Episode 40: Activision Blizzard

In episode 40 of Acquired, hosts Ben Gilbert and David Rosenthal discuss the 2008 merger of video game giants Activision and Vivendi Games, the latter being the parent company of Blizzard Entertainment. They delve into Blizzard's unconventional history, from its beginnings as Silicon & Synapse, through a series of acquisitions by companies as varied as the publishers of Math Blaster software to a French national water company established by Napoleon III. The episode highlights Blizzard's significant contributions to gaming, such as the creation of the real-time strategy genre with Warcraft and the massive multiplayer online role-playing game (MMORPG) phenomenon with World of Warcraft. They also touch on Blizzard's modding community, which inadvertently spawned the immensely popular MOBA genre. Additionally, the podcast covers Activision Blizzard's current positioning in the esports industry, their acquisition of Major League Gaming, and the release of Overwatch, a game designed with both player engagement and spectatorship in mind.

• The episode is hosted by Ben Gilbert and David Rosenthal.
• They introduce the episode as covering the 2008 merger of Activision and Vivendi Games, which included Blizzard Entertainment.

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

• Ben Gilbert and David Rosenthal are the hosts of the Acquired podcast.
• They are covering the merger of Activision and Vivendi Games, including the history of Blizzard Entertainment.

• Blizzard Entertainment was founded as Silicon & Synapse by UCLA graduates.
• The company was started by Alan Adham, Frank Pearce, and Mike Morhaime who were passionate about video games.
• Initially, they ported games to other platforms, gaining experience in game development.

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

• Blizzard was originally called Silicon & Synapse, founded by Alan Adham, Frank Pearce, and Mike Morhaime.
• The founders were college friends from UCLA who decided to start their own gaming company after graduation.

• Blizzard's early titles included 'Rock n' Roll Racing' and 'The Lost Vikings'.
• The company changed its name from Silicon & Synapse to Chaos Studios, then to Blizzard Entertainment.
• Blizzard was acquired by Davidson & Associates for $10 million before releasing Warcraft.

"They started out at first not actually making their own games... they started porting other people's games from platform to platform."

• Blizzard initially did not create original games but ported existing games to different platforms.
• This approach allowed Blizzard to earn revenue and gain experience in game development.

• 'Warcraft: Orcs & Humans' was Blizzard's first major hit in the real-time strategy (RTS) genre.
• 'Warcraft II: Tides of Darkness' introduced robust multiplayer features and a map editor.
• The map editor feature in Warcraft II allowed players to create and share their own maps, fostering a modding community.

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

• Warcraft popularized the RTS genre and became a significant success for Blizzard.
• The game's multiplayer and map editor features were innovative at the time and contributed to its popularity.

• Davidson & Associates, Blizzard's parent company, was acquired by CUC International.
• Blizzard contracted with Condor Games to develop 'Diablo', which later became a core Blizzard franchise.
• Diablo popularized the dungeon crawler genre and introduced an addictive leveling and equipment system.

"Diablo... took the real-time strategy genre and popularized it for millions and millions of gamers."

• Diablo's success mirrored that of Warcraft in the RTS genre, but for the dungeon crawler genre.
• The game was notable for its infinite gameplay loop and online item trading, which was innovative at the time.

• Blizzard developed Battle.net, an online gaming service for multiplayer and community engagement.
• Battle.net allowed Blizzard to control the online gaming experience and generate revenue through advertising and later direct monetization.

"They build their own service called Battle.net... that is the Xbox Live version. It's their way of owning and controlling how people play online against one another."

• Battle.net was Blizzard's platform for online gaming, similar to Xbox Live.
• The service became a significant part of Blizzard's business model, providing control over online multiplayer gaming and a source of revenue.

• In late 1997, CUC merged with HFS, another holding company.
• The merged entity was renamed Cendant.
• HFS owned various hotel assets, including Ramada and Howard Johnson.

"So first thing that happens at the very end of 97, CUC, the new parent company, merges with another holding company called HFS."

The quote explains the merger between CUC and HFS, which resulted in the creation of Cendant, a company with diverse hotel assets.

• Blizzard released StarCraft in 1998, which became the biggest selling game of the year.
• StarCraft was an evolution of the real-time strategy genre with improved graphics and balance.
• It sold 1.5 million copies immediately and was particularly popular in South Korea, selling 1 million copies there.

"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 immediate success of StarCraft upon its release, emphasizing its widespread popularity and sales figures.

• StarCraft's success in South Korea contributed to the birth of esports.
• South Korea became the epicenter of esports, with government regulations and dedicated TV channels for StarCraft tournaments.
• The phenomenon included professional gamers, PC bangs (Internet cafes), and a strong national interest in esports.

"This is the beginning of what we really see today in the esports world... The South Korean government has rules and regulations around these live tournaments."

This quote discusses the significant role South Korea played in the early development of esports, highlighting the government's involvement and the cultural integration of gaming.

• Cendant was found to be falsifying revenue and earnings, similar to Enron.
• The scandal led to the divestment of assets, including the sale of their games division to French publisher Havas.
• Havas was subsequently acquired by Vivendi, a conglomerate that started as a water utility company in France.

"They were a public company, and, like, total Enron style... they end up divesting all their assets, and they sell all of their games division to a French publishing company called Havas."

The quote describes the accounting scandal at Cendant, comparing it to Enron, and details the outcome of selling their gaming division to Havas.

• Vivendi, which had historical roots in water utilities, acquired Havas and later Seagram, which owned Universal Studios.
• The acquisitions and mergers illustrate the complex corporate history leading up to the Activision Blizzard merger.
• The discussions provide context for the value and structure of the companies involved.

"Havas turns around, this is still 1998 and gets acquired by another French conglomerate called Vivendi."

