The Consequences of Microsoft Buying Activision Blizzard Are Dizzying
January 18, 2022A new year is always full of surprises, but few could have predicted the out-of-nowhere announcement today that Microsoft intends to purchase Call of Duty publisher Activision Blizzard, a company that’s spent the last year engulfed in scandal, with a massive $68.7 billion acquisition offer.
At this this stage, the acquisition is not a done deal, and the earliest Microsoft will actually own Activision Blizzard—and all the games that come with it—is later this year. Reports suggest Activision Blizzard CEO Bobby Kotick, who both oversaw Activision’s rise to modern prominence and its current toxic work culture, will leave when the deal closes.
The news, even at this stage, presents a lot of thorny questions. In theory, the U.S. government could step in and examine whether such an acquisition should go through, but recent history suggests otherwise. It’s been reported employees at Activision Blizzard have considered unionizing. A strike fund launched in early December has raised nearly $400,000. And that’s without considering what this says about the longterm implications of Microsoft’s lauded Game Pass service, aka Netflix for video games.
Rob and I started openly talking about these topics both in private messages and Twitter, at which point we figured it made more sense to just start writing down our thoughts as part of a larger exchange and consideration about what this all means. You can read all of that below.
Expect even more discussion on Waypoint Radio later this week.
Rob: It's fair to say that once an industry hits a certain level of consolidation, the only big deals left to do are the ones that are so enormous that they were almost inconceivable before they were announced. "Microsoft Buys Activision" was not a headline I expected at the start of this year, not because I didn't think a company like Microsoft would be looking for more studios and franchises to bring under its banner, but because the price a company like Activision would command seemed impossibly high.
But now we have a number and it's $70 billion, with the expectation that the deal will close early in 2023. That means everything Blizzard makes, the entire Call of Duty franchise, and King's mobile portfolio are now part of Microsoft's growing gaming division. As we noted, it also means that Microsoft is acquiring a nesting-doll of scandals that have smashed both Activision's and Blizzard's reputation as well as that of their leadership, plus ongoing conflict with labor especially at Activision's Raven studio.
There's another element to this as well, however. Part of the merger process from here involves getting approval from the Federal Trade Commission. Now in recent years, the FTC has been a set of rubes with rubber stamps for mergers and acquisitions. This was typified by Facebook's now infamous acquisition of Instagram back in 2012, where the FTC effectively signed-off on Facebook's buying a growing rival and consolidating its hold over social media. The FTC (and in the telecoms sector, the FCC as well) has been nothing but a minor speed bump for all kinds of industry-consolidating mergers over years.
Except it wasn't always this way, and it may not be for much longer. Even before the Biden administration took office, Facebook was attracting more anti-trust scrutiny and that 2012 merger approval came to be regarded as a ghastly mistake that led to a major lawsuit that currently threatens to break-up the company. But literally today, the same day Microsoft lifted the covers on its purchase of Activision, the head of the Justice Department's antitrust division Jonathan Kanter and FTC chair Lina Khan announced they're changing the merger guidelines their respective agencies use to evaluate proposed mergers. Crucially, Khan had previously been focused on changing guidelines around "vertical" acquisitions while the DOJ has been looking to change policy on both vertical and horizontal mergers. And what's really interesting about Microsoft acquiring Activision is that it's kind of both at once.
Patrick: The scale of money we’re talking about here is hard to comprehend. Microsoft’s acquisition of Bethesda was $7.5 billion, which was certainly a lot for what seemed like Microsoft realizing it wasn’t any good at making open world games and it was cheaper to buy Starfield. But $70 billion is the Bethesda deal with a goddamn extra zero attached to it!
The size of these transactions should attract interest and scrutiny from places like the Justice Department or their equivalents abroad, if only to give companies some pause, but given how long it’s taken for the obvious problems of Big Tech to catch up with regulators, you’ll have to color me skeptical that we’re about to see any real heat applied to an acquisition related to video game companies gobbling one another up. If Facebook was involved…maybe? Given the UK recently stopped them from even acquiring frickin’ Gifycat?
