Could the Microsoft–Activision Deal Stymie Competition?

Microsoft’s blockbuster acquisition of Activision Blizzard is inching ever closer. Despite competition concerns, demand for Sony and Nintendo hardware is likely to remain high.

• Sony’s PS5 user base remains loyal in the face of the Microsoft–Activision deal.
• Generative AI could be used to personalise games 10 to 15 years from now.
• How to invest in video gaming: the VanEck Video Gaming and eSports UCITS ETF is up 8% in the past six months.

The game appears to be on for Microsoft’s [MSFT] $69bn buyout of Activision Blizzard [ATVI]. The deal had been on the verge of collapsing under the weight of scrutiny from the US Federal Trade Commission, but the regulatory body withdrew its internal case against it last month.

The deal still faces a hurdle in the form of the UK’s anti-trust regulator, the Competition and Markets Authority (CMA), which originally blocked the deal on the grounds that it could lead to higher prices, fewer choices and less innovation for UK gamers. But the Competition Appeal Tribunal in July paused Microsoft’s appeal against the decision, in order to allow it and the CMA to negotiate a new proposal.

For its part, Microsoft has done what it can to appease the CMA, reaching an agreement with Sony [6758.T] to keep Activision’s Call of Duty first-person shooter franchise on Sony’s PlayStation consoles. Japan, Sony’s country of origin, has approved the deal on grounds that it’s “unlikely to result in substantially restraining competition”.

Microsoft CEO Satya Nadella took to the witness stand in a San Francisco federal court at the end of June to deliver a testimony in which he defended the big tech company against anti-competition claims. Speaking specifically about Sony, Nadella argued that the Japanese gaming company had “defined market competition using exclusives”. Moreover, he said, “if it was up to me, I would love to get rid of the entire exclusives on consoles”.

Sony’s User Base Remains Loyal

Sony sold 3.3 million PlayStation 5 (PS5) consoles in the first quarter (Q1) of 2023 — the three months to the end of June. This figure was up 38% from the same period last year, although well below its record of 6.3 million units in Q4 2022. The Q1 figures were “somewhat less than the expected progress” towards its full-year target of 25 million units. However, with promotions having begun in July, the company is hoping to see “an improvement in the momentum of sales”.

While game play time only increased 2% year-over-year in Q1, a 27% increase of software sales was “driven mainly by a considerable increase in spending per play hour by the expanding PS5 user base”.

Sony’s loyal user base means that the Microsoft–Activision merger may not have any impact on its gaming segment, especially now the company has signed its 10-year Call of Duty deal. This, at least, is the opinion of Serkan Toto, CEO of Japanese game industry consultancy Kantan Games: “If the deal goes through, I fully expect all Activision games to become Xbox-exclusive the same second the concessions expire — but once again, we would be roughly looking at the mid-2030s under such a scenario,” Toto tweeted in July.

Zelda Boosts Nintendo Sales

Microsoft also signed a binding 10-year agreement with Nintendo [7974.T] back in February to guarantee that the Call of Duty franchise remains on both the Switch console and its successor, rumoured to be coming out next year.

It’s hard to predict what impact the Microsoft–Activision deal would have on future Nintendo hardware sales, but a lot is going to depend on what future game titles Activision releases as Xbox exclusives.

Nintendo reported a 50% year-over-year rise in revenue for the three months to the end of June, powered by The Super Mario Bros movie and the release of its exclusive The Legend of Zelda: Tears of the Kingdom, which sold 18.5 million units in the quarter, becoming the fastest-selling title in the Zelda series. Unit sales of the Switch were 3.9 million, up 13.9% year-over-year.

Sony Veterans See Benefits in AI

As Sony, Nintendo and Microsoft continue to vie for a bigger share of the video gaming market, artificial intelligence (AI) could well have a defining influence on future game development.

Sony veteran Shuhei Yoshida, who currently heads the company’s Independent Developer Initiative, spoke to The Guardian about how AI art generators such as Midjourney can be used to improve graphics.

“In the future, AI could develop interesting animations, behaviours, even do debug for your program,” said Yoshida, adding that he doesn’t expect AI to put developers out of jobs: “It is a tool. Someone has to use the tool.”

The Future Of Gaming Could Be Personalised

How might AI shape the future of gaming? Potentially via “a dynamic personalisation of content that is essentially going to allow users to create their own video games,” according to Pedro Palandrani, Director of Research at Global X ETFs, on a recent episode of Opto Sessions.

Palandrani expects gamers will be able to use generative AI applications to build their own personalised gaming worlds that feature certain storylines and their favourite characters. However, we’re at least 10 to 15 years from this being remotely possible.

How to Invest in Video Gaming

ETFs, or exchange-traded funds, offer an economical and diversified way to invest in a variety of stocks within a particular theme.

Funds in Focus: the VanEck Video Gaming and eSports UCITS ETF

The Roundhill Video Games ETF [NERD] holds a number of Japanese and Korean gaming stocks, but not Sony. As of 30 June, exactly half of the portfolio is dedicated to consoles, while 22.4% has been allocated to online and digital gaming, and 14.5% to mobile and portable gaming. PC gaming has the smallest weighting, at 6.8%. The fund is down 1.5% in the past six months.

The VanEck Video Gaming and eSports UCITS ETF [ESPO] has allocated the communication services sector 63.7% of its portfolio, while information technology (IT) has a 25.5% weighting as of 31 July. Consumer discretionary accounts for 10.8% of the portfolio. The fund is up 7.8% in the past six months.

The Global X Video Games and Esports ETF [HERO] has allocated 86.5% of its portfolio to communication services, 13% to IT and 0.6% to consumer discretionary. The fund is down 4% in the past six months.