Microsoft (MSFT +0.63%) recently agreed to buy Activision Blizzard (ATVI +0.00%) in a $68.7 billion all-cash deal. It marks Microsoft's biggest acquisition ever and would presumably widen its moat against Sony (SONY +0.03%) in the console gaming market.
In its press release, Microsoft declared the deal would also provide the "building blocks for the metaverse," a claim which many media outlets parroted without any deeper elaboration. But if we look at the current state of the metaverse and Microsoft's position in that nascent market, we'll see that it's probably just using the term as a distracting buzzword.
Image source: Activision Blizzard.
What is the metaverse?
The metaverse, which has arguably become an overused buzzword over the past year, refers to the notion that the social barriers between the digital and physical worlds are being blurred by augmented, virtual, and mixed-reality devices and services. The popularity of the term, which was first coined in Neal Stephenson's 1992 novel Snow Crash, skyrocketed last year after Facebook rebranded itself as Meta Platforms (FB +2.06%) to emphasize its long-term focus on the metaverse market with virtual reality (VR) and augmented reality (AR) products.
However, critics will point out that the metaverse has existed for years within virtual worlds like Second Life and popular online multiplayer games like Activision Blizzard's World of Warcraft, Epic Games' Fortnite, and Microsoft's own Minecraft. Meta's rebranding, which occurred as it faced a whistleblower scandal and the FTC's demands to break up the company, merely drew more of the public's attention to its own Oculus Quest headsets and Horizon Worlds platform for its VR users.
What did Microsoft say about the metaverse?
Before Microsoft announced the Activision deal, its metaverse plans primarily revolved around its HoloLens mixed-reality headset. It launched the developer version of the device nearly six years ago, but it still hasn't introduced a commercial version for mainstream users yet.
According to IDC, Microsoft has only shipped about 200,000 to 250,000 HoloLens headsets for developers to date, compared to Meta's estimated shipments of over 10 million Quest 2 headsets over the past year. The Wall Street Journal claims that Microsoft's HoloLens unit also recently lost about 100 of its 1,500 employees -- most of whom joined Meta instead.
Faced with these ongoing challenges, it made sense for Microsoft to change the narrative about its metaverse plans. Regarding the Activision Blizzard deal, CEO Satya Nadella declared that gaming "will play a key role in the development of metaverse platforms" but didn't elaborate on which franchises would evolve into those virtual worlds.
Microsoft also likely kept banging the metaverse drum to draw some attention away from all the problems it would inherit from Activision Blizzard -- including unresolved sexual harassment lawsuits, executive departures, employee protests and walkouts, a petition to fire CEO Bobby Kotick, the decelerating growth of its aging franchises, and delays for two of Blizzard's most eagerly anticipated sequels: Diablo 4 and Overwatch 2.
Forget the metaverse -- focus on Game Pass
Microsoft's vague metaverse discussions obfuscate the real reasons it acquired Activision Blizzard: to expand its Game Pass service and counter Sony's library of exclusive PlayStation games.
The subscription-based Game Pass service, available on Xbox consoles and Windows PCs, grants players unlimited downloads and installations from a library of more than 100 games for $10 to $15 a month. Two tiers also include access to Electronic Arts' (EA +0.28%) EA Play service, and the top Ultimate tier includes access to the new Xbox Cloud Gaming service. Microsoft currently serves over 25 million Game Pass subscribers.
Sony doesn't offer an all-you-can-download subscription service yet. Its closest competitor is the cloud-based PS Now platform, which remains a niche service with just over 3 million subscribers as of last March.
However, later this year, Sony will reportedly replace PS Now with Spartacus, its proper Game Pass competitor. As that competition intensifies, Microsoft and Sony will need to offer more first-party and exclusive games to attract more console buyers and subscribers.
Last year, Microsoft expanded its library of first-party games with its $7.5 billion purchase of ZeniMax Media, which owns Doom, Fallout, and The Elder Scrolls via its Bethesda subsidiary. By buying Activision Blizzard, it will gain additional blockbuster franchises like Call of Duty, World of Warcraft, Hearthstone, Overwatch, Diablo, and Candy Crush.
Microsoft will likely add Activision's older games to Game Pass, as it quickly did with Bethesda's games, then launch some of its future games as Xbox exclusives. That one-two punch could cause headaches for Sony.
Don't believe all the metaverse hype
Microsoft's reasons for buying Activision Blizzard are simple: It needed more exclusive games to challenge Sony, and Activision's self-inflicted wounds and depressed valuations made it an easy takeover target.
Those strategies have very little to do with the metaverse. Instead, Microsoft is likely following Meta's lead and tapping the buzzword to steer the public's attention away from Activision's problems. Simply put, investors shouldn't blindly consider Microsoft's takeover of Activision a "metaverse" play yet.
