639 days later

Microsoft closes its acquisition of Activision Blizzard. What to expect in the short term.

The SuperJoost Playlist is a weekly take on gaming, tech, and entertainment by business professor and author, Joost van Dreunen.

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My ego reached new proportions this week.

First I was a billed guest at a16z’s gaming mixer on Wednesday together with Ben Feder and Andrew Chen.

The former was previously the CEO of Take-Two and, after several years of working for Tencent as its partnership lead, he now heads a fund called TIRTA. The latter was writing cohort analyses and talking about user retention in free-to-play games long before it was cool, back in 2007. He’s now one of the leads for a16z’s Games Fund One. I’ve found both of their perspective to be very useful over the years.

Fanboying notwithstanding, it was great to see so many people come out to represent the NY game scene. After years of rubbing sticks together, perhaps digitalization and the lowering of entry barriers will finally allow New York to cultivate a dev scene on equal footing with nearby Montreal and the West Coast. Maybe. Until then we have the best views.

Second, I just came back from a full-blown studio recording. (Thanks, Peter!) I want to pretend, of course, that it’s the kind of stuff that happens to me regularly. As if to say that having a full crew with make-up, sound, light, multiple cameras, and full catering service buzzing around while I’m having a conversation about video games is somehow normal to me. It isn’t. And I hope it never will be. It raises the stakes and challenges me to improve at what I do to make everyone else’s effort worthwhile.

None of it is possible without the effort of others. It includes a small army, including the team that provides the data I quote, the event coordinators that pick my name out of a bag of other white dudes with something to say about video games, my wife who holds down the fort with a sick 2-year old while I’m out late (thanks, love ❤️), and the relentless enthusiasm of the people I meet.

You’ll forgive me the tangent because my ego is still soaring. I expect it to be deflated shortly.

On to this week’s update.

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BIG READ: 639 days later

Last week Friday the UK’s Competition and Markets Authority cleared Microsoft’s $69 billion purchase of Activision Blizzard. After 639 days of intense regulatory scrutiny and corporate jet-setting around the world, Phil Spencer finally got his wish.

The deal remains controversial and opinions on what happens next vary. Analysts, on the one hand, focus heavily on the business strategy and market positioning advantages that Microsoft gains from acquiring Activision Blizzard, including benefits for Xbox and Game Pass. Certainly, Xbox is going to need a boost to make good on that self-imposed target of 100 million Game Pass subscribers.

Creatives, on the other hand, are not so sure. They express concerns about industry consolidation and its negative impact on creativity, diversity, and consumer choice. They worry about Microsoft gaining too much control over the ecosystem. Platform holders have been gaining market power over the past decade, making them the largest game companies in the world in comparison to independent publishers. Marketing expenses have soared as titles compete for attention and franchises reign supreme. Now that Microsoft is the third-largest game company globally, all eyes are understandably on what’s next.

Well, first, Bobby Kotick is getting absolutely wasted at this year’s holiday party. Rather than ‘overseeing a successful transition’ Kotick has no time for ceremony and heads straight for the door. I recall being asked whether Kotick would ask for more money, once the deal’s time frame was going to be extended and Activision Blizzard’s value had gone up. My answer then was: no, Kotick is not looking for a few extra million. Kotick wants to complete the crowning of his career. And so he does.

It brings us to the obvious question: who’s going to be leading Activision Blizzard? Here’s my hot take: in the next few weeks Microsoft is going to promote Sarah Bond, currently corporate VP at Xbox and perhaps the most visible exec after Spencer, to the position of CEO for its new subsidiary. If they’re not, they should.

With Kotick gone, Microsoft now has to sanitize its new asset. Activision Blizzard’s legendary workplace toxicity demands new leadership. What better solution than to address widespread untreated misogyny, call it inactivision, with a woman at the wheel? Letting in some fresh air would certainly help with middle-aged musk that permeates boardrooms still. The departure announcements of not one but two industry icons in a single week juxtaposed with a woman taking the reigns at a leading firm suggests interactive entertainment as a whole is gearing up for its next decade of growth.

More so, other potential candidates have jobs that demand continuity. Spencer already has the primo position and sits at the same table as Satya Nadella. He’s the one who got Xbox here and the least he can do is to see it through. Similarly, Matt Booty, current head of Xbox Game Studios, already has plenty on his plate, especially since the ZeniMax acquisition. Adding ABK to his existing workload or making it his only job would be a lateral move. There’s a small possibility that ABK will promote someone from within. Perhaps, Mike Ybarra, president of Blizzard Entertainment and former corporate VP at Xbox, could be a candidate. But he is in the midst of changing Blizzard’s culture. An ally, perhaps. But Bond’s a better pick to lead.

Next, an important part of Microsoft’s narrative has been making games accessible to everyone. We’ve repeatedly heard Xbox emphasize how important it is for the industry to offer a diversity of voices in content and make games available to players at different price points and via different distribution channels. I can’t think of a better champion than a woman of color. The 200 or so game companies I track on a regular basis are largely led by white, middle-aged men. Many of them do a fine job, of course. It would be hugely meaningful for one of the largest tech firms to break with that tradition.

