The Fight for the Online Future: What Microsoft's Purchase of Activision Blizzard Really Means

There are plenty of good reasons for Microsoft’s near $70bn acquisition of video game giant Activision Blizzard last month and these have been widely trailed in the media. But one thing is for sure – this gives Microsoft a huge foothold with Gen Z and Millennial audiences and throws down the gauntlet to Facebook – or Meta as it is now known - which has built up a dominant position catering to these age groups. With Instagram and WhatsApp as well as Facebook, Meta has built a seemingly unassailable position with Millennials and is trying to make sure it gets similar traction with Gen Z and the upcoming Generation Alpha. 

However, digital’s mobile and gaming formats are changing faster than you can scroll and Gen Z are at the heart of that change, expecting things to be more immersive (gaming), more snackable (content) and always more shoppable (commerce). They play both in the snackable sphere of TikTok/IG and also in the deeply immersive worlds of gaming. Meta offers mostly snackable experiences. The major opportunity for Microsoft is to deliver this immersive, snackable and shoppable world.

The Activision deal boosts Microsoft’s position with younger audiences and helps chip away at Facebook’s dominance. Activision delivers Microsoft an extra 400 million monthly active users of deeply immersive games such as Call of Duty, Halo, The Elder Scrolls, World of Warcraft and casual games like Candy Crush. The business already makes significant revenues from in-game advertising. Activision’s King division makes over half a billion dollars a year through in-game advertising. Part of the appeal is that the ads can be blended into the game activity, so rather than interrupting, they can actually enhance the game experience. Total in-game video advertising is estimated to be worth some $4.4bn globally this year and is growing at about 5% annually. Activision makes hundreds of millions of dollars a year in revenues from the fast-growing esports division - including advertising and sponsorships from big name brands such as Coca-Cola and Pringles, and this also presents a significant advertising platform. 

Through this week’s Activision purchase, Microsoft is building up its audience reach, adding to the 100 million monthly users of Xbox, creating a half billion strong audience, heavily weighted towards millennials and Gen Zers. Add to this Microsoft’s LinkedIn professional network, which has some 800 million members worldwide and its regular users of other services such as Skype. This gives Microsoft increasing heft to compete with the 3.6 billion users that Meta is estimated to reach each month through Facebook, Instagram, WhatsApp and Messenger. This will no doubt go some way to breaking Meta’s stranglehold over the Gen Z and millennial audiences. 

While in-game advertising and D2C services in video games may be fairly small at the moment, at least compared to Meta’s $86bn in mainly ad revenues in 2020, when you factor in the opportunity for new formats within games and the explosive trend of hosting music gigs and merch, they are set for massive growth. And for advertisers, this presents an entirely new landscape of creative opportunities to move beyond yesterday’s measurement of ‘reach’ to a more effective measurement of engaged Gen Zers actually interacting and transacting with brands.

Microsoft highlighted preparations for the metaverse as a driving force behind the Activision deal and this is an area where it will compete strongly with Meta. The metaverse is a vision for Web 3.0 where users will interact in virtual worlds using cartoon-like avatars. It’s five to ten years in the future and the details are hazy, but versions imagined today are similar to the games created by Activision where avatars enter virtual worlds. Rather than just playing games, though, the metaverse will be what Second Life dreamed of being, a world where people shop, work, study and consume advertising, in virtual or augmented reality. Meta, with its Oculus VR headsets, and Microsoft, with its HoloLens augmented reality system, are set to compete to become dominant platforms for the metaverse.  

In reality, the acquisition is part of a fight for the online future of today’s Gen Z and tomorrow’s Alpha generation. In the short term, Gen Z are key, as they peel off from Instagram in favour of TikTok and immerse themselves in Gaming over other pursuits. Whoever can capture their loyalty over the next few years will build a strong position in the metaverse. Through the Activision deal, Microsoft is adding a whole new age range to its offer, complementing the older users of LinkedIn and its office services. The stage is set for a battle that would do justice to one of Activision’s more outlandish video games.