Tech

Microsoft + Activision: Building The Netflix Of Gaming Part 2 (NASDAQ:MSFT)

Published

1 year ago

April 29, 2023

Sean Gallup

More than one year after my original analysis about the proposed acquisition of Activision (NASDAQ:ATVI) by Microsoft (NASDAQ:MSFT) they have yet to close the landmark deal, which would be Microsoft’s largest to date. The delay is clearly not due to a lack of effort as Microsoft and Activision have been battling it out with regulatory authorities worldwide. This week Microsoft suffered a major setback as the UK’s Competition and Markets Authority blocked the sale which may result in Microsoft fully abandoning its efforts to acquire the gaming company.

As a Microsoft shareholder, I would still like to see the deal go through, but based on my analysis I may be one of the few authors on SA who believe the CMA is right to fear Microsoft’s consolidation of the cloud gaming market. More on this later.

First, let’s take a look at the charts

Following the CMA’s announcement Activision’s share quickly tanked, dropping more than 10% in just a few hours. In the days following the announcement, its shares stabilized at around $77-78 a share but that’s still a far cry from Microsoft’s proposed purchase price of $95 a share.

While Activision’s share price took a dive Microsoft experienced just the opposite, shooting up at a rapid clip due to its upside earnings surprise and renewed strength in mega-cap tech stocks in general.

While I am not an M&A expert, I can add some value by discussing the potential benefits Microsoft and Activision could gain from them finally closing on this deal and help shed some light on why the CMA may be so concerned.

Overview: The Growth of Real-Time Interactive Experiences

To understand why Microsoft was interested in Activision in the first place let’s start with a discussion about the video game industry, what makes it attractive, and what makes it such a challenging space to operate in.

First, on a positive note, the video game industry is massive and growing.

What started as a niche industry targeting children and tech enthusiasts exploded in popularity worldwide as consumers gravitated to new forms of entertainment powered by increasingly powerful technology. Long gone are the days when video games entailed playing Snake on your Nokia, now with just a headset our mobile phones can be used as virtual reality devices where we can interact in real-time with friends from all over the world.

Best. Game. Ever. | Shaker Media | Flickr — Snake Game (Creative Commons)

Or maybe VR is not your speed, there are other games that are closer to interactive movies whereby the player can make decisions that have the potential to radically change the direction of the story. Detroit Become Human, has the player take the role of a detective where the choices they make determine if key characters live or die.

It’s my fundamental belief that we are moving to a world where entertainment becomes increasingly real-time generated, 3D, and interactive. These are all tailwinds benefiting the industry.

Such a massive shift in consumer preferences will create winners and losers. In my opinion, those that have the most to lose are the legacy providers of popular 2D content (movies + TV).

One of the largest of these companies, Netflix (NFLX), seems to be aware of this threat and is trying to adapt to remain relevant. In years past they launched interactive media experiences like Black Mirror Bandersnatch, a scripted live-action movie where watchers are asked to make real-time decisions about things like what cereal the character eats or what music they should listen to on the bus all the way up to some very big decisions… (which I will not spoil here!)

But beyond interactive movies, Netflix is making other moves in the interactive media space, notably their growing free games offering that is included in your Netflix subscription. But judging by the lack of news coverage, and what I’ve heard about the offering anecdotally I would venture to guess that Netflix’s games offering is off to a challenging start.

But Netflix does have one big head start, a huge customer base paying into a recurring revenue model.

The Power of IP

But a large subscriber base is not all that one needs to run a great media empire. Another challenge that Netflix has no doubt been feeling is the power of strong IP. As great as a huge subscriber base is Netflix simply lacks IP with the same clout as Disney’s Star Wars or Nintendo’s Mario.

The power of strong IP is clear, just look at the new Super Mario Bros movie which is already one of the all-time highest-grossing movies. Releases like Tiger King, Stranger Things, and Love is Blind, just can’t hold a candle to the strength of established IP.

