Huge news for the gaming industry dropped this week when a U.S. federal judge sided with Microsoft (MSFT 1.82%) to prevent the Federal Trade Commission (FTC) from performing a preliminary injunction to block the technology giant's acquisition of Activision Blizzard (ATVI). Shares of Activision Blizzard shot up 10% on the news as this development seems to have greatly increased the chances Microsoft will be able to close the deal.
Here's what the decision means for Microsoft, Activision Blizzard, and the broader video game market.
Judge sides against the FTC
Back in early 2022, Microsoft announced its intention to acquire gaming publisher Activision Blizzard for around $69 billion in cash or at a per-share price of $95. The plan for the owner of the Xbox console was to vertically integrate the Xbox platform with gaming content in order to better compete with the likes of Sony's PlayStation, Nintendo, and the PC market. Microsoft's Xbox consoles have historically lagged behind their rivals in gaming hardware unit sales, and the division is reportedly struggling to turn a profit.
Activision Blizzard is a multinational company that sells its video game content in virtually every country, meaning that this deal would have to go through a slog of government approvals in order to close. Most governments waved the deal through, but the FTC in the United States -- led by Lina Khan, a skeptic of big technology acquisitions -- stated its intent to block the deal due to concerns over monopolization of the nascent cloud gaming market and the potential to make blockbuster gaming franchise Call of Duty exclusive to the Xbox platform.
Now, it looks like the U.S. court system has paved the way for the deal to close in the United States with the judge's decision today. The court said that the FTC's arguments against the deal lacked merit due to Microsoft's signed deals with competitors to keep Call of Duty widely available and the lack of evidence of why customers would be harmed in any part of the gaming market with Activision Blizzard under the Xbox umbrella.
The FTC can still make other future moves, such as suing Microsoft to divest Activision Blizzard after this deal closes, but right now, it looks like one of the key roadblocks to Microsoft closing this deal has been passed. It is no surprise, then, to see shares of Activision Blizzard stock soaring on the decision. Shares hit around $91 at the market close today, up 10% on the day and now only 4% away from the $95 deal price.
One more hurdle to clear
Besides the FTC in the United States, the United Kingdom's Competition and Markets Authority (CMA) voted this spring to block the acquisition due to more monopoly concerns with the cloud gaming market. After the court's decision today, both the CMA and Microsoft said they are heading back to the negotiating table in order to remedy the regulator's concerns over the acquisition and how it will affect the United Kingdom's gaming market. Investors should look for an announcement shortly as Microsoft needs to close the deal by July 18 or risks paying a $3 billion breakup fee to Activision Blizzard.
If this hurdle gets cleared and Microsoft is able to structure the deal in order to please the CMA, in all likelihood, Activision Blizzard will finally have a new home as a part of Microsoft's gaming division.
What it means for the gaming industry
The video game market is ginormous, with around $200 billion spent each year by customers around the world on gaming hardware and software. The Activision Blizzard deal -- while large -- shouldn't actually change up much for the industry, especially since Xbox has promised not to make Call of Duty an exclusive game. At least, you can easily make this argument from a consumer perspective. But there are some interesting changes that could affect the business side of things for these gaming hardware publishers.
First, it should level the playing field for Xbox versus its competitors like Sony's PlayStation and Nintendo's Switch console. Both the other console makers have large game production studios and make content exclusively for their platforms (which is why the FTC had such a hard time arguing against the acquisition in the first place). Market share could swing back to Xbox now that it owns Activision Blizzard's assets.
Second, Microsoft said it plans to use Activision Blizzard's mobile gaming assets as a springboard to launch a mobile games app store to compete with the Apple App Store and Alphabet's Google Play. The duopoly of mobile application stores has a 30% take rate on all in-app purchases, something that mobile game publishers have bemoaned for ages. Microsoft has the chance to come in at a lower take rate and potentially disrupt the platforms that mobile game producers are beholden to.
Lastly, this could open up the floodgates for other technology giants to acquire gaming publishers like Electronic Arts, Take-Two Interactive, or Ubisoft. If one of the largest gaming platforms in the world is approved to acquire one of the world's largest gaming publishers, it will be tough for regulators to make an argument against different forms of consolidation in the industry.
All in all, the long saga of Microsoft closing its acquisition of Activision Blizzard looks to be ending sometime this month.
