Microsoft’s pending Activision Blizzard purchase is the games industry story that won’t go away, better or worse. Since the Washington-based conglomerate announced it planned to spend upwards of $69 billion to purchase the Call of Duty publisher, it’s dominated headlines. No more so than the past week.
In my 2023 predictions piece, I wrote how legal hurdles could move the date back beyond Microsoft’s expected close at the end of its fiscal year, which ended last week on June 30th. Well, here we are. While many global regulators have already approved, including the European Union, there are those in key areas like the United States, United Kingdom and Canada still holding out.
The U.S. push-back is led by the Federal Trade Commission (FTC), which is suing Microsoft in an attempt to block the buy. As part of what could be a protracted legal battle, the FTC forced Microsoft into court over the last week as part of a preliminary injunction hearing, which would allow the regulator more time to review the acquisition ahead of a later trial date. There’s speculation and executive viewpoints that residing District Judge Jacqueline Scott Corley granting the preliminary injunction will dissolve the deal entirely.
Am I amending my prediction that it will, sooner or later, happen? First off, let me be clear in that I’m nowhere near a legal expert. While I have a history of tracking M&A activity, I’m learning new things about the legal process in real-time. Personally, I think Judge Corley will grant the FTC a preliminary injunction, then the two sides will duke it out in court, a tussle that Microsoft will ultimately win. Essentially, the company is too heavily invested to back down.
Either way, the benefit of this hitting our glacial legal system is there’s plenty of juicy information that might not otherwise surface. Everything from management emails, market shares, sales data, potential takeovers and great quotes have emerged as a result of discovery, evidence and testimonies, as shared by the excellent reporting of various media outlets like Axios, IGN and The Verge.
I’m here to recap five of the most important takeaways from an industry perspective. Check below for a rundown, then a fun bonus segment at the end. Thank you, due process!
Microsoft’s Many Potential Acquisition Targets
Before Microsoft decided to drop billions of bucks on Activision Blizzard, its management team compiled a laundry list of enticing targets across the games space. This M&A menu includes everything from big publishers to Eastern developers, from independent studios to mobile makers.
Chief among them were long-standing Japanese game companies Square Enix and Sega, a division of Sega Sammy. Phil Spencer and team searched for ways to expand Xbox’s portfolio of content, notably to enhance an expanding Xbox Game Pass catalog. The added benefit would be better access to the Japanese market, where Xbox has faltered for generations. Sega has since said it isn’t in a selling mood.
Other targets included Thunderful Games, Niantic, Zynga (which was since snatched up by Take-Two Interactive), IO Interactive and Supergiant Games. Even Bungie, which Microsoft previously owned before divesting. The Destiny creator is now a subsidiary of.. Sony.
What this really shows is something I’ve said for ages: companies are always on the hunt for talent and intellectual property (IP) to bolster its offerings. The likes of Tencent and Sony maintain similar lists, they just aren’t publicly available. It’s also telling that Microsoft instead opted to take the nuclear route in its industry-shaking bid for one of America’s few remaining massive publishers.
Xbox Console Unit Shipment Figures Finally.. Kinda?
During the last couple hardware cycles, Microsoft has backed away from sharing exact details of unit sales for its suite of Xbox consoles. Whether this decision is because it hasn’t kept up with peers or because the brand’s focus is more towards services and ecosystem, or a combination of both, there’s been limited visibility into just how many darn Xboxes the company is shipping since reporting stopped in 2016.
Until now. Well, somewhat. According to a slide at Microsoft’s BIG Festival in Brazil, Xbox Series X|S family is currently around 21 million lifetime units shipped since launch in November 2020. This means my wish-washy “maybe at 23 million” estimate last quarter was optimistic, though technically it could be there by now since there’s no firm date on the image. Note that Sony’s PlayStation 5 is currently at 38.4 million, moving almost two to market for every one Xbox.
Since the same slide references 79 million combined shipments of Xbox One and Xbox Series X|S, it follows that 2013’s Xbox One stands around 58 million to date. Last year, Microsoft commented that its prior generation hadn’t yet reached half of the PlayStation 4’s 117 million, which put its right near this same mark. Thus, it really confirms our existing expectation.
According to another document as shared by friend of the site John Welfare on Twitter, Microsoft sold-in 3.2 million Xboxes during the holiday quarter of 2022. Within the same Q4 last year, Sony moved 7.1 million PlayStation 5’s. What all of these data point reinforce is how, even early this generation, the 2:1 or more PlayStation to Xbox ratio is seemingly holding.
Executive Comments on Exclusive Content
Exclusives are unavoidable in most media, and it can be a heated topic within the games industry. Companies pay massive sums to keep games on their systems, even for a certain amount of time, to attract players because they can’t play these things elsewhere. This becomes even more complicated when layered on top of new business models, like subscription and cloud, whereby platform holders make deals to add titles exclusively to these services.
Since the big shots at Microsoft and Sony testified during this latest stint in court, they provided insights into how the industry thinks about and treats exclusives, regardless of their personal stances. For instance, Microsoft Satya Nadella doesn’t like exclusives. “I have no love for that world.” Yet he acknowledges that “the dominant player” (Sony) has already established the rules.
Intriguingly, his underling Phil Spencer made the call during a 2021 internal meeting that ZeniMax titles would all be Xbox exclusive, a move that surprised Bethesda’s now Head of Global Publishing Pete Hines as revealed by emails. Curiously, Xbox Chief Financial Officer (CFO) Tim Stuart and Head of Xbox Game Studios Matt Booty were skeptical this might cause profit issues after Microsoft’s $7.5 billion purchase of ZeniMax, as documented in a chat between the two.
