Dr. Melissa Harris-Perry: This is The Takeaway. I'm Melissa Harris-Perry.
Dr. Melissa Harris-Perry: It's been a rough couple of weeks for Microsoft, in the gaming space that is. The company behind the ever-evolving Xbox staked its gaming resurgence on its system exclusive, Redfall.
Speaker 2: Vampires, cultists, psychic phenomena. I've never seen anything like it.
Speaker 3: This is not the Redfall I remember.
Speaker 4: Ever forward.
Dr. Melissa Harris-Perry: Of course, Microsoft might not want to remember either. The company had high hopes for the vampire looter-shooter, but those hopes have been dashed. The game's widely panned by gamers and critics alike and boasts consistently low scores in reviews. The Redfall gaming debacle follows on the heels of another blow to Microsoft's gaming bottom line.
The company hoped to purchase powerhouse developer and publisher, Activision, in a deal worth nearly $70 billion. The developer is known for franchise hits like Call of Duty and Diablo, but the UK's Competition and Markets Authority blocked the deal due to their concerns surrounding the future of cloud gaming. Microsoft's Vice Chair and President, Brad Smith, had this to say in part following the deal being blocked.
"We remain fully committed to this acquisition and will appeal. The CMA's decision rejects a pragmatic path to address competition concerns and discourages technology innovation and investment in the United Kingdom." Ethan Gach is a senior reporter at Kotaku, and he joins us to break down Microsoft's current place in the gaming industry. Ethan, welcome to The Takeaway.
Ethan Gach: Hi, Melissa. Thank you so much for having me.
Dr. Melissa Harris-Perry: All right. Lots of folks hear Microsoft and think like Word or Outlook, because I am Gen X, but within the world of gaming, it's definitely about Xbox. Can you give me a sense of where Microsoft is situated within the gaming world?
Ethan Gach: Sure. Microsoft got into the gaming space back in the early 2000s with the first Xbox and killer app at the time, that was Halo, which was a space marine shooter. Ever since then, they've been in strong competition with Sony, which makes the PlayStation. Obviously, a lot of people are very familiar with Nintendo, but they make devices that are maybe less powerful and aren't directly competing with these more expensive gaming machines. Microsoft has really struggled in recent years to create hits on the level of what it had in the early years with Halo and some other games.
It's pivoted towards this strategy of acquiring other big studios and publishers and using their games to try and fill a new subscription service called Game Pass that is very much the Windows version of gaming. It's basically taking the subscription model that Microsoft has had a lot of success with on the Microsoft Office and on its cloud computing services and trying to use that to create a platform where anyone can sign up for $15 a month and start playing games, whether they have a machine or not.
They can do it on their phone, on a PC. It's really about them trying to, after struggling to sell as many Xboxes as Sony does PlayStation, is trying to find a new battleground on which you can compete.
Dr. Melissa Harris-Perry: When you start talking about the actual boxes, help me to understand the generations here around gaming and the distinctions for gamers between having those physical consoles which I very much remember from the start, start, to this more online experience.
Ethan Gach: Yes, it's interesting. Gaming is in some ways at the bleeding edge of technology and culture and in other ways a very strange beast. If anyone was still buying Blu-rays, they would just expect that they would work on any machine. Gaming is very unique in that if you want to play certain games, they only work on certain machines. Xbox will have a whole set of exclusives, and if you are going out to the store and deciding which console you're going to buy, a lot of that decision can be based around which games you want to play.
If you want to play the new Zelda coming out or Mario, then you would have to pick up Nintendo Switch. If you want to play God of War or the new Spider-Man coming out, then you would need a PlayStation 5. Then if you wanted to play Redfall or the upcoming RPG Starfield, you need an Xbox. For years now, each new console cycle has been a competition to see who can get out of the gate with a lot of momentum and some big blockbusters that make the people who are upgrading maybe later in the cycle who, two or three years in, are saying, "All right, I'm ready to buy one," or "This will be my first console, which one should I get?"
