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Microsoft’s Purchase of Activision Blizzard Encapsulates an Industry in a Single Deal

The deal, announced Tuesday and expected to close in 2023, touches on every hot-button gaming-industry issue, from consolidation to workplace reform to Netflix-style libraries to speculation around the “metaverse”

Microsoft/Activision Blizzard/Ringer illustration

On January 10, Phil Spencer, the head of Xbox and executive vice president of gaming at Microsoft, said on the New York Times podcast Sway that he hadn’t come to “get into any kind of finger-wagging at other companies”—specifically, one of Microsoft’s prominent partners, the prosperous but benighted video game conglomerate Activision Blizzard. Pressed repeatedly by host Kara Swisher to comment on numerous well-substantiated reports of toxic working conditions at Activision, including allegations of sexual harassment and other discriminatory practices that have spawned multiple major lawsuits, Spencer declined to engage in what he termed “virtue shaming,” saying, “I would rather help other companies than try to get into punishing. I don’t think my job is out there to punish other companies.”

Spencer won’t be able to duck questions about Activision on the basis of it being another company now, because Microsoft and Activision are about to be part of the same company. On Tuesday, The Wall Street Journal reported that Microsoft had agreed to buy Activision Blizzard in an all-cash deal valued at $75.5 billion. The acquisition, which is the largest-ever all-cash purchase of a U.S. company—not to mention the most expensive acquisition in Microsoft’s history and the biggest in video game history by roughly a factor of six—would bolster the Xbox maker’s video game revenue by roughly half and would make Microsoft the world’s third-largest video game company after Sony and Tencent. Beyond the balance-sheet implications and the impact on which massive, moneymaking franchises appear on which platforms, though, the deal will also make Microsoft the corporate power in charge of resolving the steaming legal and moral mess that Activision has become under beleaguered but entrenched—and extraordinarily well-compensated—CEO Bobby Kotick.

Between the jaw-dropping scope of the deal, the lack of rumors preceding the announcement, the public profiles of the parties involved, and the initially reported purchase price, adjusted for Activision’s net cash, of $68.7 billion—which rounds up to a more memeable $69 billion—news of Microsoft’s big buy briefly sounded like an early April Fools’ hoax. But the terms of the transaction are real and, at least from a financial perspective, spectacular. Whether the deal will close as anticipated by July 2023, whether it will be good for gamers (or at least some subset of them), and whether it bodes well for the fed-up activist employees of Activision are all difficult to forecast. But as agreed to and approved by both boards in principle, the transaction touches on almost every hot-button issue in the industry, including consolidation among the major developers and publishers, efforts at workplace reform and unionization, doubling down on streaming and Netflix-style game libraries, the pursuit of sticky mobile games, and confusing speculation about “the metaverse.”

Activision Blizzard is a behemoth that consists of several corporate components, most notably Activision Publishing, Blizzard Entertainment, and King. Activision Publishing handles the development and distribution of games by its subsidiary studios, many of which work on the big-budget, prolific Call of Duty franchise. Blizzard Entertainment does the same for games made by storied developer Blizzard (which has recently suffered severe hits to its reputation, some of them self-inflicted and others Activision-imposed). King controls the addictive Candy Crush Saga and other mobile and social games.

Together, these entities oversee an appreciable percentage of the video game franchises that even non-gamers have heard of or could quickly pick out of a digital lineup, including not just Call of Duty and Candy Crush Saga but also World of Warcraft, StarCraft, Hearthstone, Overwatch, Diablo, Guitar Hero, Tony Hawk’s, Crash Bandicoot, and many more. They also operate online multiplayer platform, preside over esports organizations like Major League Gaming, the Overwatch League, and Call of Duty League, and oversee the production and licensing of TV and film adaptations based on Activision Blizzard intellectual property. The parent company’s portfolio is sprawling not only when it comes to active concerns, but also the oodles of dormant gaming IP that lies inside the vaults of studios such as Treyarch, Raven Software, and Radical Entertainment, whose histories extend to the ’90s.

All of that is about to become the property of Microsoft, which makes the mind reel when one considers the sales of Call of Duty alone. Call of Duty: Vanguard and Call of Duty: Black Ops: Cold War were the top two games of 2021 in terms of U.S. sales. Call of Duty accounted for the top two (and three of the top 10) games sold on Microsoft platforms and two of the top three (and three of the top 16) games sold on PlayStation platforms. When this acquisition is finalized, Microsoft will dictate which platforms host Call of Duty and other Activision Blizzard titles, a potential trump card in the Microsoft-Sony competition that makes up most of what remains of the console wars of old.

Nintendo may have laughed Microsoft out of the room when the latter made overtures about buying the former in 1999, but swallowing Activision Blizzard is just as significant a purchase, as evidenced by the fact that Microsoft is spending more than Nintendo’s current market cap on the deal. Super Mario and The Legend of Zelda becoming Xbox exclusives might be even more of a mindfuck from a cultural perspective than Activision Blizzard plighting its troth to Microsoft (and taking some historically PlayStation-centric titles with it), but at this stage, absorbing Activision Blizzard is a more meaningful swing.

