What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing over the past few years. The dominance of the mega cab technology companies in the american economy has become a major subject of public policy debate. In the summer of 2020, the congressional anti-trust committee brought the ceos of amazon, facebook apple and google to a hearing where they grilled them about their monopolistic practices. Noticeably absent from the hearing was microsoft.

Ceo satya nadella, most of the anti-big tech sentiment, has been focused against amazon, facebook and, to a lesser extent, google and apple microsoft has been ignored for the most part, despite it being the second largest company in the world, with a market cap in excess of two Trillion dollars, despite their relatively low profile, microsoft, has been quietly building what could be the largest video game monopoly in history. On tuesday january 18th, microsoft announced its plans to acquire the video game giant activision blizzard for 69 billion dollars, making it the largest acquisition of a technology company in history. On the news shares of xbox's largest competitor of sony lost more than 10 of their value. It appears that microsoft is trying to consolidate the industry and turn their subscription game pass platform into the netflix of video games.

Game pass currently has 25 million paying subscribers, and this number is growing every day. Microsoft already owns valuable video game franchises, including halo, which is exclusively available on the xbox and pc with the activision acquisition. They will control even more valuable franchises, including call of duty. Microsoft has 130 billion dollars of cash sitting on their balance sheet.

They'll be able to do this activision deal without even needing to draw on their credit lines, given how dominant xbox will be after this acquisition, they could potentially have the power to crush their competitors and become a near monopoly in this video. We'll take a look at why microsoft is buying activision and what it means for the 3 billion global gamers. Microsoft is a massive company with its main products being azure cloud computing windows, the office 365 suite some computer hardware and its xbox gaming unit, which is a topic for today's video microsoft's gaming unit, made 15 billion dollars of revenue last year or about nine percent of The total company's revenue with the addition of activision blizzard this will increase to almost 15 percent of total revenue. So it's clearly an area of strategic focus for the company.

For more than a decade, the video game console industry has been a duopoly between microsoft's xbox and the sony. Playstation nintendo is also a big player, but they target a different demographic, so they aren't really a direct competitor for years. Playstation has outsold xbox in the latest. Console cycle the playstation 5 took 65 percent of market share to xbox's 35.

Over the past few years, microsoft has embarked on an aggressive strategy to close the gap with sony, and the activision acquisition is a culmination of this strategy. The strategy revolves around two pillars: their game pass subscription service and video game exclusivity first launch in 2017. Game pass is a 10 per month subscription service which allows unlimited, download and play of a rotating catalog of xbox games. Today they have 25 million game pass subscribers.

Bringing in roughly 3 billion of annual revenue they're trying to position themselves as the netflix of video games, netflix was able to become the dominant streaming platform because of their tens of billions of dollars of investment in original exclusive content. Microsoft is pursuing the same strategy. One of the biggest things that xbox has going for it is its exclusive access to the halo franchise which they own and produce, but if they want to become the netflix of video games, they're going to need a lot more exclusive titles. In march of 2021, microsoft bought video game developer bethesda for 7.5 billion dollars.

Bethesda is the company behind fallout, elder scrolls, doom and other popular franchises. Bethesda makes a few games which are exclusive to playstation, including death, loop and ghostwire tokyo. Microsoft said that they will not make changes to these existing arrangements, but it's a pretty safe bet that bethesda will not be making any new playstation exclusive games and, in fact, microsoft. Gaming, ceo phil spencer, confirmed that some of the new bethesda games will be xbox and pc exclusive over time.

Microsoft plans to build a larger and larger catalog of exclusive games in order to take market share from playstation. This is where the recently announced 69 billion acquisition of activision blizzard comes in activision is a studio behind the massively popular call of duty. Franchise call of duty has been the best selling us console game for eight out of the past 10 years, only losing out to red dead redemption in 2018 and grand theft auto 5 in 2013.. In fact, in 2021 call of duty took both the number one and number two spot in the u.s for the year 2021, with their vanguard and black ops, cold war titles respectively.

If they successfully complete this acquisition, microsoft will own both call of duty and halo, which are the two most successful and iconic console gaming franchises in the market. Today, if microsoft were to make call duty exclusive to xbox and pc, it would mean game over for sony. If this happened, you wouldn't be able to play call of duty or halo on the playstation, which would give you a strong incentive to buy an xbox instead fears around. This is probably why shares of sony tumbled.

10 on the news, an outright exclusivity of call of duty is highly unlikely. It would be an open invitation for the federal trade commission to open up an anti-trust investigation. It's more likely that microsoft will gradually make more and more of its internally developed games exclusive to the xbox they'll, probably start off with new titles that are not yet established, as this will get the least scrutiny from the regulators it looks like microsoft is playing the Long game they're buying up all these game studios, not just for the games they have now, but the new tiles that they'll make in the future. If microsoft ends up owning so many major game studios, it becomes more and more likely that the next halo or the next call of duty will be developed by them and they'll be able to make it an xbox exclusive.

Now the question is whether the government will allow the deal to go through before the deal was announced. Activision's share price was around 65 dollars. Microsoft is buying them for 95. A share at the current share price of 82 dollars.

There's about 21 downside. If the deal is scrapped and 16 upside, if the deal is successfully closed, that means the stock market is pricing in a roughly 57 chance of the deal going through. So it's better than a coin flip, but not by much, but given the obvious potential for microsoft to build a monopoly. Is this probability reasonable? Even if khan does sue microsoft to block the deal? Microsoft can challenge this in court.

This acquisition is strikingly similar to the merger of at t and time warner in 2018 time warner is a media company which supplies shows to direct tv, which was owned by atnt federal regulators feared that at t could give directv preferential access to time warner's content, which Would give it an unfair advantage over other television producers, such as dish the regulator sued to stop the merger? But after two years in court a judge ultimately ruled that the deal would not violate anti-trust laws when the acquirer and the target are not direct competitors with each other. It is very difficult to prove that they will harm consumers. It is highly unlikely that microsoft will raise the prices of any activision games. In fact, they will likely add them to the xbox game pass which effectively makes them far cheaper to access.

The long-term anti-competitive risk is that xbox will eventually build such an insurmountable lead over playstation in the future. They'll eventually become a de facto monopoly and be able to charge exorbitant prices for xbox game pass to be clear, we're still a long way off from this happening. Playstation is still far more popular than xbox in many key european and asian markets. It will take many years before microsoft's master plan to overtake sony will come to fruition.

Another thing that may play to microsoft's favor is the fact that sony is a japanese company. If regulators try to block the deal, they risk the perception of stifling american innovation to protect a foreign competitor. Because of these factors, investors appear to think the deal is more likely than not to go through with all that being said, policymakers shouldn't overlook the massive concentration of power that microsoft will achieve by owning both call of duty and halo. While it could be good for xbox game pass subscribers in the short run, it could be laying the groundwork for a massive video game monopoly that will eventually stifle innovation from their competitors and hurt consumers in the long run.

Alright guys that wraps up for this video, what do you think about the microsoft activision acquisition? Should it be allowed to happen? Let us know in the comments section below, as always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.