Why Microsoft Paid for a Video Game Company
Analysts had long wondered when Microsoft would put its growing cash reserves — $13 billion in cash as of June 30, 2020 — to work. Microsoft has a history of making significant acquisitions to grow. In 2011, the company acquired Skype for $8.5 billion, which gave it a large user base of business and personal communication customers. More recently, Microsoft signaled its interest in social media by spending over $20 billion to acquire LinkedIn in 2016. These acquisitions, along with the company's booming cloud computing business (i.e., Azure), had indicated that Microsoft was doubling down on its business costs.
By spending $7.5 billion on a gaming acquisition, this move signals Microsoft's goal to grow its consumer entertainment division. This multi-billion dollar deal is a critical reminder that Microsoft is more than Windows and Office. The company also has a highly successful video game division featuring the Xbox console.
This acquisition may reignite Microsoft's gaming division, which has had a lower growth rate than other parts of the business. In 2019, Microsoft reported that gaming revenue increased by 10% compared to 2018. While respectable, gaming's growth doesn't look exciting when you compare it to other segments. In contrast, Microsoft grew commercial cloud revenue, including Microsoft Office 365 Commercial, Microsoft Azure, and other products, by more than 40%. By acquiring a significant video game company, Microsoft's gaming segment is now positioned for significant growth.
Control Of Valuable Gaming Titles Through Acquisition
Bethesda and ZeniMax Media bring a new audience of customers for the company. With less than 300 employees, according to LinkedIn, ZeniMax Media is a drop in the ocean compared to Microsoft's global workforce of more than 150,000. More critical, Bethesda has a strong following of fans. The company is well known for its The Elder Scrolls Online game, which launched in 2014. Most importantly, the game has approximately 2.5 million active monthly gamers.
From Traditional Video Games to Game Subscription Revenue
Microsoft's shift toward selling products by subscription such as Office 365 and Azure cloud computing also extends to its gaming division. The software giant currently has over 10 million monthly subscribers for its Xbox Game Pass. Priced at $14.99 per month, the Xbox Game Pass gives players access to more than three hundred titles, including Crusader Kings III, Halo, Minecraft, and Resident Evil. When the acquisition goes through, Microsoft will have close to 13 million video game subscribers.
Will Microsoft Come for Activision Blizzard Next?
When it comes to video game subscriptions, Activision remains one of the giants. The company has more than 125 million monthly paying users as of Q2 2020 results. Activision has grown its user base in 2020 as more people are at home with more time to play games. The company's Activision segment grew by more than 200% year over year as of Q2 2020 results. With a market capitalization of $62 billion as of September 22, 2020, the company might be too big for even Microsoft.
More Acquisitions May Be Coming Soon
At first glance, this acquisition uses more than half of Microsoft's $13 billion cash stockpile. That doesn't mean that future growth plans are unlikely. Unlike some companies dependent on lenders, Microsoft's operations are the engine. The company has grown its free cash flow steadily from 2017 to the present. If the company slows or suspends its stock repurchase program, it will have even more cash to spend.
What This Acquisition Means for the Video Game Industry
Long term video game fans may be worried about the fate of a company linked with some of the industry's best-loved companies. Bethesda and ZeniMax Media own the classic action games Doom and Wolfenstein through their ownership of ID software. Fortunately for fans, Microsoft has a clear appetite for action games as well. Some of Microsoft's most-played Xbox games include Call of Duty, Marvel's Avengers, Halo, Star Wars, and Tom Clancy titles. Established video game console companies like Nintendo are probably starting to get worried. At the same time, Microsoft might not have a singular focus on entertainment. This Microsoft acquisition means that existing video game firms need to take this new rival seriously. Smaller video game companies may start efforts to court Microsoft for an acquisition offer.
About the Author
Bruce Harpham is an author and marketing consultant based in Canada. His first book "Project Managers At Work" shared real-world success lessons from NASA, Google, and other organizations. His articles have been published in CIO.com, InfoWorld, Canadian Business, and other organizations. Visit BruceHarpham.com for articles, interviews with tech leaders, and updates on future books.