In my expert opinion as a seasoned gaming industry analyst, Activision Blizzard likely justifies the huge $70 billion acquisition price tag, despite the risks involved for Microsoft.
The iconic video game company owns some of the most valuable franchises in the industry like Call of Duty and World of Warcraft. These blockbuster series have extremely loyal fan bases generating consistent revenue across numerous sequels and in-game purchases.
Activision‘s IP catalog alone is likely worth tens of billions when considering future earnings potential as online gaming continues booming. However, realizing that value depends on reversing the company‘s recent slump through better leadership and workplace culture.
While far from guaranteed, I expect the deal will ultimately pass regulatory scrutiny after concessions, paving the way for Microsoft to revive Activision‘s business. Let‘s take a deep dive into the details and complexities around this landmark deal.
What Key Franchises is Activision Bringing to Microsoft?
Activision Blizzard‘s crown jewel franchise is without question Call of Duty. The first-person military shooter game has topped the sales charts nearly every year since launching in 2003. The series has sold over 400 million copies worldwide across 19 mainline entries and countless spinoffs.
Call of Duty dominates as an eSports title and has pioneered the games-as-a-service model by releasing annual new titles with seasonal content updates. The franchise has exceeded $3 billion in bookings for six consecutive years.
World of Warcraft is also a seminal title in gaming history as the most popular MMORPG (massively multiplayer online roleplaying game) ever with over 100 million accounts created. Overwatch, Diablo, and Candy Crush are other major Activision franchises with multi-billion dollar revenues.
Diving Into Activision‘s Financials
Prior to the buyout agreement, Activision Blizzard‘s market capitalization sat around $50 billion. The company generated revenues of $8.8 billion and operating income of $2.7 billion in 2021.
Looking closer at Activision‘s segment performance last year:
- Activision publishing (Call of Duty, Crash Bandicoot) – $2.91 billion revenue, 33% of total
- Blizzard entertainment (World of Warcraft, Overwatch) – $1.91 billion revenue, 22% of total
- King digital (Candy Crush) – $2.58 billion revenue, 29% of total
- Other units – $1.4 billion revenue, 16% of total
Activision has delivered 13% annual revenue growth and 19% annual profit growth over the last 5 years through continued success of key franchises.
But monthly active users across Activision‘s portfolio peaked in 2020 at 397 million and have since rapidly declined to 361 million as of Q3 2022. This points to concerning engagement trends.
Microsoft‘s Grand Plan for Gaming Domination
Acquiring Activision Blizzard gives Microsoft control of some of the most valuable intellectual property in the gaming sector. The tech giant aims to drive further growth across its gaming division with the following key strategies:
- Boost Xbox Game Pass subscriptions – Make titles like Call of Duty exclusive to Microsoft‘s subscription service, which offers access to hundreds of games for a monthly fee. This could be a huge draw for new subscribers.
- Expand to mobile – Leverage Activision‘s mobile gaming expertise from King Digital and take popular franchises like Call of Duty mobile to grow in the $100 billion mobile games market.
- Dominate the metaverse – Position Microsoft gaming for the next-generation of interactive virtual worlds through Activision‘s massive user base and rich game environments.
- More content and exclusives for Xbox – Gain access to Activision‘s slate of games to strengthen Xbox content portfolio against key competitors like Sony‘s PlayStation and Nintendo. Restricting future Call of Duty releases from PlayStation would deal a major blow to Sony.
This deal is a massive strategic play by Microsoft to own the future of gaming and directly challenge leading rivals.
Does Activision Blizzard Warrant Such a Lofty Price Tag?
$70 billion is an eye-popping sum even for a gaming giant like Activision Blizzard. This price equates to over 20 times the company‘s EBITDA, or earnings before interest, taxes, depreciation and amortization.
Let‘s examine the key factors to evaluate whether Microsoft‘s offer makes sense:
Franchise value – Call of Duty, World of Warcraft and other major Activision Blizzard titles unquestionably have lasting appeal and loyal fan bases that generate consistent revenues through sequels, expansions, and in-game spending. These franchises likely have many more years of monetization potential.
Workplace troubles create risk – The ongoing turmoil, lawsuits and eroding employee morale stemming from Activision‘s controversial workplace culture present a significant risk. It may take years under new management for Microsoft to rebuild trust and engagement across Activision.
Growth concerns – Monthly active users across Activision Blizzard‘s portfolio peaked in 2020 and have since rapidly declined nearly 15% as of late 2022. This suggests the company may be unable to reaccelerate growth amidst increasing competition.
Synergies with Microsoft – Integrating Activision‘s catalog into Xbox‘s hardware, subscription services, and cloud infrastructure could significantly expand their audience reach and unlock major synergies.
Regulatory approval not guaranteed – Antitrust regulators may block or impose conditions on the deal over concerns about exclusivity deals reducing competition. But Microsoft has experience navigating approvals and most expect the deal will ultimately pass after potential concessions.
Considering these factors, I believe the $70 billion acquisition price is reasonable, albeit risky. Activision possesses tremendous IP value, but realizing the full potential depends on Microsoft‘s ability to revive growth prospects and company culture. The deal should withstand regulatory scrutiny but faces uncertainty.
Overall, I see the valuation as justified based on Activision Blizzard‘s financial metrics, extensive library of IP, and strategic benefits for Microsoft. But the deal is not without downside risks.
How the Merger Will Reshape the Gaming Industry
The merger has major implications across the gaming landscape:
- It accelerates consolidation in the industry as publishers seek more content, IP, and audience reach to compete at scale.
- Smaller developers and startups may benefit from reduced competition for talent and partnerships.
- Sony and others are deeply concerned about massive franchises like Call of Duty becoming Xbox console exclusives, which Microsoft raises as a possibility.
- Top talent and developers may gravitate away from Activision given ongoing scandals and toward publishers perceived as having healthier values and culture.
While risky and costly for Microsoft, acquiring Activision cements their ambitions to be the entertainment giant of the metaverse. It signals a new era of competition among tech titans in interactive gaming media and subscribtion services.
Outlook for Deal Completion and Integration
- In April 2022, Activision Blizzard shareholders approved the buyout agreement after initial reluctance by CEO Bobby Kotick.
- Microsoft remains confident the acquisition will close by June 2023 as originally planned.
- The FTC ramped up its antitrust investigation into whether the deal could harm competitors through exclusionary tactics. Microsoft may make concessions around Call of Duty to ease concerns.
- The UK government launched its own probe around anti-competitive behavior and restricting Activision games from Sony‘s PlayStation console.
- If approved, Microsoft plans major cultural changes at Activision Blizzard while allowing it to operate independently. Leadership changes seem likely.
While regulators and the industry analyze this unprecedented merger, Microsoft and Activision Blizzard appear committed to joining forces to shape gaming‘s future trajectory. The coming year will prove whether Microsoft‘s massive bet pays off.
Let me know if you have any other questions! I‘m happy to provide my in-depth perspective on this landmark deal and its complex dynamics.
