Monday, June 5, 2023

Why Microsoft is spending $69 billion on video games

As a parent, you will learn many hard lessons, such as how wrong you were when you told your kids, “You’re wasting your life playing these video games!”

How wrong? Well, the company behind some of the gaming industry’s most popular products is on sale for $69 billion.

Tech giant Microsoft, best known for its Windows, Excel and PowerPoint software, is buying Activision Blizzard, a Southern California gaming pioneer. This is an all-cash deal that is not only Microsoft’s biggest acquisition, but also the biggest video game deal in history.

Now, if you are a gamer, you understand this. Microsoft also makes the Xbox game console.

If you follow Wall Street, you understand the ebb and flow of making deals. $2.3 trillion Microsoft has taken over a smaller player in the gamer market. You know, “synergy” in corporate jargon.

But if all you know is watching young people – mostly men – gather around the TV and engage in some sort of interactive activity, you’ll probably need this Gaming 101 speaker.

Here’s how we approached this moment in gaming history and what’s behind the compelling merger.

How many?

Let’s put the $69 billion price in perspective.

The deal puts Activision Blizzard on par with consumer products like Colgate-Palmolive, Norfolk Southern railroad, FedEx shipper, Capital One bank or Irvine-based electric truck startup Rivian.

In terms of the size of the deal, it is roughly equal to the amount of dollars spent on the purchase of Wyeth by the pharmaceutical company Pfizer in 2009; purchase of Dell Computers EMC in 2013; the merger of Actavis and Allergan of Irvine in healthcare in 2015; Acquisition of Aetna by CVS Health in 2017; or Walt Disney Co. buys 21st Century Fox in 2018.

Of course, we also have to offer a real estate perspective: $69 billion will buy nearly 88,000 existing single-family homes in California for an average 2021 sale price of $787,000.

For what?

Microsoft wants to take over the majority of the industry that entertains 3.25 billion people around the world, gamers who spend $180 billion a year on video games.

Thus, the buyer gets the opportunity to expand their already hefty audience of online entertainment that is played on computers, mobile devices or special consoles. These customers pay to play many of these games or spend money on various in-game upgrades.

Look at three key aspects of Activision Blizzard.

There’s a part of that Los Angeles-based Activision and its Call of Duty war gaming franchise, as well as various endeavors including a new professional esports league. Irvine has Blizzard and their World of Warcraft gaming empire. And don’t forget King, the mobile platform best known for Candy Crush.

All these kids playing all these exciting games – psst, a lot of adults do too – add up to Activision Blizzard making about $8 billion in annual revenue and making $2.5 billion in profits.

Who is Activation?

It’s a classic Silicon Valley story that started with guys making games for the Atari game console in the late 1970s.

They got angry after the company was bought by Warner Communications. So they left and founded what became Activision in 1979.

It was a pioneer of third party game development with the founders starting to work on their new products, yes, in a garage! But perhaps in many fast-growing industries, the expansion was too hot, and the game business suffered for most of the 1980s.

Current CEO Bobby Kotick bought the then company in 1990 and essentially started over. He added a new emphasis on content buying as the corporation relocated to Los Angeles. Top-selling games included Call of Duty, Tony Hawk’s skateboarding series, and Guitar Hero.

Oh, and the merger with Blizzard Entertainment brought the revolutionary “massively multiplayer online role-playing game” known as World of Warcraft.

Blizzard who?

Blizzard Entertainment was founded by three UCLA alumni Michael Morhaime, Allen Adham and Frank Pierce in 1991.

They began making games for other studios and went through a series of corporate titles and uncomfortable ownership issues. That hasn’t stopped them from honing their specialty: games where members play online with and against others, building a community in the process.

In 1994, the first online multiplayer game Warcraft was released. Four years later they were acquired by the French publishing house Vivendi.

And in 2004, World of Warcraft was released, which soon became the world’s most popular product in this genre. It was so popular that it allowed Blizzard to host the annual BlizzCon Fan Convention, which was held at the Anaheim Convention Center.

In 2008, Activision paid $19 billion to acquire Blizzard from Vivendi, renaming the combined companies Activision Blizzard.

What is Mircosoft’s point of view?

Microsoft may be better known to us older people for its computer operating system or office software suite, but it’s been playing games for over two decades now.

Yet Xbox—Microsoft’s entry into a gaming market that now accounts for roughly one-tenth of its total sales—was far more about corporate security than entrepreneurial magic.

The Xbox brand was launched in 2001 because Microsoft viewed the emerging Sony PlayStation arcade machines as a possible threat to personal computers, which rely heavily on Microsoft software.

But what started out primarily as slot machines has since grown into a lucrative online gaming platform, the Xbox Game Pass subscription service.

What’s next?

Let’s ignore all the legal formalities that will last until the end of this year.

The gaming hype is a “metaverse,” a yet-to-be-defined fusion of real life, online life, and entertainment that has blossomed in the era of the pandemic.

Think about how the Internet and social media have changed how we communicate and share information. You can make a lot of money guessing what the next life-changing thing will be in cyberspace.

Will most office meetings ever be held in virtual reality? Can families gather around some future gaming platform to celebrate the holidays? Will the next generation of great athletes be able to play esports?

Microsoft is betting $69 billion that one major intersection will be with the type of community-based gaming that Activision Blizzard helped pioneer.

Jonathan Lansner is a business writer for the Southern California newsgroup. He can be contacted at [email protected]

World Nation News Desk
World Nation News Desk
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