This article first appeared in The Edge Malaysia Weekly on January 24, 2022 - January 30, 2022

FLUSH with cash, the biggest global tech giants — iPhone maker Apple Inc, software behemoth Microsoft Corp, search heavyweight Google’s parent Alphabet Inc, e-commerce giant Amazon.com Inc and social media Goliath Facebook’s owner Meta Inc — have long pondered whether their days of growing by making bolder transformative acquisitions are over. A hostile Congress and President Joe Biden have repeatedly made their distaste for mega mergers known. Last May, Amazon announced it would buy MGM ­Studios, which owns the James Bond franchise among others, for US$8.45 billion. That deal has been stalled as both the US Department of Justice and US Federal Trade Commission are opposed to it. If Amazon can’t buy MGM, can Big Tech get any major deal done?

On Jan 18, Microsoft announced plans to acquire Activision Blizzard Inc, a video game development studio that has been roiled by claims of workplace sexual misconduct, in an all-cash deal valued at US$95 a share or US$68.7 billion (RM287.7 billion) — the largest technology acquisition in history. The deal, if it is approved by regulators in the US and Europe, would dramatically expand the software heavyweight’s already sizeable video game footprint, adding an array of popular game franchises including Call of Duty, World of Warcraft and Candy Crush to Microsoft’s Xbox console business and its own games like ­Minecraft, Halo and Doom. It will also catapult Microsoft to become the world’s third-largest gaming company by sales, behind China’s Tencent Holdings Ltd and Japan’s Sony Group Corp, and way ahead of current No 3 player, Kyoto-based Nintendo Co Ltd.

Ostensibly, the move was intended to “accelerate the growth in Microsoft’s gaming business across mobile, PC, console and cloud” and “provide building blocks for the metaverse”. “Gaming is the most dynamic and exciting category in entertainment across all platforms today and will play a key role in the development of metaverse platforms,” Satya Nadella, CEO of Microsoft, said when announcing his company’s largest-ever acquisition. The acquisition combines gaming software or content produced by Activision and Microsoft, access to a 400 million-strong gaming community and Microsoft’s expertise and hefty footprint in the cloud as well as its experience as the biggest subscription-based software-as-a-service (SaaS) player, to herald a new era in cloud gaming.

To understand the boom in mobile video gaming and the advent of cloud gaming, you need to look at the big picture. There are 7.9 billion people on earth. Five billion of them are internet users. Over 95% of internet users also have a smartphone, which gives them access to mobile internet. Over the past year, nearly three billion people at one point or another played some form of a video game, from fairly simple ones like Angry Birds to more mentally challenging ones like Activision’s Starcraft II.

Video gaming globally is now a US$260 billion industry, if you add in all the related services and peripherals. People spent more on video gaming than they did on movies and music combined last year. Indeed, the video game industry is now bigger than the entire global sports industry, including all the sponsorships. The ubiquity of mobile devices has lowered the barriers to entry and made everyone a potential gamer. Little wonder, then, that Walt Disney Co, Netflix Inc as well all the big five tech players — ­Apple, Microsoft, Amazon, Alphabet and Meta — want a piece of the video gaming action.

Mobile is now the largest segment in gaming, with over 95% of all players globally playing games on their devices like smartphones or tables, though hardcore gamers still prefer game consoles such as PlayStation 5, Xbox Series X and Nintendo’s Switch or games on PCs. That has led to a race to develop content or software that can be streamed across platforms — mobile devices, PCs and consoles, the way we can watch movies on cinema screens, TVs, tablets or our smartphones. The popularity of mobile games, most of which are only accessible through apps on smartphones, has put game developers in a bind. Just two players — Apple and Google’s Android — dominate the smartphone space and collect 15% to 30% toll on app purchases, though both platforms have plenty of free games for casual gamers.

Apple’s App Store generated US$60 billion in revenues in 2021, Apple said in a statement two weeks ago. Gaming apps account for around 70% of total App Store revenues. According to testimony in Apple’s court case against gaming developer Epic Games Inc last year, gaming apps on the App Store have gross margins of over 75%.

Not surprisingly, Microsoft, Amazon.com, Sony, Tencent, Epic Games and a number of other players are trying to change the game by taking the games to the cloud and focusing on recurring revenues from selling cloud-based subscriptions that bypass Apple and Google. Ironically, Google and Apple are developing their own cloud-based gaming platforms so they don’t lose too much of the revenues. Nadella said earlier last week that one reason why Microsoft was so keen on building its own video content empire was because it wants to bypass toll collectors like Apple’s App Store and the Google Play Store.

The big opportunity is in cloud gaming and the Holy Grail of cloud gaming is gaming subscriptions. Just as cloud-based SaaS powered by subscriptions or recurring revenues was the key driver of the software boom over the past five years, cloud gaming has the potential to be the next big thing. Microsoft is moving to cloud gaming just as video games sales are now mostly digital. Two-thirds of total games software revenues are now digital downloads and within a few years, if you still have an old console that only takes discs, probably the only place you might find games would be on eBay.

