It's All About the Metaverse
On Tuesday morning, the gaming industry woke up to news of tectonic proportions: Microsoft announced that it was acquiring Activision Blizzard in a deal valued at almost $69 billion, according to The Wall Street Journal.
If completed, this would be the biggest acquisition deal in the industry to date. The previous record had been tentatively set just weeks earlier, when Take Two Interactive, the heavyweight publisher of such game franchises as Grand Theft Auto 5 and NBA 2K, announced that it was acquiring the mobile games giant Zynga (think Farmville) for $12.7 billion. (That deal is expected to close early next year.) As noted elsewhere, should the acquisition of Activision Blizzard be successful, it would make Microsoft the third biggest gaming company in the world by revenue, following Sony Interactive Entertainment and the Chinese company Tencent.
This is obviously a big deal, though probably a lot more straightforward than the accompanying metaverse discourse might suggest. For those intrigued by the ornate goings-on in the gaming world, there are a few key narrative threads to pick up on here. The first is how this speaks to the fate of Activision Blizzard, the beleaguered publisher that has been swirled up in a mess of controversies lately, including several ongoing lawsuits. Here’s the Washington Post’s summation of those legal battles:
In July, the publisher was sued by California’s Department of Fair Employment and Housing (DFEH); the state agency’s suit alleges widespread gender-based discrimination and sexual harassment at the company.
Activision Blizzard also faces a U.S. Securities and Exchange Commission investigation, as well as a class-action lawsuit instigated by shareholders and an unfair labor practices complaint filed by workers and the media labor union Communications Workers of America.
Vulture contributor Luke Winkie put it best when he first wrote about the California lawsuit: “At this point, it’s clear that there is something very wrong at Activision Blizzard. The company remains one of the most powerful firms in the video-game industry, but I honestly can’t remember the last time it had a good headline.” As Winkie described, the suit depicts an environment where “Activision Blizzard fused a pervasive frat-house culture to the mechanical hierarchy of the company,” and as more details trickled out into the public, the bulk of the blame landed squarely on CEO Bobby Kotick, who has been the chief executive of Activision since 1991 and through the 2008 merger with Vivendi, which led to the formation of the company’s current incarnation as Activision Blizzard.
Since California’s DFEH filed its lawsuit over the summer, it has become something of a guessing game among industry observers as to whether Activision Blizzard’s board of directors would oust Kotick. We know how these things tend to go, unfortunately, especially given the amount of corporate value Kotick has accumulated for the company through the decades. It’s hard to overstate Activision Blizzard’s prominence in today’s gaming world, between its deep bench of highly lucrative franchises, which includes Call of Duty, Overwatch, and Diablo; its ownership of mobile game giant King, of Candy Crush fame, which it acquired in 2016; and the fact that it drove $8.1 billion in revenue in 2020 (a 25 percent increase from the year before).
Curiosity can also be directed toward Microsoft’s own stance on the matter. When reports started circulating in November that Kotick was fully aware of the prevalent sexual harrassment at the company, Phil Spencer, then Microsoft’s head of Xbox, said in an email to staff that he was “disturbed and deeply troubled by the horrific events and actions” at Activision Blizzard, and that his team was “evaluating all aspects of our relationship” with the company, according to a scoop by Bloomberg’s Jason Schreier. Apparently, that evaluation resulted in a decision to straight-up acquire Activision Blizzard, though one could perhaps argue this is a shrewd strategy on Microsoft’s part, in the sense its deal-making team probably knew an opportunity for leverage when they saw one. Spencer, who was elevated to Microsoft’s head of gaming as part of the acquisition news, made the press rounds with Kotick to talk about the deal on Tuesday (CNBC headline: “Activision Blizzard CEO Bobby Kotick: Metaverse Race Helped Prompt Microsoft Deal”), and Microsoft further announced that Kotick will continue to serve as CEO of Activision Blizzard, reporting to Spencer, through the close of the deal.
But there’s also been rumblings that a Kotick exit in the wake of the acquisition is on the table, with sources telling The Wall Street Journal that he is expected to leave the company after the deal closes, probably around mid-2023. For those dismayed by Kotick’s leadership, this may not end up being an entirely satisfying resolution: It’s unclear how he’ll leave, and as Axios’s Stephen Totilo pointed out, there’s a chance Kotick might be paid almost $300 million on his way out the door. Furthermore, there remains questions as to how Activision Blizzard’s work culture will be reformed leading up to and after its takeover by Microsoft. The day before news of the acquisition broke, the Journal (again) reported that more than 30 employees had been “fired or pushed out” of the company and about 40 others had been “disciplined” since July as part of internal efforts to address misconduct in the company. How that process will continue under Microsoft will be a big dynamic to watch.
