Sony (T:6758) and (SONY) shares continue to trade near a double-digit discount to where they started in the week, following the announcement from Microsoft (MSFT) that it would buy the videogame maker Activision Blizzard (ATVI) for a whopping US$68.7 billion.
Sony stock dropped 12.8% on Wednesday, with the deal breaking after the close of Tuesday's trade. Here's a company with a market cap of US$140.8 billion that shed US$20 billion in Tokyo due to a deal from another company...
Microsoft, meanwhile, is the purchaser at a hefty price tag. That would normally depress shares of the buying company. But MSFT saw its shares initially rise 3.5%. (They've since settled back in the broader tech malaise).
It's unlikely that the pessimism over Sony is warranted. However, the enormous Microsoft purchase does promise to rewire the gaming sector - and provoke Sony into a response.
The deal is eye-popping, setting all kinds of high-water marks. It's the largest-ever buyout in the gaming sector by a long stretch. It's Microsoft's biggest-ever acquisition. And it even surpasses Dell's US$67 billion deal to buy data-storage maker EMC in 2016 as the largest tech-sector merger.
But it doesn't affect Sony, not directly. At least, not for now. Yet its shares, still 9.0% down since Tuesday, have significantly underperformed the broad Topix index in Tokyo, down 2.6% in the same timeframe.
At US$95 per Activision share, Microsoft's purchase comes at a 45.3% premium to Monday's close. Activision's current price of US$81.76 indicates that there's still some uncertainty whether regulators will approve the deal. But they will. There's no shortage of companies that design videogames - though few have the size and scope of Activision.
The immediate question in the minds of videogamers, and owners of Sony PlayStations in particular, is whether Activision games will become exclusive to Microsoft's Xbox machine. That won't be the case for the game publisher's top titles. There's too much cash to leave on the table.
Activision's latest release, Call of Duty: Vanguard, was the best-selling game in the world last year, according to market-research company NPD. That's despite coming out in September, and despite getting pretty bad reviews. There's basically a new Call of Duty game every year, and it's hard to breathe life or break new ground. Yet the previous title in the series, Call of Duty: Black Ops Cold War, sold second-best worldwide in 2021.
Call of Duty: Vanguard was also the second-highest seller in 2021 in terms of downloads from Sony's own PlayStation store. That's true both in North America, where only the basketball game NBA 2K22 from the Take-Two Interactive (TTWO) studio 2K Sports sold more, and Europe, where only the soccer title FIFA 22 from the Electronic Arts (EA) studio EA Sports sold more.
Activision's decision to sell out to Microsoft takes the heat out of a legal battle that has seen the state of California sue the company. The state Department of Fair Employment and Housing sued the Santa Monica-based company over allegations top management ignored sexual harassment and discrimination, and allowed a "frat boy" workplace culture to persist. While Activision CEO Bobby Kotick has agreed to stay until the deal closes, the assumption is that he will then leave.
The main question in the minds of investors isn't where Call of Duty ends up. It's whether Sony, which sells more PlayStations than Microsoft sells Xboxes, is losing out in a long-run battle for the future of gaming.
That is heading in the direction of streaming games, and of "games as a service." That's a concept in which a developer sells a game, more than likely as a digital download, then continues to provide ongoing interactive play that draws in a large community of continuing gamers. The digital world can be refreshed with "DLC," downloadable content that expands the game, at a cost.
Microsoft has a game-subscription service, Game Pass, that already has 25 million subscribers as of this week. It is guaranteeing "day-and-date" releases on Game Pass of games that other players may have to await, on other systems. Players keen to get their controllers on the latest game are going to migrate to Game Pass, and by extension either a computer, or an Xbox.
Game Pass can charge US$9.99 per month on Xbox or US$14.99 to include Xbox and PC. Its success will be keeping those subscriptions coming well into the future, as Netflix (NFLX) does with movies.
Sony has its own quasi-equivalent, PlayStation Now, but it has a lackluster lineup of older games, charging US$5 per month for a year-long subscription. Confusingly, it has another subscription service, PlayStation Plus, which costs the same, and includes newer games but not the old catalog.
It's highly likely that Sony will respond to the Activision acquisition first and foremost by revamping its subscription services this year. It, too, undoubtedly sees the future of gaming lying in subscriptions, gaming services and constantly updated content rather than the rather antiquated idea that you sell a brick-like structure and physical game cartridges or discs to go in it. Gaming will follow the lead of music and movies - and "interactive entertainment" is arguably the most exciting area of the sector.
