Game of Thrones: Some Hidden Logic of Microsoft Whale Swallowing Blizzard

Source: Brocade

The world's second-largest listed company by market capitalization intends to use 53% of its book cash to buy one of the world's most valuable pure game companies, and the information density of this matter is huge.

Reading the $68.7 billion deal, Activision Blizzard's perspective is irrelevant. To put it bluntly, it's just a pawn in the game of thrones. Microsoft has decided to start a new game of chess, and we had better foresee that a new round of kings will begin.

From Microsoft individuals to industrial wide areas, we try to deduce some of the next logic on paper.

Is the deal worth it?

Microsoft is the second most public company in the world with cash reserves, lagging Behind Buffett Berkshire Hathaway's 149 billion with a gap of about $10 billion, followed by Google and Apple. The whereabouts of these king-level wealth giants are regarded as a weather vane and are always highly sensitive to the market.

From a financial stand alone, microsoft would be a good deal if it could finally eat Activision Blizzard.

In 2020, Activision Blizzard's revenue was close to 8.1 billion US dollars, and its net profit was about 2.2 billion US dollars; the total revenue in the first three quarters of 2021 was about 6.7 billion US dollars, and the total profit of 2.2 billion US dollars was basically the same as that of the whole year of 2020. Maintaining eps growth rates of more than 25% in 2021 is relatively optimistic.

From the perspective of financial indicators, the game is still a rare high-growth track at present, with an average growth rate of more than 20% in the industry. Although Activision Blizzard's corporate culture is deteriorating, the growth rate of revenue and profit has remained above this level.

In the context of ultra-high inflation in the US virtual economy, and considering the natural anti-fragility of the game industry, Microsoft's acquisition of Activision Blizzard at a level of 30 times PE and 8 times PS is only from a financial point of view, which can be called a fair deal.

What does Microsoft want?

On the basis of fair prices, Microsoft has exchanged half of its cash assets for physical assets, with multiple levels of realistic considerations. We need to break this down a little more carefully.

[1] The second curve

This is most obvious.

Microsoft's second revival is based on the SaaS of stand-alone products, and under the endorsement of platform capabilities, new business incremental forms have emerged at both ends of C and B. The technical basis of SaaS is cloud computing, and the new propeller formed by the two has driven Microsoft out of the quagmire of the PC era.

More essentially, cloud computing is a technical means, as one of the most advanced productivity in the past stage, it gives Microsoft the maximum cost advantage, through the technical cost potential difference with other traditional industries, cutting excess benefits. In this sense, saying that it is Microsoft's second growth curve is actually not deserved.

In depth, on top of the operating system and office process business fundamentals, games will be Microsoft's second growth curve. The acquisition of Activision Blizzard is the most important piece of the puzzle to shape its second curve, after which it will become the largest IP owner in the gaming field.

Therefore, the acquisition of Activision Blizzard, Microsoft's direct purpose, is to replicate the secondary growth path of the office business in the game field. This is a large enough market, and merging into Activision Blizzard is an action to make a second growth curve poor dagger.

It is also obvious that the leap forward of the game business brought about by this transaction will form a second insurance for its cloud computing business. This is a leveraged capital action to strengthen the connotation value, and in the future, it will gradually feed back into its investment logic in the process of telling the new capital story to the outside world.

[1] Parallel universe.

On a philosophical level, human social life is a simulation game of adventure. This is the source of antifragility in the game industry. Especially after entering the digital age, it has shown the prototype of becoming a parallel universe of human physical society. This is also the connotation of the metaverse, especially the resistance of the game as the entrance to the metacosm is minimal.

Once the acquisition of Activision Blizzard is completed, it means that Microsoft has completed the most important piece of the puzzle to complete the game map, and its game store XPG (Xbox Game Pass) platform is expected to become the largest game parallel universe in human society:

Before Activision Blizzard, B Society (also acquired by Microsoft), EA, Ubisoft and other three major Western game IP matrix companies have been "Xiaozhi Eli" by Microsoft and joined the XPG platform; after the most difficult bone to gnaw - Activision Blizzard was included, warcraft, COD, Diablo, StarCraft, Hearthstone and other top IP in the current game industry will make the XPG platform the most brilliant parallel world in the starlight.

