Shulou(Shulou.com)11/24 Report--

The acquisition of Activision Blizzard is still up in the air, and Microsoft has more powerful news.

Microsoft plans to acquire streaming giant Netflix in 2023, Reuters reported. According to revelations, Microsoft CEO Satya Nadella wants to accelerate the expansion of the game business through the acquisition of Netflix and provide video game streaming services on a variety of devices.

From the acquisition of Activision Blizzard to its eye on Netflix, Microsoft's dedication and enthusiasm for the game business may have exceeded many people's expectations. Admittedly, the Internet industry is not as expected, all the giants are planning to transform and actively open up new growth lines, and the game business has indeed brought tangible benefits to Microsoft. But the continuous heavy investment still makes people worry-is the game really the one of Microsoft?

The setbacks encountered after Meta announced the transformation of meta-universe are still fresh in our mind, and it is hard for us not to sweat for Microsoft. Given the sheer size of Netflix, rumors of this acquisition are likely to stir up even more waves.

(photo from UNsplash) when people reach middle age, Microsoft can't do without games. As mentioned at the beginning of the article, Microsoft's interest in Netflix is mainly to enhance the strength of the game business. From Microsoft's point of view, in order to analyze the authenticity of this rumor and the significance of the acquisition, we must first consider several questions about the game business: at what stage has Microsoft's game business developed? How important are games to Microsoft?

First of all, the game business is not currently Microsoft's most important business, but the rate of growth is remarkable, and the prospect is definitely worth looking forward to.

Although Microsoft's business territory is large, most of its revenue comes from office commercial products and cloud services, LinkedIn, Windows commercial products and cloud services, search and news advertising, and games. In the third quarter, personal computing, including Xbox content and services, search and news advertising, Windows, surface, etc., had revenue of $14.52 billion, making it one of the fastest-growing businesses. Among them, the game business with Xbox as the core has become the most anticipated sector with growth potential.

The results show that Microsoft's Xbox content and service revenue has been on an upward trend in the first three quarters of this year (in natural year terms). Microsoft Xbox just recorded quarterly revenue during the non-Christmas holidays in the second quarter, according to a research report released earlier this year by Daniel Ahmad, a senior analyst at market research firm Niko Partners. Analysts are naturally quite optimistic about the results of the upcoming peak season at the end of the year.

From the historical data, we can also see that the revenue of Microsoft's game business has been on the rising track, and the game field involved is more and more extensive.

In fiscal year 2020, Microsoft's total game revenue grew by 2% year-on-year. Xbox content and service revenue increased by 11% year-on-year, mainly due to the popular game "my World". In fiscal year 2021, total revenue from Microsoft's gaming business reached $16.28 billion, up 17% from a year earlier, setting a new record for the second year in a row.

Although Microsoft has always stressed that its market share is inferior to that of Sony, and the acquisition of Activision Blizzard cannot form a monopoly position, it can be seen from all kinds of data that Microsoft's game revenue is rising and its market position is not the same as that of Sony. CEO Nadella said in the first quarter earnings call that Microsoft is in the leading position in the game console market in the United States, Canada and the United Kingdom.

Second, another reason for Microsoft to strengthen the layout of the game is the metacosmos project, which has been chanting slogans for a year but has made no real progress.

Although Microsoft has never made an official statement, it has long been an open secret that Calypso, the XR head display project, has been left out in the cold. In fact, since the release of XR headline HoloLens 2 in 2015, the project team has not come up with a new product. The rumored HoloLens 3 has been out of sight for a long time, and research and development is rumored to have stopped last year. This means that Microsoft has pinned all its hopes of opening the door of Yuan Universe on games.

Nadella has made no secret of his ambition for meta-universe and has always been optimistic about the development prospect of this new concept. He said at Microsoft's annual technology conference Ignite last year that Microsoft will continue to explore metacosmos and "embed the real world into computing." The digital world created by games can also help it board the ark of the future, compared with the XR hardware, which is a waste of money and money, and is not good at it.

It should be noted that looking back at the history of Microsoft games, we can see that acquisition has always been its key word.

Back in 1995, when the gaming division had a small team of 20 people, Microsoft acquired Aces Studios, the first key acquisition of Microsoft's gaming business. In addition, FASA Studio, which developed Mecha Warriors, and Rare, which owns famous IP such as "007: Golden Eye" and "Super King Kong", have been bought into the bag one after another, and even thought of buying Nintendo.

