The Microsoft-Activision Blizzard Deal Moves Forward

In this podcast, Motley Fool senior analyst Bill Mann and host Dylan Lewis discuss:

• Why the FTC's attempt to block the Microsoft/Activision Blizzard deal failed.
• The "concessions" Microsoft is making to make the deal happen. 
• How we're seeing a similar response to regulatory interest in Broadcom's planned acquisition.

Is it the end of an era for superheroes? Motley Fool host Mary Long caught up with Motley Fool employee Catie Peiper to discuss trends in entertainment and Mattel's big bet on Barbie.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on July 12, 2023.

Dylan Lewis: Microsoft is done playing well, won't they? Maybe. Motley Fool Money starts now. I'm Dylan Lewis and I'm joined in the studio by Bill Mann. Bill, thanks for joining me today.

Bill Mann: Hey, it's great to see you Dylan, how are you doing?

Dylan Lewis: Good to see you too, Mann. I'm excited. We have the latest update and what it's been a long saga with the Microsoft-Activision FTC deal. We have what seems like good news for Microsoft. Maybe good news for Activision depends on what side of the shareholder coin you're on there. But Judge Jacqueline Scott Corley denied the FTC's efforts to block the two companies' blockbuster, $75 billion acquisition. Bill, this is the latest and like I said, a long saga with this deal. What stuck out to you in this recent development that we have?

Bill Mann: It's important to note that the FTC does have the right to appeal, although it is pretty rare that the FTC actually takes a move to appeal once the judge has rendered an opinion at this level. I think the thing that jumped out to me is that I have always wondered, usually when you're talking about antitrust, you're talking about two competitors that are joining together. The question becomes, do they have enough of the market so that they can control pricing? Can they be predatory? Which is a word that gets bandied around a lot when you're considering these merger deals of the FTC and then other institutes a competent jurisdiction, I guess you would say. I'd always questioned because Activision and Microsoft were not competitors. But the real basis was four and antitrusts hearing. Of course, you can look and you see there's Call of Duty and World of Warcraft and the combined entity could deny other platforms the right to use it. I'm not saying there was never an argument, but I was always a little bit interested as to what it actually was. In this case, it seems like the judge, what do I say without sounding too noxious that she agreed with me? [laughs]

Dylan Lewis: Yeah, you called it, you nailed the call. I wonder to some extent we're seeing a lot more regulatory scrutiny on deals. And you mentioned that this is not one that is expressly competitive these are not two players in the same space here. Do you think that some of what we're seeing is a little bit of an acknowledgment that Big Tech has gotten very big very quickly, maybe in ways that regulators weren't expecting?

Bill Mann: Yes, absolutely. It has been an area of focus of the FTC Chair Lina Khan, that she wants to find ways to rain in the size and the dominance of the large tech companies. I like to put scale around thing. The market cap of Apple, basically three trillion dollars. If this were GDP, that would put it at about the same size as France. Like you were talking about massive entities that on some level, they have the capacity to destabilize a lot of our economy if they are a bad actor and I'm not saying that to be the case for any of these companies.

Dylan Lewis: But increasingly they have their hands in everything which I think if you're a regulator mix looking at these deals a little bit harder because gaming is not where the majority of Microsoft money comes from, but they are a major player, especially in the distribution and the way that people access games.

Bill Mann: Yeah, this is what's so funny about this case is that in the US, in order to show an antitrust concern, you have to be able to show that there's a potential for consumers to be harmed. That's the ultimate test of what antitrust is. I don't think that you can look at some of these massive companies again, I keep going off menu but let's talk about Google, for example, which has a huge component of the ad sales market. But their search is free. It's really hard to say from a consumer perspective that there is harm. But this is something that probably ultimately, I don't know that Lina Khan and the FTC will be able to fix without a relook at what the laws are and how they are applied. But in this case, Judge Corley came to the conclusion that the laws as they stand in the United States, don't really apply for Microsoft and Activision.

Dylan Lewis: One of the things that the judge also noted, which I think probably helped move this through a little bit, is while this is a historically large acquisition and there's been a lot of scrutiny on this deal. Because of that scrutiny, there have been commitments from Microsoft to increase consumer access to Activision content They've named a couple of here keeping Call of Duty on PlayStation for 10 years on parody with Xbox and agreement with Nintendo to bring Call of Duty to switch and some efforts to bring Activision titles to cloud services. It seems to me Microsoft knew they were going to have to give some stuff up here in order to make this happen and whatever they were willing to do here was enough to satisfy the judge.