Then they can look around and see which one seems to have the most to offer them. As Microsoft has somewhat struggled with that, they've pursued this other avenue of trying to offer games in the cloud where you don't necessarily have to have a machine. You can stream the biggest blockbusters ever to your phone. The experience isn't completely great right now, but it is something that they hope at least, they pitch it as being able to branch off into an entirely new audience of billions of people who might not ever be interested enough to spend $500 on a high-end machine but they might pay for a month to see what it's like on their phone and see if there's anything there for them.
Dr. Melissa Harris-Perry: Then help us to understand where Activision fits in this. Is that movement potentially into cloud precisely why Microsoft wants to acquire?
Ethan Gach: There's a question of how big cloud computing really will be and really is right now. Right now, at least, if you are part of that ecosystem, it's a perk on this side. Game Pass is this two-pronged value proposition. You both get this ability to play a lot of games over the cloud on any device but you're also getting free access if you pay for each month to a library of hundreds of games. There's the Netflix idea that instead of having to go to the store and buy a $60 or $70 game or download that, you can try a bunch of different things, find something you like, and then continue moving on to new stuff each month.
With Activision, the idea is that, well, they have a huge library of some of the biggest, most popular games around, it's basically a machine for producing annual hits, and Microsoft could purchase them for a huge amount of money, but then maybe be guaranteed these hits that would help propel this service and its platform in the future because people are naturally going to gravitate towards wherever these games are and wherever they can get the best experience with them and get them most cheaply.
Dr. Melissa Harris-Perry: Ethan, stick with us. We're going to take a quick break, but we'll be back with more on this question of gaming and the business law of rules international intrigue in just a moment. It's The Takeaway.
Dr. Melissa Harris-Perry: You're back with The Takeaway. I'm Melissa Harris-Perry, and we're still with Ethan Gach, senior reporter at Kotaku, as we break down the status and the possible future of Microsoft's bid to acquire gaming developer and publisher, Activision. All right. Ethan, help us to understand a bit about how the announcement was received by the gaming community as a whole as well as by regulators, both in the US and in the UK, relative to this attempt to close for $70 billion.
Ethan Gach: Yes, I think it was a big shock, mostly because it seemed like the UK's regulatory investigation was split up into two parts. The first one was looking mostly at whether or not Activision's Call of Duty franchise would become an exclusive on Xbox, whether it'd be pulled away from everyone who currently owns a PlayStation. For months, Microsoft and Sony were fighting back and forth about whether or not that would happen, Microsoft saying, "That's not going to happen. We're not incentivized to financially. We are promising 10-year agreements that we won't do that."
Sony saying that, basically, you can't trust that, there's all these different ways they could get around it or different ways that PlayStation customers would suffer. Initially, the CMA in a provisional finding said, "Actually, that is a big concern. We're going to block the deal based on that. You can acquire part of Activision if you want but not the whole thing." A month goes by, Microsoft brings new data to the table and is able to give in to the CMA that actually we don't have that incentive and that's not a concern and that part of the deal should be able to move forward.
At that turning point, everyone assumed, "Oh, this is probably going to go through at some point. The CMA has staked out its position on some of these things and maybe it's politically at least been able to convey that it is looking very closely at these deals and is not just letting them through." Then the last part was looking at this cloud gaming portion. Because in the gaming space, it is a very small part of it right now and it's not something that is front of mind for a lot of people, no one, I think, thought that it was going to be a big hurdle.
That's the part that the CMA came back and said, "No, actually, this is a big concern for us, and we're going to block the entire deal just for this small portion." Obviously, Activision's stock started to tank after that. Microsoft's surprisingly went up. It opened up a ton of questions of maybe this recent trend of video game consolidation that we're seeing will stall.
Dr. Melissa Harris-Perry: What does this mean for Microsoft in the short but maybe even more importantly in the longer term? Is this really for them, excuse me, a game changer? Do they have a plan B pathway?
