Episode 40 Activision Blizzard

In this episode of "Acquired," hosts Ben Gilbert and David Rosenthal delve into the 2008 merger of gaming giants Activision and Vivendi Games, which included Blizzard Entertainment. They explore Blizzard's unconventional journey, including ownership by a French water company founded by Napoleon II and a hotel chain, before merging with Activision to form a $44 billion market cap powerhouse. The episode also features a discussion on the evolution of esports and Blizzard's influence on the industry, particularly through games like "Warcraft," "Starcraft," and "Diablo." Additionally, they touch on the role of Pilot, an accounting firm for startups, highlighting its growth and services. The hosts underscore the significance of business model innovations in gaming, the creation of esports, and the potential of Blizzard's IP flywheel, comparing the company's strategic moves to Disney's successful leveraging of its franchises.

• David Rosenthal and Ben Gilbert are the hosts of the podcast about technology acquisitions and IPOs.
• They introduce themselves and mention their intent to demystify the history of Activision and Blizzard.

I'm Ben Gilbert. I'm David Rosenthal and we are your hosts.

The quote is a simple introduction of the hosts, establishing their roles in the podcast.

• The episode covers the 2008 merger between Activision and Vivendi Games, which is the parent company of Blizzard Entertainment.
• The merger's history is described as complex, with many twists and turns.

Today we are covering the 2008 merger of Activision and Vivendi Games, the parent company of Blizzard Entertainment.

This quote sets the stage for the episode's main topic, indicating that the merger will be the primary focus of discussion.

• Blizzard did not have a typical journey to the merger; it was not a public company like Activision.
• Blizzard's ownership history included being owned by publishers of educational software, hotel holding companies, and a French national water company.

Turns out that they had been subsequently owned by the publishers of the math blaster software... and then one of the french national water companies created by Napoleon II during the Second Empire in France.

The quote highlights the unexpected and varied ownership history of Blizzard before the merger, showcasing its unique corporate background.

• Pilot is a company providing accounting, tax, and bookkeeping services for startups and growth companies.
• They emphasize the importance of focusing on core business activities and outsourcing non-core functions like accounting.

Pilot is the one team for all of your company's accounting, tax and bookkeeping needs.

This quote introduces Pilot, the sponsor, and their services, suggesting that they are a trusted partner for financial services.

• Blizzard was originally founded as Silicon and Synapse by three UCLA graduates in 1991.
• The company began by porting games before creating their own titles, such as 'Rock n' Roll Racing' and 'The Lost Vikings'.

Blizzard was started initially as a company called Silicon and Synapse by three college friends from UCLA right after they graduated in 1991.

The quote provides the origin story of Blizzard, marking the beginning of its journey in the gaming industry.

• Blizzard was acquired by Davidson and Associates for $10 million before releasing their hit game Warcraft.
• Davidson and Associates were known for publishing educational software like Math Blaster.

Davidson and Associates. Acquires them for $10 million, which is huge for these kids are at this .3 years I think out of college.

The quote details the first major acquisition of Blizzard, indicating a significant milestone for the young founders.

• Blizzard's release of Warcraft popularized real-time strategy (RTS) games.
• The company introduced innovations such as multiplayer gaming over LAN, third-party tools for online play, and a map editor for user-generated content.

Warcraft was really the first game that popularized this real time strategy genre among pc gamers.

The quote underscores Blizzard's influence in establishing and popularizing the RTS genre in PC gaming.

• Blizzard was caught up in a series of acquisitions, eventually falling under CUC International.
• Diablo was released by Blizzard, pioneering the dungeon crawler genre and introducing an in-game economy.

Diablo comes out and just like Warcraft kind of took the real time strategy genre and popularized it for millions and millions of gamers. Diablo does that for the quote unquote dungeon crawler genre.

This quote explains how Diablo extended Blizzard's impact on the gaming industry by popularizing a new genre and in-game economic interactions.

• Blizzard developed Battle.net, an online gaming service, to facilitate multiplayer experiences and create a revenue stream.
• Battle.net was a precursor to platforms like Steam and Xbox Live, offering matchmaking and a platform for game distribution and advertising.

They build their own service called Battle Net, which is still a huge part of Blizzard today.

The quote highlights Blizzard's foresight in creating Battle.net, which would become a model for future online gaming services.