Bill Mann: Yeah. The way that you put it is exactly right. I'm not sure that most people recognize just how massive the revenue streams are for these titles, Call of Duty would be by a long shot, the most successful film franchise in the world if it were film instead of a video game. The amount of money that we're talking here is massive. Yes, I think that, in a world in which they could call their own shots, that it might be great for Xbox to be able to take those titles on themselves. I think it bears remembering that the platforms themselves generate a fraction of the revenue of what the titles do. I don't know that there really is that much of a concession being made to say, we would like for these titles to be available on lots of other platforms, whether we benefit from the platform or not.

Dylan Lewis: It's an easy bargaining chip is what you're saying.

Bill Mann: [laughs] Exactly. We get to sell this to them.

Dylan Lewis: Twist my arm but not you.

Bill Mann: Let me think so. There are certain obviously if Microsoft's ultimate concern is Xbox revenues, maybe you could make the case that this is going to be something that they would want to bring entirely in-house. I'm not convinced that that's the case.

Dylan Lewis: This was clearly a deal that Microsoft wanted to move through. I think in a deal that initially Activision Blizzard was very excited about same with their shareholders. What's been interesting to me and watching this deal is I think there are a lot of Activision shareholders that are rooting against this deal going through because they like the idea of this being a stand-alone company and they also seem to be getting a three-billion dollar breakup fee if this deal does not go through, Bill. I'm not used to seeing companies get acquired and having the acquired business be so rooting against.

Bill Mann: [laughs]. It is funny, and I think some of that has to do with the length of time that it's been since the deal was announced. In that period of time, our favorite hold forever investor, Warren Buffett, has come in and bought shares of Activision as an arbitrage play and then sold them again because he didn't think it was going to go through. It has been a long time. It has obviously been during the pandemic, so any type of time synapses that you can think of, they've been blown out and distorted anyway. I think at this point there are plenty of Activision shareholders who would prefer to have seen it maintained as an independent company. But a deal is a deal.

Dylan Lewis: While this does seem like major progress for the deal, it is not the final domino to fall here. We have to note that there are still other things that need to happen. This is not free and clear quite yet. It is possible that the FTC will appeal the court's decision. We don't know for sure about that. Also crucially, Microsoft is working with UK regulators to overcome some of their objections to the deal. They've been paying close attention to this one. It seems similar where they are looking for certain concessions in order to make this go through.

Bill Mann: That's right. It's important to note and not that the UK and the EU are the same anymore, but they're antitrust laws and practices are more based on competition than they are protection of the consumer. They want a broader set of competitors and so they are actually looking at this deal and scrutinizing it on slightly different vectors than they would here in the US. Again, I hate to make calls when it comes to legal cases.

Dylan Lewis: But I'm going to ask you to. [laughs].

Bill Mann: Yeah, I know. I figured. It's not natural law. You'll never really know. But I think that the concessions that they made are even more convincing in that European framework than they are in the United States. The fact that they said, for 10 years, this is going to be available on every platform that you want. There's your anti-competitive issues put to bed at least for a decade. More to the point, it's not as if Call of Duty is the only game out there in town. If they were to simply say, we're going to price this two or three times higher just to call numbers out of thin air, consumers have options.

Dylan Lewis: Yeah, there are plenty of other very popular titles out there for people that want to enjoy that type of gaming.

Bill Mann: That's right.

Dylan Lewis: If you are paying attention to this deal some days to keep in mind, the deal cannot close before Friday of this week, and the deal is set to expire on the 18th, at which point, Microsoft would likely incur that breakup fee if the deal does not wind up happening. All the say this story is probably going to move quite a bit in the next week or so [laughs]. We very well may come back to it on Motley Fool Money. Because there are probably going to be some developments along the way. Bill, we were wrapping that conversation, taking a look at the regulatory world of Europe. We also saw some regulatory progress in another deal this week with chipmaker Broadcom and their planned acquisition of VMware. This week, EU antitrust regulators approved the $60+ billion acquisition, which would help Broadcom move into the Cloud and software. Tell me if this sounds familiar, the key to the approval is concessions from the acquirer.

Bill Mann: Yeah, they were particularly remedies for Marvel Technology, that would allow them to remain competitive in the market. Again, in the UK and in Europe, that competition is considered much more important than an antitrust in the United States is. Competition is obviously an outcome, but for us it is all about how are the consumers going to be impacted. In Europe, it's not the same. Again, I think that this shows that the regulators are struggling a little bit to figure out exactly how to deal with these massive technology companies. Because if you think about it, most of these regulations and certainly the bedrock of these regulations were written and put into place and philosophized way before big tech ever came onto the scene.

Dylan Lewis: To bring it back to your point of scale earlier, Broadcom, has hundreds of billions of dollars in market cap. This is an acquisition that is well above $60 billion. It is big, but also it is not something that would sink Broadcom. It is not so large that the entire business hinges on it. It is an effort for them to move into Cloud and software. But I think the scale of these businesses is something that I think a lot of antitrust was not necessarily built to deal with.

