Microsoft’s Activision purchase could leave Japanese video game-makers out in the cold

Microsoft Corp. threw down the gauntlet last week with its biggest-ever acquisition, agreeing to purchase Activision Blizzard Inc. for a whopping $68.7 billion (¥7.8 trillion) in a deal that could preclude major shakeups in the lucrative video game industry. But where that leaves Japan's top gaming firms, from Sony to top third-party developers like Capcom and Square Enix, remains to be seen.

As hype over the so-called metaverse reaches a fever pitch, a slew of video game developers will likely seek partners to team up with or get absorbed by global tech titans to get ahead of the competition.

If that comes to fruition, long-established Japanese game-makers may be left out in the cold, as those firms are unlikely to make such decisions in an agile or flexible manner due to their traditional and conservative mindset, analysts said.

Microsoft’s move this time is “literally the beginning of the race” among tech behemoths to acquire firms that will give them a competitive edge going forward, said Satoshi Kurihara, senior analyst at the Tokai Tokyo Research Institute.

Competition in the industry is expected to get fiercer, as not only long-running industry leaders, such as Microsoft and Sony, but also Netflix and Meta, formerly known as Facebook, look set to tap into the metaverse.

The concept of the metaverse is vague, but it is often described as something that merges virtual and physical reality to create a new communication and entertainment space.

While foreign tech giants may have plenty of cash, they lack content, Kurihara said.

“By using the cash, they can make a massive investment to build a platform. With the metaverse, they can create virtual space platforms but if there is no content to attract users, they won’t be able to make a profit,” he added.

“This is why they need popular content with avid fans.”

Activision, which has been troubled by a sexual harassment and discrimination scandal, publishes mega titles, such as Call of Duty, World of Warcraft, and Candy Crush, so the acquisition will give Microsoft’s game portfolio an immediate boost.

“Gaming is the most dynamic and exciting category in entertainment across all platforms today and will play a key role in the development of metaverse platforms,” Microsoft CEO Satya Nadella said in a statement.

While analysts believe that the move by the Redmond, Washington-based giant will likely spur a restructuring of the industry, they say that Japanese companies, who own many of the industry's most popular franchises, might be left behind the trend.

Long-established Japanese developers such as Monster Hunter developer Capcom Co., Final Fantasy creator Square Enix Holdings Co., and Konami Holdings Corp., developer of the Metal Gear series, tend to be more inward-looking.

“Since those companies have a longer history (compared to foreign developers and tech giants), I think they have too much pride to easily agree to join" with others, Kurihara said.

Also, as their businesses have been going fairly well recently, they probably think that there is no rush to join any industry restructuring movement, Kurihara added.

If that’s the case, would Japanese gaming firms be able to survive on their own against the competition?

Analysts are doubtful.

For instance, necessary costs are expected to keep increasing with the development of more sophisticated devices, including PlayStation 5, with blockbuster titles possibly costing upwards of tens of billions of yen. Japanese game-makers will also need make investments in rising tech trends including the metaverse and NFTs (non-fungible tokens) to keep up with the competition.

But it will be difficult for them to shoulder such costs just by themselves.

“Somewhere down the line, I think Japanese video game firms will be forced to depend on the capital of the major global players,” Kurihara said.

Given that, it’s better for Japanese firms to seek partners soon, before they have no choice, he added.

Yasuo Imanaka, chief analyst at Rakuten Securities, also pointed out that it’s possible that mergers and acquisitions will accelerate overseas, but that trend is unlikely to carry over to Japan.

“Activision will probably receive ample funds for video game production and other support from Microsoft in relation to developing the metaverse,” Imanaka said.

That will prompt other video game-makers to seek partners to scratch their back, so “the industry will be in a restructuring phase outside Japan,” he said.

Compared to U.S. firms, many Japanese companies don't have a capitalistic way of thinking about their businesses due to a traditional, conservative mentality. That means they are unlikely to make big deals and may fail to keep up with the competition in the realm of the metaverse, Imanaka added.

When it comes to the metaverse, Microsoft's move to buy Activision has heaped pressure on its industry rival Sony.

Because Sony doesn’t have the cash reserves of Microsoft, it won’t be able to match its rival's lavish investment, analysts said.

Although the size of its investments are much smaller, Sony has been acquiring more game studios overseas and investing in metaverse development.

The Tokyo-based firm acquired several foreign studios last year, including Seattle-based Valkyrie Entertainment, and announced that it would make an additional $200 million investment in Epic Games Inc., maker of the hit title Fortnite, for their metaverse development.

While Sony may lag behind Microsoft when it comes to the metaverse in the gaming industry, Imanaka said, it has other strong assets, such as music, movies and anime, that can be used for the metaverse.

“I think music will be key content for the metaverse with live shows and events,” so Sony might want to consider focusing more on that area, Imanaka said.