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Stewart Stanbury – Director of Business Development at Jagex explores how the recent spate of big name acquisitions in the games industry have been driven by the evolution of technology.
While big studio mergers and acquisitions are a staple of the games industry, the recent spate of big spending from the dominant industry players has raised a few eyebrows. Microsoft kicked off 2022 with the news that it was buying Activision Blizzard for a cool $68.7 billion. Combined with the purchase of Zenimax Media in 2021 (for the smaller but still impressive $7.5 billion) Microsoft has brought the powerhouses of Bethesda Game Studios, Arkane Studios, id Software and more under the Xbox umbrella, placing itself in a now dominant position in the video game space.
Microsoft’s biggest rival Sony Interactive Entertainment responded by showing it hadn’t been sitting on its hands when it revealed its plan to purchase Bungie for $3.6 billion – a move that many see as a poke in the eye for Microsoft given that Bungie were once a Microsoft studio, becoming independent in 2007 before signing a ten year publishing deal with Activision in 2010. Interestingly the deal with Sony allows Bungie to remain more or less independent and self-publish games if they wish. Outside the big console makers, Take-Two Interactive (owners of 2K Games and Rockstar Games), announced it was acquiring mobile gaming giant Zynga for a hefty $12.7 billion.
But why now? As fun as it may be to imagine Sony buying Bungie in response to Microsoft and Activision, these deals can take months if not years to iron out – so both companies must have been planning similar moves for a while. The rationale for these high level consolidations are hotly debated, but many agree it is about securing valuable IP, talent, making good on the tech investment of the last console generation, and securing content for the future of an increasingly competitive market.
For context it’s important to acknowledge that physical consoles are loss leaders for Microsoft and Sony; they cost considerably more to produce than they recoup through their sales alone. Most of the revenue comes from the sales of games and services provided through the consoles’ ecosystem – which is arguably one of the reasons we’re seeing a splurge at this point in their life cycles. IPs with proven track records of big sales figures make ideal acquisition targets. This has been the case for a while, but the recent shift in the games space towards “Live Service” games (games that receive substantial/revenue generating updates for years beyond their initial release) means that these popular IPs can offer a steady stream of revenue from over-and-done releases they may have provided in the past.
This games-as-a-service model (GaaS) sounds good on paper from a revenue perspective, but this model requires significantly more upkeep in terms of relevant, curated content creation, which naturally increases the need for talent and manpower. This is something we are particularly invested in at Jagex; GaaS’s started with Massively Multiplayer Online games – games that offered a subscription model in exchange for a constant release of new, relevant content to keep the player engaged in the long term.
This model has evolved over the years to include games offering free-to-play options that include microtransactions and, more recently, “Netflix” like services offering a selection of games for a monthly fee – such as Microsoft’s Xbox Game Pass. When it comes to the big player acquisitions, it is easy to see the rationale behind them in relation to this new paradigm. Microsoft’s Xbox Game Pass is already a phenomenal success with millions of subscribers worldwide, and bringing Bethesda, Blizzard and Activision titles to the service will only mean more customers and higher retention. It will also mean that those games will likely not appear on Sony’s newly revamped PlayStation Plus service, highlighting the enduring value of exclusivity.
These ecosystems have only been made possible thanks to significant steps forward in hardware and infrastructure necessary for modern, multiplayer centric gaming. The proliferation of high-speed Internet, an increased focus on backwards compatibility, and game longevity have made more games accessible through these services than ever before. The subscription service model translates to value in bigger back catalogs that can be exclusively controlled and leveraged. However, a lot of the bigger titles being worked on by the recently acquired publishers look to be bucking this trend towards exclusivity, with various commitments from Microsoft and Sony that games from some publishers would continue to be available on rival platforms.
So in the short term the recent surge of acquisitions could be attributed to the main players of the industry securing content and talent for their growing GaaS services, making sure they have the best games while obfuscating a direct path to revenue for their rivals. On the broader stage, these acquisitions could also be seen as the gaming giants “circling the wagons” against outside forces looking to move in on the space. After all, Activision was only sold to Microsoft after an unsuccessful attempt to sell itself to Facebook’s parent company, Meta – the result of which would have given the company a significant stake in the gaming market.
Additionally, on the longer timescale, the influx of cross platform compatibility may be pointing to a more significant shift in the games industry’s modus operandi. Especially when paired with recent comments from Sony Interactive Entertainment president and CEO Jim Ryan. In late 2021 he described how he wanted the PlayStation to reach hundreds of millions of users around the world – something he said was not feasible with the current console model where players need to spend £400-£500 to buy into the ecosystem. This is remarkably similar to comments made by Microsoft’s Phil Spencer in the last few years, particularly in regards to cloud gaming and a mostly first world, city-centric high-speed Internet infrastructure.
While the cloud gaming space is currently best known for not quite living up to its potential (Google Stadia stands out as a warning), the main issues holding it back are a combination of infrastructure and entrenched consumer habits, issues which most big movers in the gaming space believe will resolve themselves naturally over time as availability and convenience increase while cord-cutting mobile networks add a feasibility of high-speed connectivity at increasingly lower price points. Having a library of exclusive games that consumers can play anywhere for a flat fee is what many consider the end goal for both Microsoft and Sony. Not only would this mean they can de-prioritise loss leading physical consoles, but they could also expand the reach of their influence, games, and brands to hundreds of millions of new global users.
Ultimately the driving force behind these acquisitions is expansion and security – specifically being able to offer more content to more long-term customers, generate more brand loyalty and ultimately bring in more money via a controlled and curated ecosystem. While the approach, methods and resources differ, the ultimate goal remains the same. The shift away from the traditional release model and towards GaaS leaves a lot more room to maneuver for the established gaming mainstays, and acquisitions are just one tool they are using to secure their space in the future of gaming and entertainment. As a result, the recent run of consolidation is likely to continue, both at the high end and increasingly around the mid-market, publicly listed game developers and publishers who continue to see their stock price cool from their pandemic related peaks, eager to capitalise in the short-to-medium term.
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