Seeing this, what games mean to Microsoft, and why Microsoft is addicted to big acquisitions, the answer is clear.

So here comes another question: why Netflix is the one chosen by Microsoft?

What is the value of the game business when acquiring Netflix under the fog? Let's focus on Netflix, another protagonist in this acquisition rumor.

When a company is associated with an acquisition, in addition to indicating the attractiveness of its business, it also more or less implies that there are some problems in the company's development that it will become prey to others. For today's Netflix, the growth bottleneck is indeed obvious.

In the third quarter, Netflix posted revenue of $7.926 billion, up 5.9 per cent from a year earlier and slightly higher than market expectations of $7.84 billion, while net profit fell 3.52 per cent to $1.398 billion. Judging from the growth curve, Netflix revenue growth has declined for four consecutive quarters, while net profit has fallen for the second time this year compared with the same period last year.

From the perspective of revenue and user changes in different regions, the ceiling of Netflix is also quite obvious.

According to the data, North America remained the most important source of income for Netflix in the third quarter, accounting for nearly 46 percent of total revenue of $3.602 billion, followed by $2.376 billion in Europe, the Middle East and Africa, and only $1.024 billion in Latin America and $889 million in Asia-Pacific. But in the quarter, only 100000 new paying users were added to North America, the lowest growth rate among all divisions.

Of course, the capital markets will not be too satisfied with this report card. Netflix has experienced several slumps in the first three quarters of this year. On January 24th, shares plunged 35 per cent in a single day after the next earnings report was released in April after the results fell 20 per cent lower than expected at the start of Netflix trading. It is no exaggeration to say that investors should be prepared for stock price volatility before almost every Netflix earnings report.

Of course, even so, Netflix's market capitalization is staggering compared to other Microsoft prey. As of press time, Netflix has a market capitalization of about $140 billion. If you add in the valuation premium of about 30 per cent for large-scale acquisitions, Microsoft may have to pay nearly $200 billion in real money to win Netflix. From this estimate, we can see how sensational the rumored acquisition will be if it comes true.

Speaking of which, we have to go back to the previous question: is Netflix worth emptying Microsoft?

The value Research Institute believes that Netflix has invested a lot of painstaking efforts in the game business in the past two years, but the results can only be said to be in order. If you look at these game assets alone, Netflix has really done very little to help Microsoft.

First of all, it is certain that Netflix has put a lot of thought into doing a good job in the game business.

Since entering the game market with great fanfare in September last year, Netflix has acquired game studios such as Night School Studio, Next Games and Boss Fight, together with its own incubation team, and now has five game development teams. Mike Verdu, vice president of Netflix's gaming business, also said the company was "seriously exploring cloud gaming services" when attending the Disrupt conference organized by TechCrunch in October.

In addition, the recent recruitment positions released by the gaming department also indicate that Netflix intends to develop new 3A games on its own. Among the urgent job requirements for senior producers and chief engineers, key words such as "3A PC game development experience" are mentioned.

However, under the hard work of Netflix, the development of the game business is really not smooth.

By the end of the third quarter, Netflix had launched 35 games, with the goal of increasing the total number of games on the platform to 50 by the end of the year. However, according to the data released by AppTopia, the average daily user of Netflix games is only 1.7 million, accounting for less than 1% of Netflix paying users, and the total number of game downloads is less than 3000.

Obviously, Netflix users have not formed the habit of playing games while watching TV shows and movies. In the eyes of users, high-quality content is the reason why they choose Netflix, and the game is just dessert and can't make the main course in a short time.

Of course, Netflix executives have not given up chasing the game dream, Mike Verdu also said that three mobile games developed by Netflix and Ubisoft will be unveiled next year, and more original games and licensed IP will be launched on the platform. But how to increase the enthusiasm of users is a problem that Netflix needs to solve-and the same is true for Microsoft, a potential acquirer.

Microsoft's dream future: neither Netflix nor Activision Blizzard can do without the answer to the above question at first glance. Spending nearly $200 billion to buy a company that is only a rookie in the game market, R & D strength and team size are not outstanding, and it is not a good deal in any way.

