GameLook report/Since the announcement on January 18, 2022, Microsoft’s acquisition of Activision Blizzard for US$68.7 billion has set a record for the highest merger and acquisition value in the global game industry. However, this shocking merger and acquisition did not go smoothly. In addition to the dismantling of old rival Sony, it also encountered investigations and obstructions from regulatory authorities in various countries.
However, with the victory of two recent court decisions, the combination of Microsoft and Activision Blizzard is just around the corner.
Beijing time on July 20th, Microsoft and Activision Blizzard jointly announced that they would postpone the transaction deadline for three months in order to clear the final hurdle in order to resolve the regulatory obstacles behind the merger. According to a motion published on the official website of the US Federal Trade Commission (FTC), Microsoft also urged the FTC to withdraw its lawsuit against the merger to an internal judge on the same day.
Microsoft mentioned in the motion, “The revocation of the ruling is not only necessary, but also in the public interest. The district court has ample opportunity to consider the FTC’s appeal and believes that for multiple, independent and sufficient reasons, the FTC’s appeal is unlikely to succeed.” In this regard, the FTC did not comment.
In addition, Activision Blizzard also announced the 2023Q2 performance report on the same day to “report the good news” to the capital market.
Deadline postponed by three months, Microsoft Activision Blizzard is almost a foregone conclusion
Microsoft’s acquisition of Activision Blizzard not only set a record for the acquisition amount of the game industry, but also became one of the most eye-catching topics in the global industry in the past year or so. Of course, the most important reason is because of some confidential data released in the lawsuit and the attitudes of regulatory authorities in various countries towards this transaction.
In fact, Microsoft’s acquisition of Activision Blizzard faces the biggest resistance, which is the antitrust investigations from the United States and Europe, especially the Competition and Markets Authority (CMA) in the United Kingdom and the FTC in the United States. As Microsoft’s old rival who least expects this acquisition to succeed, Japan’s antitrust regulator, where Sony is headquartered, took the lead in approving Microsoft’s acquisition of Activision Blizzard.
In February of this year, the CMA proposed a stern improvement plan to Microsoft, saying that the agency only supports Microsoft’s acquisition of Activision Blizzard on the premise of completely spinning off the “Call of Duty” business. However, under Microsoft’s unremitting efforts to sign cross-platform contracts and conduct new market research, CMA also let go, saying that the acquisition of “Call of Duty” IP will not significantly limit competition in the field of console games, and will be motivated to keep “Call of Duty” on the PlayStation platform.
On July 12, the U.S. federal judge rejected the FTC’s application to block the transaction case and announced that Microsoft had won the case, saying that “the court found that the FTC did not prove that the acquisition of this specific vertical field of the industry would significantly restrict competition. On the contrary, the existing evidence proves that consumers will have more channels to consume content from Call of Duty or Activision Blizzard. Therefore, the motion to apply for a preliminary injunction is denied.”
Soon afterwards, the British CMA expressed its willingness to negotiate with Microsoft to explore remedial measures, which means that the merger between Microsoft and Activision Blizzard is getting closer to success. The Nasdaq Stock Exchange in the United States even issued a notice on July 14, saying that Activision Blizzard will be removed from the “Nasdaq-100 Index” from July 17 (Monday). Many analysts believe that this move may mean that Activision Blizzard may be delisted from the U.S. stock market before the opening of next week’s trading day at the earliest.
In addition, according to the M&A contract, if Microsoft fails to complete the acquisition on time, it will need to compensate Activision Blizzard US$3 billion.
Allowing Activision Blizzard to delist and force a merger can allow Microsoft to complete the transaction according to the previously agreed time and avoid a liquidated damages of US$3 billion. However, before the FTC and CMA two major regulators have not yet made their final stand, doing so is obviously detrimental to future business and company development.
Therefore, the two companies negotiated and decided to extend the deadline to October 18, but on the condition that the liquidated damages be mentioned up to a maximum of 4.5 billion US dollars. The revised terms stipulate that if the deal is terminated after August 29, Microsoft will need to pay Activision Blizzard $3.5 billion, and if the deal is canceled after September 15, Microsoft will need to pay Activision Blizzard $4.5 billion.
In terms of lawsuits, although the FTC has lost the lawsuit, and the lawsuit filed with the Ninth Circuit Court of the United States was also dismissed by the original judge, but in addition to legal means, the FTC also submitted an application to its internal judge to block the merger by administrative means. This is why Microsoft urged the FTC to withdraw the lawsuit on the FTC official website.
In addition to the FTC, the CMA, which has not expressed its position for a long time, is also the last hurdle that Microsoft needs to cross. The reason why the two companies set the date in the revised agreement on August 29 is because the CMA extended the final ruling period of the case to this day. If the CMA ultimately refuses to pass the merger, Microsoft will have to pay $3.5 billion in liquidated damages.
Judging from the revision of the agreement, Microsoft has considered this merger thoroughly, and the extra three months also left enough time for the two companies to deal with emergencies. But from a global perspective, once the British and American regulators pass, the largest merger in the history of gaming is likely to be completed quickly.