• In 1997, Blizzard's parent company CUC merges with HFS to form Sentent.
• Blizzard releases StarCraft in 1998, becoming the best-selling game of that year.
• StarCraft's success includes improved graphics and balanced gameplay with three races.
• StarCraft sells 1.5 million copies immediately and eventually 1 million in South Korea alone.

"StarCraft just like blows past all of that and takes this right into the mainstream. Starcraft becomes the biggest selling game of 1998 anywhere on any platform, console, pc, what have you, sells one and a half million copies right out of the gate."

The quote highlights the massive success of StarCraft, emphasizing its impact on mainstream gaming and its impressive sales figures.

• StarCraft's popularity in South Korea leads to the birth of esports.
• South Korea becomes the epicenter of esports, with dedicated TV channels and professional players.
• PC bangs, or Internet cafes, proliferate in South Korea for playing StarCraft.

"This is the moment that's the birth of esports."

This quote marks the significance of StarCraft's influence in South Korea as the starting point for the esports industry.

• Sentent, Blizzard's parent company, is caught in an accounting scandal similar to Enron.
• Sentent divests its assets, including Blizzard's games, to French company Havas.
• Havas is subsequently acquired by Vivendi, a conglomerate with a history dating back to 1853.

"They were basically the Enron of the tech sector."

The quote compares Sentent's accounting scandal to the infamous Enron scandal, indicating the severity of the corporate misconduct.

• Despite corporate changes, Blizzard maintains creativity and innovation in game development.
• Blizzard's franchises like Warcraft, StarCraft, Diablo, and later Hearthstone and Overwatch demonstrate strong IP and franchise value.

"Blizzard as a group of people creating these games stayed brilliantly creative and innovative and were able to spot what that next big thing was and either go after it themselves or sort of buy it."

This quote reflects on Blizzard's consistent ability to innovate and lead in the gaming industry despite numerous corporate turnovers.

• Warcraft III's robust campaign editor leads to a vibrant modding community.
• Defense of the Ancients (DotA) mod for Warcraft III spawns the multiplayer online battle arena (MOBA) genre.
• League of Legends and Dota 2 evolve from the original DotA mod, becoming industry giants.

"And it is the multiplayer online battle arena genre which is now if not the biggest, one of the biggest portions of the whole gaming industry."

The quote explains the significance of the MOBA genre, which originated from a community mod in Warcraft III and has become a dominant force in gaming.

• World of Warcraft (WoW) revolutionizes the MMORPG genre and business models in gaming.
• WoW achieves over 12 million monthly subscribers, with revenue from subscription fees.
• Blizzard focuses on supporting WoW, contributing to its success as a community-driven game.

"World of Warcraft... grows over time to over 12 million monthly subscribers... Blizzard was making over $1 billion a year, every year recurring just from this game."

This quote highlights the unprecedented financial success of WoW and its impact on Blizzard's business model, emphasizing the recurring revenue from subscriptions.

• Vivendi merges its games division, primarily Blizzard, with Activision, valuing it at $8.1 billion.
• The combined company is valued at $18.9 billion, and Vivendi owns a 63% stake.
• Activision, known for franchises like Guitar Hero and Call of Duty, is led by CEO Bobby Kotick.

"Vivendi, the parent company, the french conglomerate, the water company announced... that they are doing a deal with Activision... that they are going to contribute, merge their games division, of which the vast majority is blizzard, into Activision, value it at $8.1 billion."

The quote details the merger between Vivendi's games division and Activision, including the valuation and the resulting ownership structure.

• Activision is a longstanding video game publisher, known for its various successful franchises.
• Activision's business model involves working with different development studios to create games.
• The company is recognized for its third-party game publishing since 1979.

"Activision is a longtime video game publisher conglomerate... Activision is run by a guy named Bobby Kotick, who's been, I believe he actually bought the company himself in the super early days of the gaming industry."

This quote provides a brief background on Activision, its CEO Bobby Kotick, and its role in the gaming industry as a pioneering third-party publisher.

• There are two main pure-play publicly traded gaming companies: Electronic Arts and Activision Blizzard.
• Vivendi now owns just under 6% of Activision Blizzard, with the remaining 94% being publicly traded.
• Investing in these companies can be seen as a way to get exposure to the gaming industry.

"There's Electronic Arts, there's Activision Blizzard. They are the main pure play gaming companies out there."

This quote highlights the limited options for investing directly in pure-play gaming companies through the stock market, pointing out Electronic Arts and Activision Blizzard as the main choices.

