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.
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!
CHICAGO (AP) — United Airlines has struck a deal with Elon Musk’s SpaceX to offer satellite-based Starlink WiFi service on flights within the next several years.
The airline said Friday the service will be free to passengers.
United said it will begin testing the service early next year and begin offering it on some flights by later in 2025.
Financial details of the deal were not disclosed.
The announcement comes as airlines rush to offer more amenities as a way to stand out when passengers pick a carrier for a trip. United’s goal is to make sitting on a plane pretty much like being on the ground when it comes to browsing the internet, streaming entertainment and playing games.
“Everything you can do on the ground, you’ll soon be able to do on board a United plane at 35,000 feet, just about anywhere in the world,” CEO Scott Kirby said in announcing the deal.
The airline says Starlink will allow passengers to get internet access even over oceans and polar regions where traditional cell or Wi-Fi signals may be weak or missing.
Sony has made it easy for Canadian consumers to preorder the PlayStation 5 Pro in Canada directly from PlayStation’s official website. Here’s how:
Visit the Official Website: Go to direct.playstation.com and navigate to the PS5 Pro section once preorders go live on September 26, 2024.
Create or Log in to Your PlayStation Account: If you don’t have a PlayStation account, you will need to create one. Existing users can simply log in to proceed.
Place Your Preorder: Once logged in, follow the instructions to preorder your PS5 Pro. Ensure you have a valid payment method ready and double-check your shipping information for accuracy.
Preorder Through Major Canadian Retailers
While preordering directly from PlayStation is a popular option, you can also secure your PS5 Pro through trusted Canadian retailers. These retailers are expected to offer preorders on or after September 26:
Best Buy Canada
Walmart Canada
EB Games (GameStop)
Amazon Canada
The Source
Steps to Preorder via Canadian Retailers:
Visit Retailer Websites: Search for “PlayStation 5 Pro” on the website of your preferred retailer starting on September 26.
Create or Log in to Your Account: If you’re shopping online, having an account with the retailer can speed up the preorder process.
Preorder in Store: For those who prefer in-person shopping, check with local stores regarding availability and preorder policies.
3. Sign Up for Notifications
Many retailers and websites offer the option to sign up for notifications when the preorder goes live. If you’re worried about missing out due to high demand, this can be a useful option.
Visit Retailer Sites: Look for a “Notify Me” or “Email Alerts” option and enter your email to stay informed.
Use PlayStation Alerts: Sign up for notifications directly through Sony to be one of the first to know when preorders are available.
4. Prepare for High Demand
Preordering the PS5 Pro is expected to be competitive, with high demand likely to result in quick sellouts, just as with the initial release of the original PS5. To maximize your chances of securing a preorder:
Act Quickly: Be prepared to place your order as soon as preorders open. Timing is key, as stock can run out within minutes.
Double-Check Payment Information: Ensure your credit card or payment method is ready to go. Any delays during the checkout process could result in losing your spot.
Stay Informed: Monitor PlayStation and retailer websites for updates on restocks or additional preorder windows.
Final Thoughts
The PlayStation 5 Pro is set to take gaming to the next level with its enhanced performance, graphics, and new features. Canadian gamers should be ready to act fast when preorders open on September 26, 2024, to secure their console ahead of the holiday season. Whether you choose to preorder through PlayStation’s official website or your preferred retailer, following the steps outlined above will help ensure a smooth and successful preorder experience.
For more details on the PS5 Pro and to preorder, visit direct.playstation.com or stay tuned to updates from major Canadian retailers.
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.