Strong performance in the second quarter, King and Blizzard performed well
At the same time as the postponement, Activision Blizzard also showed the capital market an excellent 2023Q2 report card.
Activision Blizzard CEO Bobby Kotick said, “Our talented team has brought strong performance to our players and shareholders. This quarter, our net subscription (net bookings) increased by 50% year-on-year, operating income increased by more than 70%, and earnings per share increased by more than 80%. For the first time in Blizzard’s history, quarterly revenue exceeded $1 billion.”
He also emphasized in the financial report, “Most importantly, we continue to set new standards of excellence for workplace culture and provide joy and connection to hundreds of millions of players around the world. Although we remain concerned about the economy and increasingly fierce industry competition, we remain focused on our long-term future opportunities and the completion of the merger with Microsoft.”
The financial report shows that Activision Blizzard’s 2023Q2 (GAAP) net income is US$2.21 billion, net income from digital channels is US$2.01 billion, and the operating profit margin is 26%. On a non-GAAP basis, Activision Blizzard had an operating margin of 32%, diluted earnings per share of $0.91, and cash flow from operations of $590 million in the quarter, which tripled year-over-year.
In the second quarter, Activision Blizzard’s net subscription revenue was US$2.46 billion, a year-on-year increase of 50%, in-game net subscription revenue was US$1.56 billion, a year-on-year increase of 30%, and Activision Blizzard’s overall MAU number was 356 million.
Activision’s second-quarter revenue increased by 17% year-on-year, and net operating income increased by more than 80% year-on-year, mainly due to the overall growth of the COD series. As players continue to invest and engage in the Call of Duty: Modern Warfare 2 universe, COD saw strong revenue growth on PC and console, while CODM user engagement and revenue remained stable.
On the occasion of the 20th anniversary in October, the MAU of the COD series is close to 90 million, more than half of which are participating through mobile platforms, and the regional test of “COD Battlefield Mobile Game” is also steadily advancing.
Blizzard’s second-quarter revenue grew 160% year-over-year, and operating income almost tripled year-on-year, both breaking new quarterly records, thanks largely to the release of Diablo 4. In June, more than 10 million players experienced “Diablo 4”. Blizzard also announced that the revenue of the game exceeded 666 million US dollars within 5 days of its release, setting a record for all games in the history of Blizzard in the same period.
With the release of “Diablo 4”, Blizzard also found that the participation of “Diablo: Immortal” mobile game increased accordingly, and the internally developed action strategy mobile game “Warcraft: Arclight Rumble” was also tested. Blizzard also announced the release of “Overwatch 2: Invasion” on August 10, which will be the biggest season update, and plans to add new PVE story characters, new game modes, new hero progress systems, and new heroes.
King’s quarterly revenue increased by 9% year-on-year, or 10% year-on-year if calculated at constant exchange rates, mainly due to the strong execution of “Candy Crush Saga” online operations and purchases, and in-game net bookings increased by 10% year-on-year.
In the second quarter, King saw more gains from Peltarion, the AI company it acquired last year. The latter’s machine learning technology has significantly helped the production pre-test of Candy Crush Saga’s online operation and provided players with more relevant game content. King is also currently working on other use cases of generative AI to help its developers accelerate workflows, and King’s advertising business also grew year-over-year in the second quarter.
Blizzard Family Bucket logs in to Steam, Warcraft national server may have to wait for Microsoft to decide
There is another news that has attracted the attention of the industry. Blizzard officially opened the “Overwatch 2” page on Steam, and set the game launch date as August 10.
Blizzard mentioned in the announcement, “As a game studio, Blizzard wants everyone to have the opportunity to experience our universe with old friends and make new ones, no matter how they choose to play. We are very happy to announce that we will bring a series of games to the Steam platform, starting with Overwatch 2.”
In other words, the Blizzard family barrel is expected to log on to the Steam platform, but “as for the next Blizzard game that will be logged on to Steam, we will announce more information at the right time.”
Prior to this, Blizzard games were mainly distributed through battle.net, while in the Chinese market and other regions, they mainly operated through finding local agents. This kind of self-operated store is relatively common overseas. For example, Ubisoft and EA have their own game stores, but these stores have not brought a particularly large impact except for first-party games.
With “Overwatch 2” on the Steam platform, it means that Blizzard has begun to realize the shortcomings of its own store, and has begun to try to distribute its own games through more platforms.
Considering the popularity of Steam among domestic players, it is uncertain whether “World of Warcraft” will be opened to Chinese players through Steam. However, considering that “Overwatch 2” does not support the Chinese version, the Steam rake ratio, and the synchronization of players’ game progress and other issues, “World of Warcraft” is likely to be the last object of Blizzard’s consideration even if the possibility of logging in to Steam is not ruled out.
Of course, there are also rumors in China that “World of Warcraft” will soon finalize the domestic agent, but with the progress of Microsoft’s acquisition, it is unlikely that this issue will be finalized in the short term. Perhaps, it will be left to Microsoft to decide after the merger and acquisition dust settles.
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