The Blizzard Coming to Gaming Part I: Introduction

The Blizzard Coming to Gaming Part I: Introduction

Oscar Zhu
August 2, 2023

Just when everyone thought that January 18 of 2022 was just going to be another average Tuesday, no one expected Microsoft to announce a record-breaking all-cash $69B merger with Activision Blizzard, the game development studio that published some of the most popular games ever: Call of Duty, Halo, Overwatch, and of course Candy Crush Saga. As one of the top distributors of video games seeks to partner with arguably the most well-decorated creator of successful gaming franchises, this deal has been deemed by many to be one that will reshape the present and future of gaming forever.

Accounting for the scale and the still-developing nature of this story (the deal deadline has been extended to October 18), I plan to cover it over a series of four parts: part 1 (the one that you are reading right now) serves to elicit in you the rationale of why people should pay attention to this deal and a general idea of how we got to where we are now; part 2 will go over the essential antitrust law concepts to help you fully appreciate the intricacies of this transaction beyond what the news articles report; part 3 will aim to cover the US-FTC narrative; and part 4 will focus on the EU-UK side of the story. Each section will naturally build on each other as we refer to past definitions and draw comparisons between different geographies to comprehend their varying perspectives and interests in play (no pun intended).

It's just about silly video games right, why should we care? Well, over 3 billion people play games worldwide, a figure that is scoped to jump to 4.5 billion by 2030; that is almost one out of every two people. And if we reasonably remove the toddlers and grannies that we would be alarmed to see on the opponent side of our Call of Duty matchmaking lobby, admittedly most of us are gamers (although many would never wish to be associated with this often-prejudiced label). Therefore, in this deal that vows to alter the future landscape of gaming, we are all equal stakeholders.

On the high level, this deal makes a lot of sense for both parties; while Microsoft’s Xbox is the second most popular gaming console in the world behind the PlayStation, the gaming console market, given its high barrier of entry for consumers (an Xbox Series X will run you almost $800 today), is understandably only ~30% of the gaming industry by revenue as of 2022. As 50% of that $200B gaming industry today is attributed to mobile gaming, it is a strategic acquisition for Microsoft to boost its offerings into this profitable segment with Activision’s massive franchises like Call of Duty and Candy Crush. And for Activision, this is a golden opportunity to retreat from the public limelight into Microsoft’s trillion-dollar shadow and have an emergency transfusion of Microsoft culture after a barrage of sexual harassment scandals in 2021 left bullet holes in the firm’s public image.

However, it is not these synergies between Microsoft and Activision that the authorities have an issue with, but almost all of them have homed in to one particular nascent segment of gaming – cloud gaming.

Cloud gaming is the new cool kid on the block in the video game industry; you can think of it as the Netflix equivalent of gaming. Why did people only think of this recently then if it is merely the replica of a proven existing business model? Well, the reality is that games are far more complicated to stream than videos. Not only are there many more inputs than just pause, play, and skip, but gamers are also much more sensitive to the inevitable latency caused by having to interact with the cloud than video-viewers. When we press pause on a Netflix movie, no one would bat an eye if the video paused half a second after, but even a half-second latency would render almost any type of game virtually unplayable. Furthermore, because with videos the server knows exactly what the next 10, 100, 1000 frames will be, the streaming platform can buffer, or essentially preload frames so that you would experience essentially zero-latency when watching. That is simply impossible for games. No one, even the players themselves, has any idea of what the next 10 frames of a game would look like as it is entirely dependent on the real-time inputs of all the players involved – a gunshot frame will happen at the same time for every stream of a movie, but it will display only when the player shoots the gun in a game. Yet now with the convergence of more advanced cloud computing and ultra-fast 5G connectivity, cloud gaming is finally now able to deliver a satisfactory experience for gamers.

The value proposition of cloud gaming is equally enticing. Along the same vein of how movie discs were made obsolete by online streaming, cloud gaming could guide us to a future where you will never need a game cartridge or even a proper gaming device like a console or a PC ever again. And as a giant in cloud computing, Microsoft is in prime position to capture this emerging market that is yet to encompass more than 4% of the total gaming market. In fact, its cloud gaming offering – Microsoft Game Pass, has over 60% market share in this new subscription-based segment. And just like how streaming platforms Netflix, HBO Max, and Stan are desperately competing for customers by burning truckloads of cash on exclusive original shows, the growth levers in cloud gaming will also be similarly embedded within exclusive games and IP.

Eureka! There rests the crux of the case against Microsoft’s ambitious merger with Activision – in a world where cloud gaming becomes a key avenue through which we consume games, Microsoft’s strengthening of its exclusive gaming IP moat through acquiring Activision could lead to a choice-less monopolistic future, one that is much like the game Monopoly itself – seemingly naïve and harmless on the surface, but deeply treacherous in reality.

Ciao for now. See you next week.

Below is a rough timeline of important events:

What Happened
January 18, 2022
Microsoft announce that it will buy Activision Blizzard for $68.7B in cash, marking potentially the largest deal in video gaming history.
December 8, 2022
FTC votes 3:1 to file suit to block Microsoft’s 69B merger with Activision Blizzard
April 26, 2023
In a landmark decision, CMA blocked Microsoft’s merger to “protect innovation and choice in cloud gaming.”
May 15, 2023
Weeks after the CMA block, the European Commission conditionally clears the deal.
Jul 11-13-14, 2023
FTC injunction denied by district court, FTC appeals decision, FTC loses appeal, green light for Microsoft in the US
Jul 11, 2023
CMA unprecedentedly reopens negotiations on Microsoft’s rejected merger.
Jul 19, 2023
Microsoft and Activision extend their original Jul. 18 deadline by 3 months in hopes of clearing the last hurdle (UK) to their deal.