Date: 07/11/2023
Author: Mr. X
The Federal Trade Commission suffered a brutal defeat, with Microsoft avoiding an injunction to prevent its takeover of Activision Blizzard. ATVI surged by more than 10% yesterday. As is traditional for the company actually doing the purchasing, MSFT only saw a tiny increase. However, if MSFT can indeed complete the purchase, the XBOX owner could become a dominant force in the gaming market.
ATVI is a major prize. Its franchises include Call of Duty, Diablo, and Warcraft. All of these and others are rich mines for future projects. I’ve long promoted the concept of IP Mining, the idea that each successful franchise is basically the equivalent of a natural resource like gold or silver, something that can be tapped into it completely runs dry.
Let’s be honest, the entertainment industry isn’t exactly showing much creativity these days. It’s an age of remakes, reboots, and expansions. Consume product and get excited for next product. It’s what the people want.
And these franchises are doing well. Call of Duty sold 4.4 million copies in its first week on PlayStation 4, making it the new record holder over FIFA 23 (just 3.8 million copies.) Call of Duty Modern Warfare 2 generated at least $307 million in its first week on one platform. That dwarfs the total box office of many films that are considered smash hits.
We’re talking insane amounts of money for this one franchise. In November 2022, ATVI reported that the game brought in $800 million in just three days. It hit $1 billion in revenue in just three days, faster than any past title in the series.
What about Diablo? Diablo 4 made $666 million (heh) in sales – in just five days. It’s the best-selling horror game of 2023 so far, and it is unlikely to be topped. The game has generated about 276 million hours of watch time on YouTube, hit the number one spot on Twitch, is the fastest selling game in Blizzard’s history, and is just getting started with two expansions on the way. The free-to-play game Diablo Immortal brought in $525 million in its first year and became one of the top 25 mobile games in the world.
In the fourth quarter of 2022, ATVI reported record breaking results, with net bookings up 40% year-over-year. There were 389 million monthly active users and net bookings totaled $8.51 billion for 2022. In the first quarter of 2023, ATVI brought in $2.38 billion in net revenues, compared to just $1.77 billion in net revenues for the first quarter of 2022.
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This is just the beginning.
You may begin to see why Microsoft has so much to gain from this deal and why the FTC (and MSFT’s competitors) want it stopped. The deal isn’t totally a go now, as the FTC is expected to appeal the decision (and there are international regulators that must be overcome). However, Judge Jacqueline Scott Corley said the FTC probably won’t win via its argument that the MSFT acquisition will limit competition. Indeed, consumers will probably benefit. “[T]he record evidence points to more consumer access to Call of Duty and other Activision content,” she wrote, a line Microsoft has been sticking to throughout this process. “Despite the completion of extensive discovery in the FTC administrative proceeding, including production of nearly 1 million documents and 30 depositions, the FTC has not identified a single document which contradicts Microsoft’s publicly-stated commitment to make Call of Duty available on PlayStation (and Nintendo Switch).”
The merger is expected to conclude by July 18. Attention now rests on the appeal. That appeal is almost a certainty. “We are disappointed in this outcome given the clear threat this merger poses to open competition in cloud gaming, subscription services, and consoles,” said the FTC. “In the coming days we’ll be announcing our next step to continue our fight to preserve competition and protect consumers.” Microsoft, not surprisingly, was grateful to the court. The FTC now faces an uphill battle to get the Court of Appeals to enjoin the merger before July 18.
Microsoft also faces opposition from the United Kingdom. The UK Competition and Markets Authority has said it will stop the deal. The European Union, in contrast, found that MSFT “would have no incentive to refuse to distribute Activision’s games to Sony.”
If the deal goes though, it will be the biggest deal in gaming history, at $68.7 billion. If the revenue from Call of Duty and Diablo is any indication, Microsoft may get it all back and then some within just a few years.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing
