Microsoft risks a cartel battle over the future of gaming

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Wednesday 7 December 2022

Microsoft could face its first antitrust fight in years over Call of Duty

Microsoft has fired its opening salvo in what could be a major confrontation with the Federal Trade Commission (FTC) over the tech giant’s $69 billion acquisition of Activision Blizzard. On Monday, Microsoft President Brad Smith wrote an op-ed in The Wall Street Journal saying the deal would benefit gamers and developers as Microsoft would become more competitive with rival Sony.

The decision is dangerous, however, because a fight with the FTC risks exposing Microsoft to the same negative attention and scrutiny that Alphabet, Amazon and Meta face when they stare at their own antitrust investigations.

So why take such a risk? Because Activision Blizzard, which owns the hugely popular “Call of Duty” franchise, will immediately make Microsoft the third-largest gaming company in the world by revenue behind Tencent and Sony. In addition, it will also give Microsoft the opportunity to further Sony in the fledgling cloud gaming industry, which Newzoo says will grow from $2.4 billion in 2022 to $8.1 billion in 2025 being ahead would also make Microsoft a real contender in the fast-growing mobile gaming industry.

Activision Blizzard’s Call of Duty is a hugely important game for both Microsoft and Sony. (Image: Activision Blizzard)

And Microsoft would have a truly massive gaming storefront if it combined its cloud gaming options and the mobile gaming titles it acquires through Activision Blizzard, like Candy Crush.

“The only reason they’re buying this is because they really intend to be the Netflix of games,” said Michael Pachter, managing director of equity research at Wedbush. “The difference between Microsoft’s approach and Netflix’s is that Netflix does so largely based on content it has licensed from others, and Microsoft does so largely based on content they own and control.”

Microsoft’s goal isn’t to dominate the console wars, but to stay ahead of the competition in the future battle for cloud gaming supremacy. And if that means taking over government, Microsoft seems more than happy to do so.

Play from anywhere, anywhere

Not only would the FTC’s antitrust lawsuit be a black eye for Microsoft, it could also prove to be a major distraction. If Microsoft hadn’t fought the Justice Department’s antitrust lawsuit that almost split the company in half in the 1990s and 2000s, it might not have missed out on the smartphone revolution.

But the gaming industry, which Newzoo estimates will reach $196.8 billion in global revenue by 2022, seems like too big an opportunity for Microsoft to pass up.

“There is a lot of control [the deal]because it’s an absolutely massive acquisition,” said Lewis Ward, IDC Research Director of Gaming, Esports and VR/AR. “That would shake up the competitive dynamics of the entire gaming industry.”

However, it’s not just gaming consoles and downloadable games. Microsoft is aiming to finally get a step ahead of Sony by becoming the leading cloud gaming company.

Cloud gaming basically allows gamers to stream and play games like Assassin’s Creed Origins, Deathloop, and Halo Infinite on traditionally underpowered devices like smartphones, tablets, or even smart TVs, without the need for expensive consoles or PCs are.

During Microsoft’s Q1 earnings call in October, CEO Satya Nadella revealed that 20 million people have used Microsoft’s Xbox cloud gaming service so far. That’s up from 10 million people in April.

A man poses for a photo in front of a Microsoft Xbox sign opposite a Sony PlayStation sign at the Electronic Entertainment Expo, or E3, in Los Angeles, California, U.S. June 16, 2015. REUTERS/Lucy Nicholson

A man poses for a photo in front of a Microsoft Xbox sign opposite a Sony PlayStation sign at the Electronic Entertainment Expo, or E3, in Los Angeles, California, U.S. June 16, 2015. REUTERS/Lucy Nicholson

However, that’s less than the 25 million PlayStation 5 consoles Sony has sold since the console’s launch in 2020. Despite its best efforts, Microsoft consistently lags behind Sony in the gaming space, regularly selling fewer consoles and games than the PlayStation maker.

However, cloud gaming represents a new opportunity for Microsoft that the company is keen to seize. It already has the necessary technological backbone thanks to its huge servers around the world. It just needs to attract more players.

“Game pass [Microsoft’s gaming service that includes its cloud gaming platform] has become really central to the growth of Microsoft’s gaming business. It extends beyond the highly competitive console market; it builds on Microsoft’s strengths in cloud and software as a service, and it enables access to new audiences…among many other things,” Louise Shorthouse, research manager at Ampere Games, told Yahoo Finance.

“It would of course allow Microsoft to be more competitive against Sony, but also against China-based tech giants like Tencent, which are very focused on international expansion right now.”

Call of Duty is the key

At the heart of the very public dispute between Microsoft and Sony is whether Sony will still have access to Activision Blizzard’s “Call of Duty” if Microsoft can buy Activision Blizzard.

Per Smith’s comment, Microsoft is willing to sign a 10-year deal that will ensure Call of Duty will be available on PlayStation and Xbox on the same day. It makes sense that Microsoft is keeping Call of Duty on PlayStation too. The newest title in the franchise, Call of Duty Modern Warfare 2, grossed $1 billion in its first 10 days on the market. Cutting out Sony would mean eating up Call of Duty sales.

FILE - The Activision Blizzard booth is shown on June 13, 2013 during the Electronic Entertainment Expo in Los Angeles.  Microsoft is buying Activision Blizzard on Tuesday, January 18, 2022 for $68.7 billion in exchange for access to blockbuster games like Call of Duty and Candy Crush.  The all-cash deal will allow Microsoft to accelerate mobile gaming and provide it with building blocks for the Metaverse, or virtual environment.  (AP Photo/Jae C. Hong, file)

Microsoft’s deal with Activision Blizzard would help the company bolster its cloud gaming service. (AP Photo/Jae C. Hong, file)

However, it’s unclear whether Sony could offer the game through its PlayStation Plus service, which offers a cloud gaming option.

Both Microsoft and Sony have a history of buying up third-party game companies and making their titles exclusive to Xbox or PlayStation. But Call of Duty is such a huge franchise that if Sony doesn’t have access to it, say after the proposed 10-year deal expires, gamers could opt for an Xbox over a PlayStation.

Mobile is huge, but part of the cloud story

While expanding Game Pass is a huge goal of the Activision Blizzard acquisition, Microsoft will also benefit from finally having its own competitive mobile games. Activision Blizzard’s King hosts titles like Candy Crush and then there’s the mobile version of Call of Duty.

According to IDC, the mobile gaming industry will reach $225 billion in revenue by 2026. And with more people globally having access to smartphones than high-end PCs and gaming consoles, investing in the mobile games industry just makes sense for Microsoft.

But, as Ward explained, if Microsoft can ensure users can both stream console-quality games via the Xbox Game Cloud and access downloadable versions of traditional mobile games, it could create a one-stop shop for gamers around the world.

Microsoft still has a long way to go to close its deal. And there’s no way to guarantee that the collaboration will benefit gamers, rather than harming them through less competition, as Sony argues. For Microsoft, however, the risk seems worth the reward. Even if it means being the bad guy.

Through Daniel Howley, technical writer at Yahoo Finance. follow him @DanielHowley

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