It looks like Microsoft has learned the same lesson, IP is powerful. That’s likely a big part of the reason why they were attracted to Activision which has some of the highest-grossing IP in the industry vis-a-vis Call of Duty, Candy Crush, and many others.

Leveraging strong IP increases your chance of successful launch across all forms of content, from video games, to movies, to TV, to music.

IP is not a Silver Bullet

As essential as strong IP is, it’s not enough on its own to create a sustainable business that generates strong returns for shareholders, at least not usually.

You don’t have to look far for examples of this, even Activision itself has seen wildly fluctuating returns depending on the success of individual call-of-duty launches. Or alternatively, in the movie industry, massive commercial flops can torch hundreds of millions of dollars, even those based on strong IP like several of the latest Marvel movies.

When you are subject to the rapidly evolving tastes of consumers your financial success is dictated by whether you are able to hit that mark or not. And sometimes, despite best efforts, that mark is horribly missed.

The movie industry was slow to adapt, but Netflix forced them to. Now nearly all large movie studios own or have deals with a larger streaming service to get to lose lucrative recurring revenues.

But the video game industry has been even slower to adapt, in many ways it operates close to how it always has. Numerous individual studios invest huge resources into individual game launches and consumers buy the product one time. You can point to in-game purchases/DLC as positive steps in the right direction (at least positive for investors) but in the console market and PC market the industry is still overwhelmingly reliant on cranking out hit after hit.

As a caveat, the same cannot be said for mobile gaming which is largely built on a model of free-to-play games with recurring in-game purchases.

A Microsoft X Activision Combo could fundamentally reshape the industry

That’s where Microsoft and Activision come into the picture, I believe that the combination of these two could fundamentally reshape the industry, and that’s not me being hyperbolic, it’s my genuine belief. Here’s why:

Rolling in all of Activision’s IP into the Xbox Game Pass would combine all secret ingredients, powerful IP, a recurring model, and a massive audience could cement its position as the place to go for gaming.

Let’s take one hypothetical example to illustrate how this could drive value. Imagine a casual gamer, let’s call him ‘Kyle’, he only plays one game, the same game all his friends have, Call of Duty. The game, on its own, costs $70 a year. Let’s imagine Microsoft comes in with an aggressive offering, for $10 a month and you get access to all their games, new releases, and updates across your console, and mobile device. For each ‘Kyle’ that Microsoft can convert to its service, they earn more than 70% more than before ($120 a year vs $70). It becomes easier, and easier to convert more of these consumers as the portfolio of gaming properties on the service grows.

Given the strong profitability of its Azure cloud portfolio Microsoft can afford to invest heavily to make sure that the most important, most desirable games are on its platform. And if they wanted to, they have enough cash to continue the gaming shopping spree. If the deal is ultimately blocked, I think Microsoft will likely shift its sights to another studio.

Apart from Take Two’s Grand Theft Auto, and Nintendo, it’s hard to think of any other company with gaming IP anywhere near the quality possessed by Activision.

If they really wanted to, and I’m not suggesting they would do this, but if Call of Duty were made exclusive to Game Pass I believe they really could crush Sony, perhaps that is why the CMA is so fearful of the deal closing. Microsoft for its part, promises not to do that, but it’s easy to understand the threat that could pose should they go back on their word.

A brief word on the financials

Microsoft continues to execute on its cloud and office suite strategy, its Teams app continues to take share from Slack, showing off the power of the bundle. Azure, another growing category for Microsoft, is firing on all pistons, revenues have been stickier than many expected during the slowdown that started in 2022.

Revenues and EPS

After a slow decade of growth under prior CEO, Balmer, Satya Nadella has ushered in a new era of growth. Both revenues and EPS continue to grow despite macro challenges. Cloud helped Microsoft get to this point, but I believe that gaming could unlock that next leg higher if the Activision deal closes.

Return on Invested Capital

Unsurprisingly returns on capital have been strong, constantly generating doubt digits returns since the turn of the decade. As the cloud computing market matures I would expect these returns to moderate. Again, cloud gaming and its recurring revenues represent a potential catalyst to juice these levels over the coming decades.

