello was a concert had last year, I think-- and, no, in 2020. And then Travis Scott was in 2019. And so what they've done is they're able to have nongaming events inside their game that people pay money for. Now, that makes it a compelling proposition.
Electronic Arts is compelling because it owns these sports franchises, the NFL and FIFA sports franchises that get new versions released annually or biannually. And it has a ton of games that would be interesting for any gaming company or anyone that wants to get into it. Take-Two Interactive is also interesting. They, early in January, announced the $12 billion acquisition of Zynga, which is focused on mobile games.
And mobile gaming is actually the biggest and fastest-growing category of gaming overall. And so that's what makes Take-Two Interactive interesting as well, not least its own catalog of games. But mobile gaming is-- certainly, it's a nascent category for Microsoft. They don't have that much in mobile gaming. It could become-- it could be an interesting target, although regulators might push back on that.
But, yeah, so those three in gaming would be my top picks. Roblox is potentially another one. That's sort of they have that social network effect as well with young people playing inside this world-building game.
And then in the metaverse, there are several startups that raised a lot of money in recent months. These include Forte, which is a blockchain gaming platform. There's a wearable technology developer called Magic Leap. And then you have an augmented reality software development company called Niantic, who are famous for their-- for the creation of the Pokémon GO game. So those would be my top three picks in the metaverse.
JULIE-ANNA NEEDHAM: Great. Thank you. And I think it's absolutely fascinating how this has got the potential to change our lives so much and basically remove any need for us to leave our houses, although whether that will happen or not will be-- only time will tell.
MARK ANDRESS: Oh, perish the thought.
JULIE-ANNA NEEDHAM: Thanks very much, Mark.
MARK ANDRESS: Pleasure.
JULIE-ANNA NEEDHAM: That was Mark Andress. Thank you for listening to this week's episode of Dealcast presented by Mergermarket and SS&C Intralinks. Please rate, review, and follow the podcast. You can find this on Apple Podcasts, Spotify, or look out for your Mergermarket news alert. For more information, check out our show notes. Join us next week for another episode.
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