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Microsoft Struggling To Grow Game Pass After A$132 Billion Dollar Activision Aquisition, Now Long Term Play

Back in 2023 Microsoft splashed out a massive A$132 billion to acquire Activision and Bethesda Studio’s, and after a head on fight with various Governments including in the UK the deal was approved, now questions are being asked as to whether the big software Company whose focus today appears to be more about AI, data centres and their Copilot offering is getting a return on invest after Microsoft’s gaming revenue growth fell in fiscal 2024 from what Microsoft gaming management had forecast.

US site The Information claims that in 2021, Microsoft CEO Satya Nadella faced a choice involving the company’s Xbox and cloud gaming business. The company could either acquire major game studios to drive more subscriptions to its nascent Game Pass subscription service. Or it could wind down its games business entirely, Nadella told two people at the time.

Nadella took the first path, acquiring Elder Scrolls maker Bethesda Studios for US$7 billion in 2021 and Call of Duty maker Activision Blizzard for US$75.4 billion in the fall of 2023. So far, the returns on the investments appear unimpressive: In the year to June, Microsoft’s gaming business revenue grew 5.8%, well below the 11% target set for the purpose of calculating part of Nadella’s compensation, according to securities filings. (That growth excludes revenue of Activision since its acquisition but includes Game Pass).

In the  last quarter of 2024 was a positive quarter for Microsoft as a whole, driven by its Cloud and AI services, and a particularly interesting one in its gaming divisions.

The company is refusing to reveal exact numbers within its More Personal Computing segment, which includes Xbox, but did share that its gaming revenue as a whole claiming it was up 43% year-on-year.

The Company did report that the “net impact from the Activision acquisition” on the revenue of its Xbox content and services branch, up 61% year-on-year. Xbox hardware, however, was down 29% compared to the same period last year.

Microsoft CFO Amy Hood claimed that the results in Microsoft’s gaming segment were above its expectations for the quarter due to strong performance in “both first and third-party content as well as consoles.”

The reality is that the Companies gaming division fell short of Microsoft’s goals with the overall gaming market feeling the pressure of inflation and COVID hangovers when consumers invested in gaming hardware and software.

IN three months ending Sept. 30, 2024, Microsoft said that that its gaming division didn’t grow at all without the first-time contribution of Activision revenue in the quarter.

Now questions are being asked as to whether the company’s big investment in new data centres will generate a return with investors taking each way bet on where the Microsoft stock is going to go this year with questions being raised at CES 2024 as to whether AI has already peaked with consumers.

The acquisition of Activision and Bethesda Studio’s was the Companies biggest with Nadella claiming at the time that Microsoft was “In it for the long run”.

Microsoft logo is seen on a smartphone placed on displayed Activision Blizzard logo in this illustration taken January 18, 2022. REUTERS/Dado Ruvic/Illustration

“A132 billion is not a pittance—it’s a lot of cash. They might lose money in the short term, which is fine, as long as they can prove that in the long run Game Pass is a solid source of recurring revenue,” said Wedbush analyst Michael Pachter.

Microsoft first launched its Game Pass subscription service in 2017, now like several Companies including LG Electronics the Company is punting their future on subscription revenues spanning gaming, Microsoft 365 and AI and data centres.

Today they charge gamers $22 a month to access a library of PC and Xbox games on multiple devices.

In the past Activision, have historically been reluctant to put their games on an all-you-can-play subscription service, worried they would make less money than they do by selling games outright at $60 to $70 apiece.

Buying Activision allowed Microsoft to change that dynamic claims US media.

Currently competitors in the gaming software market have resisted Microsoft’s pitch that they should put their titles on Game Pass in exchange for fees that Microsoft offers to pay to the gaming studios, according to people familiar with the discussions.

“I just think the majority of the game market doesn’t really want a game pass” like the one Microsoft is offering, said Gus Zinn, a portfolio manager of the Macquarie Science and Technology Fund.

Microsoft in acquiring Activision also punted on game developers renting space on their its Azure cloud servers.

Prior to the deal Activision was buying space from Google Cloud and Amazon Web Services, with that still the case today with the business relying on Azure servers for development.

Between launch and 2021, the number of Game Pass subscribers grew to 18 million, Microsoft reported.

Then in 2022, Microsoft stopped reporting annual numbers, although it did claim last year that Game Pass had grown 36% since 2022 to 34 million subscribers, however there was no independent confirmation from auditors.

Before completing the Activision acquisition, Microsoft targeted having over 100 million Game Pass subscribers by 2030, meaning it would have to triple its current subscriber base in five years—or grow at a rate of 40% annually and this is not happening.

Also removed late last year from their reporting processes, was reference to Game Pass growth as one of the metrics that determined CEO Satya Nadella’s pay package.

This came after Microsoft failed to deliver Game Pass growth targets in the prior two years.

A Microsoft spokesperson referred to Nadella’s remarks to shareholders in October that Game Pass had set a “new revenue record” in the quarter prior and that a record number of people had signed up for Game Pass on the day Microsoft published Activision’s new Call of Duty: Black Ops 6 title”.

“[Activision] has been disappointing,” said Denny Fish, a Janus Henderson Investors portfolio manager who oversees two funds that included a total of more than $800 million in Microsoft stock as of November.

“It’s also a business that had some degree of consistency over, like, a three- to five-year period but was highly volatile from year to year, because you’re so dependent on the big releases like Call of Duty.”

However, Microsoft’s heavy spending on data centres for AI is a bigger drag on its stock price than the Activision deal, Fish said.



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