Valve's Steam and Epic Games' two cloud gaming platforms will make it worse – on THE XPG platform, not only is the big IP more complete, but it can be played for single-digit dollars a month. As for the SONY PS platform, which has always been known for its high price, how far-reaching the impact will be, it is not optimistic.

However, valve, Epic and even Sony's perspective is not important, back to the entire technology industry, Microsoft used $68.7 billion to risk, the most obvious appeal and guidance significance, but also in the first card slot and even to take the "executive power" of this parallel universe.

This is where its strategy lies — on the one hand, it has tried to choke the throat of the largest parallel universe while the main competitors are still planning to invest in the construction of the individual metacosm at a heavy time cost; on the other hand, when the business model expectations of other individual metacosms are unclear, it can already feed up the possible future metacosmary cash flow business through the existing game cash flow business.

[2] Energy engine.

An important difference between the game industry and other content industries is its soft and hard integration. Looking back at the history of the development of contemporary digital games, in a sense, it has spawned the origin and prosperity of the entire GPU industry. In turn, the rise of the GPU industry has continuously raised the threshold of the game industry. More importantly, the two together promote the intelligent process of the whole society.

A basic fact is that the game industry is currently the most active and developed area of AI. The connection between games and AI indicates the future direction of the evolution of the entire technology industry - the core of the two, the game engine - whether unreal, frost or IW Endless, and the AI engine - NVIDIA and AMD's respective GPUs, together constitute the core of the future intelligent business "energy engine".

Microsoft's acquisition of Activision Blizzard, a more important expectation is that it has the opportunity to attack the "energy engine" of the intelligent era:

Activision Blizzard's most valuable property is not only the externalized cash flow and big IP, but more importantly, the patent tree accumulated over more than a decade. These patent trees record the main circulation path and core logic of AI development so far. Specifically, its constantly changing IW Endless Game Engine is the B side of the entire graphics chip industry. And this B-side, in theory, can be extended from the simple game industry to any intelligent industrial field.

A reference case is that Nvidia's acquisition of ARM is being blocked, and Microsoft, which has always maintained a positive co-evolution with the CPU, reflects the same desire and idea as NVIDIA through the roundabout attack on the graphics chip industry: stronger industrial literacy capabilities will bring a higher position in the food chain.

The above logic will be relatively tortuous, but with the evolution of the era of hybrid intelligence, this tinder may be able to bring unexpected impetus to Microsoft in the future.

In fact, for this heavy expectation can be seen in a small way, it was circulated last year, Microsoft and the US military signed a $21.9 billion "HoloLens technology augmented reality goggles" large order. This $21.9 billion, described as the "Lord of the Rings," summons Microsoft's hopes for an energy engine in the intelligent era.

[4] New cycle

One of the most valuable elements of the game industry is also its user value. It's a particularly pure and gold-rich industrial belt: people will eventually grow old, but there will always be people who are getting younger. The game industry is always (relatively) a sunrise industry because the core of its user base is always the younger generation.

From the data point of view, the number of Activision Blizzard users is showing a stagnant trend: less than 20 million monthly active users, the number of active users is about 400 million. But from the perspective of quality, this group of users is the cornerstone of the game industry. As a piece of the puzzle of Microsoft's expected entire game business, winning Activision Blizzard also means taking the "City of Rome" of the entire industry.

From the humble Minecraft to the hardcore Diablo, Microsoft bought out the poles of the game industry.

In a higher dimension, office and games are themselves the current two poles of human society, from office to XPG, Microsoft's logic is very linear and rigid - package survival, unlimited penetration.

Judging by the current economic cycle, we believe that the US stock market is on top of a cyclical trend. For global tech giants, the halo cycle may be a fantasy, but meeting the cycle challenges does require new logic. Microsoft sprinkled $68.7 billion to buy out the younger generation, and then buy out a new growth curve, betting on a new cycle, perhaps the best option.

Microsoft is ready to buy and leave, a new round of game of thrones has begun, and we will wait and see how the new disputes of the kings are interpreted.