News & Analysis

 

Microsoft's blockbuster $68.7 billion bid to acquire video game giant Activision Blizzard, owner of the "Call of Duty" and "Candy Crush" franchises, has hit a snag. Yet venture capitalists, by and large, see the deal as good for their portfolio companies, despite concerns over competition.

The UK regulatory body, the Competition and Markets Authority, blocked the deal Wednesday, citing competition concerns in cloud gaming.

Several current and former investors at gaming-focused VC firms said the mega-deal would be good for investors and would lead to new investment opportunities. Moreover, they argued that UK regulators are focusing on the wrong issue, that consolidation is overdue and that blocking the deal could have chilling effects on entrepreneurs.

"Over the last three years, gaming has been on an absolute tear," Josh Chapman, a managing partner at Denver-based Konvoy Ventures. "A lot of cash in the gaming market is pursuing M&A; the environment is healthy. The deal is a positive for the industry because it showcases that big tech companies like Microsoft remain committed to gaming."

The wrong focus 

The UK's main point of contention with the proposed deal is how Microsoft's Xbox platform could gain an unfair advantage and monopoly within the emerging cloud gaming subsector.

The investors PitchBook spoke with say CMA has the wrong focus. "They clearly don't fully understand cloud gaming," said Chapman.

Andrew Sheppard, managing director at Transcend Fund, agrees and said that the agency's concerns around cloud gaming don't alter his firm's investment strategy.

"Cloud gaming is inevitable; however, it is too far off on the horizon. This deal will not affect how that story will be told," he said.

Many VCs pointed to mobile gaming and Microsoft's push into the segment as one of the biggest investment opportunities surrounding the deal. King, the publisher of the popular "Candy Crush" mobile games, is owned by Activision Blizzard, and Microsoft's interest is a good sign, according to Chapman.

"Microsoft doesn't touch mobile right now," he said.

Microsoft would be acquiring about 400 million players from King's games, Chapman estimates, and the company has announced plans to launch its own Xbox mobile games app store to rival those of Google and Apple.

"They're playing the volume game," Chapman said of Microsoft expanding into new game segments.

'Consolidation is inevitable' 

Several investors said consolidation in the games industry is long overdue and that it would ultimately benefit their portfolio companies and consumers.

Erik Reynolds, a 20-plus-year veteran of video game publishing who founded esports media startup Aggregated Media, said it's the natural progression of an industry.  He supports the deal because the "cost of doing business continues to go through the roof" and added that acquisition provides studios with a better safety net and more resources.

Reynolds said the problem currently is that smaller to midsize studios like Electronic Arts must demonstrate growth through costly content development, a strategy difficult for the independent game development community in comparison to M&A.

"Consolidation at the platform level is inevitable," said Sheppard, of Transcend Fund, citing a fragmented ecosystem.

He argued this consolidation would be a positive for gamers as well.

"Yes, consumers want choice, but what they really care about is simplicity," he said.

Vinayak Rao, the former head of gaming at Fundamental Labs, said many studio startups look at the deal as a potential North Star in their strategies to be acquired by bigger publishers and studios.

"It set expectations of what a new ceiling could be in gaming," he said.

The head of Lightspeed's gaming unit, Moritz Baier-Lentz, said he expects to see more consolidation.

"Former top talent at Blizzard, Epic Games, Riot Games and other publishers are now increasingly looking to realize their entrepreneurial ambitions at their own startups, with the help of venture capital," he said. "For us as investors, there is no doubt that we will continue to see innovation and consolidation in this sector."

Chilling effects  

Some investors and founders warned that the UK's decision to block the deal could have a negative effect on startups.

Reynolds, the former publishing executive and startup founder, warned that the decision sends a chilling message to gaming startups in the country.

"The decision feels very political in nature," he said. "If you're in a country like the UK, I wouldn't start a company."

Chapman, of Konvoy, echoed those sentiments. "I think it's all to prove a point, just like they've gone after big tech companies. I don't believe that point is warranted."