Microsoft is betting its future on cloud gaming – but that has derailed the Activision deal

Watch CNBC's full interview with Microsoft CEO Satya Nadella

Microsoft has invested tremendous amounts of capital and time to make cloud gaming a core part of its gaming offering.

Peter Sommer | Getty Images

If Microsoft announced its purchase offer Activision Blizzard for $68.7 billion, it was one of the largest acquisitions in video game history — and the biggest deal ever for the Redmond, Washington-based tech giant.

There were many reasons for the US tech giant to buy Activision. Activision owns a variety of popular game franchises – Call of Duty, World of Warcraft and Candy Crush Saga.

Microsoft would win a variety of content to add to its Xbox games division. And it would add a ton of talent to the in-house game studios that could help create new games.

But most importantly, and what Microsoft is betting its gaming future on, was cloud gaming – and that ultimately thwarted the company’s multi-billion dollar bid to swallow Activision when UK regulators decided to scrap the deal on Wednesday To block.

What is cloud gaming?

Cloud gaming is a technology that allows people to play games from any device with an internet connection – a console, a PC, a smart TV or a mobile phone – from a far away data center.

Traditionally, you need specific hardware to play a game, e.g. B. an expensive console or a PC.

Things have gotten better over time with the advances in smartphones and there are now even big studio quality games that can be played on phones like Call of Duty Mobile.

But what cloud gaming offers — that’s what makes it a differentiator — is a service that lets you stream a selection of titles in real time from a company’s remote data centers, just like you would a movie or TV show Netflix.

Microsoft has invested tremendous amounts of capital and time to make cloud gaming a core part of its gaming offering. The company has included cloud gaming as a free perk in its Xbox Game Pass subscription product, which gives people access to a variety of titles for a monthly fee.

Cloud gaming could benefit consumers in developing markets where consoles and PCs are too expensive.

Microsoft has been losing ground to console rivals — particularly Sony – over the years. In the last generation of consoles, Sony won the infamous “console wars” with its PlayStation 4 machine, which surpassed Microsoft’s Xbox One in terms of lifetime sales.

It was more like that with the current generation of consoles, which launched in November 2020. The PS5 has sold 32 million units so far, according to the latest quarterly figures.

Microsoft doesn’t release unit numbers in its results, but an estimate by video game data site VGC puts lifetime sales of its Xbox Series X and S consoles at just over 20 million units.

Microsoft CEO Satya Nadella outlined the company’s vision for cloud gaming and incorporating Activision Blizzard in an interview with CNBC’s Tanvir Gill in November.

Watch CNBC's full interview with Microsoft CEO Satya Nadella

“We want people to be able to enjoy the games they love on platforms they play on. And that’s our goal,” Nadella said.

“We love console, Xbox, we love PC, we love mobile. We love xCloud, it’s the streaming service so you can even play on your TV and whatever.”

“Activision has been a fantastic partner for us today, where we want to be able to take all the content and make sure it’s available on every platform,” he added.

Why the CMA is concerned

In its merger review released Wednesday, the CMA said it was concerned that Microsoft’s dominance in cloud gaming could hurt competition in that particular market.

“Allowing Microsoft to hold such a strong position in the cloud gaming market as it begins to grow rapidly would risk undermining the innovation critical to developing these opportunities,” the CMA said in a press release on Wednesday.

According to the regulator, Microsoft takes 60-70% of the total cloud gaming market.

The CMA, along with other regulators and competitors like Sony, fears that Microsoft may withhold its blockbusters Call of Duty, Warcraft, and Diablo from other cloud gaming platforms in the future.

Activision Blizzard’s crown jewel, Call of Duty sells in huge numbers every year. The multiplayer mode Warzone Battle Royale alone was played by more than 6 million people in the first 24 hours after its release.

That makes it an extremely attractive asset for a company like Microsoft. Imagine how Nintendo Announcement that it would buy Electronic Artsand there was a subscription service that you could pay $10 a month for to play any new FIFA soccer game on the day it was released.

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Besides Xbox, Microsoft also owns Azure, the cloud computing platform used by thousands of businesses for their data storage and computing needs.

“Although Microsoft has partnered with third-party cloud gaming providers to bring select ABK titles to their services, that doesn’t necessarily mean those companies will get unlimited access to those games by default,” analyst firm Omdia said in an email CNBC broadcast comments.

“There will continue to be license terms, fees and terms that operators must pay — fees that Microsoft itself will have otherwise absorbed as part of the acquisition.”

“Microsoft also owns the Azure infrastructure that powers Xbox Cloud Gaming and other third-party cloud services that pay for every minute and user provided by the Azure backend,” Omdia added.

“This should ensure that ten years from now – when cloud gaming has a much larger addressable market – Microsoft will face lower operating costs than competing services.”

Cloud gaming is not perfect

Ultimately, cloud gaming is still in its infancy. The technology requires a strong internet connection to work well, otherwise gamers will face performance degradation and latency issues.

Shooters and fighting games are particularly responsive.

Google Notably, the cloud gaming service Google Stadia was shut down in September just three years after its launch after problems finding the right product market for the platform.

Cloud gaming isn’t a huge market either. According to data from Omdia, cloud-enabled gaming services generated $5.1 billion in revenue in 2022, less than 15% of the $35 billion generated by console game sales.

However, the CMA is concerned that Microsoft could throttle the industry in the future as it becomes a mass-market technology. According to the CMA, cloud gaming revenue tripled year over year in 2022.

“What the CMA is doing is taking a forward-looking view of the matter and addressing concerns about where cloud gaming will end up in the future relative to its small size today,” Omdia said.

“Our forecast is that cloud gaming will grow rapidly, with revenue more than doubling by 2026.”

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