Ethan Gach: I think definitely for Microsoft. You never know how these deals come about and how much of it is that certain people in charge at the time decide that this would be a great play and this would be a way to create a new path forward for the company or it's just an opportunistic thing. One important thing to remember is that at the time the deal came about, Activision was-- A couple of its big games were delayed.
Its stock price was down a lot, and it was facing this unprecedented lawsuit by the state of California alleging widespread sexual discrimination and harassment at the company for years. At the time the deal came out, it very much felt like this was almost a way for Activision and its C-suite to exit the business and give this very valuable company to Microsoft for a premium and $95 a share and get a reboot on that whole legacy there. For Microsoft, they could take the money. There's plenty of other publishers they could buy.
For Microsoft as at large, gaming is not an existential part of their business. It is a very big part. It's a very important part, but they obviously are very invested in Windows and in Azure computing. I think for people who are invested in the Xbox ecosystem, there's a big question of, what am I here for? I think at some point when there were issues with Xbox, we mentioned Redfall, there's a sense among people who have invested in Xbox who played a lot of, when am I going to get some of these huge hits on the scale of what people might be getting with Nintendo or with Sony.
In lieu of those big hits, the deal made it feel like, "Well, I'll eventually get Call of Duty on Game Pass. I'll get Diablo IV on Game Pass. I will get this huge benefit where for a very low price each month, I can get access to the biggest games around. Even if there aren't a lot of new exclusive Blockbuster IPs coming out of Xbox, I will at least have this great deal on my hands that makes it very convenient and appealing to go pick up an Xbox because you don't have to start buying a bunch of games and stuff. You can get access to all these things immediately."
I think now with this deal on hold and potentially down and out, it leaves that question of what is Microsoft's next thing on the gaming front to offer people. There's no clear answer.
Dr. Melissa Harris-Perry: As you were talking about, we can never be sure if it's just somebody inside who's like, "This is the way to go." I have this vision in my head of a succession version of what's going on with these decisions. I guess I'm wondering-- I am not a gamer. I've got lots of gamers in the family, but I do wonder about, again, in the 10-year term, let's say, maybe even 20, if having consoles, hardware can possibly make sense across, that it creates a barrier to entry, even a barrier to entry to older games that you then have to actually go out and find older devices to play on. Given that we all are always carrying phones with us, I guess I'm just not quite capturing why there'd ever be a long-term investment in the hardware.
Ethan Gach: Well, I think Microsoft is exactly, or the Xbox team especially, that's exactly their thinking, which is that the days of this hardware being a huge selling point and being a big profit driver are over, and we need to pivot. The margins on consoles have gotten worse and worse. They're not great. Usually, where companies are making a lot of their money is on the games they sell for those consoles. Like Apple, for instance, they get, on average, a 30% cut of all the sales, especially digital sales.
Now in terms of in-games like Fortnite and other things, microtransaction sales, sales of cosmetics, and other stuff, these huge in-game economies around things you buy for your characters. I think they are seeing like it's a lot of work to produce this console every so many years, there's a lot of headaches involved, it's very hard to compete, so what if we could rise above that? And yes, whether it's through cloud gaming or through just being a huge publisher of games, make money through those because that's much more profitable for them
I do think one of the big questions is really cloud gaming probably would be a lot bigger, especially here in the US right now, if other issues were solved like the infrastructure. The US has notoriously bad internet providers in terms of competition. The services aren't great, the prices are high, the speeds are slow. If that were to turn around in 5 to 10 years, I think you probably would see that-- To your point, it's probably more a question of if it is going to happen in 5 to 10 years or it's going to happen in 10 to 20 years. That would be, obviously, a huge difference for what their strategy is in the short term.
Dr. Melissa Harris-Perry: Ethan Gach, thank you so much for taking the time out with us today on The Takeaway.
Ethan Gach: Thank you so much for having me.
Dr. Melissa Harris-Perry: Ethan Gach is a senior reporter at Kotaku.
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