Game Over? Why Sony and Nintendo Won’t Try to 1-Up Microsoft-Activision Deal | Analysis

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Game makers EA and Epic are unlikely to be gobbled up next, here’s the state of play

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Photo illustration by TheWrap ("Call of Duty" / Getty Images)

Microsoft’s all-cash purchase of game studio Activision Blizzard (“Call of Duty”) for $68.7 billion is one expensive way to assert dominance over gaming rivals Sony and Nintendo.

But don’t expect the makers of PlayStation and the Switch to follow their U.S. rival, the manufacturer of Xbox. As tempting as it may be to make a merger play for top game makers EA or Epic, the cost can’t be justified — or in some cases, is simply unaffordable, experts told TheWrap.

“There’s absolutely no question that Microsoft is simply in a different league than Sony, at least financially,” Clay Griffin, research analyst at MoffettNathanson, told TheWrap. “In other words, it’s a much more difficult economic decision for Sony” to try to make a similar acquisition.

A quick glance at all the market caps involved here prove that out. Microsoft as a whole is worth a mind-boggling $2.28 trillion today. Sony is valued at $156.59 billion and Nintendo at $60.53 billion.

Activision Blizzard is literally worth more than Nintendo at the moment, with a market capitalization of $63.99 billion. The market cap for EA, the maker of top games like “Madden” and “FIFA,” is $38.72 billion. Epic Games, the maker of “Fortnite,” was valued at $28.7 billion last spring — and is already about 40% owned by Tencent. (Meanwhile, Take-Two, which this month announced a $12.7 billion acquisition of mobile-game maker Zynga, will soon have a combined market cap of nearly $29 billion.)

“In some respects, we have to allow for the fact that this Activision Blizzard/Microsoft deal might just be an opportunistic strategy by Microsoft,” Griffin said, noting that the deal is certainly that for Activision Blizzard and its embattled CEO, Bobby Kotick. “Activision Blizzard stock was left for dead, Microsoft has a bottomless checkbook and it gives Activision Blizzard [and Kotick] an opportunity to save face and exit stage left gracefully.”

Kotick has been at the forefront of the company’s troubles. In July, the studio was hit with a civil lawsuit from California’s Department of Fair Employment and Housing, claiming the company was “akin to working in a frat house.” The alleged sexual harassment included inappropriate comments about women’s bodies, rape jokes and unsolicited touching of female employees. The company dismissed the claims and said in part in a statement to NPR, “The DFEH includes distorted, and in many cases false, descriptions of Blizzard’s past.”

There is one way Sony will likely follow Microsoft’s play. Since the Activision Blizzard deal allows Microsoft to bolster its Xbox Game Pass subscription service, PlayStation and its various (and some might say, half-hearted) subscription services could finally step their game up to compete.

“We are certainly going to see Sony try to harder to compete with Game Pass,” Griffin said. “That’s been rumored for a while. They kind of do it with their PS+ and PS Now subscriptions, but they’ll need to harmonize those two things and could very well go down the path of offering up their first-party games on launch day included with the subscription.”

Nintendo, which aims its products at kids and families, doesn’t really follow the same playbook as its bigger, better-funded rivals. Griffin sees the Switch maker “sticking to their knitting” amid the Microsoft/Activision and Take-Two/Zynga mergers.

Microsoft’s purchase of Activision, which still needs regulatory approval, will be the company’s largest acquisition ever — and by double. (Microsoft acquired LinkedIn for $26.2 billion in 2016. On the gaming side, Microsoft bought Mojang, which makes the hit game “Minecraft,” in 2014 and ZeniMax Media in 2020.)

The Activision Blizzard deal makes tech giant Microsoft the world’s third-largest gaming company by revenue, behind only Tencent and Sony. To keep that positioning, Griffin believes it is unlikely Microsoft will make Activision Blizzard games like “Call of Duty” Xbox-exclusive, like rival shooter “Halo” is. That concept also helps explain why a console-maker may be hesitant to buy EA, for example.

EA’s major titles, popular sports games like “Madden” and “FIFA,” “need the broadest distribution possible,” Griffin told TheWrap, so it doesn’t make much economic sense to buy a major studio and cut its revenue potential by two-thirds.

Not everyone agrees that “Call of Duty” and other top Activision games will remain available on PlayStation after this deal is done. Some experts believe the deal is bad news for Sony as Microsoft can make top games like “Call of Duty,” “Overwatch” and “Diablo” Xbox exclusives. “This is clearly an important part of the motivation for the deal,” Cowen analyst Doug Kreutz wrote. “Ultimately, we think Microsoft’s goal is to move Activision’s flagship console franchise away from Sony (and other platform competitors like Google or Apple) and thereby improve its competitive position.”

We’ve focused a lot on consoles, though mobile gaming makes up an eye-popping majority — roughly 95% — of gaming revenue these days. And Activision Blizzard’s “Candy Crush” is a giant in that space.

How valuable is mobile gaming? Take-Two, a $19 billion company, just spent nearly $13 billion to up its game in the app store.

Take-Two is best known for the “Grand Theft Auto” series, all the “2K” games, as well as “Red Dead Redemption,” “BioShock” and others — all made for traditional consoles. But the company also makes mobile games like “WWE SuperCard,” while Zynga is best known for making mobile games like “Words With Friends” and “FarmVille” that are among the industry’s fastest-growing.

Much like the streaming wars for TV series and movies, the future of console and PC gaming may lie in subscription services rather than hardware and software. Microsoft’s popular Game Pass product costs $9.99 per month, for which players get access to more than 100 games through PC and Xbox. Game Pass already boasts some 25 million subscribers as it competes with Sony’s Playstation subscriptions and Nintendo Online. (Microsoft is also making its VR headset, HoloLens, more targeted for the metaverse and B2B sectors.)

While Microsoft may or may not make some of its shiny new titles exclusive to its own platforms, research from content intelligence firm Diesel Labs suggests that there is a major opportunity for the company to capitalize on a unique audience. About half of “Call of Duty” enthusiasts discuss shows and movies, and 25% of them are Netflix users, according to Diesel Labs. Top titles they watched on Netflix included “Army of the Dead,” “Cowboy Bebop” and “The Witcher,” suggesting that there is a lot more potential for Microsoft to develop other dedicated content and strike partnerships down the line. Microsoft is one of the few tech giants that has not made a play in the streaming wars.

“We are watching tomorrow’s ‘cable bundle’ being built – except today it’s a content bundle which includes video, gaming, sports gambling and subscription content,” Scott Schiller, media professor at NYU’s Stern School of Business, told TheWrap. “These early-year moves put pressure on companies like Ubisoft and Niantic to align in order to play at scale.”