Lawful Neutral: What if Activision-Blizzard just… sold Blizzard?

What if ABK sold the B?

We have Au Ra at home.

Last week, Activision-Blizzard and Bobby Kotick got a bad surprise: The UK moved to block the acquisition of ABK by Microsoft, citing concerns over anti-trust and monopoly, particularly in cloud gaming. Kotick responded with desperate flailing to control the news cycle and rebound the stock price by releasing the company’s quarterly financials a full day early, which has largely been unsuccessful.

Why did the UK block the acquisition? Because according to regulators, it would negatively impact “cloud gaming.” As with most things in regulation, definitions and word-choice are king. The Competition and Markets Authority (CMA) here takes a very broad view on what constitutes cloud gaming. Folks who follow the industry are accustomed to using the term cloud gaming for things like Stadia and other game-streaming services. But the CMA also bundles online games like MMOs and squad-based shooters under its definition of cloud gaming. As stated in the press release itself:

The deal would reinforce Microsoft’s advantage in the market by giving it control over important gaming content such as Call of Duty, Overwatch, and World of Warcraft.

Why is this significant? There are two reasons. If the CMA took the time to name specific games, that means it has specific concerns about those games. Second, by Microsoft’s own admission, it was primarily interested in adding mobile gaming to its portfolio, with the Blizzard IPs being what definitely seemed like a distant second.

In other words, if Microsoft and Activision-Blizzard want to make the deal happen at this point, selling off Blizzard might appease the regulators while still giving Microsoft what it claims it’s really after: mobile.

Today in MassivelyOP’s Lawful Neutral, let’s speculate on why it might makes sense to sell off Blizzard to get the deal through.

The CMA cares a lot about Blizzard

In its the press release, the CMA calls out three games as “important gaming content,” two of which are Blizzard IPs. When it comes to press releases like this, everything included is scrutinized. The fact that both Overwatch and World of Warcraft were explicitly mentioned heavily implies that the CMA is concerned about those games in particular. There’s a very high likelihood that the Authority sees those IPs as blockers to the deal.

The implication here being that if, somehow, Microsoft were to move those games off the table, it would make the deal more palatable to regulators.

Microsoft cares a lot about mobile

This is a key point. Mobile has really become something of a white whale for Microsoft – going back as far as 2010 when Microsoft announced the Windows Phone 7 OS, which launched with a lot of pomp and circumstance and landed with all the grace and elegance of that beach towel you accidentally dropped in the water and then flung into the laundry room and it made that moist, juicy fwlap sound as it hit.

Over the last 13 or so years, Microsoft has tried – repeatedly – to make inroads into the mobile market, all with similar fwlap outcomes. The ABK acquisition is actually just the latest attempt to enter the mobile market from a different perspective: the Xbox Gaming Division. While broader Microsoft has arguably floundered in recent years, the Xbox Gaming Division has continued its successful upward trajectory. Changing tactics to focus on the successful gaming business to break into mobile actually makes a lot of sense for Microsoft.

Also, in the full report in paragraph 11.224, the CMA gives us an interesting little tidbit:

We note Microsoft’s submission that Activision has significant strength in mobile gaming, and consider that the presence of Activision’s games on any mobile gaming store would enhance its competitiveness. However, we also consider that this could be achieved by less anti-competitive means than the Merger, and Microsoft could acquire ‘attractive content and experience with player engagement and acquisition’ by buying a different mobile games publisher. This appears to have been Microsoft’s strategy – it attempted to buy -redacted- in -redacted- and said -redacted-.

So ABK was Microsoft’s second choice, and the acquisition is primarily driven by mobile aspirations, with the additional PC portfolio coming in almost as an afterthought. Microsoft’s actions (and future ambitions) suggest that if it had to pick between making a big splash on mobile or getting established IP like Warcraft, it would jump for the former.

Blizzard does not care about Mobile

Blizzard is many things, but its never been a prolific mobile developer. Oh sure, it has Hearthstone as a slowly fading crossplatform title, and it’s working on Warcraft Arclight Rumble. There’s also Diablo Immortal, whose co-development with NetEase ensures its uncertain future.

Indeed, the latest financials report “stable trends across engagement” for DI, which is just a fancy way of saying, “not really doing well.” The game landed in the West to mixed-to-negative reviews; and in the East, Blizzard must contend with a much more competitive mobile market, Beijing’s continuing crackdowns on gaming and Western games, and the falling out with NetEase that ejected most Blizzard games from China earlier this year.

So it’s unlikely that Diablo Immortal brings a “safe bet” to the table for Microsoft. While there’s an argument to be made that putting it on the Xbox Mobile Gaming Store could boost the prospects of DI, gaining additional traction there would take a lot of extra effort. Many of problems with DI are are fundamental to the game – that is, the gameplay loop is fundamentally designed to manipulate you out of as much as money as possible.

All of this is to say that right now, Blizzard doesn’t have a strong mobile presence, and its existing pipeline suggests that no matter what executives say to soothe investor concerns, it doesn’t really intend to have a strong mobile presence either. Blizzard’s existing and future mobile titles are ancillary to the core of the studio’s business. When Microsoft comes looking for mobile opportunity in the short-to-near term, Blizzard isn’t top of mind.

It could be the concession the CMA is looking for

The CMA blocking the acquisition can really only have one logistical outcome: The CMA wants additional concessions before it will approve the deal. Since regulators have repeatedly said they believe the acquisition could give Microsoft too much of an advantage in their definition of the “cloud gaming space” while specifically calling out two Blizzard properties, they could be angling to force this exact split.