Bill Mann: No. I mean you think about it in this country and again, I don't want to make too much of a deal about market cap. But just to put a little scope around how big these companies are the largest seven companies in the Nasdaq 100 are all tech companies and they are 55 percent of the total value of the Nasdaq 100. You are talking about companies that are a level of concentration in this country that has not existed really since Standard Oil was broken up in the early part of last century. It is that level of concentration and that level of, I guess what they would call structural risk that they're taking into account.

Dylan Lewis: If you're paying attention to the VMware and Broadcom deal, some things to pay attention to, while we did see EU approval, regulators from the US and the UK still need to weigh in on this one. You mentioned some of the differences and regulatory environment, Bill. Is there anything from this one that you see is like we should be paying attention to this as it shifts over to US regulators.

Bill Mann: I would suspect that since it has gone through in Europe, which ultimately because of the difference of focus, I think it's a higher standard in Europe and in the UK than it is in the United States. I would suspect, unless they're just mad about the loss from Activision and Microsoft that they will not have the same level of problems that the amount of concessions that they've given will be satisfactory.

Dylan Lewis: From your lips to regulators ears.

Bill Mann: That's right. Give me a call.

Dylan Lewis: Bill, thanks for joining me.

Bill Mann: Hey, thanks, Dylan. 

Dylan Lewis: Coming up. Is it the end of an era for superheroes? Mary Long caught up with Catie Peiper to discuss entertainment cycles and Mattel's big bet on Barbie.

Mary Long: Yeah, Mattel certainly helps if this works out. Barbie is the first movie that they're co-producing, but it certainly won't be the last as there are nearly 45 other films that are allegedly in development. Those movies are set to tackle toys like Polly Pocket, Uno, Barney, Hot Wheels. The list is pretty extensive and pretty wild. Do you expect each of these future productions to get the same star treatment and presto takeover that we've seen with Barbie. Obviously, as you said, we haven't seen the movie yet, but the hype around it has been pretty intense.

Catie Peiper: I think it depends. We're going to have to see how Barbie lands and how probably the next two or three successive Mattel features go. My guesses though, they have sat out of the pool for a little while. They've seen how DC and Marvel, or Hasbro back with the Transformers a decade ago handled this bridge into the big screen. They've bite at their time. Based on the names that they are releasing right now, they've got J.J. Abrams associated with an upcoming film. It looks like they're going for a combination of wide screen appeal or wide audience appeal with a slightly more gritty or more real and adult, arguably theme than we might have thought coming from, say, a Marvel franchise. Basically, they're drawing on talent that already is known for being part of a prestige group in hollywood. I think they're trying to use that to differentiate themselves from the other large IP franchises in the market. You could make comparisons to Black Panther or one of the earlier Spider-man films from the Marvel collaboration, not the Toby Maguire Spider-man. In terms of engaging with the genre at a film craft level instead of just a bankable box office cookie cutter. But again we're going to have to wait and see.

The one thing I will note is that it's also really going to depend on how this translates to not just their film sales, but their at home streaming sales, what kind of money they're going to make when it crosses platforms and how much they're able to again drive that child demo. Whether it's apps on their screens or toys that they're brought by another store, marketing to children now is really different than marketing to children when we were the consumers. They focus mainly on screens now and not the toy box. We may have gone to movies because we had Barbie and our toy boxes. In 20 years, there will probably be another Barbie media production out there and the adults who bring their kids to that are going to bring them to those releases based on their engagement with the film or apps, anything that's on the screen. You mentioned the Transformers franchise. Mattel is not the first company to wait into this toyed a movie pipeline. Hasbro was behind partnering with Paramount to bring transformers to the big screen in the 2000s and that was a success. There were seven films that collectively brought in over five billion dollars. What's the history of toys serving as the foundation for movie plots?

Mary Long: We could be here all day if you wanted to talk specifically about that. I would say the 1980s were a really pivotal moment for this in the industry. We have a couple of things going on around that time. One is we have a lot of film producers and studios realizing that the film doesn't stop at the credits, it stops at the toy store. So you have people, George Lucas, infamously making creative decisions about films based on the merchandising capability of those franchises. You have that being driven by the studios on the one side and then on the flip side you have a lot of manufacturers out there who are starting to think in a more cross media cross-platform way, and so you have franchises like He-Man and Masters of the Universe, Rainbow Brite where they were always intended to be both on-screen and toys. So they were spending up television series and comic books in addition to the action figures. The 1980s is really when this started and we've really just been renegotiating that relationship ever since.

