Consolidation for video game stocks has been on the horizon for years. Digital distribution of games for PC, mobile, and console devices has made the hit games of the past less meaningful and the advent of subscription models from Microsoft (NASDAQ:MSFT) and Apple has enabled a new generation of games with no upfront cost. The result has been a shift in how studios, console-makers, and digital distributors make money.
When Microsoft announced its $68.7 billion acquisition of Activision Blizzard (NASDAQ:ATVI), it solidified the company’s position atop gaming. Microsoft makes the leading Xbox console, has 25 million subscribers on Game Pass, would own 30 studios if the deal closes, and has one of the biggest cloud platforms in the world. The combination makes for a powerful force, with flexibility to dominate any market.
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It’s about the platform
What’s key about Microsoft’s acquisition and home-grown gaming business is the business model flexibility it allows. Here are four main monetization strategies that any of its 30 studios can use, depending on the content being produced:
- Subscriptions: Game Pass is an industry leader that gives subscribers access to multiple games for one monthly fee. The added content from Activision Blizzard will make attract additional subscribers.
- Franchise games: Microsoft can still sell some of the most popular games, like Call of Duty, individually.
- Advertising: The hot topic in gaming right now is advertising, and with billions of users on all of its platforms, Microsoft has the first-party data to monetize any game this way.
- Freemium: Mobile games that have had success with a freemium model can still be built on Microsoft’s platform.
The business model is flexible, and so are the devices it builds for. There are mobile games, console games, and PC games, with some being omnichannel. Gaming is also moving more to the cloud and so is Microsoft with its business software. In gaming, the company can leverage the Azure cloud tools to allow developers to distribute content to mobile, PC, and even console games.
Microsoft’s scale and flexibility are the key to making the Activision Blizzard acquisition a no-brainer. No other company can bring the same platform advantages to the table.
Microsoft’s key competitors in gaming
As Microsoft continues to play the role of the aggregator in gaming, we will see more consolidation in order to compete against Microsoft’s position. Sony, Electronic Arts, Valve (which operates the Steam gaming platform), and even Epic Games don’t want to be the last stand-alone competitor, so investors should expect some of these companies will also propose acquisitions.
On the smaller side, niche products for any of the gaming platforms will continue to pop up. These could be high-growth niche segments of the gaming market, and some may even be acquired, but strategically it’s hard to compete with these companies, especially as tools like Unity Software make it easier than ever to make and publish games across multiple platforms.
A new behemoth in gaming
Microsoft’s investments are big in gaming, but I think its vision is even bigger. The company wants to be everywhere gamers are, and it has the tools and studios to dominate the market. As we see midsized studios merge with each other or large tech conglomerates, I think we will see this aggregator model being successful. The rest of the gaming world is going to have to respond or risk being beholden to Microsoft, which can outspend and outcompete nearly everyone in gaming if this Activision Blizzard deal closes.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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