Microsoft’s mobile gaming opportunity

Phil Spencer, the CEO of Microsoft’s gaming division, declared this week that Microsoft could release an alternative app store on both iOS and Android as soon as next year if its acquisition of Activision Blizzard is approved. Spencer’s comments come as the deal faces competitive review by a number of regulatory agencies, most notably the UK’s Competition and Markets Authority (CMA), which will issue a decision on the matter in late April.

The ability to launch an alternative app store on iOS will be catalyzed and facilitated by the EU’s Digital Markets Act (DMA), which primarily goes into effect next year (I provide an overview of the DMA here). In The DMA and the Content Fortress-ification of the app economy, I argue that the DMA is more likely to marginally increase the size of the existing smartphone content distribution oligopoly currently controlled exclusively by Apple and Google, rather than instigating the blossoming of an open and vibrant marketplace of app stores. From the piece:

A more likely outcome of the DMA than alternative app stores proliferating and gaining traction on either iOS and Android, where they are currently allowed, is the accelerated Content Fortress-ification of the app economy…The threat to Apple (and to a lesser extent, Google) from the DMA isn’t that apps will sidestep the App Store through direct consumer installs: ATT made sure of that by erecting barriers to reaching relevant audiences through direct response advertising. What the DMA will do is allow large social platforms and some other scaled businesses (eg. Epic Games) to launch stores that lure developers through lower processing fees and customers through existing relationships.

(Excuse the fact that I use an incorrect ticker symbol for Microsoft, which trades as $MSFT, in the tweet above)

Microsoft is clearly invested in joining this expanded oligopoly, and for good reason: the company already possesses the component parts for a Content Fortress across identity (through XBox authentication and the XBox network), content (its existing portfolio of games), and AdTech through its acquisition of Xandr. Microsoft has already spoken to the scale of its advertising ambitions; from Microsoft’s Xbox advertising ambitions:

That Microsoft would seek to introduce ads to the Xbox environment is not altogether surprising: I posited back in January that, if an ad network were introduced to it, Microsoft’s proposed acquisition of Activision could spawn a considerable content fortress, consisting of a substantial content portfolio spanning mobile, desktop PC, and console, all supported by a premium subscription product on Xbox, the Xbox Game Pass, with 25MM active subscribers. Such a large, contextually-homogenous yet platform-diverse pool of content creates the conditions for efficient cross-promotion and augmented monetization efficiency through personalization (eg. sales and special offers) using first-party data. But an advertising platform is needed to unlock this functionality.

Resistance to Microsoft’s acquisition of Activision Blizzard mostly relates to control of the Call of Duty franchise, which is seen as the crown jewel of Activision’s content portfolio. But I have contended since the acquisition was announced that King — the developer behind Candy Crush, the ATT-resilient, decade-old game that celebrated its best-ever quarter in Q4 2022 — is an overlooked asset that would provide Microsoft with a considerable nexus of engagement on mobile. Microsoft published a set of open app store operating principles last year that suggested that Microsoft might enter the mobile market with an app store. The current announcement lays bare the company’s commercial intentions.

If Microsoft’s acquisition of Activision Blizzard passes review, Microsoft would enter the mobile space with the benefit of a scaled content portfolio, an identity management system, and advertising infrastructure. The integration of these assets, post-acquisition, is certainly not trivial, but the opportunity is substantial: a logged-in subscriber base of more than 25MM through the XBox Game Pass, a portfolio of content that spans hundreds of millions of MAUs, touchpoints across numerous hardware form factors, and an advertising technology platform that can potentially serve ads within the entire portfolio. If this is paired with a mobile app store, Microsoft would be unique in owning all of these components.