• eSports has a massive audience, with over 300 million people watching competitive gaming annually.
• Investment opportunities in eSports are limited due to private ownership of major players like Riot Games and Valve.
• Activision Blizzard offers a public investment avenue into eSports due to its involvement in the industry.

"Really the only way that public company investors can really get exposure to this bet on this wave is through Blizzard Activision."

The quote emphasizes that for investors seeking to invest in eSports through publicly traded companies, Activision Blizzard is one of the few available options because of its engagement in the eSports sector.

• Blizzard released 'Heroes of the Storm' in 2015, entering the MOBA (Multiplayer Online Battle Arena) market.
• Despite not surpassing 'Dota 2' and 'League of Legends,' Blizzard's entry into MOBAs showcases its innovative efforts.
• Activision Blizzard's acquisition of Major League Gaming in 2016 was a strategic move into eSports league management and broadcasting.

"Activision itself would never, I think, have innovated on this level of stuff. But so Blizzard finally gets in the act on MOBAs itself."

This quote reflects the belief that Blizzard's innovative culture contributed significantly to Activision's ability to enter and compete in the MOBA market.

• Overwatch was released by Blizzard in 2016, quickly gaining a significant player base and revenue.
• The game combines elements of MOBAs and first-person shooters, designed to be both fun to play and optimized for viewing as an eSport.
• Overwatch uses a hybrid business model, charging upfront for the game and offering in-game purchases, such as loot boxes.

"Overwatch... gets 7 million players in the first week, 25 million players by the end of 2016, and now it's over 30 million players and already over a billion in revenue."

The quote indicates Overwatch's rapid success in terms of player adoption and revenue generation, highlighting Blizzard's effective business strategy for the game.

• Established games like 'StarCraft II' and 'League of Legends' continue to command significant viewing hours on Twitch, indicating their lasting popularity.
• Newer games are being designed with the viewing experience in mind, but older titles still dominate viewership.
• The trend suggests that well-established games maintain a strong hold on audience attention in the eSports arena.

"Seven year old League of Legends still commands 23.3% of the viewing hours and Dota 2 has 32.2%."

This quote provides concrete metrics on the enduring popularity of older games in the eSports viewing space, despite the introduction of newer titles.

• Blizzard has evolved the video game market approach to focus on long-term growth and depth of games beyond initial software sales.
• This business model is likened to startup company strategies, emphasizing continuous development and monetization.
• Activision Blizzard's financial success is partly due to this innovative approach to game development and monetization.

"Blizzard really brought this new approach to the video game market where it's not about just publishing a piece of software, people buying it, and then that being the end."

The quote describes Blizzard's shift from traditional one-time game sales to a model where games are continually updated and monetized, reflecting a more sustainable and growth-oriented approach.

• Activision Blizzard's game releases generate revenues comparable to blockbuster movies but with a longer tail of profitability.
• The company's ability to keep making money over time from games like 'Call of Duty Ghosts' is highlighted as a significant advantage over the traditional movie revenue model.

"These games when they come out are making as much money as movies are when they come out, but they have an incredible tail of the ability to continue making money."

The quote compares the revenue generation potential of games to movies, emphasizing the extended earning period that games can have compared to the finite theatrical run of movies.

• By the end of 2016, Blizzard's revenue had grown significantly, reflecting the success of their business model.
• The time consumers spent playing and watching Activision Blizzard content was comparable to Netflix and significantly higher than Snapchat.
• The company's reach and impact on consumer attention highlight the importance and scale of the gaming industry.

"Consumers spent approximately... 43 billion hours playing and watching Activision Blizzard content, which is on par with Netflix and over one and a half times the amount of time that people spent on Snapchat."

This quote underscores the massive scale of engagement that Activision Blizzard commands, comparing it to major content platforms like Netflix and Snapchat.

• The merger between Blizzard and Activision was seen as mutually beneficial, combining marketing and distribution capabilities with a track record of successful online games.
• Activision's interest in Blizzard's long-term monetization potential of games is evident, contrasting with the traditional hits-driven business model of video games.
• The merger allowed Blizzard to focus on creative development while benefiting from Activision's marketing and distribution expertise.

"Activision sort of make this play to make it happen because Vivendi games, which Blizzard probably wanted, Activision's kind of marketing and distribution, and Activision obviously looked over and Blizzard had hit after hit after hit of online games."