However, in the view of the value Research Institute, what Microsoft values most may not be the strength of research and development and the number of games, but the large number of users behind Netflix and the screen entrance that users master. After all, Microsoft's ambition is not limited to the mainframe game track. If it can win Netflix, it can not only extend to video game streaming services, but also share resources with Xbox. There are plenty of new stories to tell.

Compared with the mainframe game market represented by Xbox, video game streaming service is a completely different track, and the scale of users and the consciousness of paying subscriptions are more important. When the game developers conference in 2019 announced the launch of video game streaming service and new game hardware, Google shouted the slogan to become "Netflix of the video game world", which shows its admiration for the Netflix model.

In addition to Google, giants such as Amazon, Apple and Sony have also explored new forms of combining gaming and streaming. Sony's case shows that the subscription model of streaming media and the game subscription platform being vigorously promoted by the console game industry have a lot in common, and they can fully share experiences and complement each other.

Sony's PlayStation Now developed a paid subscription model in the early days, providing paying users with hundreds of platforms to play games smoothly. Between 2018 and 2019, Sony's subscription business accounted for nearly 50% of the game subscription market, which can be said to have benefited a lot.

Microsoft's current game layout, there is no lack of hardware, no lack of technology, but the user base is really not as good as Sony. The most valuable resource of Netflix is precisely the users. By the end of the third quarter, Netflix had 223 million paid subscribers worldwide, still unbeatable in the horizontal comparison of a single streaming platform. If we can make good use of this precious wealth, it will be of great help to Microsoft's game business.

And don't forget that there is another big acquisition under way in Microsoft's gaming business, which is also aimed at strengthening the deficiency.

After the news of the intention to acquire Netflix plus-size game business came, Activision Blizzard acquisition also became the focus of public discussion for the first time. As of press time, the acquisition has not made much progress, and the major camps are quarrelling more and more loudly.

On the other hand, the US Federal Trade Commission (FTC) has just launched a lawsuit to prevent Microsoft from advancing the acquisition on antitrust grounds, and another 10 US gamers have jointly filed an antitrust lawsuit in San Francisco recently. On the other side, 75 per cent of users supported the deal in the latest public consultation, according to the UK Competition and Markets Authority (CMA).

Activision Blizzard's role and significance to Microsoft is clear: content. Super IP, including call of Duty and Diablo, is attractive enough for every company that wants to run a game business.

Just imagine, if the acquisition of Netflix is true, Microsoft may have laid out a blueprint for the future: while acquiring massive high-quality game rights through the acquisition of Activision Blizzard, enriching Xbox's game library to attract users, and getting a steady stream of streaming users from Netflix and adding game subscription business, coupled with its own hardware products, Microsoft's tentacles will be found in every corner of the game industry.

Of course, all these plans are just fantasies now. Even if Microsoft does go after Netflix, it will only face greater censorship pressure than Activision Blizzard's acquisition, and it will not be plain sailing.

Finally, since becoming the head of Microsoft eight years ago, Nadella has turned Microsoft into a "sweeper" who has spent a lot of money buying leading companies in a large number of industries over the years. Examples include the $26 billion acquisition of LinkedIn and the $20 billion acquisition of artificial intelligence software developer Nuance.

Of course, there is no end to Microsoft's eclecticism and expansion, and these deals are nothing compared to Activision Blizzard's $69 billion acquisition and the rumored acquisition of Netflix for as much as nearly $200 billion.

The acquisition of Netflix is still at the stage of media revelations, and it is difficult to determine whether it is true or not. Activision Blizzard's acquisition also faces huge resistance and must not be able to reach an agreement in a short period of time. But from the series of big purchases since Nadella took office, we can clearly see the changes that are taking place at Microsoft.

Through buying and buying, Microsoft's business scope continues to expand, and games and other businesses have indeed achieved breakthroughs and become an important source of revenue. Unfortunately, Microsoft, which is addicted to acquisitions, has increasingly lost its original intention, getting closer and closer to capital and farther and farther away from technology and innovation.

Will games become the most important business for Microsoft in the next phase? Of course we don't know the answer now. But one thing is certain-Microsoft, which is determined to innovate, may be hard to see again.

This article is from the official account of Wechat: Institute of value (ID:jiazhiyanjiusuo), author: Hernanderz

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