Microsoft's giant bet on Activision Blizzard is its ticket to the metaverse

Analysis: The Windows maker's decision to drop so much cash shocked almost everyone. But a few telling statements from its senior leadership team and ongoing industry trends may lend some key insights.
Written by Michael Gariffo, Staff Writer

Microsoft sent shockwaves through pretty much every corner of the tech industry when it announced its plans to acquire game publisher Activision Blizzard. The $68.7 billion ($95 per share) transaction is Microsoft's largest acquisition ever, and will create the third largest gaming brand in the world, behind Japan's Sony and China's Tencent. It will serve as a foundation for the creation of Microsoft Gaming, a new division that will encompass the entirety of the Windows maker's PC, console, and mobile gaming brands, as well as one other very important – indeed, perhaps even more important project: its plans to enter the 'metaverse'. 

As with any transaction of this size (more than double the company's $26.2 billion purchase of LinkedIn), there are plenty of big questions that need to be answered. Why is Microsoft willing to spend so much cash on a game publisher? What's any of this got to do with the metaverse? And crucially: why Activision Blizzard? 

SEE: Microsoft's biggest acquisition yet: Game developer Activision Blizzard for $68.7 billion

But first it's important to fill in a bit of the background that makes this deal more intriguing than even the massive price tag suggests. 

Microsoft's gaming history

Microsoft's first attempt at entering gaming came in the form of a now-infamous attempt to acquire Nintendo in late 1999. The bid resulted in the company being essentially laughed out of Nintendo's offices and embarrassed to the point that it took two decades for it to make official documentation from the humiliation publicly available as part of a virtual museum it created to celebrate the 20th anniversary of the Xbox brand. 

That letter, and its existence in the type of virtual space the metaverse is expected to become, is a perfect encapsulation of Microsoft's journey in the gaming space. It has bounced from that first attempt to purchase a gaming giant through to being a pioneer of the ongoing evolutions of the internet, with virtual reality, video conferencing, entertainment, and online commerce all rolled into one. But, let's not get ahead of ourselves – here's a quick potted history of how Microsoft's gaming ambitions developed:

  • March 10, 2000: Bill Gates unveils the original Xbox console at the Games Developers Conference. The company would go on to acquire Bungie to secure its then-unknown Halo franchise as an exclusive launch title for the console and would found Microsoft Game Studios to kick off its first attempts at in-house development.
  • November 14, 2001: The original Xbox arrives for sale in North America. It goes on to sell about one million consoles in its first three weeks and over 24 million during its lifespan. 
  • November 15, 2002: Xbox Live launches to power Microsoft's online gaming ambitions.
  • November 22, 2005: The Xbox 360, Microsoft's second-generation console, launches. 
  • October 5, 2007: Bungie parts ways with Microsoft to become an independent company. Microsoft goes on to create 343 Industries to continue the Halo series, pushing its in-house development efforts to the forefront of its strategy.
  • May 21, 2013: Microsoft unveils the Xbox One, its third-generation console. 
  • September 2014: Microsoft acquires Mojang, the developer of the massively popular Minecraft franchise for $2.5 billion, signaling a new uptick in its willingness to spend cash on game development. 
  • November 10, 2020: Microsoft debuts its current-generation consoles, the Xbox Series S and upgraded Xbox Series X.
  • September 2021: Microsoft, still riding the momentum of the perennially popular Minecraft platform, acquires ZeniMax Media, parent company of Bethesda Softworks for $7.5 billion. 

This takes us very close to today, and into the latest and most expansive era of Microsoft's on-again, off-again focus on gaming investments. When it happened, the acquisition of Bethesda Softworks parent company ZeniMax was seen as confirmation that a company that, at times, seemed to almost forget that it owned the Xbox brand was once again turning its gaze, full force, onto the games industry. The $7.5 billion purchase price raised many eyebrows, but brought with it blockbuster franchises like The Elder Scrolls series, Fallout, Doom, Dishonored, and many, many more. 

It also brought some of the biggest games on the market under the umbrella of its Xbox Game Pass service as future exclusives. The service had launched in 2017, but had never really gained the traction Microsoft would like. The need to bolster Game Pass with top-tier exclusives was at the heart of Microsoft's willingness to shell out that $7.5 billion. Phil Spencer, who is now a key figure in the Activision Blizzard buyout, made this point very clearly in an interview early last year. 

Activision Blizzard's ongoing issues

Activision Blizzard is a company that's been everywhere in the news lately, for all the wrong reasons. Before mid-2021, the organization was best known for its AAA franchises, such as Blizzard's World of Warcraft and Overwatch brands, as well as Activision's massive hits like the Call of Duty series, and mobile games like Candy Crush, which are developed under the company's King brand.

But in July 2021, California's Department of Fair Employment and Housing filed a lawsuit against it over "numerous complaints about unlawful harassment, discrimination, and retaliation." The agency called Activision Blizzard out for maintaining a corporate culture where female and minority workers were not only frequently sexually harassed, marginalized, and underpaid, but also had their complaints over the incidents ignored, dismissed, or squashed. A Wall Street Journal report claims current Activision Blizzard CEO Bobby Kotick was aware about some sexual-misconduct allegations for years. 

Since then, the company has seen: the departure of Blizzard's co-lead Jen Oneal – who said she was paid less than her male counterpart, Mike Ybarra – after specifically being tapped to help clean up the toxic workplace culture within Activision's Blizzard structure; the launch of a US Securities and Exchange Commission (SEC) investigation into the company's handling of employee complaints over sexual harassment and misconduct; numerous high-ranking executives departing the company; the loss of several major sponsors; and multiple employee protests over the lack of progress in addressing the issues. This final element culminated in a walkout of thousands of Activision Blizzard employees, 700 of which signed a petition demanding that CEO Bobby Kotick be removed.