Microsoft, which of course is coming from an office-software background, has had a greater need for content to populate Game Pass. It also bought ZeniMax Media in 2020 for US$7.5 billion, the parent of Bethesda Softworks. Bethesda develops The Elder Scrolls and Fallout series, and is due in November to deliver its first new "IP" in a quarter-century in the form of the game Starfield.
Starfield will be exclusive to Xbox and "non-platform" players on personal computers, despite initial indications from Bethesda that wouldn't be the case. So we may see Call of Duty migrate in that direction - or, more likely, less high-profile (and high-selling) titles such as Overwatch and Diablo.
Sony has bought smaller studios that were effectively already working exclusively with PlayStation. Last year, it bought Housemarque, the Finnish maker of the PS 5-exclusive game Returnal and prior PlayStation-specific games, as well as Bluepoint, which specializes in remasters and remakes of older PlayStation games. It has yet to buy a mammoth out-of-house studio.
For gamers (and I'll confess I own a PS 5 and a very dusty PS 2), the game world is getting a little more bifurcated. There'll be less choice on each platform as studios get gobbled up, with cross-platform games less and less likely.
Sony isn't exactly talking up an eternal future of Activision games, only that they're remain for the time being.
"We expect that Microsoft will abide by contractual agreements and continue to ensure Activision games are multiplatform," a Sony spokesperson said, according to The Wall Street Journal.
The CEO of Microsoft Gaming, Phil Spencer, was equally cagey. When asked if Activision games will remain on Sony systems, he said only that "our goal is to allow the content to reach as many players as possible."
Activision games also appear on the eShop at Nintendo (T:7974) and (NTDOF) . It's noteworthy that Nintendo's share price has not been dented in the slightest by the Microsoft deal. In fact, Nintendo shares are up 2.4% since Tuesday's close in Tokyo.
That's partly because Nintendo shares sold off heavily last summer. They plunged 27.4% between July 6 and October 5, just before the company announced the OLED upgraded version of its best-selling Switch gaming console. Investors had clearly expected a bigger boost from the rumored "Switch Pro" version with higher-processing power - there's now abundant doubt that one will ever come out.
Hardware makers have also had huge struggles securing enough semiconductor chips to meet demand. Both the Xbox Series X and PS 5 are in such supply that there's a whole industry of resellers and restock trackers that treat hardware "drops" like mining gold.
It's a good time, however, to be a game designer. Where Sony's share price has suffered, the stock of Take-Two is up 6.8% since Tuesday's deal was announced. EA shares have risen 3.7%.
Both are potential targets for Sony if it continues its corporate expansion in gaming. Take-Two had only just set a record on January 10 for a videogame-company purchase in agreeing to buy Zynga, maker of FarmVille and other free mobile games, for US$12.7 billion. Notably, Activision has another huge mobile-gaming and smartphone favorite in the form of Candy Crush.
Chinese gaming giant Tencent Holdings (HK:0700) and (TCTZF) is the current heavyweight in mobile gaming, with best-sellers such as Player Unknown's Battlegrounds and Honor of Kings. It bought Finnish mobile-gaming maker Supercell for US$8.6 billion in 2016. Tencent pioneered the concept of giving your games away, and making money from microtransactions and in-game purchases.
Sony's profile in gaming is currently intricately linked with its consoles. But we're seeing Microsoft, with its software origins, break that mold. Sony surely wants to expand its digital, mobile and hardware-free offering, as intangible intellectual property surmounts hardware sales.
In terms of its own acquisitions, Sony may stay closer to home and look at Japanese game studios such as Capcom (T:9697) and (CCOEF) , Square Enix (T:9684) and (SQNXF) and FromSoftware, a subsidiary of Kadokawa (T:9468).
Capcom has consistent winners with series such as Resident Evil, Street Fighter and Monster Hunter, while Square Enix consistently delivers big numbers with its Final Fantasy games, with the 16th edition in the works. FromSoftware has the much-hyped George R.R. Martin collaboration Elden Ring due next month, and publishes the Demon's Souls and Dark Souls series.
Konami Holdings (T:9766) and (KNAMF) has been less successful in recent years, so it might make a cheaper target. But Konami still has intellectual property in the form of titles such as Metal Gear Solid, Silent Hill and Castlevania that Sony could give a reboot.
We'll see what Sony's reaction is, assuming the Microsoft-Activision merger goes ahead. MSFT has a big first-mover advantage with the early success of Game Pass. Ultimately it would be a good thing if Sony offers gamers an equivalent service. Meantime, we can only hope "indie" gamemakers are not going to become an extinct species, producing high-quality games anyone, on any system can play.