Microsoft's Activision Blizzard Takeover Is Really About the Metaverse

Back in January, Microsoft (MSFT, Financial) announced its plans to acquire the game publisher Activision Blizzard (ATVI, Financial), the maker of several famous franchises like Call of Duty and World of Warcraft, for $68.7 billion in an all-cash transaction. This news sent shares of the stock up 25% at the time.

Microsoft, which already owns the Xbox platform, will further be able to expand its share of the rapidly growing gaming industry by developing more Xbox-exclusive titles as well as getting a better foothold in mobile gaming via Activision's Candy Crush. The gaming industry has already been growing globally, and that growth has been further accelerated by the pandemic.

According to Mordor Intelligence, the gaming market was valued at $173 billion in 2021, and is estimated to nearly double to $314 billion by 2027, implying a compound annual growth rate (CAGR) of 9.64% over the period.

The Activision Blizzard deal will still require approval from shareholders and regulators. Investors are clearly pricing in the risk of regulatory hurdles, since Activision's share price is still below the acquisition price ($81 vs. $95 per share). The deal is highly anti-competitive since it could allow Microsoft to prevent the release of popular gaming titles on competitors' platforms, and if it falls through, Microsoft could face a whopping $3 billion penalty due to the deal's termination conditions (if the termination notice is provided after April 18).

What about the metaverse?

This takeover deal is not just about 2D gaming, though - it’s about the metaverse. Microsoft's CEO Satya Nadella confirmed this on the press release:

“Gaming is the most dynamic and exciting category in entertainment across all platforms today and will play a key role in the development of metaverse platforms.”

In October 2021, Facebook announced its name change to Meta Platforms (FB, Financial), signaling a shot across the bow to all major tech giants out there that they plan to become a leader in this space.

However, Microsoft followed shortly after with their own metaverse concept. But rather than renaming the company to something like “Metasoft” (you heard it here first!), they are making big moves in a more under-the-radar fashion.

Microsoft's metaverse

Microsoft is undergoing a transition phase from a purely software-focused company to a platform company. These platforms include:

• Microsoft 365 (300 million paid seats)
• Productivity Software (Teams)
• Cloud Services (Number two market player Azure)
• Linkedin (303 million monthly active users)
• More Personal Computing (Gaming, hardware, (Hololens) and software).

I personally believe the “More Personal Computing” part of Microsoft is meant to become the metaverse part of the company, though of course this is just my own theory. The company is perfectly placed to leverage all the other platforms to help it become the number one player in the metaverse.

Their Cloud Services platform can act as the backbone of the metaverse, while their communications platform Teams can connect the 145 million daily active users together.

Microsoft Mesh

In November 2021, Microsoft announced Mesh for Microsoft Teams, which aims to make collaboration more personal and fun. Mesh takes existing Teams features such as Together mode and Presenter mode one step further, making hybrid meetings more immersive.

From a gaming standpoint, they have Xbox and soon to be Activision Blizzard (if the deal closes). Activision Blizzard has the skills in producing and running real-time cloud based virtual gaming on a vast scale. World of Warcraft has 26 million monthly active players, and some would argue that this type of game is already a from of metaverse. I have even seen avid gamers create their own hacks to allow VR gameplay in World of Warcraft, and although this is not officially available yet, it seems to be only a matter of time.

Then there are extremely popular Microsoft games such as Minecraft. In an April 2021 earnings release, Nadella claimed that Microsoft’s gaming communities, like Minecraft and its then-140 million monthly users, could grow into huge commercial marketplaces “as games evolve into metaverse economies.”

Then, in November 2021, Nadella told Bloomberg"

“If you take ‘Halo’ as a game, it is a metaverse. ‘Minecraft’ is a metaverse, and so is ‘Flight Sim.’ In some sense, they’re 2D today, and the question is: ‘Can you now take that to a full 3D world?’ And we absolutely plan to do so.”

On the hardware side, Microsoft has Hololens, although Meta's Oculus Rift has more market share at 59%. Despite this, Microsoft has all the ingredients to become a leader in the Metaverse.