This analysis was first published in SvD Näringsliv, in Swedish, on October 25th, 2023. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.
Billion-dollar AI investments and the world’s largest gaming acquisition. CEO Satya Nadella has repositioned Microsoft for the future — and aimed it directly at Google. The quarterly reports suggest even more investment lies ahead.
Satya Nadella was in a good mood when he was recently in Berlin to accept an award — and took the opportunity to talk cricket.
Microsoft’s Indian CEO sat relaxed in a dark suit, without a tie, and told anecdotes about what he had learned from his favourite sport.
“Learn from your competitors, but don’t be in awe of them.”
That philosophy is easy to recognise in what the new Microsoft looks like. Who would have thought, a year ago, that the tech giant from Seattle could credibly challenge Google in search? And position itself as a leader in the exploding AI wave?
But that is where Microsoft finds itself now. How fitting, then, that both tech giants chose to report their quarterly results on the same day.
The reports from both companies on Tuesday evening were strong. Both Google and Microsoft beat analyst expectations on all key metrics. Revenue rose 11 and 13 percent respectively, and profits grew solidly at both companies. For Google, it was the advertising business in search — the company’s heartbeat — that looked strongest, while Microsoft showed robust growth in its cloud services, with revenues up 19 percent. The core businesses of both are performing powerfully — even as they have been somewhat overshadowed in terms of public attention.
Expectations aside, the biggest Microsoft news came a few weeks earlier.
That was when the acquisition of gaming giant Activision Blizzard was completed, after months of negotiations with competition authorities in several countries. The final price tag was 755 billion kronor, moving Microsoft to become the world’s largest game developer by revenue.
The acquisition builds on Microsoft’s successes with the Xbox console. It has previously bought additional studios such as Bethesda and Swedish Mojang.
With mobile game developer King — the Swedish company behind the mega-hit Candy Crush Saga — included in the new acquisition, Microsoft also becomes by far Sweden’s largest owner of gaming studios, with a combined revenue of more than 10 billion kronor.
Like the television industry, gaming is moving towards a subscription model. Xbox Game Pass is Microsoft’s service that offers games this way, and acquiring studios is a means of ensuring a pipeline of new titles for it. This move is aimed primarily at rival Sony, which owns PlayStation, and much of the regulatory negotiation focused on ensuring access to certain titles across all platforms. That says something about the position that video games have reached in the world.
Google’s exposure to gaming is very limited. The company owns Google Play — the largest store for Android devices — and made a larger push into streaming games through a project called Stadia. Google approached the gaming world — true to form — with advanced technology designed to create a better experience through cloud services. But the reception was lukewarm, and the service was barely launched before it was shut down.
For both Google and Microsoft, their enormous scale is a challenge in itself. It creates a kind of Darwinism in which only the very largest initiatives receive sufficient attention to survive internally. An acquisition of 755 billion kronor is of course enormous — but it has to be seen in the context of Microsoft’s market capitalisation of close to 27 trillion kronor. If initiatives are not large enough, they make no difference to the companies as a whole. With this perspective, one can also understand the massive billion-dollar investments both companies are making in AI right now. Not investing on a sufficiently large scale becomes almost pointless.
The challenge for both tech giants is to balance enormous, long-term investments with the here-and-now of the business. While the market waits for efficiency gains and sales increases from AI, there is an ordinary core business delivering profits day to day. Lose focus on that, and you erode the ability to keep investing in the future. But with reports as strong as the ones both companies delivered on Tuesday evening, we can expect more major investments and acquisitions from both Microsoft and Google going forward.
