Yahoo Finance Microsoft's gaming future depends on the US
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Wednesday, May 24, 2023
Microsoft needs the US to get its $70 billion Activision Blizzard deal to happen
Microsoft (MSFT) is betting $70 billion that buying Activision Blizzard (ATVI) will finally take it from a gaming also-ran to a behemoth. But for the gambit to pay off, it needs one major player to go along with the deal: the US.
Acquiring Activision Blizzard would instantly make Microsoft one of the largest gaming companies in the world by revenue. More importantly, it would give the Windows maker a huge boost in the still nascent cloud gaming industry, as well as a massive increase in its mobile gaming exposure.
Antitrust authorities around the world, including those in the European Union, China, Japan, Brazil have already approved the deal. Two major countries, however, are fighting the move over fears it could give Microsoft too much power in the gaming industry: The US and UK.
And while Microsoft and Activision Blizzard could theoretically deal with the UK by continuing to operate as separate companies in that country, and a single entity elsewhere, it can’t do that with the US and its 217 million gamers.
“Without the US market the deal is a bust,” explained NYU Stern Adjunct Business Professor Joost van Dreunen. “It needs the US market.”
The US is a gaming powerhouse
Microsoft needs the US for a relatively simple reason: the country is a massive gaming hub. According to Statista, the US is expected to bring in $92.27 billion of the anticipated $396.2 billion in global gaming revenue in 2023. China, the largest gaming market, will account for $110.1 billion.
The UK? That’ll bring in just $9.46 billion in 2023.
In the US, Microsoft’s plans will eventually rest in the hands of an administrative judge, which will rule on the company’s appeal of the Federal Trade Commission’s lawsuit seeking to block the deal. In its suit, the FTC says that the acquisition would hurt competition in the gaming space.
If Microsoft wins the appeal, it could eventually move forward with the deal. If not, the plan is dead.
In the UK, the country’s Competition and Markets Authority (CMA) has put Microsoft’s deal on hold, but the company has a chance to appeal the decision to the Competition Appeal Tribunal some time next week.
If the tribunal finds problems with the CMA’s ruling, Microsoft gets another shot at completing the deal in the UK. But if the ruling stands, van Dreunen says Microsoft could simply keep itself separate from Activision Blizzard in the country.
“UK customers won't have access to cloud gaming the same as everybody else in the world,” he said. That’s because without the deal Microsoft wouldn’t be able to provide Activision Blizzard games via its cloud gaming service like it would elsewhere.
“And it will mean for them to say ‘Okay, we have, effectively, this somewhat outdated distribution model in this one island off the coast of Europe that insists on maintaining walled gardens around the platform ecosystem, as opposed to providing different channels of access different price points, and different ways for consumers to get to gaming content’,” van Dreunen added.
But Microsoft wouldn't be able to do that if it loses its FTC appeal. The US is simply too important in terms of overall gaming revenue. Regardless of what Microsoft has in mind for its gaming future, the fact is, the Activision Blizzard deal is in a difficult place.
“This is an especially tricky case,” explained Randal C. Picker, James Parker Hall Distinguished Service Professor of Law at the University of Chicago Law School.
“But you can’t complete deals in this environment unless you are willing to be patient, and Microsoft seems to be in this for the long haul notwithstanding the headwinds.”
The win for Microsoft is worth the risk
Microsoft is willing to spend $70 billion on Activision Blizzard because it could prove to be a massive boon for its gaming business. The video game giant counts the incredibly popular “Call of Duty” as one of its marquee franchises, which would drive billions in revenue toward Microsoft’s gaming division. Last year’s “Call of Duty: Modern Warfare II” brought in $1 billion in its first 10 days on the market.
But it’s not just about “Call of Duty.” The deal would also give Microsoft the ability to offer Activision Blizzard’s various franchises via its Xbox Game Pass service. Game Pass is a subscription offering that allows you to download hundreds of games each month.
Game Pass’s top tier includes Microsoft’s cloud gaming service, which allows you to play games on your console as well as stream them to devices ranging from smartphones to smart TVs for $15 per month.
Cloud gaming is still in its early stages — Microsoft refers to the platform as a beta — but the company is angling for it to become the de facto means for users to play in the future. Building up Game Pass, then, would give Microsoft first-mover advantage in the market.
The company is already beating Sony (SONY) and Nvidia (NVDA) in the cloud market, with the UK’s Competition and Markets Authority estimating that Microsoft controls 60% to 70% of cloud gaming market share. Adding Activision Blizzard to the pool would make it even more of a dominant force.
Then there’s Activision Blizzard’s King mobile gaming line, which includes “Candy Crush Saga.” Adding that would ensure that Microsoft has a foothold in one of the fastest growing gaming spaces.
But whether any of Microsoft’s plans come to fruition comes down to the US.
Daniel Howley is the tech editor at Yahoo Finance. Follow him @DanielHowley
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