Microsoft / Activision – 2nd time lucky

Microsoft has a 2^nd shot at the consumer ecosystem.

• Microsoft’s acquisition of Activision is a sure sign that the gold rush for the Metaverse is now in full swing which gives Microsoft another shot at winning the consumer digital ecosystem.
• Microsoft is paying $68.7bn (net of $6.37bn net cash on Activision’s balance sheet) to acquire Activision and is paying for the entire acquisition with cash.
• The timing is clearly opportunistic as Microsoft is paying roughly the same price at which the shares were trading before the company’s cultural troubles began.
• Consequently, Microsoft is paying around 5x EV / Sales and a 2022 PER of around 26x.
• To value-oriented investors, this appears expensive but relative to other acquisitions, IPOs and SPAC listings in the tech industry, the numbers are relatively tepid.
• Microsoft has openly admitted that this acquisition is all about positioning itself to be a player in the Metaverse despite the fact that it does not have a virtual reality hardware platform of its own.
• Its in-house HoloLens product is an enterprise-focused augmented reality product, and I don’t think that it is very well suited to being leveraged into consumer VR.
• That being said, Microsoft is not a mainstream manufacturer of PCs either despite dominating the platform meaning that it may intend to create its offering as a software platform on the hardware of others.
• In this current age of verticalization, this is a contrarian approach and may run into problems if the hardware owners decline to host or disadvantage Microsoft’s metaverse offering.
• It is Apple’s history of designing its fully verticalized platform to suit its own agenda at the expense of everyone else which has triggered the Metaverse players to be very cautious about not owning their own hardware.
• This acquisition will boost Microsoft to become one of the largest game developers with a large, engaged and diversified user base.
• This is a stepping-stone towards the Metaverse as VR is currently almost entirely about video games.
• Consequently, if other Digital Life activities are going to migrate into the Metaverse, they are likely to utilise technologies that have already been established for games.
• This means that it is the games companies that will have an early claim on the Metaverse and an advantage when this starts to become a reality.
• This is still a long way off but the groundwork is clearly being laid now.
• I suspect that this is what lies behind Microsoft’s acquisition of Activision, but it is only half of the story.
• The other half is the platform that Microsoft will need to stake out its territory in the Metaverse and fortunately, it has a few options.
• Its ownership of the Xbox and Minecraft and their respective communities should be able to provide the platform from which Microsoft can launch its assault upon the Metaverse.
• A very robust stable of game development assets will be crucial in ensuring that user engagement with its platform stays strong such that other developers remain keen to create content within its ecosystem.
• Microsoft also needs to decide whether or not it needs a hardware platform because the main reason why Meta Platforms currently has a big lead on everyone in VR is due to its cheap, easy and fun to use product, the Quest 2.
• Microsoft also has the Surface hardware brand and so an untethered consumer VR unit that is separate and distinct from the HoloLens category could be possible.
• The last time Microsoft had a go at this, it made a complete mess of it as the Windows Mobile platform was perfectly usable, but its execution of the marketing meant that the platform did not see the take-up it needed and so it withered and died.
• It had better do a better job of it this time around as there are hundreds of billions of dollars at stake rather than the tens of billions last time.