Bobby Kotick, Chief Executive Officer of Activision Blizzard, claimed on the stand that he’s never thought of making Call of Duty exclusive to any single platform. He argues it would alienate a major portion of the military shooter’s massive 100 million plus monthly active players, thus becoming “very detrimental” to the company’s bottom line. I’ll note here that this lines up with what Microsoft management is claiming, that they would keep the sales juggernaut on all platforms, yet it’s worth noting the title would be made available on Xbox Game Pass, which some posit is a form of partial exclusivity.
Then there’s CEO of Sony Interactive Entertainment Jim Ryan who said that he doesn’t view a game like Starfield’s exclusivity as anti-competitive, even if he doesn’t like it (probably because he didn’t lock it up). Which makes sense, because otherwise it would contradict a key part of PlayStation’s model of stacking third-party exclusives like Final Fantasy XVI and Deathloop via external partnerships.
We also heard spicy background happenings and the status of certain projects by way of these folks taking the stand. Spencer said there were fears at Microsoft of Starfield becoming PlayStation exclusive. (Makes sense why he authorized the purchase of its publisher, ZeniMax.) Head of Xbox Creator Experience Sarah Bond dropped a bombshell that Kotick squeezed Microsoft for a better Call of Duty revenue share after threatening to keep 2021’s Call of Duty: Vanguard off Xbox. Finally, the case confirmed the likes of MachineGames’ Indiana Jones and, perhaps Xbox’s most important future release in The Elder Scrolls VI, would be only available on Xbox platforms.
Massive Cost of Sony’s Biggest PlayStation Titles
It’s no secret the cost around triple-A game development has ballooned. The most expensive titles are multi-hundred million dollar collaborations across hundreds, if not thousands, of people. Even way back in 2013, Rockstar Games reportedly spent $265 million to make Grand Theft Auto V. Embracer Group has almost 17K employees, while Ubisoft employs over 20 thousand. It’s a wonder any AAA game even makes it to market. Now, we have even more context on just how “big budget” titles can be for a publisher from a financial standpoint.
Back in April, PlayStation Head of Independent Initiative and former President of SIE Worldwide Studios Shuhei Yoshida told The Guardian the firm’s flagship titles can cost hundreds of millions, citing 2022’s God of War: Ragnarok requiring a staggering $200 million to create.
More recently during this Microsoft vs The FTC battle, a partially-redacted document dropped news around the cost of other internal PlayStation projects to the disappointment of Judge Corley (and I’m sure PlayStation brass). While I feel quite bad for the poor paralegal that didn’t fully black-out the evidence, I’m grateful for the intel.
Notably, The Last of Us Part 2 from Naughty Dog in 2020 cost $220 million with approximately 200 developers contributing to the sequel to one of Sony’s signature games. Then, over 300 people at Guerilla Games and its support studios worked on last year’s Horizon Forbidden West, pushing the budget upwards of $212 million. Keep in mind these astronomical expenses are strictly for the creation of said titles. Costs associated with a single game’s marketing and distribution add many tens of millions, if not hundreds, to the already absurd totals.
New Consoles in 2028, Cloud Not a Major Market Until 2025 to 2030
While there are a variety of points for regulators to consider in a deal like this where a platform holder is buying one of the world’s premier publishers, two key aspects of their hesitance to approve the deal revolve around console market share and the future of cloud gaming. The FTC aims to protect American consumers not just now, but also where the industry will be in five, ten, twenty years down the line. Projecting the direction of an entire medium is a monumental task, even for the most knowledgeable of dedicated economists, which is why these reviews take as long as they do.
Part of the discussion around consoles spurred talk about the future of the traditional market. While Judge Corley compared console gaming to the usage of DVDs in that she expects it will, at some point, be obsolete (for the record, I disagree), Microsoft is certainly planning to keep up its hardware plans. Court documents suggest that the manufacturer anticipates a 2028 start date to the next generation, implying the next Xbox Series Whatever and PlayStation (I assume 6) will debut in around five years.
Personally, I believe the current Xbox Series X|S and PlayStation 5 may be an anomaly and last longer than this. No console generation has ever faced a global pandemic of the coronavirus magnitude, which significantly disrupted supply in the buyer acquisition phase. The fact that people are just now able to find new boxes at retail two and a half years into the cycle could extend the usual window.
The much more nascent segment of cloud streaming is a future bet for platform holders, with Microsoft’s Xbox Cloud Gaming and Sony’s PlayStation Plus incorporating this feature. Sarah Bond stated on record that cloud is the least used feature of Xbox Game Pass Ultimate, implying that it’s still niche. Jim Ryan echoed this sentiment, saying that cloud will not be a “meaningful component of how gamers access games” until at least 2025, or even as late as 2030. I think adoption could be even slower because even if the technology improves, gaming is much different than streaming a movie or show in that latency will always be the biggest impediment. The laws of physics can’t be beat.
Bonus: Five of The Trial’s Most Quotable Moments
Judge Corley to FTC: Why did [Sony boss] Jim Ryan say there’s nothing anti-competitive to making Star-whatever exclusive? Because he does the same thing!” (Referring to Bethesda’s Starfield.)
Xbox boss Phil Spencer: “The console war is a social construct.”
Microsoft says it will keep Call of Duty on PlayStation because “They couldn’t face the Wrath of the Gamers.”
FTC lawyer James Weingarten: “What about a world in which Microsoft offers the best new Christmas character to play on Christmas in Call of Duty?”
Judge Corley: “No Sharpies!” (Joking in reference to how a key document didn’t have the proper redacting technique and everyone could see through the marker.)
Sources: Axios, Federal Trade Commission, GamesIndustry Biz, IGN, John Welfare, Microsoft, The Guardian, The Verge (Image Credit).