This latest and greatest acquisition comes on the heels of a year in which video game companies kept eating each other and outside capital kept pouring into an industry that exceeded even the record revenues it earned amid 2020’s pandemic-driven lockdowns. A recent report by investment banking firm Drake Star Partners identified more than 1,100 gaming acquisitions, mergers, funding rounds, and other financial arrangements made in 2021, with a total disclosed deal volume that almost tripled 2020’s then-record total. That spending, buoyed by a mobile gaming gold rush, venture capital buzz about blockchain and NFT fads/scams, and a rush to stockpile software exclusives in hopes of juicing subscription services, reflected investors’ desire to get in on an entertainment area that thrived even as other economic sectors stalled.

Much of that gobbling was led by the likes of China’s Tencent and Sweden’s Embracer Group, but Microsoft and Sony got in on the action too. Sony acquired five small or midsize studios with an eye toward enriching its first-party offerings, while Microsoft purchased ZeniMax Media, the holding company that encompasses Bethesda Game Studios, Id Software, Arkane Studios, and other notable developers. The ZeniMax purchase was the second-biggest gaming acquisition made prior to 2022, but the Activision Blizzard deal dwarfs that comparatively puny $8.1 billion transaction. Spencer wasn’t kidding when he said last October that Xbox Game Studios was “definitely not done” adding developers.

Earlier this month, Take-Two Interactive landed social and mobile game maker Zynga (of FarmVille and Words With Friends fame) in a $12.7 billion deal, likely with an eye toward porting Grand Theft Auto Online and other acclaimed Rockstar Games titles to mobile platforms. But the Zynga deal’s reign at the top of the list of priciest gaming acquisitions lasted barely one week, an indication of just how swell the biggest gaming companies are and how intense the feeding frenzy is.

Microsoft’s ZeniMax purchase was completed largely with an eye toward populating the company’s Game Pass subscription service—which boasts more than 25 million customers—with more must-have releases. Although some fans held out hope that big games by Bethesda and other ZeniMax studios might still make it to PlayStation, those dreams were unsurprisingly soon dashed by announcements that upcoming releases such as Arkane’s Redfall and Bethesda’s Starfield and The Elder Scrolls VI would be Game Pass exclusives. It seems inevitable, then, that all or most major Activision Blizzard titles will be Game Pass–only also; as Spencer put it in a Tuesday press release, “Upon close, we will offer as many Activision Blizzard games as we can within Xbox Game Pass and PC Game Pass, both new titles and games from Activision Blizzard’s incredible catalog.” (Spencer has promised in the past not to “rack the price up,” but in light of Microsoft’s recent spending spree and the value it lends to Game Pass subscribers, a modest hike could be coming.)

Call of Duty’s future availability is still in question, because bypassing PlayStation would mean forgoing millions of sales. Microsoft hasn’t made Minecraft, a previous purchase, exclusive to its platforms, so there’s some precedent for holding off on siloing a popular and lucrative title. But if the multiplatform franchise could be turned, it would be a powerful ally in Game Pass’s battle with the upcoming PlayStation subscription service, a rebranded combo of PlayStation Plus and PlayStation Now that’s codenamed Spartacus and will reportedly launch this spring. As console manufacturers (and tech giants) explore cloud gaming and focus on monthly subscription revenue, the console war has morphed into a subscription service war, and the richest spoils will go to the company with the deepest library and most enticing lineup of exclusives.

Hence the gaming rivals’ desire to snap up IP, much as has happened elsewhere in the entertainment industry via transactions such as Amazon’s 2021 purchase of MGM, Disney’s earlier acquisition of 21st Century Fox (which commanded a price similar to Activision Blizzard’s), or GoJo’s pending merger with Waystar Royco. Just as TV viewers have had to resign themselves to subscribing to a multitude of streaming services to access what they want to watch, gamers may find that fewer and fewer Triple-A titles stay available to all. (Granted, gamers are already more accustomed to exclusives, given that console manufacturers have always sought to hoard high-quality titles to sell their systems.)

Although a Microsoft post promised that the deal would provide “building blocks for the metaverse,” which was echoed by Microsoft chairman and CEO Satya Nadella’s promise that gaming will “play a key role in the development of metaverse platforms,” the metaverse still isn’t much more than a buzzword that makes investors feel tingly. For now, the gaming metaverse looks mostly indistinguishable from the digital diversions of the past decade or two, and Microsoft is trying to ensure that more people will spend more of their usual phone and TV time consuming Microsoft’s stuff. By buying both Candy Crush and a suite of additional HD games that can be streamed to mobile devices via the Game Pass app, Microsoft is taking a two-pronged approach to penetrating the massive mobile market.