I haven’t done the reporting to back up this hunch, but if Disney, a company who has a clear stranglehold on popular culture and the means to be more destructive if it chooses, isn’t sweating anything, neither is Microsoft. It’s also the case that even with this transaction, I don’t believe Microsoft would be the biggest player in video games. It’s harder to apply scrutiny to someone who isn’t first place. Maybe it’s as simple as society not believing consolidation related to video games—or entertainment generally—is worth worrying about, because it’s the stuff that’s supposed to make us laugh, cry, and cheer. It’s not “important.”
“It's fair to say that once an industry hits a certain level of consolidation, the only big deals left to do are the ones that are so enormous that they were almost inconceivable before they were announced.”
But to your point, that was the same attitude applied to Big Tech for the better part of two decades, and now we’re left with a mess that’s left society a black eye. It’s probably overstating to suggest a similar path here, but video games are culture, a culture that’s bigger than ever, and a competent government should care about its business practices.
The latest reporting is definitely hinting that Kotick will depart the company after the deal closes, and it makes me wonder if one silver lining for all of this is a chance for the thousands of employees who still work at Activision Blizzard to have some kind of fresh start under new management. It also, sadly, probably dumps cold water on unionization efforts.
Rob: I don't disagree that the track record suggests this would sail past regulatory scrutiny, but I also couldn't imagine a worse moment in the last few decades to try and close a deal like this because that track record itself is being re-evaluated by the people who make decisions like this and it's not quite a neatly partisan issue anymore. Even beyond the right-wing whining that happens every time one of their dipshit Wormtongues violates a platform's TOS and gets kicked off, there is a wing of the conservative movement that's become skeptical of Big Business and its tendency toward monopoly.
Ever since the days of Robert Bork we've been ruled by this really narrow "consumer welfare standard" when it comes to how regulators evaluate mergers. Planet Money gave a really good primer on how antitrust used to be administered and what changed in the 80's, but the long and short of it is that for about forty years, as long as business lawyers could semi-plausibly argue that consumers wouldn't see higher prices, the government had no business intervening to stop a merger even if the resulting entity would have an enormous amount of market power. Prior to that, however, regulators could consider things like the amount of influence over market prices a merger would likely give a company, or how difficult other firms in the sector would find it difficult to compete, or whether it would make it impossible for new, competing companies to start-up and bring choice and innovation to consumers. None of that mattered as long as the prices would probably stay flattish, never mind that if anything a properly competitive market probably sees prices come down over time rather than stagnate.
But the antitrust people Biden has appointed don't share that view and Lina Khan made a name for herself by basically demolishing the utility of these standards in light of a company like Amazon. I think you're right that regulators may not take spaces like culture and entertainment as seriously, and I'm yet to be convinced that the Biden DOJ and FTC would have stopped the Disney-Fox merger, for example.
On the other hand, check out how weird this merger may look to regulators. Microsoft owns the Xbox platform and exerts tremendous influence on the PC via Windows, and it has increasingly tried to unite that power under the banner of Microsoft Gaming and turn Xbox into an umbrella term covering a wider ecosystem. One of the tools they have used to drive that is Game Pass, a subscription service that gives you access to a rotating library of games that Microsoft has licensed for the service. To feed that service, however, Microsoft has spent now tens of billions of dollars to acquire IPs, studios, and entire publishers. They also make several games of their own that compete or used to compete with other products from publishers and developers around the industry. With Activision, one of the predominant publishers in the space becomes just an important pillar supporting Microsoft's platforms.
We've always wondered, long-term, whether Game Pass would be a net positive for people who make and sell games, or whether it would just condition players to play what's on Game Pass and wait-out games that are selling at their full price. Maybe if you're under the Microsoft umbrella, this doesn't matter, but I think developers and publishers will see a lot to worry them in Microsoft's ambitious form of platform capitalism. I'd already heard, anecdotally, that Game Pass licensing deals aren’t exactly putting much profit in the hands of developers in recent years, and a lot of third-party games might end up there mostly to recoup potential losses on under-performing games. But there's a vicious cycle there, right? It's only going to be harder to sell games when a cheap subscription service is offering them all "for free" with the cost of your sub.
In a different business environment you might see companies like EA or Ubisoft screaming bloody murder and preparing to fight this but my guess is, just about every board member and C-suite executive is daydreaming about selling to a similar acquisition, because it's a hell of a lot easier to sell a company and take the price for the shares than it is to create and sell games year in, year out. But the fact that a lot of corporate stakeholders want to see deals like this go through doesn't change the fact that, if you're looking at this from the standpoint of what preserves a fairly competitive playing field for existing companies, Microsoft acquiring Activision represents at best a sea change and at worse an accelerating monopoly roll-up.