Dividend and Buyback

As someone who is generally neutral regarding capital allocation, I don’t normally pay too much attention to dividends and buybacks as specific indicators in their own right. With that caveat, they can provide some indication to investors that management views the shareholders as owners that should be paid, not just third-party observers. They can also provide a sense of safety during times of increased market volatility and help nervous investors calm their nerves as they see the quarterly dividend check come in.

Conclusion

Microsoft and Activision are winning the competition, the combination of the two would make them the clear leader in the cloud video game subscription market. They could transform an industry reliant on mega-hits, to one based on recurring cashflows as subs become stickier over time.

Now all that’s left is for the transaction to be pushed over the finish line if regulators will get out of the way. Again, I am no legal expert, and this is purely speculation but I believe Microsoft will look to sue to push through the transaction. Given how fragmented the gaming market is it will be hard to prove this transaction is so anti-competitive to the extent that it should be banned. That said, I am not an arb-trader, but I will hold my Microsoft shares for the long term.

I rate Microsoft stock a Buy.

Thank You

I hope you enjoyed reading my article, if you have any questions or have another viewpoint you wish to share feel free to let me know in the comments. Have an amazing day!

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Tech

Introducing the PlayStation 5 Pro: The Next Evolution in Gaming

Published

1 hour ago

September 10, 2024

Harry Miller

Since the PlayStation 5 (PS5) launched four years ago, PlayStation has continuously evolved to meet the demands of its players. Today, we are excited to announce the next step in this journey: the PlayStation 5 Pro. Designed for the most dedicated players and game creators, the PS5 Pro brings groundbreaking advancements in gaming hardware, raising the bar for what’s possible.

Key Features of the PS5 Pro

The PS5 Pro comes equipped with several key performance enhancements, addressing the requests of gamers for smoother, higher-quality graphics at a consistent 60 frames per second (FPS). The console’s standout features include:

Upgraded GPU: The PS5 Pro’s GPU boasts 67% more Compute Units than the current PS5, combined with 28% faster memory. This allows for up to 45% faster rendering speeds, ensuring a smoother gaming experience.
Advanced Ray Tracing: Ray tracing capabilities have been significantly enhanced, with reflections and refractions of light being processed at double or triple the speed of the current PS5, creating more dynamic visuals.
AI-Driven Upscaling: Introducing PlayStation Spectral Super Resolution, an AI-based upscaling technology that adds extraordinary detail to images, resulting in sharper image clarity.
Backward Compatibility & Game Boost: More than 8,500 PS4 games playable on PS5 Pro will benefit from PS5 Pro Game Boost, stabilizing or enhancing performance. PS4 games will also see improved resolution on select titles.
VRR & 8K Support: The PS5 Pro supports Variable Refresh Rate (VRR) and 8K gaming for the ultimate visual experience, while also launching with the latest wireless technology, Wi-Fi 7, in supported regions.

Optimized Games & Patches

Game creators have quickly embraced the new technology that comes with the PS5 Pro. Many games will receive free updates to take full advantage of the console’s new features, labeled as PS5 Pro Enhanced. Some of the highly anticipated titles include:

Alan Wake 2
Assassin’s Creed: Shadows
Demon’s Souls
Dragon’s Dogma 2
Final Fantasy 7 Rebirth
Gran Turismo 7
Marvel’s Spider-Man 2
Ratchet & Clank: Rift Apart
Horizon Forbidden West

These updates will allow players to experience their favorite games at a higher fidelity, taking full advantage of the console’s improved graphics and performance.

Design & Compatibility

Maintaining consistency within the PS5 family, the PS5 Pro retains the same height and width as the original PS5 model. Players will also have the option to add an Ultra HD Blu-ray Disc Drive or swap console covers when available.

Additionally, the PS5 Pro is fully compatible with all existing PS5 accessories, including the PlayStation VR2, DualSense Edge, Pulse Elite, and Access controller. This ensures seamless integration into your current gaming setup.

