MeterMicrosoft is the forgotten tech giant. Although it is the world’s second-largest public company by market capitalization, it is excluded from the Big Five acronym – FAANG – along with Facebook, Amazon, Apple and Google, while Netflix accounts for 7%. Even adding them to the equation (GAFAM seems to be the most popular sort, although it should really be MAMAA given Google and Facebook’s rebranding to Alphabet and Meta), Microsoft has avoided the scrutiny its peers have received.
Part of this has to do with the company’s source of profit. Microsoft’s consumer brands are large and popular, but they don’t seem like unstoppable behemoths compared to other MAMAAs. Amazon dominates e-commerce; Meta owns the social network; Alphabet dominates web browsers, email and search; and Apple can practically print money with the phone, arguably the most successful consumer product ever created. Still, Microsoft makes money from enterprise sales and cloud computing, and its uninterrupted power over the desktop operating system appears to be a relic of the past rather than a meaningful current focus.
The company has been making the most of the situation. Its president, Brad Smith, is the second most powerful person at the company after Chief Executive Satya Nadella, and he is known as a leader in the tech industry pro-regulatory forces. When we met in the hazy past of 2019, he warned that the industry would soon feel the backlash against years of “acceptable if legal” behavior, months after he took aim at Apple, because Apple can get up to 30% of all economic activity on the iPhone.
The same strategy allowed Microsoft to lean in a market where its competition lagged behind, supporting policies and practices where its costs were low but its competitors’ costs were high. In February 2021, Smith approved an Australian proposal requiring payment for news content, accepting a small fee from Microsoft’s Bing to support Google’s massive content. Two months later, the company eliminated its own Windows Store fees, putting pressure on Apple and its huge App Store profits.
For a while, this approach worked. Compare the two acquisitions: In 2021, Facebook tried to buy a VR developer called Within, which made a hit fitness app for Oculus called Supernatural. The deal was valued at just $400 million, which is a lot of money for a Facebook acquisition, but a lot of money for a company with one major product in a fairly niche industry. Still, the US Federal Trade Commission (FTC) filed a lawsuit in July to stop it, arguing that “Meta is trying to buy its way to the top.”
However, just a few months before buying Within, Microsoft managed to pull off an even bigger coup: paying $7.5 billion for ZeniMax, the video game publisher behind titles like Skyrim, Doom and Fallout. The deal went off without a hitch, giving Microsoft a flagship roster of first-party developers and hundreds of games to offer for free to subscribers of its Xbox Game Pass service.
Now, though, Microsoft’s nonstick coating is wearing off. In January 2022, the company announced yet another planned acquisition, and it was a massive one: $68.7 billion in cash for the creators of World of Warcraft, Candy Crush, StarCraft, and Call of Duty. Giant publisher Activision Blizzard.
It’s clearly hoping the acquisition goes as smoothly as it did with ZeniMax. Despite the obvious strategic benefits, the acquisition feels like a spur of the moment, with the company’s stock price plunging following months of legal wrangling over the sexual harassment scandal, and Activision Blizzard’s own poor financial performance.
Instead, Microsoft found itself mired in investigations around the world. The European Competition Commission, the UK’s Competition and Markets Authority and the Federal Trade Commission have all launched investigations into the takeover and moved to block it in December. The first pretrial hearing in the case will begin today, January 3.
The acquisition was controversial not just because of the buyout cost, but because of one game: Call of Duty. The military shooter series is one of the most commercially successful game series of all time. Few other games have guaranteed sales like Grand Theft Auto or The Legend of Zelda, rare in a release calendar averaging around two releases per decade.
Call of Duty, by contrast, is a machine rebuilt by Activision. Three development studios take turns producing a new title each year, with many smaller units providing support in roles such as asset creation and playtesting, while a new wildly successful free-to-play Fortnite competitor, Warzone, plugs in on top of the whole thing. Bolt. The cinematic single-player campaign is known for its interactive blockbusters, but it’s the multiplayer that dominates the series.
There are other benefits to acquiring the company. Microsoft could use King, the Activision Blizzard subsidiary that made Candy Crush, to gain a foothold in mobile gaming, or bring the 9 million players who still subscribe to World of Warcraft into the Game Pass ecosystem. But at its core, this purchase is about Call of Duty — and Game Pass in particular.
Microsoft has always been very clear about what it doesn’t want to do. It’s not about making Call of Duty an Xbox exclusive. The company has committed to signing a “consent decree” that, if accepted by the FTC, will bind it to offer the game on other platforms. It has struck a deal with Nintendo to bring the series to the Switch, the first game to be available on a Nintendo console since 2013’s Ghosts.
But in the eyes of industry insiders, Microsoft’s competitors — mainly Sony, which makes the PlayStation — are not concerned about narrow exclusivity. Instead, it’s about what happens to the industry if Xbox becomes the best place to play Call of Duty, either because it was developed for those platforms but half-heartedly ported to others, or simply because it It’s free via Game Pass on Xbox and £70 on PlayStation.
They worry that the center of gravity of online gaming will gradually shift to the Xbox: first with Call of Duty players, then with people who play other games, and then with everyone who plays online games.
It might be hard to feel sorry for Sony, the undisputed market leader in home consoles and having used its clout to win battles before, but regulators are paying attention. After five years of being the gentle giant everyone likes to forget, will Microsoft in 2023 remember why its competitors live in fear of antitrust enforcement?
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