This analysis was first published in SvD Näringsliv, in Swedish, on February 3rd, 2022.
After Microsoft’s and Sony’s billion-dollar gaming deals, attention turns to the quietest gaming giant of all — Apple. Now the tech company may be forced to change its strategy to keep up.
In the tech world, the strongest position is often the one you don’t see. It might be being taken for granted, the way a web search is now just called “googling”. It might be the hidden infrastructure running the internet, like Amazon’s cloud service AWS, with its 32 percent market share. Or it can mean not even being seen as a player in a market where you are actually one of the leaders.
This is what CEO Satya Nadella hinted at when he framed Microsoft’s acquisition of Activision Blizzard for more than SEK 600 billion — the largest deal in gaming history. In the presentation that followed, where he gave the background to the transaction, there was a very telling sentence:
“Today, we face strong global competition from companies that generate more revenue from gaming distribution than we do from our share of game sales and subscriptions.”
Nadella named no names, but the target was clear — Apple.
The company is rarely counted among the gaming giants, since it does not make any games. But in the most recent quarter alone, Apple had revenue from its “services” segment of nearly $20 billion. Most of that is commission on app sales in the App Store, and the majority of those dollars comes from games.
There is no doubt, in other words, that gaming is important to Apple. But the reverse is also true — Apple is enormously important to the gaming world. Together with Google Play, the store for Android phones, the two tech giants effectively have a duopoly over anyone who wants to reach mobile gamers. If you want to distribute your game through the App Store, you also have to pay 15 or 30 percent of the revenue to Apple. The high-profile Epic Games lawsuit is essentially about exactly that.
Microsoft’s mega-deal — and Sony’s acquisition this week of the game studio Bungie for SEK 33 billion — could be the start of something bigger that shifts this balance of power. Microsoft and Sony already own their respective consoles, Xbox and PlayStation, but the new acquisitions are mainly about software. The companies want to expand their subscription businesses, where players pay monthly, moving away from the sale of individual titles. The assumption is that players will follow the best titles, and in some cases access them on any hardware. The subscriptions also go around Apple’s store. The dynamic echoes when Netflix swept in and took over the video market from iTunes, which sold and rented movies and TV series one at a time. Apple does not want to repeat that mistake.
The company does have its own gaming subscription, Apple Arcade, but it relies on licensing games from other developers. As gaming consolidates under competitors, there is a risk that the best titles will no longer be available to Apple — neither for licensing to Arcade, nor for distribution via the App Store. That would lead to billions in lost revenue. Apple suddenly starting to buy a bunch of its own game developers is not particularly likely given how the company usually does deals, but the revenue is important enough that it could force Apple to change its otherwise very clear acquisition strategy.
In the newsletter “Power On”, Bloomberg journalist Mark Gurman has gone through Apple’s various acquisitions. He notes that Apple likes to buy companies when they add one of two things: a single hardware component (like the company Authentec, which became the Touch ID fingerprint reader) or software (like Beddit, which became the sleep tracking on Apple Watch). The priority, in other words, is buying development time rather than new brands or products.
But there is one big exception — the acquisition of Beats Music and Beats Electronics in 2014. The streaming service Beats was renamed Apple Music, but the Beats headphones kept both their brand and their identity. Getting quickly into music streaming was strategically important. And as Apple now faces a similar fork in the road in gaming, it is possible that it needs to think about acquisitions that look more like Beats in structure.
Where, in that case, should Apple look? If the checklist includes a strong brand, a history of integrated hardware and software, and a gold mine of content and characters to build from, all the arrows should point in one direction.
Nintendo.
It would be a deal that has the potential to top Activision Blizzard in size. The Japanese game company Nintendo has a market cap of just over SEK 530 billion today. With a solid premium to get the deal done, we’d probably land well above the SEK 600 billion Microsoft spent. A high price, but Apple can afford it. The company sits on a war chest of over SEK 1,800 billion and hasn’t made a big acquisition in many years.
It would be an unusual, but not impossible, deal. The gaming market today is so important that it demands larger and bolder bets. Microsoft has already made one. Will Apple follow?