The quote reflects the strategic thinking behind the merger, where Activision sought to capitalize on Blizzard's online game success and Blizzard sought to leverage Activision's marketing and distribution prowess.

• Blizzard is recognized for its growth, innovation, and advanced business model in the video game industry.
• The potential loss of opportunities had Blizzard not been part of Activision is highlighted.
• The importance of Blizzard's approach to the industry is underscored, considering the company's impact.

"But all the growth and the innovation and the better business model that Blizzard has, they would have missed out on."

This quote highlights the significance of Blizzard's growth and innovative approach, suggesting that without certain strategic decisions, such as its partnership with Activision, Blizzard might have missed out on key opportunities for advancement.

• The development and cancellation of the game 'Titan' raises questions about Blizzard's decision-making process.
• Speculation on whether Blizzard would have persisted with 'Titan' if it were an independent entity rather than part of Activision.
• The discussion suggests that corporate decisions on project continuation might be influenced by the parent company's perspective.

"The question is just in my mind, if it were just Blizzard, would they have believed in it and persevered through it and shipped it anyway?"

This quote reflects on the hypothetical scenario of Blizzard operating independently and whether it would have had the resolve to continue with the 'Titan' project, implying that being under Activision may have influenced the decision to cancel it.

• Diablo III's performance is debated, with one speaker viewing it as a flop and the other as a success, albeit not on par with other major franchises.
• The high stakes in the industry are mentioned, where only the most successful franchises significantly impact businesses with high capital requirements and potential revenues.
• The conversation suggests that the success of a game is relative to the expectations set by other franchises within the company.

"There was a flop. I think it was successful but just not to the degree of these other franchises."

This quote clarifies that while Diablo III may not have been a complete failure, its success was limited when compared to Blizzard's other more successful franchises, indicating a nuanced understanding of success in the video game industry.

• Blizzard considers Diablo a core franchise despite its less successful third installment.
• The future direction of Diablo is considered promising, especially with its potential for creating an online item economy.
• The discussion acknowledges the importance of adapting to new trends such as esports and viewing models to maximize a franchise's potential.

"Blizzard views Diablo as a core franchise and it'll be super interesting to see what directions they take it in."

This quote suggests that despite any perceived shortcomings of Diablo III, Blizzard still values the Diablo series and is interested in exploring its future potential, particularly in creating an engaging online economy.

• The significance of creating platforms that enable user creativity and entrepreneurialism is emphasized.
• The modding engine and campaign and maps editors released by Blizzard are credited with creating a multi-billion-dollar industry in esports and MOBAs.
• The discussion parallels the impact of Apple and other platforms that have facilitated user-driven content creation and business opportunities.

"If you can execute that well in whatever domain and essentially create a marketplace around what you're doing, but a marketplace where you're enabling new types of creativity and really entrepreneurialism, that's how you can grow just an enormous ecosystem in any type of business."

This quote captures the essence of the tech theme discussed, emphasizing the power of platforms that empower users to be creative and entrepreneurial, which can lead to the growth of vast ecosystems within any industry.

• Blizzard's efforts to expand its intellectual property (IP) into movies, TV shows, and toys are compared to Disney's successful model.
• The potential for Blizzard to leverage its game characters and storylines across various media forms is considered an open question.
• The acquisition of Major League Gaming is seen as part of Blizzard's strategy to build a comprehensive IP flywheel, akin to Disney's model.

"It's an open question to me if the sort of storyline and character development and affinity for these characters that Blizzard, Activision and that Riot and these games are doing for the heroes and characters and champions in these games, if they'll be able to really parlay that the same way that Disney has with the characters in their universe."

This quote raises the question of whether Blizzard will be able to replicate Disney's success in leveraging its characters and storylines across different media platforms, highlighting the strategic importance of IP management in the gaming industry.

• The shift from traditional distribution methods to direct digital distribution is discussed.
• Once a game studio establishes a customer relationship, platforms like Battle.net and Steam allow for sustained customer engagement without recurring distribution costs.
• The discussion reflects on the broader implications of the Internet's impact on distribution and the potential for game studios to maintain long-term customer relationships.

"You acquire a customer once and you can retain them for a long time. It really inspires more of an ecosystem view of your customer, where you can sort of keep sending new titles to them and figuring out what they would like for really their entire lifetime."

This quote explains the transformative effect the Internet has had on game distribution, where studios can maintain a lasting relationship with customers, continually offering new content without the traditional costs and barriers associated with physical distribution.