Why Microsoft spends $69 billion on video games – The Mercury News

You learn a lot of hard lessons as a parent, like how wrong you were to say to kids “You’re wasting your life playing those video games!”

Just how wrong? Well, the company behind some of the gaming industry’s most popular products is being sold for $69 billion.

Technology giant Microsoft — perhaps best known for its Windows, Excel and PowerPoint software — is buying Southern California gaming pioneer Activision Blizzard. It’s an all-cash deal that not only marks Microsoft’s largest acquisition, but it’s also the largest video game deal in history.

Now if you are a gamer, you get it. Microsoft also makes Xbox game consoles.

If you follow Wall Street, you understand the ups and downs of dealmaking. Microsoft, worth $2.3 trillion, has grabbed a small player in the gamer space. You know “synergy” in corporate lingo.

But if all you know is watching young adults — mainly men — gather around the TV participating in some interactive activity, then you probably need this Gaming 101 column.

Here’s how we got to this moment in gaming history and the thinking behind the eye-catching merger.

How much?

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

The deal puts Activision Blizzard’s value on par with consumer goods companies Colgate-Palmolive, Norfolk Southern Railroad, shipper FedEx, Capital One Bank or Rivian, the electric truck startup in Irvine.

In terms of deal size, this equals the dollar involved in the 2009 purchase of drugmaker Pfizer of Wyeth; Dell Computers bought EMC in 2013; Allergan’s healthcare merger of Actavis and Irvine in 2015; CVS Health acquisition of Aetna in 2017; Or The Walt Disney Company buying 21st Century Fox in 2018.

Of course, we must also offer a real estate perspective: $69 billion will buy you approximately 88,000 existing California single-family homes at a 2021 average sale price of $787,000.

why?

Microsoft wants a big chunk of an industry that entertains 3.25 billion people worldwide, players who spend $180 billion annually on video games.

The acquirer will therefore need to add to its already massive online entertainment audience that plays on computers, mobile devices or dedicated consoles. Those customers pay to play many of these games, or they spend cash on various in-game upgrades,

Check out Activision Blizzard’s three major slices.

Activision is part of the company from Los Angeles and its fighting-game “Call of Duty” franchise, as well as mixed efforts including a new professional eSports league. Irvine owns Blizzard and its “World of Warcraft” community-gaming empire. And don’t overlook the mobile platform king known for “Candy Crush.”

All those kids playing all these addictive games — psst, many adults play too — take Activision Blizzard about $8 billion in annual revenue and generate $2.5 billion in profits.

What is Activism?

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

He became angry after the company was bought by Warner Communications. So, he quit the job and started what became Activision in 1979.

It was a pioneer of third-party game development with the founders starting to work on their new products in, Yes, in a Garage! But perhaps as many fast-growing industries, expansion was hot—and game-making businesses suffered greatly in the 1980s.

Current CEO Bobby Kotick bought and essentially started the then struggling company in 1990. He added a new focus of material buying when he moved the corporation to L.A. The top-selling games purchased included “Call of Duty”, the Tony Hawk Skateboarding series, and “Guitar Hero”.

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

yes blizzard?

Blizzard Entertainment was founded in 1991 by three UCLA graduates Michael Morhaime, Alan Adham and Frank Pearce.

He began writing games for other studios and went through a series of corporate names and strange ownership issues. This hasn’t stopped him from honing his specialty: games where participants play with and against others online – building a community in the process.

In 1994, the first Warcraft online multiplayer game came out. Four years later they were acquired by the French publisher Vivendic.

And then in 2004, “World of Warcraft” was released and soon became the world’s most popular product in this genre. It was so popular, it allowed Blizzard to create the annual BlizzCon fan convention held at the Anaheim Convention Center.

Activision paid $19 billion to acquire Blizzard from Vivendi in 2008, renaming the merged entities to Activision Blizzard.

What is the angle of Mircosoft?

Microsoft may be better known to us older people for its computer operating system or its suite of Office software, but it’s been a player in gaming for more than two decades.

Yet the Xbox — Microsoft’s foray into gaming that now accounts for about a tenth of total sales — was far more about playing corporate defense than any entrepreneurial magic.

The Xbox brand was launched in 2001 as Microsoft saw Sony’s developing PlayStation gaming machines as a potential threat to personal computers that relied heavily on Microsoft software.

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

What will happen next?

Let’s ignore all the legal formalities that will take to get over by the end of this year.

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

Think about how the Internet and social media have transformed communication and information sharing. That’s a lot of money to speculate on what will be the next life-changing thing out of cyberspace.

Will most office meetings someday be in virtual reality? Can families gather around a gaming platform of the future to celebrate the holidays? Can the next generation of great athletes play eSports?

Microsoft is betting $69 billion that a key intersection will revolve around the type of community-scale gaming Activision Blizzard helped pioneer.

Jonathan Lancer is a business columnist for Southern California Newsgroup. He can be contacted at jlansner@scng.com

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