The second narrative thread lies with the meaning of gaming for Microsoft. There has long been a kind of compartmentalization that tends to happen with the public perception of the company. On the one hand, it’s a stodgy tech giant that deals in conventionally stodgy tech-giant things like operating systems, productivity tools, and LinkedIn, I guess. On the other hand, it’s a stodgy tech giant that also happens to operate a robust video-games division. This acquisition, with its explosive magnitude, should go far to mess with that compartmentalization and, perhaps, position gaming and its related concepts — distribution of content via the cloud, the metaverse (more on that in a bit), and so on — at the very center of Microsoft’s identity.
After all, Microsoft has long been an important player in the gaming world, since the launch of the very first Xbox in 2001 straight through to the present. Further, the tech giant has never lacked for boldness with its interests in the category, as exemplified by its $2.5 billion 2014 acquisition of Mojang, which makes Minecraft (still a highly lucrative property); last year’s $7.5 billion acquisition of Zenimax, which owns Bethesda Softworks and id Software, among others; and its broader level of activity around investing in and acquiring a variety of smaller gaming studios.
Indeed, Microsoft is currently in the middle of a major transition with respect to its gaming strategy, one that sees the company moving away from an exclusive title-centric approach that privileges the sales of Xbox consoles — placing it in competition with Sony PlayStation, which continues to dominate the console-first strategy — and toward a more accessible Netflix-style value proposition that runs through its Xbox Games Pass offering, which can be enjoyed on Xbox consoles, PCs, and various cloud-streaming touchpoints. (The Verge’s Jay Peters has a more comprehensive look at these shifts, and what they mean for you as a consumer, in a piece published last November.) This transition also offers one of the more helpful windows into interpreting the value of thisdeal: ActivisionBlizzard has more stuff that can further deepen the value of a Xbox Games Pass subscription, currently priced at $14.99 or $24.99 per month depending on the plan, which looks real pretty when compared to the $70 price tag for most next-gen Playstation 5 games. In addition to giving the company a previously unexplored pathway into mobile gaming via King, the Activision Blizzard acquisition seems poised to vault Microsoft deeper into its Game Pass–oriented approach. It’s a strategy meant to help the company’s gaming division match up to Sony, and perhaps create more distance between itself and hungry upstarts like Epic Games, which has been laser-focused on claiming the so-called metaverse narrative and is seemingly ever eager to publicly raise all kinds of hell.
And what about the metaverse? What of it? Though the concept has its own (dystopian) etymology and internal literary meaning, as The New Yorker’s Kyle Chayka explored last year, the word has been mercilessly whipped into unrecognizability in the hands of contemporary technological hype. Even so, it’s absolutely applicable to the gaming context, given the fact that online games offered, in many ways, the OG metaverse experience via its panoplies of persistent virtual worlds going back decades. Consider the metaverse as both a rebrand and a further capitalist extension of these online games: a re-marketed virtual world that’s also being rethought as a literal market where the governing tech platform holds the monopoly of power over commercial control. In other words, these are virtual worlds designed to keep you inside of them so they can sell you more shit and/or have other people sell you shit (while taking a cut of those transactions, of course). Like the rest of gaming, sometimes it’s in virtual reality, sometimes it’s not. That might all sound very shiny and novel at the moment, but it will probably end up feeling the same as everything else does right now. Microsoft already has several persistent virtual worlds on deck — gaming (Minecraft, Halo Infinite, etc., etc., etc.) and otherwise (Mesh for Microsoft Teams, LOL) — which it presumably hopes to someday use as building blocks for some kind of grander, unified, exponentially more lucrative metaverse strategy. With Activision Blizzard’s deep bench of games, it’s adding some more virtual worlds to the stockpile.
At least, that’s the idea as far as Microsoft is concerned. Which brings us to the last key narrative thread: the possibility this deal might not survive antitrust scrutiny. In a fascinating bit of timing, the Microsoft-Activision Blizzard deal was announced on the same day that Lina Khan and Jonathan Kanter, the Federal Trade Commission chair and the Justice Department Antitrust chief, respectively, held a press conference to mark the launch of a joint effort to modernize antitrust enforcement, spurred in part by the Biden administration’s interest in more aggressively regulating monopolistic tech giants like Meta (f.k.a. Facebook) and Google. As other outlets have pointed out, Microsoft has largely avoided the spotlight in the contemporary brouhaha around tech giants, digital markets, and monopolies, but there’s an emerging suspicion it might not skate by with this one. The company will likely try to narrow the conversation around the competitiveness of its gaming division, but the fact is, Microsoft in its totality regularly competes with Apple in being the most valuable company in the world. Against that context, will it succeed in getting past the antitrust regulators? Like many questions this move brings up, we’ll have to wait to find out the answer.