[Tech Talk] A Staggering 90 Trillion Won Acquisition Cost... MS's Ultra-Differentiation Bet Targeting the 'Netflix of Gaming'

Activision Blizzard's 90 Trillion 'Mega Deal' in Sight
MS, Serious About Gaming... Unstoppable Acquisition Moves
Intent to Secure a Moat in the Large Gaming Industry

American big tech company Microsoft (MS) is close to acquiring the gaming company Activision Blizzard. The acquisition, valued at $68.7 billion (approximately 92 trillion KRW), is a historic mega deal that took a staggering 21 months to complete.

With the UK competition authority CMA approving the merger of the two companies, MS is expected to soon take control of Activision Blizzard. However, some doubts remain. Was spending 90 trillion KRW on a single gaming company a wise investment? What future does MS envision in the gaming market?

Acquisitions upon acquisitions... MS gaming division expanding its size

Phil Spencer, CEO of Xbox, who oversees Microsoft's (MS) gaming business.
[Image source=YouTube]

To properly understand MS's 'gaming business strategy,' there is one person to note. Phil Spencer, CEO in charge of MS's console gaming division 'Xbox,' is the key figure. He also led the charge in the recent MS-Activision Blizzard acquisition.

Since becoming Xbox CEO, Spencer's approach can be summed up in one word: relentless acquisitions. Xbox has already merged with large and small gaming companies, including the major American game studio 'Bethesda,' and the Activision Blizzard acquisition marks the pinnacle of this strategy.

At first glance, Xbox's acquisition strategy aims at 'expanding its scale.' Currently, Xbox is pushing its cloud gaming service called 'Game Pass.' Consumers pay a monthly subscription fee to freely choose and play games provided by Xbox. It is like the Netflix of the gaming industry.

Activision Blizzard owns numerous popular online games and already manages hundreds of millions of accumulated users. Simply absorbing Activision Blizzard into Game Pass can significantly increase Xbox's monthly subscription revenue.

MS’s rationale behind spending 90 trillion KRW on games... Ending the 'AAA game' IP winter

The latest installment in Activision Blizzard's flagship IP, the 'Diablo' series [Image source=YouTube]

However, this is only the surface reason. Spencer’s ultimate goal through acquiring game companies lies elsewhere. The game companies MS mainly acquired are large studios that develop so-called 'AAA games.' AAA games refer to massive games developed by large teams with enormous budgets, typically involving around 200 developers spending about $200 million or more over 8 to 10 years.

Because AAA games require huge costs and time to develop, their market impact is also enormous. The problem is that since the 2010s, the 'arms race' among AAA game companies has overheated, causing game development costs to skyrocket to uncontrollable levels.

In a recently leaked internal letter from Spencer, this issue was highlighted. Spencer pointed to 'changes in the distribution market' as the cause of the overheated AAA game competition. In the past, large game companies dominated the shelves of game package retailers for marketing, but now that online downloads have become widespread, this strategy has become meaningless. Instead, large game companies have started focusing on AAA games that mid- and small-sized companies cannot match.

Activision's 'Call of Duty: Modern Warfare 3' is a remake version of a previously developed game. [Image source=Activision]

However, as the development costs of AAA games easily exceed hundreds of billions of KRW, large game companies now view game development as a 'risk.' Game development involves high uncertainty. If a game receives negative feedback during closed testing, the project could be overturned.

In the past, it would have been no big deal for large game companies to cancel one or two underperforming games. But now, even a single poorly made AAA game can jeopardize a company's future.

Because of this, an 'IP winter' has descended among large game companies. The cycle of releasing new games has slowed, and companies have started relying on extending the lifespan of existing games. This issue is clearly evident in Activision Blizzard’s new releases such as 'Diablo 4' and 'Call of Duty: Modern Warfare 3,' which are sequels or remakes of famous games that are decades old.

MS, which wrote a blank check for games, can it hold the moat?

MS aims to dominate the cloud gaming market with its 'Game Pass' subscription service.
[Image source=MS]

Spencer believes that Game Pass can end the stagnation of AAA game companies. As explained earlier, Game Pass creates a fixed income through monthly subscriptions, similar to Netflix. Once predictable fixed income flows continuously, developers at large game companies gain 'stability.' They can approach project planning and development from a more long-term perspective.

Spencer emphasizes that the 'Netflix strategy' has already had a positive impact on the blockbuster film industry. In his letter, he stated, "Netflix has clearly demonstrated the same dynamism in Hollywood by creating far more new IPs than any movie studio."

If Spencer’s prediction comes true and game companies stabilize thanks to the massive revenue source called 'Game Pass,' the 'AAA game drought' that has lasted over a decade will come to an end. Moreover, Xbox, which controls the majority of AAA game developers, will possess a moat incomparable to other gaming companies.

According to MS, Game Pass already recorded 150 million monthly active users in the second quarter before the Activision Blizzard acquisition, with quarterly revenue approaching $1 billion.

According to global market research firm Statista, the cloud gaming market exceeded $4 billion this year and is expected to grow at a high rate of 40% annually. If MS secures a firm leadership position in this market, it will have another growth engine following the Windows operating system (OS) and Azure cloud. This is why MS has effectively handed a 'blank check' to CEO Spencer.

This content was produced with the assistance of AI translation services.