The DeanBeat: Interpreting Microsoft’s $68.7B Activision Blizzard deal as a metaverse play

Microsoft‘s $68.7 billion pending acquisition of Activision Blizzard will shake up the game industry to its core. It has upset the status quo and will likely trigger more deals.

Within Microsoft, I believe this will trigger or accompany a huge investment in the metaverse, leading to things like a Call of Duty metaverse and similar things for each of the company’s major franchises. A lot of other stories have said it helps Microsoft’s strategy of being the Netflix of gaming, but I think more money is at stake in the metaverse.

I don’t know this for a fact, but I can surmise it from the facts. This deal provides Microsoft many big advantages like giving the company more than 30 game studios (compared to Sony’s 17) and getting all of Activision Blizzard’s games like Call of Duty up on Xbox Game Pass. But I think that is thinking in the past. Microsoft is already the leader in its subscription gaming service, with more than 25 million subscribers.

Some deals are about the here and now, like Take-Two’s $12.7 billion acquisition of Zynga. That is about beefing up Take-Two’s console and PC offerings with mobile games. Mobile games are more than half the market now.

Microsoft gets a nice mobile game business with King, which was part of Activision Blizzard. But I think this deal is about the future. And that means the metaverse, the universe of virtual worlds that are all interconnected, like in novels such as Snow Crash and Ready Player One. We’ll discuss this at our GamesBeat Summit: Into the Metaverse 2 event on January 26-27.

Activision Blizzard CEO Bobby Kotick gave us an interview and said a few reasons why he did the deal, which intensified as the company’s stock price fell and the Wall Street Journal did an article saying Kotick knew about serious sexual harassment allegations for years and did nothing. Kotick has denied those charges. He noted that delays for Overwatch 2 and Diablo IV triggered a bigger stock slide. (It’s worth noting that Microsoft’s game leader, Phil Spencer, said he was disturbed by the allegations and it was evaluating its relationship with Activision Blizzard; that didn’t help Activision Blizzard’s stock price.) And so climbing out of that stock price trough wasn’t attractive, compared to getting there overnight with a $95 a share cash offer.

One of the other reasons that mattered was that Activision Blizzard couldn’t hire enough people, Kotick said. In a historic expansion for game investments, startups were hiring away people and the company couldn’t expand fast enough to hire thousands of employees to meet its production obligations. And he noted that AI and machine learning experts were quite scarce, and they were what the company needed a lot. It should be noted that it probably wasn’t easy to recruit anyone with a massive sexual harassment scandal.

Some people don’t believe that, and that Kotick was instead just looking for a graceful exit from the difficult sexual harassment scandal. Still, if it is true, then Kotick needed those AI and machine learning people for a reason. I would say he needs them to build a Call of Duty metaverse and other such assets.

AI is a critical asset for the metaverse for a variety of reasons.

Satya Nadella, CEO of Microsoft, echoed that sentiment with his own statement, which said, “Gaming is the most dynamic and exciting category in entertainment across all platforms today and will play a key role in the development of metaverse platforms.”

Nadella has been talking up the metaverse for a while, and while Microsoft has stayed out of a lot of the VR market, it has been continuously investing in enterprise versions of its HoloLens technology. Some believe that hidden in the company’s R&D budgets are sizable investments in metaverse tech, just as Apple, Google, Amazon and others are. As it changed its name to Meta, Facebook came out and said that it is investing more than $10 billion a year in the metaverse. Nadella has to invest similarly to stay competitive.

Back in November, Nadella said at the Ignite 2021 event that the metaverse would be a new platform and application type, similar to the rise of the web and website in the early 1990s. And Microsoft has plenty of strong properties that could be candidates for franchise-based metaverses, like Minecraft and Halo. Minecraft has already generated more than $350 million in revenues for game modders.

Kotick also said that he and Phil Spencer, head of gaming at Microsoft, has always been aligned on the definition of the metaverse. Kotick said it won’t be like Neal Stephenson’s Snow Crash vision. Rather, he sees it as a collection of like-minded players focused on their favorite franchise. I didn’t get to press him on that, but I would guess that a Call of Duty metaverse is a priority at Activision Blizzard, but Kotick didn’t have enough people to pull it off.

Such a metaverse would have content creation tools for fans, much like Electronic Arts did with its Battlefield Portal mode, which allowed players create their own multiplayer matches.

“That’s going to be an important part of what a metaverse will be,” Kotick said.

Kotick noted he would get more resources to spend on dormant franchises like Skylanders or Guitar Hero. Both of those require manufacturing and supply chain expertise, which Activision Blizzard doesn’t have but Microsoft has plenty of thanks to its Xbox Series X/S manufacturing.

And while Activision Blizzard is worth $68.7 billion, Kotick argued that it was too small for future investments, and once again I believe that means the company is serious about doing the metaverse.

This deal does come with some risks. It could take 18 months to clear antitrust scrutiny around the world, and a lot can happen in those 18 months. The Biden administration’s Lina Khan, the head of the Federal Trade Commission, is expected to be aggressive in examining the deal.

As far as antitrust goes, it would be a tough case to prosecute for the government. Rivals such as Sony and Tencent have bigger games businesses than Microsoft, and the Redmond giant has been free to acquire companies in games while other big tech firms such as Google, Facebook, and Amazon have stayed away from that.

But Microsoft could find it hard to navigate due to all of the heightened concern around antitrust, with foreign governments and lawmakers shifting to become more aggressive at antitrust enforcement.

Microsoft can alleviate the antitrust pressure by making sure no consumer harm comes from the deal. That means it should probably not yank Call of Duty from Sony’s PlayStation platform. Of course, Microsoft could cut a deal with Sony to get Sony to adopt Xbox Game Pass, where Call of Duty will likely be available. Spencer has said that Microsoft would likely make the Activision Blizzard games available to the communities where they are currently played.

Spencer also said he spoke with Sony and confirmed “our desire to keep Call of Duty on PlayStation.”

As for the competition, Microsoft’s move will put pressure not only on its rivals like Sony, Nintendo, and Electronic Arts. As we noted, the deal will change the industry, as it is resetting the idea of how big a company has to be to stay competitive in the games business. It will also put Microsoft on rivals that are gunning for the bigger investment of building the metaverse. The move seems more directed at the Apples and Metas of the world.

That’s because I expect that games will lead the way to the metaverse. And this deal will mean that Microsoft will have the lead position with game developers and game talent. It will have in-house talent that makes it authentic with gamer audiences, and it will also have other technologies, like AI, to boost its metaverse position.

Even though Microsoft’s Activision Blizzard seems to be all about games, it’s also all about the metaverse.

Originally appeared on: TheSpuzz