And for people who mostly see this as a good thing because it means more cool games will reach Game Pass, I hear that. It's an amazing service. It's also a service that benefits a lot from the games industry ecosystem that Microsoft is radically altering. Put another way, do you think Game Pass is as interesting in five or ten years when Bethesda, Activision, Blizzard, and all Microsoft's other studios are all coordinating releases to stay out of each other's way and have all been reduced in size and scope in order to save money on the corporate bottom line?
Even if consumers are unmoved by that, employees shouldn't be. I think you're probably right, Patrick, that this will likely dilute the push for unionization at Activision, if only by making some of the issues seem less acute or like they might plausibly get better under new management down the road. But that's an awful lot of games industry jobs that will be put under one roof, and as a rule, oligopolists don't bid against themselves for talent. Blizzard famously underpaid people for years because the brand was so strong that people were willing to endure far too much to continue working there. Just imagine how it'll play out once a lot of the companies that were competing for that kind of talent are now part of the same organization as Blizzard. Wage-fixing won't even require the collusion of the Silicon Valley wage theft scandal anymore.
Patrick: Before I continue, I want to point out that I just received an email press alert from, of all places, the U.S. Chamber of Commerce, the largely right-wing business lobbying institution, about a virtual meeting they’re holding tomorrow about potential antitrust legislation. Can you guess where the meeting is happening? Microsoft Teams, baby.
Back to your point, though. It’s a very reasonable analysis of the situation both broadly (corporate consolidation) and specifically (games) that sounds exactly like the “ah, crap” analysis we’ll be hearing in 10 years when people start realizing the consequences of these rapidfire moves. The potential consequences of gaming’s increased consolidation may seem obvious, but they also remain speculative. Game Pass might be a cool service that radically shifts the way games are made in extraordinarily bad ways, but we don’t know that’ll happen, and that suggests to me regulators, both in the U.S. and elsewhere, will turn a blind eye.
But Game Pass has been around long enough that you can almost make judgement calls on the quality of a game, based on whether Microsoft acquires it right before it’s released. This happened most famously with Outriders last year, a perfectly fine game that almost immediately sputtered out—but was a huge hit on Game Pass for a hot minute. It’s hard not to draw the same conclusion about Rainbow Six Extraction, the long-in-development spin-off that, at the last second, is coming to Game Pass. At one point, you might have assumed that’s because Microsoft wants to make a splashy play, but now, maybe it’s just Ubisoft trying to sell the cable rights to their video game, while Microsoft waits for folks to come knocking.
“It’s also telling that much of the public reaction—including a lot of people in the media, frankly—has been to wonder less about whether this acquisition is part of a broader negative trend that’ll have unforeseen ripple effects in and outside of games and simply a vehicle to wonder how a company like Sony will respond.”
Why spend time building an expensive video game when you can pay a fraction for the cost of hosting it? Now, imagine how such a mentality might influence how games are made in a world where Game Pass has been around since publishers are green lighting their projects.
And while we’re broadly on the same page about this, to play devil’s FTC advocate for a moment, isn’t it also the case that, in many ways, video games are more competitive than they’ve ever been? We do not exist in a world where one company dominates the landscape and others pick up the scraps. Nintendo, Microsoft, and Sony are all doing exceptionally well, and that was before a COVID-driven boost for additional distractions inside our homes.
That’s the kind of shortsighed nonsense that prompts regulators to make poor choices, obviously. It can be true and also not the truth. But I suspect that’s how it’ll actually play out.
It’s also telling that much of the public reaction—including a lot of people in the media, frankly—has been to wonder less about whether this acquisition is part of a broader negative trend that’ll have unforeseen ripple effects in and outside of games and simply a vehicle to wonder how a company like Sony will respond. “I mean, boy, they gotta buy Square Enix now, right?” is the vibe that I’m seeing on social media and elsewhere and it frankly sucks.
Bloomberg’s Jason Schreier reported this morning that one of the sentiments from employees at Activision Blizzard is a “determination to keep organizing.” Let’s hope so, because while a union effort under Activision Blizzard would have been a big deal, a union effort under Microsoft—success or failure—would be even bigger. They should keep going.