So what is Microsoft getting for nearly US$70 billion? The software firm will get its hands on nearly 400 million monthly active players with its purchase of Activision. At least 250 million of them play games on their smartphones. Microsoft has a Game Pass gaming subscription service with over 25 million players. One reason it is buying Activision is to woo a large enough portion of Activision users to its Game Pass service. Microsoft’s Xbox Cloud Gaming service is smaller than its Game Pass but its strategy is to combine Game Pass and Cloud Gaming and come up with something akin to a Gaming-as-a-Service.

If you find all this a little overwhelming, let me explain: Cloud gaming is an emerging technology that allows people to stream games using nearly any internet-connected device with a screen, just like how they stream videos on Netflix, Amazon Prime, ­AppleTV+ or other platforms. Streaming games is more challenging, though, because games are interactive and require a lot more data to run smoothly. While Netflix moved into mobile games last year, it has so far offered only a handful of games that subscribers must download to an Android or iOS device — not games that can be streamed via the cloud. But Netflix’s cloud gaming offerings are coming. Netflix CEO Reed Hastings has identified gaming as the biggest threat to his streaming service and wants to be one of the leading players in cloud gaming.

Cloud-game services raked in US$3.7 billion in consumer sales in 2021. Omdia, a video games research firm, estimates total cloud-games revenues will exceed US$12 billion by 2026. Barclays Research in a recent report estimates that total cloud gaming revenues are likely to grow 32% from an estimated US$4.03 billion last year to US$5.3 billion this year. In 2024, Barclays forecasts it would touch US$7.9 billion. Microsoft with its xCloud is a dominant player with more than half of the total market, but others like Google’s Stadia as well as Amazon have been growing market share. Both Facebook and Apple have cloud gaming ambitions and several large game developers like Epic Games and Roblox are eyeing the opportunities in the cloud space as well.

From radio to filmed entertainment in cinemas to TV and streaming, what we watch and hear to entertain ourselves has dramatically changed over the past century. As the metaverse evolves, gaming is likely to have a transformative impact on entertainment. Video games are continuing to change the way we entertain ourselves. Adaptations of video games into movies and TV shows have picked up momentum in recent years. Sony is reportedly working on three movies and seven TV shows based on its PlayStation video games. Netflix has already adapted or is working on adapting a number of video game titles into TV shows and movies such as The Witcher, Assassin’s Creed, Minecraft, Resident Evil, ­Cyberpunk and Dota.

Will the Microsoft-Activision deal get Washington’s seal of approval or will it be blocked to send a message to other tech giants about what is permissible and what is not? The chances of the deal going through are said to be 50-50. Until Biden took the helm a year ago, America had almost outsourced tech regulation to Europe where Margrethe ­Vestager, the Commissioner for Competition, has imposed hefty billion-dollar fines and called out Facebook, Google, Amazon and Apple for using their power to skirt the rules. Because of the Danish politician’s crusade against Big Tech, Brussels, not Washington, DC, is the global capital of tech regulation. Even with Biden in charge, the US government had shown little interest in Microsoft when it came to reining in its expansion. But the Activision deal is different. US regulators are likely to scrutinise it and even if they do somehow approve it, the deal is likely to be blocked by European regulators.

For its part, the software giant is likely to argue that the video gaming industry is very competitive, and that it is essentially using the acquisition to beef up its own gaming IP ­(intellectual property) portfolio. Microsoft already owns a smaller game development studio, the Xbox Game Studios. In 2020, Microsoft bought ZeniMax Media, the parent company of Doom and Fallout studio Bethesda Softworks, in a US$7.5 billion deal. But that was a small deal and done before Biden took office.

What does it all mean for Microsoft’s stock? Regular readers of my Tech column will recall the piece I wrote on the software behemoth exactly three years ago when the stock was languishing around US$96. The key to how successful Microsoft would be was how much traction it had in the cloud space, I wrote then. Not just as a competitor to Amazon’s AWS cloud infrastructure unit but also its ability to move everything else it was offering to the cloud, including gaming. So, what’s the scorecard? Consider this: The stock has more than tripled since my late-December 2018 column. That’s how successful the market thinks Microsoft’s cloud push has been.

Over the next three years, how well Microsoft does will depend on whether it remains on regulators’ radar. One reason the software giant has done well is that regulators have been laser-focused on the parent companies of Facebook and Google or, to a lesser extent, ­Amazon and Apple. Whether the Microsoft-Activision Blizzard deal goes through over the next 18 months, one thing is certain:  Cloud gaming is the game in town and every player wants to be the Netflix of gaming.

Assif Shameen is a technology writer based in North America

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