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Microsoft and Activision Blizzard announced the biggest deal in gaming history today with Microsoft’s $68.7 billion cash offer to buy the decades-old independent game publisher.
The deal will combine Microsoft’s Xbox and PC gaming business with franchises like Halo, Fallout, and Forza with Activision Blizzard’s franchises like Call of Duty, World of Warcraft, and Overwatch. And it should be a big boost for Microsoft’s Xbox Game Pass subscription service, which has 25 million subscribers.
Bobby Kotick has been CEO of Activision Blizzard since its inception in the merger of Activision and Blizzard in 2008, and he was also CEO of Activision for decades before that. He engineered the $5.9 billion acquisition of King, maker of Candy Crush Saga, in 2015.
But Activision Blizzard was in a weak position with internal turmoil, thanks to a sexual harassment lawsuit by the California Department of Fair Employment and Housing, which alleged the company had a culture of sexual bias and tolerance of sexual harassment. The company denied the charges, but, combined with weaker performance for Call of Duty and Overwatch, Activision Blizzard’s stock price fell and made it a ripe takeover target. That prompted the deal of the century for gaming.
I spoke with Kotick about the acquisition and why it made sense to do it.
Here’s an edited transcript of our interview.
GamesBeat: Why do the deal? Why is this a good time to sell? And why is it a good price as well?
Bobby Kotick: The most important is — it’s funny, you and I were talking about AI last time — as you look at the increased competition between Tencent, and NetEase, and Sony, and now you have Google and Amazon, and Apple, and Facebook, and Microsoft and Netflix. We were looking at over the course of the next couple of years, and starting to realize that we need thousands of people to be able to execute against our production plans. We need them in disciplines like AI and machine learning, or in data analytics, or in purpose-built cloud and cybersecurity — and that we just don’t have. And that competition for that talent is expensive, and really hard to come by.
And so, as we’re starting to think about all these skills that we need, that we don’t have and that were really necessary, we realized that we should be thinking about ways to get that talent. This was an acknowledgement and recognition. And then Satya [Nadella, CEO of Microsoft] and Phil [Spencer, head of gaming at Microsoft] and I have had conversations over many, many years of bigger things that we could do together.
And so when Phil called, it happened to be at a time where we were getting ready to start our long range planning process, and realizing that these were going to be issues and challenges. We had the discussion. Phil and I know each other well, and we have a great relationship, and the company has a great relationship. And when you start to think about all the skills we need, all the resources we need, and what they have, it made a lot of sense.
When they originally called, we said we would we think about it, and then they made this offer that was incredibly attractive at 45% premium over the stock price. And I think it just made a lot of sense. And so, the more we spent the time talking about how it would work, and what would happen, what resources were available, they clearly were the best partner.
GamesBeat: And was the sexual harassment investigation factor in this, as it certainly seemed to affect the stock price?
Kotick: I think what affected the stock price more than that is pushing out Overwatch and Diablo. And then I think people started to see that this year’s Call of Duty wasn’t performing as well. So I think certainly the [California Department of Fair Employment and Housing] filing and the Wall Street Journal article contributed to that, but stocks go up and down for a variety of reasons. I think our view was that at $95 a share with all cash, that’s a really great deal for our shareholders. And so that was an easy and independent judgment. It’s a great deal.
GamesBeat: I assume there are going to be antitrust questions here. How do you address that? And how is this good for consumers? And does your content stay on all the platforms?
Kotick: I think that was an important part of the discussions. With Microsoft, most of the content they create has nothing to do with gaming. They’re on every device with a microprocessor and a display. And I think that they have no mobile business. So for them King was a very complimentary thing. But we all realize that gaming over the next five years is going to be more on phones than on any other devices. And I think that they they have given us repeated assurances that our content will be available on as many devices as possible.
And I think that was really important for us. They’ll drive the bus, obviously, on the antitrust issues. I think the thing that is obvious to me is that when you look at the competition, whether it’s Tencent and NetEase, and Alibaba or Sony, or Amazon, Apple, Google, Facebook, Netflix, then you start looking at like, the second part of competition and content, and you realize whether it’s Roblox or Minecraft, or the variety of other sort of platforms that are becoming available for content creators, I think there’s more competition than we’ve ever seen for games.
It’s a reality that started to factor into our thinking. There is more competition from bigger companies with more resources. Facebook is spending [billions] a year on the metaverse. I’ve never seen as much competition, and we’re seeing it even in the wage inflation. Whether its Riot, Tencent, Epic, Sony, or Microsoft, EA, there are just so many different places that people are recruiting talent.
And then you look at the specialized skills, like AI and machine learning or computer graphics. You’ve got Nvidia and all of those big companies recruiting the best AI and computer graphics talent. And so we realized the pipeline for talent — we just didn’t have it. And we needed to have access to somebody’s pipeline of talent. And that was a big consideration.
