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Microsoft Wants to Be the Disney of Video Games, the Metaverse

Microsoft has been buying up game publishers but regulators may take issue with its latest purchase.

When Walt Disney (DIS) - Get Walt Disney Company Report bought Pixar, nobody -- maybe even not then-CEO Bog Iger -- knew that the Mouse House had a plan to lock up an enormous amount of top-tier intellectual property (IP). He bought Pixar because Disney had been distributing the animation company's films and knew the value of owning the studio.

That strategy worked and it later led to Iger feeling confident in buying LucasFilm (Star Wars) and Marvel. Microsoft (MSFT) - Get Microsoft Corporation Report has been, perhaps, more planned in its approach rolling up 23 game studios that produce everything from ""Minecraft," to "Gears of War," Fallout," and much more.

Now, Microsoft has a deal to snap up video game company Activision Blizzard  (ATVI) - Get Activision Blizzard, Inc. Report, makers of popular titles “Warcraft,” “Diablo,” “Overwatch,” “Call of Duty” and addictive mobile phone game "Candy Crush.

If all goes according to plan, the deal, the biggest acquisition of all time for the Redmond-based company, will find Microsoft purchasing the company in an all-cash transaction valued at $68.7 billion. The transaction is set to close in the next 18-months. 

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Why Did Microsoft Purchase Activision? 

Activision Blizzard has been one of the leaders of the video game industry since 2008 when Activision Publishing merged with Vivendi Games, and even before that, Activision was a reliable name to avid gamers, having introduced popular and innovative titles such as Tony Hawk's, “Call of Duty,” “Guitar Hero” and the “Tony Hawk” skateboarding franchise. Currently, the company has studios all around the world with close to 10,000 employees. 

Ever since the first Nintendo Entertainment System hit U.S. shores in 1985, the media has sometimes considered video games a cultural afterthought or a fringe hobby, but that isn’t really the case. 

Just in case you personally aren’t a gamer and you don’t talk to your teenage nephew very often, it needs to be pointed out that video games are absolutely one of the driving forces of popular culture. More than two-thirds of Americans, or 227 million people, play games, a number that saw a sharp increase during the COVID-19 pandemic,USA Today reported. Today, the $200 billion gaming industry is the largest and fastest-growing form of entertainment.

Just as Disney somewhat quietly went about acquiring some of the most valuable intellectual property in entertainment (including Marvel, Pixar, and the Star Wars franchise) on its way to becoming the biggest name in popular culture, if this deal goes through, Microsoft will become the world's third-largest video game maker. 

Like Disney, Microsoft has been on a shopping spree of late; last year it acquired ZeniMax Media, the parent company of game developer Bethesda, for $7.5 billion, with plans to make popular game franchises “Fallout” and “Doom,” exclusive to Xbox and PC consoles.

To people who work in offices, Microsoft is mostly associated with Windows and Office productivity software, but this purchase indicates a desire on the company’s part to increase the stature of its Xbox console, which has long been locked in competition with Sony’s Playstation  (SNE) - Get Sony Corp. Report and Nintendo's various iterations for market dominance. 

Microsoft has plans to incorporate Activision Blizzard games into its $15 per month Game Pass Ultimate subscription service, which counts more than 25 million subscribers. Microsoft also plans to offer Activision’s games through mobile devices, PC platforms such as tablets and cloud gaming, though the company hasn’t yet announced whether Activision’s titles will become exclusive to Xbox and other Microsoft products such as its Microsoft Surface tablet or not. 

The company did say they will make some games exclusive for Xbox, but does this mean Microsoft will want to retain the profits from allowing Sony (SNE) - Get Sony Corp. Report  PlayStation users to buy Activision games, or is it worth cutting into its sales to grow its Game Pass service? At the moment, it’s unclear which way Microsoft is leaning. 

But owning the underlying developers gives Microsoft the freedom to keep the most popular titles from competing platforms, such as the PlayStation.

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“I’ll just say to players out there who are playing Activision Blizzard games on Sony’s platform: It’s not our intent to pull communities away from that platform and we remained committed to that,” Microsoft Gaming CEO Phil Spencer, said in an interview with Bloomberg.

Microsoft Is Betting on The Metaverse

As more and more people become aware of the virtual reality world the metaverse, there’s an increasing sense that the public isn’t exactly sure what this all means for them, as the idea, put forth by Facebook (Meta) (MVRS) - Get Meta Report founder Mark Zuckerberg, that people might want to attend virtual reality office meetings has been met with widespread skepticism. 

But video games are a much different story, because playing an immersive game with a few friends is something that would get people to strap on a VR headset. Games are a clear way for companies to monetize the metaverse, as the gaming platforms Robolex and the NFT-based online company Axie Infinity are already developing games for the metaverse. 

Microsoft CEO Satya Nadella said in a press release that gaming “will play a key role in the development of metaverse platforms,” though what exactly that means is currently unclear. 

"The metaverse as we believe it will be a collection of communities that are anchored by franchises that we'll start with, whether it's a Call of Duty or World of Warcraft or Candy Crush, those franchises that have hundreds of millions of players are going to be the basis for what we think will be as large vast virtual world", Phil Spencer, Microsoft Gaming CEO, said in an interview with CNBC.

And added: "we will now actually be able to integrate the idea of audio and video while you're playing games and sharing your experiences may have the beginnings of what will be ultimately created crater economies like Minecraft, where we'll be able to create content that both can be commercialized or shared."

Microsoft  hopes to reposition itself for younger audiences, as the metaverse is seen as a dominated world filled with new gaming opportunities

Regulators May Stop Microsoft from Buying Activision

This sale is contingent on the Federal Trade Commission's approval, which is very far from a fait-accompli. Regulators are looking closely at breaking up giant technology firms with anti-trust lawsuits, as lawmakers are increasingly worried that companies are accruing too much influence and building monopolies in an attempt to squash competition.

“Amazon, Apple, Facebook, and Google are facing very real threats to their considerable power over our everyday lives from all sides: lawsuits, federal and state legislation, international action, and a public that is increasingly distrustful of these companies and eager for more regulation and enforcement," Vox reported.

It’s possible the government could decide Microsoft shouldn’t be allowed to buy Activision.

That isn’t the only cloud hanging over Activision Blizzard of late. Activision CEO Bobby Kotick has been under fire for allegedly not informing the company’s board of directors about the sexual assault of a female by her male supervisor.

Employees have accused Kotick of either ignoring or fostering a toxic work environment where sexual harrassment was rampant. Last September, the US Equal Employment Opportunity “accused the company of violating the civil rights of employees, subjecting them to sexual harassment, pregnancy discrimination and retaliation. Activision Blizzard quickly settled with the EEOC for $18 million,” reports CNET

The Wall Street Journal reports on Tuesday that Kotick is expected to leave after the deal closes, but Microsoft said he will remain in his position, and will report to Spencer. It should be pointed out that Microsoft is a company with its own harassment issues. 

After the fallout from a Microsoft board committee investigation into sexual harassment allegations against co-founder Bill Gates and a shareholder resolution, the company recently announced that “it has finally decided to look into its sexual harassment and discrimination practices, including any sexual harassment investigations in recent years against its directors and senior executives.”