With Microsoft in the position that it is as a pervasive technology vendor, it’s not really feasible for the UK to block Microsoft from doing business in the UK (because Windows). But the country could make it painful and expensive, which isn’t really a long-term tactic for any government or business. A regulator ultimately levies fines and punishments as a way to change company behavior, not as a long-term “cost of doing business.” The CMA is almost definitely gunning for a concession here, and ABK selling off Blizzard to get the rest of the deal through is a concession that seems to fit with the CMA’s stated concerns.

Who would want to buy Blizzard?

Blizzard has decades of history and goodwill that hasn’t been thoroughly ruined yet. It has a small number of very successful franchises that are arguably being mismanaged. It’s currently profitable, and a company coming in with the right vision and investment could easily capitalize on franchises that gamers already adore and want to see succeed. It’s maybe not quite a downhill battle, but it’s at least flat, maybe with a slight downhill grade. It is much, much harder to build that kind of loyalty from the ground up than it is to repair damaged brand loyalty.

This is where things get dicey. There’s a pretty small list of gaming companies that could afford to buy Blizzard, and even fewer for which it wouldn’t be a straight-up net-negative for Blizzard. EA jumps to mind as a company that wouldn’t be a terrible home for Blizzard. MMO players will understandably grumble at this, but it’s managed SWTOR well enough to at least keep the game running. EA has a bit of a history in MMOs but not much in the way of current AAA offerings. If it wanted to re-enter the market, purchasing Blizzard would be a handy way to do that.

Amazon Games is another feasible option. It has been thirsty about making in-roads into the gaming market, specifically MMOs, and its success so far have largely been in publishing, not creating. It’s doing OK with New World but it doesn’t have a great track record with its home-grown games overall. Considering that most of its strategic choices seem to involve some combination of a dart board, bath salts, kazoo, and a vigorous game of pin-the-tail-on-the-piñata, I’d say it’s hard to predict if it would want to buy Blizzard – and what would happen to Blizzard of it did.

Some of the other options are less… pleasant. Gamigo’s parent company MGI might be an option, but we’ve seen it grind Trion World’s games into the ground and run round after round of layoffs, and it’s closed more games in the last couple of years than it’s kept alive. Square-Enix doesn’t really have a reason to purchase Blizzard, and EG7/Daybreak is… well… Daybreak, even if it could field the capital. And there are plenty of other gaming companies in the buying business right now, particularly overseas companies like Tencent, Sony, and Nexon. Even Epic Games isn’t out of the question.

Another possible option is private equity. This was the path that SOE went when it was originally reformed as Daybreak and sold to Columbus Nova in 2015. A similar situation could happen with Blizzard if ABK spins it off to a private equity company. Private equity tends to focus in one of two ways: either buy an existing IP and cut investment and bleed it dry over years or buy an existing IP and reinvest to try to grow with the goal of taking the it public again and thereby make a ton of money. Warcraft is an iconic brand, so it’s unlikely anyone would pay the absurd amount for Blizzard and not try and grow and capitalize on those brands.

Of these, I think the most likely buyer of Blizzard would be Amazon; it’s got the capital and the hunger to carve out its space in the games industry. I also think private equity is a strong contender; a firm could see potential to revitalize and grow a mainstream, iconic brand and make easy profit for years to come.

What if the deal falls through?

Even if the deal falls through in the end, ABK may still want to sell off Blizzard. When a deal of this magnitude collapses, investors stand to lose a lot of money, and most of the blame in those cases falls on the squarely on the shoulders of the CEO. If there’s one thing that Bobby Kotick loves more than money and threatening to have his assistant murdered, it’s saving his own hide.

Selling off Blizzard would generate a massive cash infusion for Activision, which Kotick will likely need as the stock was already being propped up by the promise of the buyout and will tank much, much more if the deal officially collapses. Not only would the sale fund the business while Bobby straps on the proverbial parachute and finds the nearest exit, it would also likely cause a short-term boost to stock, which would benefit Activision in the near-term.

Are you for real, guy.

What would a sell-off mean for Blizzard games?

It’s impossible to say with any certainty. But Blizzard is one of the most iconic game developers and has been for the last 20+ years. There’s a devoted fanbase of millions across all of their games, even after the last few years of the company actively alienating them. If Blizzard were to be sold off, I would expect a rapid infusion of money into the games, a focus on transmedia-synergistic opportunities, and of course, a change in leadership.

Any impact gamers would see in, say, World of Warcraft would be months out from the sale, maybe more than a year. But all in all, Activision has seemed to resent Blizzard in recent years, and investment and evolution in the games has reflected that. A new owner for Blizzard (and new leadership) would mean an influx of energy and drive for the games, and likely money too. It’s hard to argue that it’s not needed as Blizzard has been one misstep – both operationally and game-design — after another for years now.

So will Activision try to sell off Blizzard? I don’t have any inside information that would let me to do more than speculate and read the tea leaves. But I think it’s a distinct possibility, and I think that possibility is greater than today than it was a year ago. It could be great and usher in a renaissance of the Blizzard IPs.

But then, it could also go the way of RIFT.

Every other week, Andy McAdams braves the swarms of buzzwords and esoteric legalese of the genre to bring you Massively OP’s Lawful Neutral column, an in-depth analysis of the legal and business issues facing MMOs. Have a topic you want to see covered? Shoot him an email!
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