Assuming this sale doesn’t run into any antitrust trouble with regulatory bodies like the Justice Department, the FTC and SEC, and the European Union—which seems unlikely, even though the “metaverse” babble paints the transaction as more of a tech deal than one predicated on gaming alone—it will likely serve as a model for more acquisitions to come. As Activision’s stock price soared on Tuesday, it boosted shares of Electronic Arts, Ubisoft, and Nintendo along with it, as investors predicted that the landmark deal would put pressure on other companies to join forces. The magnitude of this purchase would be almost impossible to match in any other single gaming merger, but we could be heading for a future in which the world of electronic entertainment is carved up by a small group of bloated, Hampton DeVille/E Corp-esque contenders vying for Disney-esque dominance.

The ramifications for Microsoft’s and Sony’s subscription catalogs, and for future blockbuster mergers, make up only one part of a complex picture. When the WSJ broke the news of the industry-reshaping purchase, one of the top stories on its website was a report from the previous day about how Activision Blizzard had dismissed or disciplined dozens of employees in connection with well-documented incidents of alleged sexual harassment and other discriminatory conduct. The Journal also alluded to several hundred reports of employee concerns collected since last July, when the California Department of Fair Employment and Housing followed up on a two-year investigation by filing a suit alleging sexual harassment, employment discrimination, and retaliation at both Blizzard and Activision. The company’s shareholders subsequently filed a second lawsuit that alleged that Activision Blizzard’s leaders kept details of those problems out of the company’s financial statements, which sparked an SEC investigation. The Equal Employment Opportunity Commission also filed suit after conducting its own investigation into the company’s workplace conditions, though that suit was settled immediately.

The Journal has repeatedly reported that Kotick himself was accused of mistreatment by several female employees, that he was aware of much of the misconduct for years, and that he intervened to spare some offenders, downplay the severity of the alleged incidents internally, and bury news about the company’s attempts to address its failings. Yet Kotick—who became CEO of Activision in 1991 and ascended to CEO of Activision Blizzard after spearheading the merger between Activision and Vivendi in 2008—has retained control of the company (and its chummy-with-Kotick board) despite thousands of employees signing a petition in which they called on him to resign.

In its messaging on Tuesday, Microsoft was reticent on the subject of Activision’s bad behavior, noting only that the company is “looking forward to extending our culture of proactive inclusion to the great teams across Activision Blizzard” and affirming its commitment to “treating every person with dignity and respect.” Nadella went so far as to say he was “grateful to [Kotick’s] leadership and commitment to real culture change,” which is certainly one way to describe the qualities Kotick has exhibited. Microsoft declined to disclose whether Kotick would continue at Activision Blizzard, though the WSJ cited sources familiar with the companies’ plans who said that he will depart after the deal is done. Kotick, whose exorbitant bonuses were the subject of some concern among shareholders even before the harassment scandal broke, stands to gain almost $400 million in cash and stock on his way out, on top of the more than $150 million he reportedly made last year alone.

Given all of the above, it’s hard to know how to feel about casting Microsoft as a reformer. On the one hand, Microsoft could hardly make Activision Blizzard’s working conditions worse, more egregiously mismanage the internal and external fallout, or be less supportive of employees’ collective action and unionization drives, and the acquisition may have been the only scenario in which Kotick would (eventually) step down. On the other hand, Microsoft—like many other tech and gaming companies—has had its own issues with sexual harassment and demeaning behavior; women may make up the majority of the current Xbox “gaming leadership team,” but some of the men implicated in reports of harassment at Blizzard were former Microsoft execs.

Moreover, it’s tough to divine Microsoft’s motivations. Last November, Spencer wrote in an internal email that he was “disturbed and deeply troubled” by the details of one of The Wall Street Journal’s reports about Kotick’s and Activision Blizzard’s behavior, adding that “this type of behavior has no place in our industry” and that Microsoft would be making unspecified “proactive adjustments” in its relationship with Activision. Yet according to a WSJ report published late Tuesday, the same story that prompted Spencer’s email—and that continued the downward plunge of Activision Blizzard’s stock price—also “provided the catalyst for [Spencer] to approach Mr. Kotick about a takeover soon after.” Maybe Spencer and Microsoft were disturbed by conditions at Activision Blizzard, but they also seemingly saw an opportunity to snap up a distressed asset whose share price had tumbled more than 30 percent since the filing of the first lawsuit even as it turned a $639 million profit in the third quarter. A cynical observer could wonder whether Microsoft’s leaked email was a way of further suppressing the price of a potentially underpriced target.

In declining to chasten Activision Blizzard or Kotick during last week’s podcast appearance—at which point Microsoft and Activision Blizzard must have been busy putting the finishing touches on the terms of their agreement—Spencer said, “the things that we choose to do with our brand and our platform, in coordination or not with other companies, is the avenue that we have to have an impact.” In other words, actions speak louder than words. Microsoft acted boldly in buying Activision Blizzard, which will give the new owner the chance to make more of a mark on its new subsidiaries’ cultures than anyone imagined. But those changes will require actions yet to come. Spencer also said, “the thing that we continue to focus on is to try to grow.” He was talking about growing toward a more enlightened and equitable workplace. For now, though, all we know is that Microsoft will be even bigger than before.