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Microsoft is now a gaming juggernaut

Microsoft (MSFT) officially owns Activision Blizzard (ATVI), making it the third-largest gaming company in the world by revenue behind just Tencent and Sony (SONY). But the acquisition does more than boost Microsoft’s standing in the global gaming industry. It gives the company far greater access to the mobile gaming market, lines it up for revenue via mobile games advertising, and provides it with the opportunity to grow its Xbox Game Pass subscription service and Xbox Cloud Gaming streaming service.

“It's certainly a seismic shift in how the money flows around the gaming ecosystem,” explained International Data Corporation (IDC) research director Lewis Ward. “It is the biggest acquisition in Microsoft's history. It is one of the biggest acquisitions in the tech market. It is … by anyone’s measure, a big sea change.”

But don’t expect the company to start reaping the benefits of the $69-billion deal anytime soon. Microsoft still has a long way to go before it can begin to put its stamp on any of Activision Blizzard’s games like “Call of Duty” and longer still before its bet on cloud gaming pays off.

Microsoft is a major mobile player

Microsoft has never had much of a hand in the mobile gaming market. And while the console and PC markets are huge, bringing in $43 billion and $40 billion respectively in 2023, the mobile gaming market is even larger. According to a study by data.ai and IDC, the segment will bring in a whopping $103 billion this year alone.

But with Activision Blizzard, Microsoft is now one of the biggest players in mobile gaming. Activision Blizzard’s “Candy Crush Saga” was the second-highest-grossing mobile game in the world in the first half of 2023 behind only Tencent’s “Honor of Kings.” And as of Q2 2023, Activision Blizzard’s King mobile division had an incredible 238 million monthly active users. That’s far more than Activision’s 92 million, despite that arm running “Call of Duty,” or Blizzard’s 26 million.

Blizzard gift cards are seen at the shop in Krakow, Poland on July 17, 2023. (Photo by Jakub Porzycki/NurPhoto via Getty Images)
Blizzard gift cards are seen at the shop in Krakow, Poland, on July 17, 2023. (Jakub Porzycki/NurPhoto via Getty Images) (NurPhoto via Getty Images)

“The amount of revenue that 'Candy Crush' generates should not be underestimated,” said Forrester senior analyst Will McKeon-White. “Microsoft has also traditionally had a minimal ... mobile gaming presence. So this acquisition also significantly helps out with that.”

That mobile presence also gives Microsoft a significant leg up in the mobile advertising space. After all, mobile games generate money via either in-game sales or ads, and “Candy Crush” does both.

Subscriptions and cloud gaming are key

Outside of mobile gaming, Activision Blizzard gives Microsoft the firepower it needs to exploit its Game Pass subscription service and nascent Xbox Cloud Gaming. Game Pass gives subscribers access to hundreds of games that they can download to their Xbox consoles or PCs for $16.99 per month. The service has been a key portion of Microsoft’s gaming strategy, with CEO Satya Nadella regularly calling out the service during the company’s earnings calls.

In January, Nadella announced that the service had surpassed 120 million monthly active users. And with Activision Blizzard’s library of intellectual property, Microsoft can make Game Pass an even more appealing option for gamers, giving the company more firepower to drive subscriptions over time.

Then there’s the cloud gaming aspect of the deal. Microsoft is the leader in cloud gaming, and has opened up the service to a slew of new devices including smart TVs and even Meta’s (META) Quest 3 AR/VR headset. But cloud gaming is still in its early stages. The quality of streams doesn’t always match up to what you’d get playing games on a console or PC, and high-speed internet still isn’t available in portions of the US, let alone globally.

A general view of tradefairgoers is seen in front of the Xbox booth during the opening day of Gamescom at the Cologne Trade Fair Center in Cologne, Germany on August 23, 2023 (Photo by Ying Tang/NurPhoto via Getty Images).
A general view of tradefairgoers is seen in front of the Xbox booth during the opening day of Gamescom at the Cologne Trade Fair Center in Cologne, Germany, on Aug. 23, 2023 (Ying Tang/NurPhoto via Getty Images). (NurPhoto via Getty Images)

“In terms of cloud gaming, we're still in the active experimentation phase,” McKeon-White said. “And while the current results are much better than they were previously, it's still ... not the best possible experience for playing video games, if we’re completely honest.”

It’s also important to note that cloud gaming is still a small portion of overall gaming revenue. But, eventually, the service could power Game Pass subscriptions.

“I think it is a positive for cloudstream gaming,” Ward said. “I think that it will be one of the drivers of growth over time, but let's not kid ourselves. Right now, it's only like 2% or 3% of market revenue. It's a very small component of total market revenue.”

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Sign up for the Yahoo Finance Tech newsletter. (Yahoo Finance)

But as Microsoft perfects the technology and high-speed internet continues to spread across the globe, Xbox Cloud Gaming will become a far more attractive and viable option for gamers in regions where consoles and PCs are too expensive due to taxes or import restrictions.

Microsoft can take advantage of Activision Blizzard’s library

There’s one other aspect to Microsoft’s acquisition that could prove beneficial over time, and that’s how the company could take advantage of older Activision Blizzard properties. There are a slew of titles, such as “Guitar Hero,” that the gaming giant hasn’t worked on in years, and with Microsoft’s backing, it could begin to dig those out of storage and breathe new life into them.

What’s more, it gives Microsoft a boost to the number of first-party games it will release each year.

“There's just a critical mass that they probably weren't at prior to the acquisition, and this pushes them over the top,” Wedbush analyst Michael Pachter told Yahoo Finance. “You suddenly go from maybe a half a game a year of new content under the old Microsoft to four, five, plus ‘World of Warcraft.’ ”

Taken as a whole, the acquisition is a boon for Microsoft. Though it could take some time for it to begin to pay dividends. After all, with games already in development it will be a while before Microsoft has any real say in how Activision Blizzard develops new titles.

There’s also the looming threat that the Federal Trade Commission (FTC) could break up the companies as part of its antitrust case against Microsoft. The FTC is moving forward with an in-house challenge to the deal and working on an appeal to a prior ruling against the commission’s effort to halt the move.

Still, if everything pans out in Microsoft’s favor, acquiring Activision Blizzard could be a turning point for the company, and the gaming industry as a whole.

Daniel Howley is the tech editor at Yahoo Finance. He's been covering the tech industry since 2011. You can follow him on Twitter @DanielHowley.

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