Microsoft is betting its future on cloud gaming, but that’s what broke the Activision deal

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

Peter Summers | Getty Images

When Microsoft announced a purchase offer Activision Blizzard at $68.7 billion, it marked one of the largest acquisitions in video game history — and the largest ever for the Redmond, Washington-based tech giant.

The US tech giant had many reasons to buy Activision. Activision owns many popular game franchises – Call of Duty, World of Warcraft and Candy Crush Saga.

Microsoft will be getting a lot of content to add to its Xbox gaming division. And it would add a host of talent to its in-house game studios that could help develop new games.

But the big thing, and what Microsoft is betting on for its gaming future, was cloud-based gaming, which ultimately held the key to the company’s multibillion-dollar bid to swallow Activision when UK regulators moved to block the deal on Wednesday.

What is cloud gaming?

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

Traditionally, you need special hardware like an expensive console or computer to play a game.

Things have improved over time with the development of smartphones, and now there are even major studio-quality games that can be played on phones, such as Call of Duty Mobile.

But what cloud gaming offers is a service where you can stream different titles in real-time from the company’s remote data centers, just like you would movies or TV shows. Netflix.

Microsoft has invested huge amounts of capital and time to make cloud gaming a core part of its gaming offering. The company added cloud gaming as a free benefit to its Xbox Game Pass subscription product, which offers people access to many titles for a monthly fee.

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

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

With the current generation of consoles that were released in November 2020, it has been more of the same. According to the latest quarterly data, the PS5 has sold 32 million units so far.

Microsoft doesn’t release unit sales in its results, but video game data site VGC estimates that its Xbox Series X and S consoles have sold just north of 20 million units over their lifetime.

Microsoft CEO Satya Nadella outlined the company’s vision for cloud gaming and the inclusion of 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 the platforms they play on. And that’s our goal,” Nadella said.

“We love console, Xbox, we love PC, we love mobile. We love xCloud, which is a streaming service so you can even play on your TV and what have you.”

“Activision is a fantastic partner for us today and 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 a merger review published on Wednesday, the CMA said it was concerned that Microsoft’s dominance in cloud gaming could harm competition in that particular market.

“Allowing Microsoft to take such a strong position in the cloud gaming market just as it is starting to grow rapidly could jeopardize the innovation that is essential to the development of this opportunity,” the CMA said in a press release on Wednesday.

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

The CMA – in addition to other regulators and competitors such as Sony – fears that Microsoft could keep its popular Call of Duty, Warcraft and Diablo titles from other cloud gaming platforms in the future.

Call of Duty is Activision Blizzard’s crown jewel, selling huge every year. Its Warzone battle royale multiplayer mode alone was played by more than 6 million people in the first 24 hours of its release.

This makes it a very attractive feature for a company like Microsoft. Think about it like this Nintendo announcing that he was going to buy Electronic artand it had a subscription service where you could pay $10 a month to play every new FIFA soccer game the day it came out.

Activision Blizzard CEO on blocked merger: It was the wrong decision on all counts

In addition to Xbox, Microsoft also owns the cloud computing platform Azure, which is used by thousands of businesses for data storage and computing power.

“While Microsoft has partnered with third-party cloud game providers to provide certain ABK titles to their services, this does not necessarily mean that these companies will receive unlimited access to those games by default,” analyst firm Omdia said in comments to CNBC via email.

“There will still be licensing terms, fees and conditions that operators must pay — fees that Microsoft will have otherwise acquired as part of the acquisition.”

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

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

Cloud gaming isn’t perfect

However, at the end of the day, cloud gaming is still in its infancy. A strong internet connection is required for the technology to work well, otherwise players will experience decreased performance and latency.

Shooters and fighting games are particularly demanding in terms of responsiveness.

Google killed cloud gaming service Google Stadia in September, just three years after its launch, as it struggled to find a suitable product market for the platform.

The cloud gaming market is also not a big market. Cloud-enabled gaming services generated $5.1 billion in revenue in 2022, according to Omdia, which is less than 15% of the $35 billion in console game sales.

But the CMA is concerned that Microsoft could hold back the industry as it becomes a mass-market technology. According to the CMA, cloud gaming revenue will triple in 2022 compared to the corresponding period of the previous year.

“The CMA is taking a forward-looking view of this issue, given the concerns about where cloud gaming will go in the future compared to its small size today,” Omdia said.

“Our forecasts show that cloud gaming is growing rapidly, with revenues more than doubling by 2026.”

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