Next, the future of gaming is better informed. The ABK/MSFT kicked up so much dust that it became a catalyst for both creatives and consumers who all now better understand how this industry operates. Between Sony’s emails, leaked internal documents, a slew of research reports and academic writing, and a few lawyers doing a shitty job redacting documents, it’s been nothing short of an all-you-can-eat buffet. Delicious. A generation of aspiring analysts and experts now have some actual data and verbatim from high-ranking execs to build their models and assessments.

Millions of gamers learned more about the industry in the past 22 months than they did in the entire decade before. For example, you’ll recall that an early argument from regulators was the concern about Microsoft acquiring Activision Blizzard to suppress any competitive threat in cloud gaming. Known as a so-called ‘killer acquisition’ it is difficult to prove such a theory because the number of cases remains small and the details scarce. Some of the more recent research evaluating the killer acquisition theory maintains its skepticism. The researchers admit, however, that they had to rely solely on publicly available information and financial disclosures. For better or worse, the orgy of information we’ve just witnessed will birth a generation of better-informed experts and analysts.

Moreover, we can expect more acquisitions in the coming period. Despite a loss of momentum in the games market and firms operating at much lower valuations than a year ago, any purchases or spin-offs have been wisely delayed. The regulatory attention and public scrutiny added a lot of risk to any major transaction. With ABK/MSFT in the bag, that is likely to change.

You can already see how, for instance, Embracer’s continued shedding of studios may become a fire sale instead. It still has several assets that are valuable enough that in the case of a sell-off, a transaction would generate enough capital for it to get back to making games instead of figuring out where to cut staff.

The question is, of course, who has the capital to do so?

Embracer recently collapsed because its Saudi sugar daddy pulled out of a $2 billion commitment. My first instinct was that the Saudis had seen something they did not like. But more recently we learned that the issue wasn’t Embracer’s offering or disorganization but the inevitable issues that come with relying for 90 percent of your economy on oil. Inflation and supply chain problems were hampering Saudi Arabia’s effort to reduce its oil dependency. It noted a change from anticipated growth and profitability to decline and loss. It marks the end of a financial bonanza we won’t see for a while.

Similarly, other tech and entertainment firms, two favorites among regulators, have only made minor acquisitions. Netflix, for instance, has made modest-sized acquisitions such as Night School Studio, Next Games, and Dungeon Fight Entertainment. What Netflix and Amazon need to play a more meaningful role is intellectual property. They now understand what’s involved in getting such a deal done, in addition to the monetary expense.

Sure enough, this week a rumor emerged that Disney CEO, Bob Iger, may be planning to acquire a video game maker soon. As usual, the very thought of a media firm showing any interest in video games sparked a widespread frenzy. The video games industry and its many amateur industry observers live in the twilight world where they both deem themselves as culturally different from more conventional entertainment categories and crave its validation.

The following single, one-sentence quote from Bloomberg echoed throughout trade press and online forums:

“Iger's deputies are pushing him to consider a bolder transformation of Disney from gaming licensee to gaming giant through, say, an acquisition of Electronic Arts. But, as with everything else, he's been noncommittal.”

It shouldn’t require explanation that a large multi-billion dollar media empire is always considering assets it could acquire or spin-off to better streamline its business. (For a great write-up, try Naavik’s assessment.) I do not doubt that gaming, a large and growing entertainment category, is part of those strategy conversations. However, something that is possible isn’t necessarily probable.

First, it was Iger who previously spun off Disney’s video gaming assets. After previously overseeing the acquisition of Playdom in 2010 and FoxNext in 2019, Iger fell out of love with the category and instead insisted on only licensing its intellectual property to others. Taking a minimum guarantee and some upside from a blowout success is a more reasonable risk profile for an exec who knows he doesn’t know games well enough. I don’t recall Iger taking my class during his two-year retirement, so he’s unlikely to pursue gaming now.

Second, Iger is trying to cut $5.5 billion in costs, not spend more money. The immediate emphasis will go to building on what already works (e.g., theme park expansion) and looking for efficiencies. It is unlikely Big Mouse is going to take on a bunch of debt to acquire an asset that can be easily turned into a profitable subsidiary or acutely amplify the value of existing intellectual property.

As part of my reasoning in favor of the ABK/MSFT deal, I’ve argued that both Apple and Google now have to contend with a much larger tech giant. My perhaps naive expectation is that Microsoft will have more leverage and a friendlier coopetition with the mobile giants to pull some much-needed oxygen into these ecosystems. Marketing spend is spiraling and even Apple has started fencing with AAA titles for their devices.

Am I reading too much into Tim Cook’s visit to China where he, of all things, showed up to support one of Tencent’s gaming tournaments? Sure enough, Cook is looking to build bridges into China. And those bridges are made of games. It suggests we can expect more from Apple as it seeks to leverage its position in interactive entertainment and aims higher. Partnering with Microsoft and its pricey portfolio may very well prove to be on that roadmap.

Whatever comes next, it’s been a fascinating two years. I’m grateful to have been privy to a host of confidential conversations and to learn about some of our industry’s most intricate processes.

Now let’s hope Microsoft doesn’t fcuk this up.