GamesBeat: There’s a little irony in, I guess, interpreting what you’re saying. It almost feels like Activision Blizzard was too small.
Kotick: It’s true. I think like, you’d think, oh, we’re this big company and have just these great resources. But when you’re comparing us to, you know, $2 trillion companies and $3 trillion companies and trillion dollar companies and $500 billion companies, you realize, we may have been a big company in video gaming, but now, when you look at the landscape of who the competitors are, it’s a different world today than ever before. I think Strauss did a good deal with things, because I think he realized he needed mobile. But I think that even if we were to have consolidated within EA, that wouldn’t have given us what we’re going to need going forward. And so you needed to have a big partner in order to be able to make it work.
GamesBeat: I wonder what the combined company will be capable of doing. Is there a metaverse play here? Or are there other things for people to consider?
Kotick: Phil and I have always been aligned about this. What really is the metaverse? It’s not like Neal Stephenson’s Snow Crash vision. It’s the evolutionary vision of a collection of players. And I think players are going to be the defining characteristic of the metaverse. It’s a community of players anchored in a franchise. And then those communities anchored in some bigger virtual experience that allows you to have either access to your friends or access to other content. I think you’re going to see a big part of it is going to be content creation tools. That is going to allow for user generated content that can be either free or commercially exploited, and that’s going to be an important part of what a metaverse will be.
You look at all the opportunities that we get with a company like Microsoft. I’ll give you one great example. Phil and I started riffing on things for the future. I’ll give you three that are really compelling. I wanted to make a new Guitar Hero for a while, but I don’t want to add teams to do manufacturing and supply chain and QA for manufacturing. And the chip shortages are enormous.
We didn’t really have the ability to do that. I had a really cool vision for what the next Guitar Hero would be, and realized we don’t have the resources to do that. And Skylanders too. One of the great disappointments of my career is that other people came in and they came out with crappy alternatives. And they dumped all of these crappy alternatives in the market, and basically destroyed the market for what was a really cool future opportunity. If you look at Skylanders, with its hardware and manufacturing and supply chain, there are the same kinds of things that we can’t do but Microsoft can.
And in these conversations I was sharing my frustration about not having enough social capability in Candy Crush. I really want to be able to have a Candy Crush experience where players can play games against each other. And they can socialize. And they can have voice over IP and video over IP.
That’s a more social game, but it’s rooted in being able to play the game against another person or other people. There is nothing but opportunity for the kinds of things that we can’t do on our own, and the resources that they have for us to just make a difference.
GamesBeat: What what do you think of reporting to Phil? What might you think about doing next once the deal is done? And is retirement one of your thoughts.
Kotick: Right now my focus is just staying CEO and running the business. And I think you probably could tell this from the stock price, there is still a long way between now and getting a deal approved, and all the regulatory issues. So I’m still going to be first focused on running the business. What I told Microsoft is that I care so much about this company, that whatever role they want me to have, in making sure that we integrate the business and we get a proper and smooth transition, I’m willing to do. However much time that takes, if it’s a month after the close, if it’s a year after that, I just care that the transition goes well.
Reporting to Phil is an easy thing to do. He’s a great guy, and we have a great relationship. And if I have to do that, I’m happy to do that. All I care about is making sure that the transition and the integration go well.
GamesBeat: It does sound like you still have enthusiasm for the job.
Kotick: I mean, like, I come to work every day, as excited as I was, I mean, we have a lot going on right now. I have a new set of responsibilities in my focus on the workplace. And that is my principal focus is making sure that when you think about and part of why I’m so committed to this welcoming, inclusive workplace is when you think about companies that have defining characteristics that are going to help attract talent. Having a really welcoming, inclusive workplace will be a defining characteristic of the culture of a company in an increasingly competitive talent environment that will ensure that we’ll have access to great talent, and so independent or not thought, that is an important part of what I think will allow us to attract talent, we have to do that. And that’s something I’m spending a lot of my time.
GamesBeat: You got had a few months of tough coverage. A lot of tough words from the Wall Street Journal. What was some of the learning from this experience that you’ve had?
Kotick: From my perspective, if you have one single incident of harassment at your company, that’s one too many. And you don’t want to ever have an environment where people don’t feel safe and comfortable and respected. And so when the EEOC started their investigation, where it was like three years ago now, that was the catalyst for us to start thinking about, how do you change and transform the culture to making sure that you do have the most safe welcoming, inclusive culture. It’s a priority for me to make sure we have the very best workplaces.
GamesBeat: I wonder is there anything that you think will benefit Call of Duty from this? I’m sure it’s the number one thing Call of Duty fans and people like me, who are Warzone players, are worried about.
Kotick: I would say probably the biggest thing is the AI and machine learning, and ultimate access to that talent. And that that’s one of our big needs. For the long term, we could have a real streaming Call of Duty experience that’s going to be critically important.
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