The game world is a combination of vertical and horizontal: Sony acquires Bungie against Microsoft

Editor's Note

Recently, the game industry has been one after another. During the Lunar New Year, Sony, the world's second-largest game maker, announced that it would pocket Bungie Studios for $3.6 billion. Bungie is the creator of Microsoft Xbox's most well-known IP "Halo", and the market believes that Sony's move is a response to Microsoft's previous large-scale acquisition of Blizzard.

Even for Microsoft, which has a market capitalization of $2.3 trillion, $69 billion is a huge amount. On January 18, Microsoft announced that it would acquire video game developer Blizzard in cash. This is not only the largest acquisition in the history of the video game industry, but also the largest acquisition Microsoft has ever made. The deal was more than double the amount of the deal it acquired in 2016 for the social network LinkedIn. The move, which surprised industry watchers, propelled Blizzard's stock price up 25 percent. That represents a gamble on the future of the entertainment industry, but it may not be crazy.

Even before the pandemic, gaming was already a large, fast-growing industry. Whether it's for hardcore players who have more time at their disposal, or amateur rookies who play soy sauce when bored, the pandemic lockdown has made the game more attractive. According to analyst firm NewZoo, the total revenue of the game industry in 2020 was nearly $180 billion, an increase of 23% year-on-year. Such high growth rates have attracted the attention of tech giants such as Apple, Netflix and Amazon, which have entered the market in recent years to test the waters.

Microsoft has been in the industry for 20 years. The company makes $15 billion a year from games, largely thanks to its Xbox console. Since Satya Nadella became president in 2014, Microsoft has made a string of acquisitions in the gaming space. If not blocked by regulators who are eyeing big tech companies, the deal will establish Microsoft's industry position. By the time the deal is completed in 2023, Microsoft will be the world's third-largest video game company, with revenue behind Tencent and its old rival Sony in consoles.

Large acquisitions are always risky. Like most companies, Microsoft's history has been mixed. Blizzard shares fell 40% from their February highs to the deal's announcement due to the sexual harassment scandal. Blizzard's gamer count has dropped from 530 million per month in 2015 to 390 million, and some of its recently released games have been met with mixed reviews. Pessimists may argue that the company is overvalued. Optimists who see Microsoft's $8 billion in annual revenue and a net profit margin of about 30 percent may instead think the stock price is cheap.

What's more, Blizzard has a lot of content. Piers Harding-Rolls of research firm Ampere Analysis believes that, like all media, video games are content king. In the film industry, movies like Star Wars (including some of the worst ones) are reliable money-making machines. Video games are also increasingly relying on franchises, i.e. popular game settings or brands that can be monetized on a regular basis. Blizzard has the best-selling military-themed shooter "Call of Duty", the popular graphics elimination mobile game "Candy Saga", and the fantasy setting "World of Warcraft".

According to NewZoo's Julianne Harty, the acquisition may help Microsoft expand beyond the mainframe. Blizzard's mobile-focused King division claims to have 245 million monthly gamer customers, most of whom are poking at "Candy Saga." It also constituted a blow to Sony, which shares fell 10 percent after the news was announced. If Microsoft controls the copyrights of things like Call of Duty, it will be able to decide whether these games are compatible with Sony's PS consoles. When Microsoft bought another game company, ZeniMax Media, in 2020, it announced that it would comply with the existing game release terms between ZeniMax and Sony, but whether the new game was compatible with Sony consoles would be "one matter at a time".

Microsoft hopes that the gaming market still has enough room for growth, and the long-term goal is to become the number one player in it. Microsoft is packaging content and pushing for a game subscription service called Game Pass, which allows console and PC users to choose from a continuously updated catalog for $10 a month, typically for $40-60 each. Being able to add Blizzard's games to its catalog would significantly enhance the service's appeal.

In the longer term, Microsoft hopes to use its Azure cloud computing segment to prop up video games and replicate Netflix's approach in the film and television space. In 2020, Microsoft released a game streaming plugin for Game Pass, pushing high-end games to mobile phones, TVs or computer desktops via the Internet, with game code running on the cloud and users not having to buy powerful, expensive consoles or PCs. It's still a bit tricky, but Microsoft still hopes to attract more gamers in middle-income countries as the technology matures, many of whom have phones but no consoles. While Sony, Amazon, and Nvidia offer similar services, it doesn't seem competitive enough. As a software giant, Microsoft has both a strong content library and many years of experience in the game industry, as well as the world's second largest cloud service platform after Amazon, and the two can be organically combined.

Microsoft's gamble may convince opponents that they must also harden their content as soon as possible. There are already a lot of buy-ins in the game industry. Last year, there were five transactions of more than $1 billion. On January 10, game developer Take-Two Interactive bought mobile game maker Zynga for $13 billion. Sony is also deeply upset about Microsoft's acquisition. Apple or Netflix may judge that now is the time to show their determination to participate in the gaming industry. There is a game that is about to be released, and the name is mergers and acquisitions.