Pricing & Availability

The PS5 Pro will be available starting November 7, 2024, at a manufacturer’s suggested retail price (MSRP) of:

$699.99 USD
$949.99 CAD
£699.99 GBP
€799.99 EUR
¥119,980 JPY

Each PS5 Pro comes with a 2TB SSD, a DualSense wireless controller, and a copy of Astro’s Playroom pre-installed. Pre-orders begin on September 26, 2024, and the console will be available at participating retailers and directly from PlayStation via direct.playstation.com.

The launch of the PS5 Pro marks a new chapter in PlayStation’s commitment to delivering cutting-edge gaming experiences. Whether players choose the standard PS5 or the PS5 Pro, PlayStation aims to provide the best possible gaming experience for everyone.

Preorder your PS5 Pro and step into the next generation of gaming this holiday season.

Tech

Google Unveils AI-Powered Pixel 9 Lineup Ahead of Apple’s iPhone 16 Release

Published

4 weeks ago

August 13, 2024

Harry Miller

Google has launched its next generation of Pixel phones, setting the stage for a head-to-head competition with Apple as both tech giants aim to integrate more advanced artificial intelligence (AI) features into their flagship devices. The unveiling took place near Google’s Mountain View headquarters, marking an early debut for the Pixel 9 lineup, which is designed to showcase the latest advancements in AI technology.

The Pixel 9 series, although a minor player in global smartphone sales, is a crucial platform for Google to demonstrate the cutting-edge capabilities of its Android operating system. With AI at the core of its strategy, Google is positioning the Pixel 9 phones as vessels for the transformative potential of AI, a trend that is expected to revolutionize the way people interact with technology.

Rick Osterloh, Google’s senior vice president overseeing the Pixel phones, emphasized the company’s commitment to AI, stating, “We are obsessed with the idea that AI can make life easier and more productive for people.” This echoes the narrative Apple is likely to push when it unveils its iPhone 16, which is also expected to feature advanced AI capabilities.

The Pixel 9 lineup will be the first to fully integrate Google’s Gemini AI technology, designed to enhance user experience through more natural, conversational interactions. The Gemini assistant, which features 10 different human-like voices, can perform a wide array of tasks, particularly if users allow access to their emails and documents.

In an on-stage demonstration, the Gemini assistant showcased its ability to generate creative ideas and even analyze images, although it did experience some hiccups when asked to identify a concert poster for singer Sabrina Carpenter.

To support these AI-driven features, Google has equipped the Pixel 9 with a special chip that enables many AI processes to be handled directly on the device. This not only improves performance but also enhances user privacy and security by reducing the need to send data to remote servers.

Google’s aggressive push into AI with the Pixel 9 comes as Apple prepares to unveil its iPhone 16, which is expected to feature its own AI advancements. However, Google’s decision to offer a one-year free subscription to its advanced Gemini Assistant, valued at $240, may pressure Apple to reconsider any plans to charge for its AI services.

The standard Pixel 9 will be priced at $800, a $100 increase from last year, while the Pixel 9 Pro will range between $1,000 and $1,100, depending on the model. Google also announced the next iteration of its foldable Pixel phone, priced at $1,800.

In addition to the new Pixel phones, Google also revealed updates to its Pixel Watch and wireless earbuds, directly challenging Apple’s dominance in the wearable tech market. These products, like the Pixel 9, are designed to integrate seamlessly with Google’s AI-driven ecosystem.

Google’s event took place against the backdrop of a significant legal challenge, with a judge recently ruling that its search engine constitutes an illegal monopoly. This ruling could lead to further court proceedings that may force Google to make significant changes to its business practices, potentially impacting its Android software or other key components of its $2 trillion empire.

Despite these legal hurdles, Google is pressing forward with its vision of an AI-powered future, using its latest devices to showcase what it believes will be the next big leap in technology. As the battle for AI supremacy heats up, consumers can expect both Google and Apple to push the boundaries of what their devices can do, making the choice between them more compelling than ever.

