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Microsoft bets on the metaverse

By Charles Henry Monchau, CIO, and Christoph Kirsch, Investment Advisor, at Bank Syz

This week, software giant Microsoft announced a deal to acquire the American video game publisher Activision Blizzard in an all-cash transaction valued at $68.7 billion ($95 / share). What are the strategic reasons behind this gaming mega-deal?

Video Games: a booming industry

Global gaming is one of the fastest growing categories in the Media industry. Video games attracted an estimated ~3B gamers globally, a number which is expected to rise to 4.5B by 2030. As of today, the video games industry generates more revenues than movies, music, and books combined.

Over the last decade, gaming has greatly transformed itself:

  • Mobile has brought a console into everybody’s hand, democratizing gaming far beyond young male teenagers. Today women and elders have become new population of gamers (think of your grandparents playing Candy Crush). Today, mobile gaming makes up about half of all revenues generated by the industry.
  • Digitalization: a few years ago, video games were bought at a retail store (ex. GameStop). They can now be downloaded in minutes from home on various digital platforms. This convenience has not only decreased the friction of the purchase act, but it has also allowed gaming companies to stop sharing part of their profits with the distribution network.
  • The revenue stream has changed. Before, a video game was generating revenue only when it was sold on a stand-alone basis. With the “free-to-play” model, players can start playing a game for free and later purchase in-game items and/or upgrade their subscription to level up faster (commonly known as in-game purchases). Other games offer extensions and online passes. Altogether, games can now generate 2-3x more revenue than their original purchase price. Another type of revenue model has been introduced by streaming services (e.g Netflix) which give gamers access to a library of content (here games) for a fixed monthly fee, improving the recurrence and visibility on revenues for gaming companies.
  • E-sports: nowadays, teenagers can spend more time watching people playing than playing themselves. This has been unlocking tremendous market opportunities for gaming companies since they can now negotiate license fees with broadcasters (pay per views) and advertisement companies that want to associate their brands with these new sports idols. For instance, one of the latest TV ads by Coca Cola features e-sport players. Apparel companies are already sponsoring e-sport teams, football clubs now create their own e-sport team, etc.

 

On top of the secular trends aforementioned, the gaming industry has enjoyed three recent tailwinds:

  • Covid-19: People were locked at home, sometimes with no jobs, giving them time for home entertainment, which of course includes gaming.
  • A new hardware generation: the launch of PlayStation 5 and Xbox Series X as well as VR headsets (ex. Oculus) is opening a new realm of possibilities.
  • The Metaverse: Today, gaming is probably the closest thing to the definition of the Metaverse – a virtual world where people can connect. It is therefore not a surprise to see the growing popularity of this theme bringing back the gaming space on investors’ radar while encouraging companies from all horizons to assess how they could benefit from its development.

As companies target the Metaverse, gaming is also becoming increasingly relevant given its collection of virtual communities.

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