On 13 October 2023, Microsoft's acquisition of Activision Blizzard finally reached completion. At $68.7 billion, it was the largest acquisition ever within the video gaming industry, far surpassing the second largest, Take-Two Interactive's $12.7 billion acquisition of Zynga in 2022.
The deal was announced on 18 January 2022. Owing to the deal size it quickly drew attention from the media, competitors and anti-competition authorities.
On 26 April 2023 the CMA blocked the deal from proceeding in the UK. The primary reason cited was the potential of the deal to "alter the future of the cloud gaming market, leading to reduced innovation and less choice for UK gamers in the years to come". However, other competition authorities (including the EU, Japan, Brazil and Saudi Arabia) allowed the deal to proceed. The FTC unsuccessfully attempted to block the deal in the US courts (though appealed). The CMA later lifted the block on 13 October 2023, after Microsoft agreed to sell cloud gaming distribution rights over all Activision Blizzard's gaming IP to Ubisoft, for 15-years.
Implications for the video gaming industry
This acquisition has already brought significant changes within the video gaming industry. Microsoft, previously the fourth-largest company in the industry by revenue, has now climbed to second place behind Tencent and ahead of Sony.
Console & mobile; Esports
Short-term, Microsoft's multi-platform commitments ensure players will see little change in how they access and play some Activision Blizzard games such as the Call of Duty franchise. The longer term is less predictable, particularly as Microsoft has following past video gaming acquisitions made popular franchises exclusive to its own platforms. For example, following it's $7.5 billion acquisition of ZeniMax - parent company of Bethesda - in 2021 Microsoft has since made new Bethesda titles (Redfall, Starfield) Xbox exclusives. Competitors are unlikely to wait and see if Microsoft takes the same approach with other popular Activision Blizzard titles. The deal may prompt greater innovation and investment in new gaming properties as Microsoft's rivals seek ways to remain competitive.
In mobile gaming, where over half of the industry's revenue originates, Microsoft's newfound ownership of popular franchises like Candy Crush places them at a distinct advantage in "mobile-first" markets, for example in China where Tencent rules supreme. Microsoft may look to make further gains in mobile gaming.
The esports industry has been facing challenges, Activision Blizzard has been struggling in particular with its Call of Duty and Overwatch leagues, questioning whether to continue with either of them. Microsoft's support could revitalize or, conversely, call an end to these esports leagues.
The nascent cloud gaming market holds immense potential. Cloud gaming has been described as "Netflix" for games. On traditional gaming platforms (e.g. console, PC, handheld, mobile) physical or digital copies of games are held by each individual player. With cloud gaming, games are stored and run on a cloud computing server.
With Cloud gaming, since games are held and processed on a remote server, consumers do not need to pay for high-end gaming hardware. This significantly reduces upfront cost. It also allows consumers greater versatility, any device with a good connection to a cloud gaming server - such as a mobile phone – allows cloud gaming without degradation of quality between devices. For game publishers, cloud gaming eliminates manufacture and distribution costs associated with physical games. It is also more resistant to piracy as compared to physical/digital copies of games, games held on remote servers cannot easily be copied and illegally sold on. Cloud gaming is better suited to subscription-based fee models, potentially yielding higher revenues in the longer term, as compared to a one-off sale of gaming hardware, game disc or download.
Some believe cloud gaming will become the most dominant gaming platform in the future. For now, however, it is in its infancy. While there are cloud gaming providers out there (Microsoft, Amazon, Nvidia, and Ubisoft being notable examples) only a minority of players use these platforms. It is not certain that cloud gaming will have the same success as it's film/tv counterparts like Netflix. Google Stadia, for example, failed to gain traction and Google shut it down in January 2022.
Nevertheless, Microsoft is positioned to be a major player in this emerging space. Estimates indicate it already accounts for around 60-70% of global gaming services. Furthermore, it has an existing global cloud computing infrastructure – Microsoft Azure - which sets it apart from other competing game publishers. Once their 15-year commitment ends, Microsoft might consider exclusivity of content to further reinforce their position in the cloud gaming arena.
Whatever happens, the next few years will be an interesting time for the industry.
Implications for future deals
Microsoft's acquisition of Activision Blizzard was initially announced in January 2022 and finally completed in October 2023. The CMA's block delayed and threatened to prevent the deal altogether.
Unanticipated delays and obstacles are risks that arise within any deal. Transacting parties and their advisors should always consider the risk of such events and the potential consequences on the deal timetable, commercial implications for the target business, costs, and the transaction itself. Once identified, parties and their advisors can address the risks within the transaction documents, assigning responsibility, obligations and recourses should delays occur or the transaction not proceed as the parties anticipate.
Risk management should begin even before transaction commences. For example, taking early regulatory and competition advice especially if it is likely that certain bidders will be interested; assessing grades of confidential information and how and when that information will be provided to bidders/ potential buyers; and, of course, insisting on well considered confidentiality agreements to help mitigate the risk of a buyer using deal information to their own advantage.
Where the transaction is potentially threatened by events outside of the parties direct control – such as a regulatory block/ consent or a material adverse change (for more information on material adverse changes, please read our recent article by Shattik Shaheen) – the agreements should carefully set the respective rights and obligations of the parties prior to completion, the conditions to completion and what happens if those conditions are not met (such as what happens in respect of sunken costs and confidential information). For example, the transaction documents for the Microsoft acquisition obliged Microsoft to pay a $3 billion fee to Activision Blizzard if the deal did not complete by 16 September 2023. Fortunately, the parties successfully negotiated an extension to the transaction to avoid scuppering the deal (and incurring the fee) while awaiting CMA approval.