So after all this, you might be wondering why Microsoft would still be interested?

The answer appears to come down to two things: Xbox Game Pass and the metaverse. The Windows maker seems to see these two very important factors as integral to its future in not just the gaming space, but in industries like entertainment, communication, and the many, many others the metaverse is expected to touch on as well. 

The metaverse

The metaverse is currently one of the tech world's biggest buzzwords, and a hot target for investors on par with quantum computing, cryptocurrency, and Web3. Despite its recent popularity, the term dates all the way back to the 1992 novel Snow Crash, a creation of Neal Stephenson that is considered one of the seminal works of the "cyberpunk" subgenre of science fiction. 

While we've yet to achieve anything like the entire virtual universe Stephenson laid out, we have made early attempts at things that vaguely resemble a metaverse. The best known of these is likely Second Life, an online platform that supports everything from games, to social networking, to online sales, and business interactions. 

SEE: Facebook: Here comes the AI of the Metaverse

Late last year, Facebook decided that it would take the ideas pioneered by Stephenson, Second Life, and other virtual reality and multimedia endeavors and run with them full force. Its decision to change the name of its parent company from Facebook to Meta in part reflects the level of commitment to this new line of business it currently holds. Thanks to the success of the company's Oculus Quest (now Meta Quest) line of VR headsets, it now has both the financial means and a retail hardware entry point to create what it thinks will essentially be the next stage of evolution for the internet in virtual reality

Rather than visiting websites or (gasp!) physical stores to shop for clothes, imagine strapping on a headset and entering a virtual boutique where your customized avatar can try on that dress or business suit while browsing the digital racks and interacting with real, live advisers working for the companies that created these shops in the new metaverse. The same scenario can be applied to business meetings, educational classes, live entertainment, and, of course, gaming. This last point is the most important because it is at the very crux of why Microsoft suddenly feels the need to spend so much money on a company that makes games. Simply put, games are the key to the metaverse, and Microsoft knows this. 

Gaming companies hold the key…

Ever since Disney released Tron in 1982, and indeed long before that, games have been seen as a prime way of entering a virtual world. 

Gaming technology has always been at the forefront of developing the hardware and software we need to explore virtual spaces. 

A company on the scale of Activision Blizzard staffs thousands upon thousands of employees that have the skills and tools necessary to design the virtual worlds that companies like Facebook and Microsoft believe we'll soon be inhabiting. Whether your task is designing the interfaces to get us there, or the virtualized physical spaces themselves, someone (probably hundreds of someones) within Activision Blizzard can help you do it. 

The driving force behind Microsoft's choice was likely the fact that, in addition to providing the talent Microsoft needs to stake its claim in the nascent metaverse, Activision Blizzard comes with another very important thing for its new owner: one hell of a back catalogue. In fact, incoming CEO of the newly created Microsoft Gaming division, Phil Spencer, has already promised that his company will "offer as many Activision Blizzard games as we can within Xbox Game Pass and PC Game Pass, both new titles and games from Activision Blizzard's incredible catalog." 

Assuming the transaction passes all necessary approvals, Halo will live under the same umbrella as Overwatch and Call of Duty, Age of Empires will sit in the same online store as Civilization, and Forza will motor along right beside Crash Bandicoot.

Does Microsoft really know what it's getting into?

First, Microsoft's choice to create the new Microsoft Gaming division with CEO Phil Spencer, an aforementioned co-architect of Xbox Game Pass, at its head is indicative of where its thought processes are heading. Spencer already called out Activision Blizzard in a leaked memo to Microsoft staff, previously published by Bloomberg

So, what is Spencer saying now? Well, both he and Microsoft CEO Satya Nadella addressed the issue in their statements to staff on the transaction, which The Verge obtained.

While it noted that the company has a "mission to extend the joy and community of gaming to everyone," it also said that "creative success and autonomy go hand-in-hand with treating every person with dignity and respect," and it also promised that Microsoft will "hold all teams, and all leaders, to this commitment." 

Meanwhile, Nadella notes Microsoft's plans to bring its goal of creating a "more diverse and inclusive culture to our new colleagues at Activision Blizzard," and its intention to foster a "safe and welcoming environment – one where everyone feels empowered to do their best work."

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The only other topic that Microsoft's chief exec talked about with equal passion was Activision Blizzard's importance to his company's future in not just gaming, but in the metaverse as well. Nadella noted that gaming is "the largest and fastest-growing form of entertainment, and as the digital and physical worlds come together, it will play a critical role in the development of metaverse platforms." Even at Microsoft's highest levels of leadership, gaming is being seen as a gateway through which Microsoft can profit in the short term, and leverage owned assets to develop its metaverse aspirations in the years to come. 

Whether or not the Redmond-based company can change Activision Blizzard remains to be seen. It's also not clear what this means for Kotick. The CEO's own statement, also obtained by The Verge, makes no mention of his continued presence in the leadership role following the closure of the transaction. Nor does he appear in the newly released Gaming Leadership Team image shown within Microsoft's blockbuster press release.  

The Wall Street Journal is also reporting that internal sources have confirmed Kotick will depart following the deal's closure.

What's next for the transaction? 

Microsoft is obviously not an inexperienced company when it comes to highly strategic acquisitions, nor is it likely to have spent nearly $70 billion if it didn't have a real, workable plan in place. While it may take weeks, if not months, before we begin to get a taste of what it has in store to polish Activision Blizzard's tarnished image, you can be sure efforts are already underway to shine one of the biggest parts of the engine Microsoft is now constructing to power its extremely important, very expensive entry into the metaverse.

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