Microsoft Faces Its Biggest Challenge Despite Its "Social" Standing
Microsoft's CEO Satya Nadella’s and Vice Chair and President Brad Smith face their toughest challenge. There was always the belief that so long Microsoft acted like a “good citizen” on social issues they would be immune to anti-trust. That myth has been burst. The FTC has filed a lawsuit and a judge must decide if the case is strong enough to block the $69 billion deal. To be blunt, the FTC fears Microsoft will not provide titles for other platforms. Other headwinds include 16 countries that will have to approve the mega deal. China will probably block the deal to protect TenCent's position. Tencent also owns 5% of Activision.
Digital Giants Operate On A Different Dimension And Playbook
Should the deal be completed, Microsoft will become the third largest gaming player by revenue as they reach 3 billion users behind Tencent (#1) and Sony (#2). Activision brings 97 million monthly active users (MAUs). Xbox gaming brings 20 million users to the mix. At the surface, Microsoft's argument about industry competition makes sense for the $200 billion gaming market. However, digital giants are collapsing industries into value chains. A software company, gaming company, telecom company, and entertainment have collapsed value chains along four common elements:
- Content - titles, movies, software
- Network - monthly active users and subscribers
- Distributions channels - stores, cloud (Azure), internet, consoles
- Tech platforms - gaming platforms, consoles, marketplaces
Moreover, a concentration of competitors who have integrated content, network, distribution channels, and technology platform could stifle competition. This argument should be the heart of the FTC's argument around digital giant dominance and future digital giant dominance.
Past History Haunts Microsoft's Argument
Activision has blockbuster titles such as Overwatch, Call of Duty, Diablo, Warcraft, and Candy Crush Saga. The FTC's argument primarily rests on how Microsoft failed to keep its word on more open distribution of its titles post acquisition when it acquired Zenimax. Bethesda titles Starfeld and Redfall were not available on other platforms. European regulators have not been happy with this as Microsoft has already shown it will withhold titles from competitors. Despite this, labor unions such as the Communication Workers of America (CWA) are in favor of the deal. While Microsoft's gaming head Phil Spencer has offered Activision's blockbuster title Call of Duty, (a $1 billion dollar franchise) for 10 years to both Sony and Nintendo, this may not have been enough for the FTC to back off.
The Bottom Line - Microsoft - Activision Will Become A Landmark Case In Antitrust
Tech companies who thought they could be immune by taking positions on social issues have now realized they are not immune to government interference. At the heart of this case will be how to define the current markets versus the future markets in anti-competitive activity and anti-trust. Dominance in content, network, distribution channels, and tech platforms will eventually become the standard, once this has been identified by the FTC. For now, this is really about the FTC and Lina Khan needing a win as time is ticking for the current administration to make their point.
In the larger picture, a key factor should be how the innovation lifecycle plays a role in innovation. Startups and mid-size companies need exits to fund new innovation. Large digital giants often can not innovate fast enough, attract enough talent, and reach new markets without mergers and acquisitions. Over regulation on M&A will stifle market innovation. Yet, not understanding the dynamics of how digital giants operate in dominating markets will harm consumers in the long run. These factors make this deal a landmark case for the future and may also pave the way for the Metaverse ambitions of Microsoft.
Your POV
Should Microsoft complete their acquisition of Activision? Will the FTC go too far to stifle innovation? What should anti-trust rules be in the digital world?
Add your comments to the blog or reach me via email: R (at) ConstellationR (dot) com or R (at) SoftwareInsider (dot) org. Please let us know if you need help with your strategy efforts. Here’s how we can assist:
- Developing your metaverse and digital business strategy
- Connecting with other pioneers
- Sharing best practices
- Vendor selection
- Implementation partner selection
- Providing contract negotiations and software licensing support
- Demystifying software licensing
Reprints can be purchased through Constellation Research, Inc. To request official reprints in PDF format, please contact Sales.
Disclosures
Although we work closely with many mega software vendors, we want you to trust us. For the full disclosure policy,stay tuned for the full client list on the Constellation Research website. * Not responsible for any factual errors or omissions. However, happy to correct any errors upon email receipt.
Constellation Research recommends that readers consult a stock professional for their investment guidance. Investors should understand the potential conflicts of interest analysts might face. Constellation does not underwrite or own the securities of the companies the analysts cover. Analysts themselves sometimes own stocks in the companies they cover—either directly or indirectly, such as through employee stock-purchase pools in which they and their colleagues participate. As a general matter, investors should not rely solely on an analyst’s recommendation when deciding whether to buy, hold, or sell a stock. Instead, they should also do their own research—such as reading the prospectus for new companies or for public companies, the quarterly and annual reports filed with the SEC—to confirm whether a particular investment is appropriate for them in light of their individual financial circumstances.
Copyright © 2001 – 2022 R Wang and Insider Associates, LLC All rights reserved.
Contact the Sales team to purchase this report on a a la carte basis or join the Constellation Executive Network
0 Commentaires