Microsoft's $68.7 billion bid to buy Activision Blizzard could shift the balance of power in the nascent metaverse and open enticing advertising potential for brands.
On Tuesday, Microsoft and Activision Blizzard announced their planned union, but the deal still needs to pass regulatory scrutiny. If it goes through, Activision Blizzard would propel Microsoft into the No. 3 game-maker position behind Tencent and Sony. Microsoft has touted the pending acquisition for its potential to advance its agenda in the metaverse through gaming worlds owned by Activision Blizzard, including Call of Duty, the military action game, and World of Warcraft, the fantasy role-playing series. Activision Blizzard also owns King, the mobile game maker behind Candy Crush.
The video game industry is more reliant on game sales and in-game virtual transactions for revenue than it is on ad sales. But advertising is becoming an increasingly significant part of the video game business, according to Brandon Ross, partner and media and technology analyst at LightShed Partners.
“If you see where the world is going, interactive media is becoming the next big platform or use case for the distribution of intellectual property and communications,” Ross said. “Everybody, especially the tech giants, are trying to position themselves for that coming reality, or virtual reality.”
Content and commerce
Microsoft and Activision Blizzard executives talked about the prospects of uniting the “metaverse,” “content,” and “commerce” during a Tuesday conference call to discuss the deal. “When we think about our vision for what a metaverse can be, we believe there won’t be a single, centralized metaverse and there shouldn’t be,” Microsoft CEO Satya Nadella said. “We need to support many metaverse platforms, as well as a robust ecosystem of content, commerce and applications. In gaming, we see the metaverse as a collection of communities and individual identities anchored in strong content franchises, accessible on every device.”
Gaming has become one of the most important sectors in entertainment across platforms, through consoles, like Microsoft’s Xbox, mobile devices and computers. There has been a flurry of activity in the sector. Just last week, Take-Two Interactive announced a plan to buy Zynga for $12.7 billion. Microsoft’s deal for Blizzard Activision would be the tech giant’s largest acquisition. Microsoft has loaded up on deals over the years, including a $26.2 billion purchase of LinkedIn in 2016. In 2014, Microsoft paid $2.5 billion for Minecraft.
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In-game ad revenue is still a small portion of the overall revenue generated in video games. But advertisers are buying video ads in mobile games like Candy Crush and developing branded virtual worlds inside user-generated platforms like Roblox. Brands are also dabbling in non-fungible tokens and virtual goods.
Activision Blizzard has worked with brands like Pringles, L’Oréal and Hello Fresh to serve ads in its gaming ecosystem, according to case studies on its website. In the third quarter, Activision Blizzard’s King saw ad revenue grow 60% year over year. The company does not disclose the exact ad revenue it makes quarterly.
“If there is a platform out there that’s capable of getting attention, advertisers will follow,” said Nirish Parsad, practice lead of privacy, identity and marketing technology at Tinuiti, a performance marketing agency.
That’s exactly what Microsoft is trying to build through acquisitions with gaming platforms like Activision Blizzard. “This acquisition is about communities, like Candy Crush and Call of Duty,” said Elizabeth Emery, senior director of mobile and ad tech solutions at Tinuiti.
Mike Proulx, research director and VP at Forrester, said that Activision Blizzard would help round out Microsoft’s metaverse technology. Microsoft owns the Xbox consoles, Windows software, Bing search, LinkedIn, and Azure cloud services. Microsoft also is developing the HoloLens mixed reality goggles.
“What this means is that Microsoft is now holding an ever-increasing number of important cards in the developing metaverse,” Proulx said in a research note on Tuesday, “back-end infrastructure, devices, and a rapidly growing experience platform.”
Microsoft’s offer for Activision Blizzard comes at a sensitive moment, however. For one, Activision Blizzard is in the middle of a crisis after employees sued the company, alleging executives oversaw a toxic culture that included widespread sexual harassment. There has been pressure for Activision Blizzard CEO Bobby Kotick to step down. During the conference call, Nadella said that Activision Blizzard staff would report to Phil Spencer, CEO of Microsoft Gaming. There were reports that Kotick would leave the company under the new structure. Meanwhile, on Tuesday, the Federal Trade Commission and Department of Justice said they would strengthen oversight of merger deals to prevent anti-trust activity, suggesting greater scrutiny of deals, like Microsoft buying Activision Blizzard.