Catie Peiper: We've seen that pattern crossover through decades with toys being fodder for movie plots. But this feels like it's maybe a moment where toys are overtaking superheroes as a potential foundation for the next cinematic universe. We had the Nintendo movie and Nintendo make a movie about Super Mario and Spring which is the only movie I think that's far this year to gross over $1 billion. Then you have the Barbie movie, you have all these different Mattel films that are in production or in development that we talked about earlier. What's the history of different movies cycles look like? Are we out of this superhero era, which it seems like was the dominant for the past decade and entering into something new? What did the past of that look like as well?

Mary Long: Really great question and I love it because 2023 is really the year when all of the film critics, all the culture critics really want to eulogize superhero movies and say they are over, we are marking this point in time. We're going to have to actually see if that's true, but it does seem to be in the cultural conversation right now. There are a number of industry constraints at the moment that are affecting the potential fall of superhero films from just a workforce and union perspective, the visual effects industry in particular has been pivotal to the growth of the superhero genre and they have not been unionized to date and they are working toward it now. We're getting a little bit of industry pinch there. But it's also been 20 years, so maybe it's time for the genre to sunset for a little while. It would not be the first time that that's had happened. We have seen this happen often on for decades. We definitely saw this in the '60s and '70s. In Hollywood, audiences were deeply over saturated by musicals and Epic films think Sound of Music, My Fair Lady. All of these big budget films that as a child i grew up on not realizing that contemporary audiences were rolling their eyes at them. They really withdrew from the Box Office. 

A lot of those were lost leaders for the studios at the time. Instead, audiences really pivoted toward gritty and more realistic cinema, and then also to the rising popularity of television, so this is not the first time a cycle like this has happened in the industry. You mentioned eulogizing the superhero era and how that's been a popular take for critics to have. About a month ago, we saw a lot of eulogies about Pixar, more or less because there was just not that much tracked their original animated film Elemental had not really gained the traction that Pixar is pretty notorious for. Compare Elemental's Box Office with what we saw with Nintendo's Super Mario, which obviously has so much pre-awareness. Is there still money to be made from original content? Or are we entering an age where all movies need to have recognition from the audience before they actually hit the theater.

Catie Peiper: It's a good question. I have a little bit of a hot take on it. I would argue that Elemental from Pixar was not really all that quote unquote, original and that was part of the problem. Sure it was a new narrative, it was new characters, but in content it is fairly derivative of the type of film that we have come to know Pixar puts out over the last decade. If I'm looking at a cage match between that and a movie adaptation of a heavyweight brand and franchise that's built that relationship since the '80s, Mario, no contest. I'm betting on the ladder. The cookie cutter Pixar, I think is something that's a little overdone in the industry at the moment. That being said though, I don't think we need that pre-recognition that you get with Mario for example, for a movie to be successful. If you take a look at something like everything, everywhere all at once, are you with the most original film we've seen in, I would argue decades. It brought me back to fight club in terms of really shaking up what we saw on the big screen. Then meanwhile you have movies like The Flash. 

As you mentioned, it was a flop. It brought back not one, not two but three big screen Batman's for that adaptation and it still flopped. I don't necessarily think that recognition is important. Originality and execution seem to be more important if I were to try and draw that trend out. I think this goes back to what we were talking about before. If there is a contraction happening, people are less willing to pay for Box Office bloat when they can get junk food at home. They're kind of slimming their media diets. We've seen this in the '70s, we also saw it a bit in the '90s. They go toward a more minimal pallet for a little while before we have another surge at the big epic Box Office swings again.

Catie Peiper: We love hot takes on Motley Fool Money, so I'll push you for another one. Barbie comes out on July 21st which is the same day that Chris Nolan's Oppenheimer comes out. If you were a betting woman, which do you have your money on to top the Box Office?

Mary Long: I am a house divided right now because I'm looking at both. I would say if we're looking at bottom line, Barbie is going to win the Box Office. It's just going to bring in a swath of age demographics. You get your kids, you get your older adults. I don't think a lot of people are going to be bringing their 8-year-olds to a movie about the atomic bomb. I don't think that's going to happen. In terms of what gets more critical appeal, I think that could be more of a toss up. Who knows? Maybe both get Oscar nodes at this point, it's a little unclear, we'll have to see. We'll see which one has legs, I'm uncertain. But it sounds like you will be attending the Barbieheimer double feature that day.

Catie Peiper: Oh, I am all about it. Especially I'm about the Barbieheimer run red carpet, the hot pink pinstripe suits showing up at the red carpet, are on-point. [laughs] 

Mary Long: Yeah, talk about marketing, just making waves across every medium.

Catie Peiper: Absolutely.

Mary Long: Awesome Katie. We will stay tuned and we can do a follow-up to see if your predictions about Box Office numbers hold through. Thanks so much for the time, fun chatting with you today.

Catie Peiper: Thank you.

Dylan Lewis: As always, people on the program may own stocks mentioned in the Motley Fool and may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.