PlayStation Doomed: The Fallout of Microsoft’s acquisition of ZeniMax Media

October 10, 2020

3 min read

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What's going on here?

Microsoft acquired ZeniMax Media in September 2020, the parent company of Bethesda (the creator of Doom, Fallout and Skyrim) for $7.5bn.

What does this mean?

The all-cash deal marks Microsoft’s largest-ever developer acquisition and, behind Skype and LinkedIn, ranks as its third-largest overall deal. It follows an acquisition strategy that saw it acquire Bungie in 2000 (the developer of Halo), Mojang in 2014 (the developer of Minecraft) and seven other studios between 2018-19. The purchase matches the $7.5bn it paid for GitHub in 2018 and has been compared to Disney’s purchase of Pixar in 2006 for $7.4bn. It will increase Microsoft’s studio portfolio from 15 to 23, 9 more than the number controlled by its rival Sony. The announcement was made one day before pre-orders start on Microsoft’s new Series X and Series S consoles and comes in the wake of its failed bid to purchase TikTok. 

This is a boon for Microsoft, the firm’s cloud-based subscription-based Xbox Game Pass and its 15m subscribers. The pass will soon include all ZeniMax-affiliated titles. The developer, which has in excess of 2,300 employees across eight gaming studios, has hailed the financial weight of Microsoft as a good thing for gamers and for the future development of its games.

What's the big picture effect?

The U.S. videogame software industry is a highly profitable and growing sector. Its growth was arguably augmented by the coronavirus pandemic too, with 2.7bn people expected to play a video game this year. Globally, gamers are expected to spend $160bn in 2020 according to The Times. Microsoft has publicly forecasted the industry to reach $200bn by 2021. This industry growth will make for fertile ground for the newly acquired ZeniMax to utilise Microsoft’s financial firepower to fund new game development.

Anti-trust concerns have been raised following the purchase. This is particularly because the global market for consoles is duopolistic. It is dominated by Sony’s PlayStation and Microsoft’s Xbox, with the two firm’s having a 66% and 33.65% market share respectively. It raised questions in related industries too, such as in videogame software. Yet prior to the purchase, Microsoft controlled 9%, lagging behind market leader Activision Blizzard (13%). Given the presence of a more powerful rival in the sector, Microsoft does not pose a great threat to competition in the software space.

The acquisition is an example of a vertical integration, which is a consolidation of an industry’s supply chain. This is in contrast to the Disney Fox horizontal integration merger last year. Horizontal integrations, i.e. when two competitors from the same market combine together, pose greater threats to consumer choice and the provision of goods in a market. Thus, from an anti-trust standpoint, the acquisition should remain admissible. Coincidentally, this purchase follows the termination of the “Paramount Rule” by a New York federal judge. The long-standing rule forbade movie studios from owning cinema chains (another example of vertical integration). Thus, given the similarity, it would have been strange for anti-trust concerns to have formally crystallised in Microsoft’s case.

The major anti-trust question surrounds console exclusivity. If Microsoft were to restrict its games to its consoles and deprive users of rival Sony consoles of access, questions of competition may be raised. If taken to an extreme, Microsoft could purchase all independent software development studios whilst enforcing exclusivity. This would shut out demand for PlayStation, as there would be no games to play(!). But, so far this has not featured as part of Microsoft’s strategy. For example, Halo, one of its biggest gaming franchises, lacks Xbox exclusivity. So too does Minecraft. The major advantage of this purchase is the control of distribution. Microsoft can now include ZeniMax titles for free in its subscription-based service, avoiding troublesome revenue-sharing agreements with developers, whilst determining both where and for how much the game is sold.

Report written by George Maxwell

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