Commissioners at the Federal Trade Commission voted 3-1 last week to sue to block Microsoft’s (MSFT) $69 billion acquisition of Activision (ATVI) on anti-trust grounds.
It's expected that Microsoft will fight this decision to the bitter end, but already in doing so, Microsoft has belittled its own gaming segment. You can’t ever un-say something, that's why we are raised to think before we speak. And if this deal fails to go through, Microsoft may end up kicking itself.
Overview
Microsoft is keen on fighting the FTC, which should be an interesting battle. The FTC is blocking the acquisition as it sees the deal as harmful to competition in the video game market.
Holly Vedova, Director of the FTC’s Bureau of Competition noted that Microsoft has already shown its willingness to withhold gaming content from rivals and that it intends to block Microsoft from “gaining control over a leading independent game studio and using it to harm competition in multiple dynamic and fast-growing gaming markets.”
As an apparent effort to downplay concerns over Activision games becoming Xbox exclusives, Microsoft signed off on a deal to guarantee that "Call of Duty" titles remain playable on Playstation, and later Nintendo, systems for a decade.
Potentially noteworthy, the PlayStation 4 was launched in November 2013, while the PS5 came out in November 2020. This seems like an assurance to gamers that the PS5 and the next Nintendo Switch will be able to run the game. However, it seems likely that it gets used later on as marketing leverage ahead of the launch of the next generation of consoles to sway buying decisions.
Microsoft
While Microsoft has a whole lot more to it than video games, a lot of eggs are getting put in this ever-bleaker basket. At risk for Microsoft is its reputation with gamers and its growth plan for Game Pass. PlayStation has had the edge in the console wars for the last two cycles and this Activision deal is certainly aimed at clawing back market share.
In court, Microsoft will try to argue that Activision is about leveling the playing field with Sony. To do so, the company will have to continue to speak poorly of its existing exclusive games and its position in the gaming industry, which may harm the business if the deal falls through.
Microsoft argued last week in an op-ed in the Wall Street Journal that the acquisition is good for gamers, as Game Pass is like Netflix and allows players to enjoy games at a fixed subscription price rather than shelling out for each game.
The company also argued it is good for competition as it could compete through innovation, meaning its subscription service. Though, that argument mostly doesn’t make sense given that it helps Microsoft compete better with one rival, Sony (SONY), while increasing the economies of scale required in order to compete in the gaming industry, rather than creating a playing field that inspires new rivals (which is what being good for competition means).
If Game Pass is to be like Netflix, as Microsoft feels inclined to compare itself to, it would have to be available on all devices, Playstations included. Can you imagine Roku telling YoutubeTV or Netflix that it isn’t welcome on its streaming devices?
“Think about how much better it is to stream a movie from your couch than drive to Blockbuster”, Microsoft argued. But think about how terrible of an experience streaming would be if you had to have an Amazon device for Prime, an Apple device for AppleTV+, and a Netflix device for Netflix.
The upside for Microsoft is that it can be the frontrunner in the next-gen approach to how one games. That could be a huge boost for MSFT as it is a growth opportunity that also exposes the company to non-corporate customers.
But the downside is that Microsoft could shoot its own foot during this pursuit, either through concessions in Game Pass or by making too many assurances that games won’t become exclusives to the point where the deal no longer becomes a market-share needle mover.
Activision
Activision continues as ATVI if the pair fails to sway the court and there aren’t too many risks to the company’s reputation.
If the deal fails, the biggest threat will be a knee-jerk selloff to its stock as many people have bought the stock in anticipation of the deal going through at a hefty premium. Activision was trading at about $60 per share before the announced $95 per share acquisition, so the stock would likely find support right around there.
Ultimately, Activision has a strong business model and consistently brings blockbuster games to market. Markets will need to reevaluate their trading levels for the stock, but from there it would commence normal trading behavior again. Following the initial plunge, a buying opportunity could arise if the price falls below where it was when the deal was announced.
Conclusion
While Activision investors will fear a failed acquisition as a short-term risk, Microsoft investors are betting on a long-term return that not only helps the company reclaim market share but also helps make it a front-runner in a newly modeled business. While the upside is likely pretty big for Microsoft, it won’t be able to make the case without conceding that it is currently behind its rivals, which could make failure to acquire Activision a costly blunder as many people are still trying to get their hands on the next-gen device of their choice.
