I wrote just a couple weeks back that the decline in Sony's stock due to Microsoft's planned buyout of Activision Blizzard (ATVI) didn't make a lot of sense because it stemmed from a deal between two totally different companies. And I wrote that we were waiting to see what kind of response Sony had in mind. This is the first step.
Ironically, or perhaps pointedly, this deal would bring under Sony's umbrella the original creator of "Halo" - the flagship first-person shooter franchise on Microsoft's Xbox console, the chief rival to Sony's PlayStation. Bungie no longer owns Halo; it is intellectual property that it handed over when it sold itself to Microsoft in 2000. But Bungie, which then took itself private again in 2007, does own another first-person shooter game, "Destiny." And it has the brains and a plan to do it again.
It's all about IP. The 2014 original Destiny and its 2017 sequel "Destiny 2" had already drawn in 167 million players by 2020, spending 8.6 billion hours in that universe, Bungie said then. The company is also developing at least one entirely new game that it plans to bring to market by 2025.
There's a lot of talk in the videogame industry about whether these corporate deals will lead to more "console exclusives," games you can only play on Xbox or PlayStation or Switch from Nintendo (NTDOY). We can see that it likely will. We can take the lead from Microsoft's US$8.1 billion buyout in 2020 of ZeniMax Media, parent of Bethesda Softworks and role-playing adventures such as "The Elder Scrolls" and "Fallout." Bethesda's first new IP in 25 years, "Starfield," will only be on Xbox (and personal computers) when it launches on Nov. 11.
Bungie says it will continue making games across all platforms, but Bethesda initially said the same thing. Microsoft certainly isn't paying a price equivalent to half of Sony's entire US$140 billion market capitalization for Activision games it then sells on Sony's system. When the legal agreements already struck and in place run out, the games likely go exclusive.
But this is about much more than what game you get to play on your box. This is about the world when the box doesn't matter, but your subscription does. Sony is reportedly working on a project, code-named "Spartacus," a subscription service that would expand on its current PlayStation Plus and PlayStation Now plans and offer a wide catalog of current and older games. That would set Spartacus up to rival Microsoft's highly successful, software-style subscription service Game Pass, which has 25 million subscribers.
Positive market reaction
Sony's shares are up 5.3% since Monday's close, with the Bungie deal announced that evening on the West Coast and therefore in the wee hours of Tuesday on Tokyo time. They've risen 13.8% from their recent low on Jan. 27 but have still only reclaimed half the losses prompted by the mammoth deal announced Jan. 18 by Microsoft for Activision, maker of the top-selling "Call of Duty" game and the object of a California lawsuit alleging a "frat boy" workplace culture of sexual harassment and discrimination.
Sony's planned purchase of Bungie is clearly an order of magnitude smaller than the deal for Activision, which landed for US$68.7 billion, a 45% premium to the share price at the time. MSFT is offering US$95 per share, but Activision stock is still trading well below that at around US$79, reflecting some doubt in the minds of the markets that regulators will sign off on the deal.
The Bungie acquisition by Sony amounts to US$4 million per developer, considering its 900 or so employees, Wedbush analyst Michael Pachter says in an interesting CNet story. "I think this purchase is more panic-driven than financially driven," he says.
Then again, the Activision purchase, involving some 9,500 employees and several successful games, amounts to US$7.2 million per head.
Give us gamers
Besides brains, what the companies are buying are communities of game players who continue to buy subsequent games in a series and continue to play games for years after they come out.
Sony has recently bought smaller studios with which it was already working closely, mainly on PlayStation-exclusive games. The developers benefit from Sony corporate support and time to put effort into new games.
Bungie is more than doubling its headquarters in Bellevue, Washington, a stone's throw from Microsoft's HQ in Redmond, the Seattle suburb next door. That construction is due for completion this fall. It is also expanding to Amsterdam with its first overseas office, to be home to its increasingly extensive publishing and marketing divisions.
Activision, in another quirk, used to publish Destiny for Bungie. All the corporate ins and outs can mask us to the broader trend, which is that the console makers desperately want to expand away from their brick-like consoles and into games-as-service and videogame communities.
This is where Bungie is onto a winner with Destiny 2, which began as a pay-to-play game and then became free. It's also where the Call of Duty IP is so very successful, with staunch support from loyal customers who buy most if not all of the annual releases of the game and keep playing them long after they come out while watching e-sports professional teams play the game.
It is interesting also to see that Bungie, in announcing its expansion, has added external board members from ViacomCBS (VIAC) (President of Global Consumer Products Pamela Kaufman) and the software maker Altair Engineering (ALTR) (Trace Harris), with Harris also having a background at Vivendi. They join Simon Zhu, the globalization and strategy chief at Chinese e-commerce company and videogame maker NetEase (NTES) , who was already on the board. Those are figures with nous from other nodes of the entertainment industry.
Going the franchise route
Successful videogame titles are becoming powerful cornerstone franchises, even if I hate that word. There has been an extremely poor record of turning videogames into good live-action movies or TV. But that's starting to change.
Unsurprisingly, Netflix (NFLX) has led the charge and has itself announced plans to enter videogames. The wildly successful Netflix TV series "The Witcher" got off the ground largely on the success of "The Witcher 3" videogame by Polish developer CD Projekt Red, although that was based itself on the original novels by Polish author Andrzej Sapkowski.
Netflix also had some success with the 2017 anime show "Castlevania," based on the long-running vampire-hunting videogame series first developed by Konami Holdings (KONMY).
Now, the Halo that's so synonymous with the Xbox (and invented 20 years ago by Bungie) will have its own live-action TV show, due to debut March 24 on the Paramount Plus streaming service. Indeed, there is a whole slew of videogames about to be turned into TV, movies and other forms of content.
I'm not alone in thinking that videogames, or "interactive entertainment," may be the most-exciting, most-captivating segment of the entertainment industry. The U.S. market alone hit US$85.9 billion in 2021, according to Statista, on 12.8% one-year growth. That's double the size five years ago. The global industry likely surpassed US$138 billion, Statista says. Separately, stat tracker Technavio says the global industry will grow by US$75.5 billion by 2025.
By comparison, the global music industry is around US$57.1 billion in 2021 and is growing at a compound rate of just 5.2% per year. Global movie box office in a "normal" 2019 year was just US$41.7 billion.
Plenty of engaged customers
Videogames offer an immersive world in which the player interacts with the environment and increasingly other real-life players around the world. People passively watching a movie or a TV show don't have the same involvement in the content or continued engagement with it. Watch it and you're done. Yet people continue to play some videogames for years - Bethesda's 2011 addition to The Elder Scrolls series, "Skyrim," just got a 10-year anniversary edition. It has been played by 60 million people, and millions continue to wander around its massive open world.
In that sense, videogames are more akin to software than movies or TV. The games can be given DLC, or downloadable content updates, that could theoretically refresh a game for as long as the developers support it. A game such as Skyrim has a large community of independent "modders" adding elements to the game themselves, in particular on computer.
It's that long, long life that Sony and Microsoft are buying, plus the players who keep playing and the subscriptions that the console maker can sell well into the future. Bungie will be one of many weapons in Sony's expanding catalog, just as Activision and Bethesda bring name-brand game series to Microsoft. It's an excellent time to be in videogame content creation. Just like a never-ending game, the industry M&A ain't done here, not by a long shot.