What’s Behind Microsoft’s $70 Billion Gaming Takeover
Last week Microsoft Corp. (Nasdaq: MSFT) announced a $70 billion acquisition.
It’s the largest tech deal in history.
Microsoft’s target? Video game company Activision Blizzard Inc. (Nasdaq: ATVI).
You might be thinking…
“Really, a video game company?”
But I’m not surprised one bit.
It’s clear that Microsoft sees the opportunity too.
Microsoft Doubles Down on Gaming
There are 2.5 billion gamers in the world, and 60% of them play at least four hours per week.
In other words, the world collectively spends a lot of time playing video games.
This has helped the video game market blossom into a $229 billion industry.
And the market is set to double in size over the next several years.
(Source: Fortune Business Insights.)
Microsoft already has an established video game business, which it started in 2001.
Since then, it has sold roughly 200 million gaming consoles and surpassed 100 million paid online users.
Now, two decades later, its gaming segment has generated $15.9 billion in revenue over the past year.
This should’ve been even higher. But supply shortages limited sales of its newest Xbox console.
Even though Microsoft’s video game business has grown so large, its gaming segment only accounts for 9% of its total revenue.
But by buying Activision Blizzard, Microsoft is doubling down on its video game business.
The Gaming Market Has Huge Untapped Potential
Microsoft’s move indicates there’s huge untapped potential in both the gaming market and Activision Blizzard, specifically.
Activision Blizzard has developed an extremely loyal gamer base across its franchises. The company now has 400 million monthly active players across 190 countries.
Its loyal customers have helped the company generate $9 billion in revenue across its franchises Call of Duty, Warcraft and Overwatch, among others.
Microsoft also sees its deal with Activision Blizzard as an opportunity to bolster its Game Pass service.
Game Pass is a paid monthly subscription that lets users play games for free.
In just over four years, Game Pass has reached 25 million monthly users.
It very well may be the future of gaming.
A No-Brainer for Consumers
The service is part of the gaming-as-a-service model, where companies provide a large selection of games for a monthly fee.
But users still have to download the games before playing them.
This can take a long time, especially for larger games.
But Microsoft has a solution to this problem. It has begun incorporating cloud games in its Game Pass service.
This lets users play games directly from the internet.
Soon, major games like Activision Blizzard’s should be available to play in cloud format.
When this happens, I expect the purchase of Microsoft’s Game Pass to be a no-brainer for consumers.
This will transform the video game market as consumers move away from buying games.
A Smart Way to Bet on the Gaming Industry
Any time an industry changes, there are winners and losers.
Right now, it looks like Microsoft’s gaming business will be a winner.
It could make more gaming acquisitions in the future.
As this happens, I expect gaming stock prices to rise to higher levels.
To get exposure to gaming stocks, you can buy the Global X Video Games & Esports ETF (Nasdaq: HERO).
The ETF holds 40 gaming companies across the U.S., Japan and other countries.
With HERO, you can bet on the gaming sector as a whole rather than risk your money on one company.
Research Analyst, Strategic Fortunes
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