What’s Really Behind the Microsoft-Activision Deal

What’s Really Behind the Microsoft-Activision Deal

What’s Really Behind the Microsoft-Activision Deal

It isn’t the end of the console wars but the start of the metaverse wars.

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The “metaverse” just got real. At least for me. That’s because Microsoft just announced that it will spend nearly $70 billion to buy video game developer and publishing giant Activision-Blizzard. We’re less than three weeks into 2022, and we already have what will be the biggest gaming story of the year—hell, maybe the biggest tech story of 2022. To put the all-cash deal in perspective: If Microsoft had just bought Nintendo outright, it would have been a smaller purchase. Activision-Blizzard is a slightly bigger company, by market size, than the venerable industry pioneers.

Some people will inevitably see the move as just the latest escalation in the console wars—specifically, Microsoft’s (makers of Xbox) war with Sony (makers of Playstation). In fact, it’s bigger. It’s a challenge to Microsoft’s real competition: Facebook, Google, Apple, and the Chinese holding company Tencent. This isn’t about video games. This is about the “metaverse”—a fact Microsoft more or less acknowledged in its press release announcing the deal. The acquisition, it said, would provide “building blocks for the metaverse.”

The “metaverse” (for those lucky enough not yet to know) is just the current tech-industry buzzword attached to the concept of a virtual space where people exist and interact through avatars which represent their real selves. People inside the virtual space are allegedly free to be who they want to be as opposed to who they are. Sometimes it’s sold as a virtual or alternate reality where people get a second chance to be the heroes of their own stories; at other times, it’s sold as an augmented reality where people do everyday things like shop for groceries and attend business meetings from the comfort of their own computers.

But always, it’s sold, because nobody is trying to create a digital reality for free. The metaverse is really just a new name for the old goal of getting people to spend money online to look and feel cool. The concept is simple: People spend money in real life for personal expression and status symbols (clothes, cars, fancy haircuts, yada), so people should be willing to spend money for such “status” and “expression” in their digital lives. The tech industry doesn’t just want to sell people the service; it wants to sell users the social stratification that is readily purchasable in the real world. Moreover, all of those virtual choices and metaverse shopping sprees can be expressed in the only language computers understand: data. And that data can be packaged and sold to advertisers who will then induce users to make purchases in either the digital world, the physical world, or both. That’s the metaverse in a nutshell, an online space where tech bros can sell you a digital yacht so they can go buy another one in the real world.

The problem holding back the metaverse right now is that tech giants haven’t been able to create a virtual space that is preferable to the real world to a critical mass of people . Despite the “opportunity” Covid and quarantines have created, most people are choosing to remain their real selves rather than digital representations. Most people want to go back out in public to a concert or show or bar, not experience one virtually while alone at home. Facebook (or Meta or Russian Troll Farm Simulator or whatever they’re calling themselves these days) is stuck merely talking about the metaverse, instead of profiting off it, because it has yet to devise a way to entice grandmas to create and maintain digital avatars just so they can share photos of the grandkids and spread vaccine misinformation.

But Activision-Blizzard has already cracked the code on getting people to care about how they appear in online virtual spaces. Video games can provide the structured virtual activity that people do want to sit at home and experience while “interacting” with their friends. A company can bootstrap all sorts of metaverse-style transactions around the shared virtual experience of an online video game.

Most games already do. Take one of Activision-Blizzard’s best known games: World of Warcraft (WoW). As a massively multiplayer online role-playing game, WoW has already created a virtual world that people have spent thousands of hours living in with their virtual avatars. Industry sources estimate there to be over a million current daily WoW players, which is actually below previous highs of 3 million or more. The game is subscription based, costing about $15 a month to play (plus the initial purchase of the game, around $60); even so, people still regularly spend money in game on cosmetic goods. People will buy outfits, hairstyles, “pets” (literally just things that follow around behind your character in the game), and “mounts” (which are just things your character can ride in between play areas) that provide no real in-game benefit other than looking cool. And these additions are not cheap: Mounts cost around $25, outfits $20, pets $10. Trust me, people will buy stupid stuff in games. I spent seven entire US dollars to make my character do a funky dance to indicate my readiness for battle last week. I’m 43 years old, by the way.

WoW isn’t even Activision-Blizzard’s most popular or most profitable game. The company makes Call of Duty, which puts out new versions yearly and generates massive sales, but it hasn’t been monetized in quite the same way as WoW—yet. But the king of the empire is actually a little game called Candy Crush, created and developed by Activision-Blizzard subsidiary King Limited. The “free” mobile game generates over a billion dollars in revenue, one booster (a paid-for power-up that makes the game easier and becomes all but essential at higher levels of difficulty) at a time.