News

Microsoft Outage Hits Payment Processors

Published

1 month ago

August 2, 2024

Harry Miller

When major payment processing systems have problems, the issues impact many critical systems that society depends on. In this article, we’ll explain the cause of the Microsoft outage and discuss the impact computer networking issues had on Canada. We’ll also examine whether or not Microsoft was at fault and what businesses can do to prevent further outages.

What Happened With the Microsoft Outage?

The outage with Microsoft’s Azure payment processor resulted from a buggy security update from an outside company, CrowdStrike. CrowdStrike offers information technology security services for many Microsoft Windows computers. The company’s software developers sent a new update out, but instead of patching up minor issues with the existing software, the code within conflicted with Windows and prevented computers from booting up. Users expecting to start their computers for a typical day were instead faced with the dreaded “Blue Screen of Death” error message.

So, how does this produce a problem and a payment processor issue? Many computers running payment processing, among many other kinds of software used for airlines, banks, retail, and other essential services, couldn’t start and were unable to let payments through. This is a catastrophic issue for companies that are heavily reliant upon the speed and ease of an electronic transaction.

In Canada, the outage impacted critical computer systems for air travel. Flights couldn’t be paid for and booked, which caused major problems for customers unable to make transactions while flights remained grounded. Travellers stuck waiting for flights to take off made their way over to the airports’ Starbucks and other vendors, only to discover unusually long lines due to payment issues. Even online gamblers looking to take their minds off the situation couldn’t take full advantage of one of the fastest payment options out there because of the outage.

Aside from payments, hospitals for major health systems had to use paper to complete important tasks like ordering lab work and getting meals to patients. Emergency dispatch lines were temporarily unable to function correctly while their computer systems were down.

How Was the Outage Fixed?

Thankfully, CrowdStrike fixed the problem on their end quickly, mostly via an additional reboot that allowed CrowdStrike to send over unflawed code. Unfortunately, for some business and private customers, rebooting wouldn’t be enough with command-line level adjustments needed for the operating system to run correctly.

The Good and Bad of Outages

First, we’re thankful that the outage was not caused by hackers accessing and stealing a mountain of personal data. A recent outage with an automotive software provider went on for much longer and ended much worse for software provider CDK, which likely paid an undisclosed sum north of $20 million to get data back and systems restored.

By some chance, Microsoft is reported to have experienced its own outage, and many information technology professionals blame Microsoft in part for their issues because of how their systems attempted to fix the problem by rebooting over and over again, though some of Microsoft’s PCs needed to warn users to make a change manually. Unfortunately, any computer that required manual intervention took longer to recover, as a knowledgeable person had to access each computer affected by the issue. In some cases, between dealing with several hours of backlogged tasks and slow recovery processes, some businesses took days, not hours, to get back online.

The outage brings up another major point in the cybersecurity and computer industry. CrowdStrike and Microsoft are both big companies in their respective fields. As a result, the effects of bad code spread much further than they could have if there were more competitors making security products or if there were more software companies making operating systems like Windows. While only 8 million computers were believed to be affected out of a much larger global network, those are essential computers for worldwide communication and payment processing. Perhaps companies should be putting their eggs in more than one basket?

The testing methods for the outage are unclear—did CrowdStrike test the routine software update enough to detect the potential for a major outage? Apparently not.

What Should Businesses Do Next?

Software like Microsoft Azure’s payment systems come from what information technology professionals call ‘the cloud.’ The software is remotely managed over the internet, meaning that the computer that runs the system is not physically present at the location. Unfortunately, this also means that an issue with the internet can take critical systems out of service.

Businesses ranging from major airlines and banks to mom-and-pop stores would be well served by backup systems at their locations. These don’t have to be as primitive as the old-fashioned credit-card carbon-copy slide, but there are options available with consistent service that don’t repeatedly rely on the same networks.

Conclusion

There were certainly challenging moments for Canadian businesses and emergency services during the CrowdStrike and Microsoft outage. As they scrambled to understand the problem and waited, albeit briefly, for issues to resolve, many companies learned the importance of having local and reliable backup for their computer systems.