Microsoft’s Pact With Ubisoft Signals Long-Term Plan on Videogame Business

The U.K. regulator had blocked the Microsoft-Activision merger, citing concerns about how Microsoft could use Activision’s blockbuster Call of Duty franchise to stamp out competition in the nascent cloud gaming business.

The regulator will now give the deal a fresh look. It includes noteworthy concessions, making approval more likely, wrote Raymond James analyst Andrew Marok in a Tuesday note.

The key difference is Ubisoft will acquire the exclusive cloud streaming rights outside the European Union to existing and future Activision Blizzard games for 15 years. Those rights are in perpetuity, meaning Microsoft will only get exclusive rights to games published after that timeline has expired.

Microsoft’s Activision acquisition had cleared nearly every hurdle except in the U.K. But the decision to move forward without Call of Duty exclusivity outside of the Europe Economic Area, where it has existing streaming pacts lined up, shows the company is willing to make short-term concessions to protect the deal’s long-term value, Marok adds.

Wedbush analyst Nick McKay told Barron’s that even though Microsoft’s Xbox Game Pass likely won’t be the only streaming service to offer new Call of Duty games, it still shifts the landscape from a period where Call of Duty was only sold for $70 a pop.

On its own, Activision Blizzard viewed selling individual copies as a better business than licensing out Call of Duty to cloud services. But Microsoft sees a far larger market of users who may not want to pay for a high-end computer or console but would pay for a subscription access to games on any device.

“Over the long term, it’s going to gradually tilt the console market more in Microsoft’s favor, because Game Pass becomes that much better from Activision content being available within it from day one,” McKay said. “The future of console gaming, because of this deal, is going to become dictated more by the popularity of Xbox Game Pass, and subscriptions in general, than it had been previously.”

He thinks the deal will still position Microsoft to become a
Netflix
-like powerhouse in the game streaming business.

“Console and PC gaming is unique in that you’re still expected to pony up $60 or $70 up front to try truly triple-A experiences, when music and filmed entertainment have moved to these subscription models,” McKay says. “Games will as well over time because consumers have shown an interest in paying for monthly access to wide portfolios of content, over paying intermittently at higher prices for access to individual pieces of content.”

Activision Blizzard also owns mobile-games giant King, which published Candy Crush. It will give Microsoft a major presence in the mobile games business.

“At a minimum, it gives them several high profile mobile IPs,” McKay says. “I think the long term goal would be, within the company, for them to start to catch up with the Apples and Googles of the world, as it relates to their prominence in the mobile ecosystem.”

Of course, the U.K.’s regulator will still need to approve the agreement. It set an Oct. 18 deadline for an investigation into the restructured deal.

“We see this move as alleviating the CMA’s concerns; it is hard to argue that providing rights to a rival firm restricts competition in the market, especially when that rival firm is then given permission to act in their economic interest with the rights they have received,” Marok wrote.

Write to Connor Smith at [email protected]