By trying to corner the market on games (Microsoft already owns the immensely popular Minecraft), Microsoft is building the kind of cross-medium virtual space that could lead to the social-status transactions the metaverse requires. Microsoft could theoretically make a shared, online virtual “lobby” people had to pass through on their way to playing all of their titles, forcing a social interaction between Minecraft kids and Candy Crush parents and selling them both some useless but gaudy purchase. It could create an entirely new “game” that draws in users across its empire to a virtual space, and then incentivize that space by giving out boosters or enhancements for all of its games based on how much time (or data) people spend in digital reality. I don’t know what the virtual version of a giant foam finger would look like, I just know that I’ve bought the real thing, and baseball caps, on my way to my seats at Citifield to make my kids happy and look like I belong.

I say “corner the market,” but I don’t expect this acquisition to trip any antitrust laws. Joe Biden is trying to make antitrust laws great again, and I’m sure the acquisition will draw some scrutiny given that Microsoft’s purchase of Activision-Blizzard is the largest transaction in the history of the video game industry by a considerable margin. Yet I doubt that the feds can call Microsoft a video game monopoly, just yet. Other video game consoles exist and have opportunities to do well, be they the Playstation, Nintendo’s Switch, or even Valve’s new Steam Deck, set to be released next month. Moreover, Microsoft is at least talking like some of its newly acquired games will not be exclusive to its own Xbox console. Minecraft didn’t go Xbox-only after Microsoft bought it. Meanwhile, Candy Crush is a mobile game and WoW is available only on a PC. There’s a chance that Call of Duty will go Xbox-exclusive in the future, but even if it does, there will be other games on other platforms where we can shoot our friends.

Of course, even if Microsoft does get tagged as a “monopoly” in the gaming space, it’s unlikely to matter. Back in 1999 a federal judge ruled Microsoft a monopoly in the PC market and ordered the company split up. But it didn’t split up. It appealed, got part of the ruling reversed, and made a deal with George W. Bush’s Department of Justice. I doubt that the Biden administration or overwhelmed Attorney General Merrick Garland will want to take on this giant on behalf of hardcore gamers.

The real concern will be if Microsoft’s strong play in the video game market makes other metaverse-curious companies buy up game studios and further consolidate the market. Does Sony buy Blizzard competitor Square-Enix (makers of the critically acclaimed MMORPG Final Fantasy XIV)? Or perhaps more to the point, does Google buy Sony since Google’s own foray into the gaming landscape (Google Stadia) crashed and burned miserably?

Almost lost in the frenzy of the billions of dollars being bandied about is the way the acquisition allows yet another bad corporate man to jump out of a burning plane in the most golden of parachutes. Activision-Blizzard has spent much of the last year rocked by scandal. In June, the California Department of Fair Employment and Housing filed a massive lawsuit against the company for employment discrimination, workplace harassment, and unequal pay. The company has been hemorrhaging senior leadership. And there are reports that Activision-Blizzard CEO Bobby Kotick has known all along about the allegations of workplace mistreatment and done nothing to stop it, and is himself a bad actor. Indeed, Phil Spencer, head of Microsoft’s Xbox division, said back in November that all of the information coming out about Activision-Blizzard would cause Microsoft to reevaluate “all aspects” of Xbox’s relationship with Kotick.

To go from that nod towards accountability to we’re buying your company for $70 billion is quite a turnaround. Kotick, according to the press releases, will remain as Activision-Blizzard’s CEO, though now in a subordinate role to Spencer himself. Call me skeptical about how long that relationship will last. At a bare minimum, Kotick’s contract calls for him to be paid nearly $300 million should he be let go following a change in control.

There is simply no penalty the state of California could impose on Activision-Blizzard that Microsoft cannot absorb. Things could scarcely have worked out better for Kotick: He’s gone from having a lawsuit threaten to submerge his company to making however-many hundreds of millions of dollars Microsoft eventually pays him to go away.

If you don’t play any kind of games, if your interaction with the online world is limited to a few social media posts, Waze, and Home Advisor, you are probably safe from the metaverse, for now. But the tech industry is determined to find a way to get people to pay for unique online signifiers. Just remember that all the people selling status online always ask for real life money eventually. The people pushing the metaverse sure seem focused on how much money they can make outside of it.

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