EVEN FOR Microsoft, which boasts a market capitalisation of around $2.3trn, $69bn is a lot of money. On January 18th the firm said it would pay that sum—all of it in cash—for Activision Blizzard, a video-game developer. It is both the biggest acquisition ever made in the video-game industry and the biggest ever made by Microsoft, more than twice the size of the firm’s purchase in 2016 of LinkedIn, a social network, for $26bn (see chart). The move, which caught industry-watchers by surprise and propelled Activision Blizzard’s share price up by 25%, represents a huge bet on the future of entertainment. But not, perhaps, a crazy one.

The gaming industry was growing apace before the pandemic. Covid-19 lockdowns bolstered its appeal—to hardened gamers with more time on their hands and bored neophytes alike. Worldwide revenues shot up by 23% in 2020. NewZoo, an analysis firm, puts them at nearly $180bn. Microsoft is already a big player in the business, thanks to its Xbox games console. It has made a string of gaming acquisitions since 2014, when Satya Nadella, its chief executive, took the reins. The Activision Blizzard deal would cement its position. Once completed in 2023, it will make Microsoft the third-largest video-gaming firm by revenue, behind only Tencent, a Chinese giant, and Sony, Microsoft’s perennial rival in consoles.

Activision Blizzard’s share price had slid by around 40% between a peak last February and the deal’s announcement, as the company was embroiled in a sexual-harassment scandal and some of its games underwhelmed. That may have made it look cheap in relative terms, given the benefits it brings to Microsoft. It boasts annual revenues of around $8bn and net profit margins of 30%. Most important, Activision Blizzard offers plenty of content—and in video games, as in the rest of the media industry, content is king, says Piers Harding-Rolls of Ampere Analysis, another research firm. Like the film business, where “Star Wars” films, even bad ones, are reliable money-spinners, video games rely increasingly on “franchises”—popular settings or brands that can be squeezed for regular new games. Activision Blizzard boasts, among others, “Call of Duty”, a best-selling series of military-themed shoot-em-ups, “Candy Crush”, a popular pattern-matching mobile game, and “Warcraft”, a light-hearted fantasy setting.

In the short term, the deal gives Microsoft more of a foothold in the smartphone-gaming market, to which it has had little exposure. King, a mobile-focused subsidiary of Activision Blizzard, boasts around 245m monthly players of its smartphone games, most of whom tap away at “Candy Crush”. It is also a strike against Sony. If Microsoft controls the rights to “Call of Duty”, it can decide whether or not to allow the games to appear on Sony’s rival PlayStation machine. When Microsoft bought ZeniMax Media, another games developer, for $7.5bn in 2020, it said it would honour the terms of ZeniMax’s existing publishing agreements with Sony, but that Sony’s access to new games would be considered “on a case-by-case basis”.

In the longer term, says Mr Harding-Rolls, the deal should help Microsoft achieve its ambition to make gaming cheaper and more accessible (including, if hype is to be believed, in the virtual-reality “metaverse”). Its “Game Pass” product already offers console and PC gamers access to a rotating library of video games, which usually cost $40-60 each, for $10 a month. Adding Activision Blizzard’s catalogue to the service could boost its appeal. It could also strengthen Microsoft’s two-year-old game-streaming service, which aims to use the firm’s Azure cloud-computing division to do for video games what Netflix did for video. Microsoft hopes to stream games across the internet to a phone, television or PC, removing the need to own a powerful, dedicated console or PC. That could lower the cost of the hobby and draw in more players, especially in middle-income countries where smartphones are common but consoles are rare. And that, in turn, would make exclusive content even more valuable.

Other firms—both games-industry veterans and arriviste tech titans attracted by the sector’s growth—have streaming ambitions of their own. Sony runs its own service, called “PlayStation Now”. Amazon launched an early version of its own “Luna” service in 2020. “GeForce Now”, a streaming offering from Nvidia, a maker of gaming-focused microchips, launched the same year. But none is as well-placed as Microsoft, which has decades of experience in the games business and boasts the world’s second-largest cloud-computing operation after Amazon. And the more content Microsoft owns, the more attractive it can make its service compared with its rivals.

Such thinking may provoke more deals by Microsoft’s competitors, eager to snap up franchises of their own while they can. The gaming industry was already seeing plenty of merger activity. Last year saw five deals worth $1bn or more. On January 10th Take-Two Interactive, a game developer and publisher, spent $13bn to buy Zynga, a maker of mobile-phone games. Besides Amazon, both Apple and Netflix have dipped their toes into the video-game business in recent years; an acquisition by either one could help boost their presence. Consolidation is the name of the game.

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