Jefferies Equity Research Analyst Brent Thill joins Yahoo Finance Live to discuss Microsoft's acquisition of Activision Blizzard, Microsoft becoming the third-largest gaming revenue company in the world, and the pressure this will put on others like Meta and Netflix in the industry.
BRIAN SOZZI: Microsoft's $68.7 billion deal for Activision Blizzard is still reverberating throughout markets, as seen in shares of Sony falling off a cliff today. Let's stay on the deal with Jefferies analyst Brent Thill, who covers Microsoft. Brent, nice to see you. Now that we've had some time to digest this really shocking deal, in many respects, from Microsoft, do you think it's a home run for the company?
BRENT THILL: I think it's going to be a good deal. I'm not going to say it's a home run. Obviously, it's the largest deal, and M&A can go in a tailspin quick. But ultimately, when you think about the 25 to 30 plus million people on Game Pass, and they want to get to billions of users on their system-- and these can be casual users on a mobile device. They can be hardcore users. You could be entering the metaverse and a new experience. And I think Microsoft, you know, has always been forward-thinking in terms of the markets that they're in, and is looking forward.
The beauty of Activision is a lot of their content is owned content. They have already close to 40% of their revenue on mobile. They have some franchises that need a little bit of a jump, in terms of excitement, that Microsoft can probably-- can probably put into it. And also, obviously, you had massive cultural issues at Activision.
When-- you know, we've never seen 20% of a company sign a petition to remove a CEO. That's unheard of in our industry. So you know, there were a number of factors that we think Microsoft can help with. You know, it's a year-- over a year of cash flow. They're still sitting on the nuanced transaction. So you're looking at, you know, digesting a cumulative 88 billion of M&A.
So many will ask, well, does Microsoft have organic, you know, energy and excitement around their portfolio? And I think the answer is no. We think the core software business is alive, but there's no question, when the CEO of Amazon says that gaming could be bigger than Amazon Prime Video, you know, you've got to listen.
And that tells you a lot about where the gaming industry is going, where Microsoft can have a role. And again, this has historically been a lower margin business versus their core software business. If they can convert this to more subscription and cloud and not have as much hardware, clearly there's a lot of margin leverage in this business over time.
So we like it. Look, it's going to be a long fight. This is going to take this entire year to get this deal closed. And that's why the spread on the transaction is pretty wide right now. So we think it gets closed, it's just going to take time.
JULIE HYMAN: Yeah, and in terms of the-- what you were talking about in terms of the subscription revenue, I mean, 400 million monthly active users certainly attractive to Microsoft. I want to come back to the cultural question for a minute, Brent, because I've been really preoccupied with that side of this deal. As you say, it's going to take a while to close the deal. There are reports that Bobby Kotick is going to exit, even though right now they're saying he's going to stay on. But there are reports he'll exit once the deal closes. Can indeed Microsoft solve the cultural problems at Activision?
BRENT THILL: They can, because if you look at Nadella and Amy-- and I've talked about them being the best two co-pilots in tech-- you know, they have a strong team in-- and I think ultimately, having followed them for so many years and believing that they are aligned to the right direction, they'll solve it. Look, I mean, Bobby is a brilliant guy, right? He built Activision into what it is. And you know, right or wrong, I think clearly there's concern that they need to make some changes.
And so I'm not-- I'm not saying that he's the issue. What I'm saying is they need change, right? They just need a changeup. And this is another huge reason why this deal makes sense, is for the Activision shareholders, as well as the employees, this is a chance where, you know, Microsoft just threw-- not a lifeboat, but like they pulled up in a mega yacht and is like, hey, everyone get on and let's go.
And so I look at it and say, look, I've said this repeatedly. You know, working for the Microsoft team, they do it right. They are competitive, they are focused, but they do it with integrity. And I think, ultimately, the employees at Activision are probably going to be pretty excited to be part of that culture. Look at what they've been able to achieve over time.
So I think it's an upgrade for a lot of the Activision employees. And again, all you have to do is, you know, look at what Nadella has done. And if anyone doubts me, read his book on empathy and leadership. And it's pretty-- it's pretty inspirational, in my opinion. So I don't want to get all soft on the culture side, which I think is important, and the business side we're here to talk about. But I do think it's an important element of this for shareholders and for their employees.
BRIAN SOZZI: Brent, there are reports out this morning that Activision reached out to Facebook, but Facebook rebuffed them. Now, you cover Facebook. Do you think this deal with Microsoft now puts pressure on Facebook to go out there and make a big deal in gaming to support their metaverse rollout?
BRENT THILL: It's going to be-- like, the chess pieces are moving quick, right? I mean, it's going to put pressure on everyone in the industry. And so when you think about Take-Two and Zynga coming together, you know, in the last month, and you've got this transaction, that leaves Ubisoft, Take-Two, and really EA as the only ones that the entire industry can go after.
Is Netflix excited about gaming? Probably. Amazon told us that the gaming business could be bigger than Prime Video. We know, right, what is Sony going to do? Like, there's only a few assets with more acquirers. So that's a good thing if you're in this industry. And our gaming analyst has been-- Anne [? Berkowitz ?] has been highlighting this, covering the space for so long that this is no doubt going to-- there's going to be a lot of other bidders for other assets.
And the space may consolidate very quick. So I think that underpins the excitement of gaming. Look, Facebook I think has a strong on-ramp with the Oculus for the metaverse. The challenge with the Oculus right now-- and this is due diligence for my kids-- they need more games. They need more content. And so clearly, they're going to be-- I wouldn't be surprised if Facebook went on, did some small studio acquisitions. You know, doing this transaction probably is not right up their wheelhouse.
BRIAN SOZZI: Interesting. All right, we'll leave it there for now. Jefferies analyst Brent Thill, always appreciate talking to you. We'll check back with you later.