This quote outlines the acquisition chain that led to Vivendi's significant role in the gaming industry, demonstrating the company's expansion beyond its original utility focus.

• Blizzard maintained creativity and innovation despite corporate turnovers.
• They were adept at spotting and generating tech waves relevant to the gaming world.
• Blizzard's franchises like Warcraft, StarCraft, Diablo, Hearthstone, and Overwatch became valuable IPs.

"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."

The quote emphasizes Blizzard's consistent innovation and creativity, which allowed them to remain influential in the gaming industry through various corporate changes.

• Activision was a major video game publisher with franchises like Guitar Hero, Call of Duty, and Tony Hawk.
• Bobby Kotek, known for his capitalist approach, led Activision.
• Activision's history as a third-party game publisher dates back to 1979.

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

The quote provides an overview of Activision's history and leadership, highlighting its long-standing presence in the gaming industry and the significance of its CEO, Bobby Kotek.

• Warcraft III's map editor led to a robust modding community and the creation of the mod "Defense of the Ancients" (Dota).
• Dota spawned the Multiplayer Online Battle Arena (MOBA) genre, leading to games like League of Legends and Dota 2.
• Blizzard did not maintain control over the IP, allowing the mod community to innovate independently.

"In 2003 a member of the Mod community named Eul, he creates a mod, a map that he calls Defense of the Ancients. 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."

This quote discusses the creation of the Dota mod by a community member and its significant impact on the development of the MOBA genre within the gaming industry.

• World of Warcraft (WoW) became a massive MMORPG with over 12 million subscribers.
• WoW introduced a subscription-based business model, generating over $1 billion annually for Blizzard.
• The game's community aspect was key to its success, with players creating content and experiences.

"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."

The quote highlights the unprecedented success and revenue generated by World of Warcraft, emphasizing the game's subscription-based business model.

• In December 2007, Vivendi merged its games division with Activision, valuing the new company at $18.9 billion.
• Vivendi invested cash into the combined company and retained a 63% ownership stake.
• The merger was complex, with a significant portion of the company remaining publicly traded.

"Vivendi, the parent company, the French conglomerate, the water company... announce that they are doing a deal with Activision... the total new combined company will be valued at $18.9 billion."

The quote details the merger between Vivendi's games division and Activision, including the valuation and ownership structure of the newly formed company, Activision Blizzard.

• There are two main publicly traded pure play gaming companies: Electronic Arts (EA) and Activision Blizzard.
• EA and Activision Blizzard represent the primary options for investors looking to invest in the gaming industry through the stock market.

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

• This quote emphasizes the dominance of EA and Activision Blizzard in the publicly traded gaming sector.

• eSports has grown to over 300 million viewers annually.
• Investors looking to bet on eSports have limited options with public companies.
• EA is not a significant player in eSports.
• Riot Games and Valve are privately held and dominate eSports, but they limit direct investment opportunities.
• Activision Blizzard is the primary public company offering exposure to the eSports trend.

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

• This quote highlights Activision Blizzard as the primary public investment vehicle for the eSports industry.

• Blizzard's involvement in MOBAs (Multiplayer Online Battle Arenas) and eSports has been pivotal for Activision.
• Heroes of the Storm, released by Blizzard, gained market share in the MOBA genre.
• In 2016, Activision Blizzard acquired Major League Gaming, a strategic move into eSports league structures and broadcasting.
• Blizzard's Overwatch was a new franchise that achieved significant success and revenue.

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

• This quote suggests that Blizzard's creative influence was crucial for Activision's venture into MOBA-style games and eSports.

• Overwatch is designed to be addictive and to optimize both the playing and viewing experiences.
• The game combines elements of MOBAs and first-person shooters, aiming to appeal to eSports audiences.
• Overwatch achieved over 30 million players and over a billion in revenue by the end of 2016.
• Blizzard chose a hybrid business model for Overwatch, combining upfront payment with in-game transactions.

"Overwatch is very intentionally designed to be like a love child of a MOBA, but from a first person shooter perspective."

• This quote describes the unique design approach of Overwatch, blending genres to appeal to a broad gaming audience.

• Despite new games, older titles like Starcraft II maintain significant viewership on Twitch.
• League of Legends and Dota 2, despite their age, command a large portion of eSports viewing hours.
• Blizzard's approach to games has shifted from one-off purchases to ongoing engagement and monetization over time.

"Even though Overwatch has sold quite well, they're really only 1.9% of the monthly esports hours viewed on Twitch."

• This quote indicates that while Overwatch is successful, older games still hold substantial viewership and relevance in eSports.

• Blizzard within Activision Blizzard experienced significant revenue growth from 2015 to 2016.
• The combined attention on Activision Blizzard content was on par with Netflix and greater than Snapchat in terms of hours spent.
• The gaming industry's business models have evolved to resemble startup companies with continuous growth and engagement.

"In 2016, consumers spent approximately 43 billion hours playing and watching Activision Blizzard content."

• This quote underscores the massive consumer engagement with Activision Blizzard's games, rivaling major entertainment platforms.

• The transcript includes an advertisement for Vanta, a trust management platform that automates security reviews and compliance efforts.
• Vanta is presented as a solution for companies to focus on their core product while outsourcing compliance and security reviews.

(Note: As per instructions, the advertisement content is not included in the study notes.)

• The merger between Activision and Blizzard was driven by mutual benefits.
• Activision sought Blizzard's continuous revenue streams from online games like World of Warcraft.
• Blizzard likely benefited from Activision's marketing and distribution capabilities.
• The merger allowed for the creation of new franchises like Overwatch and the expansion of eSports initiatives.

"Holy crap, this is a revenue generating business line, and the secret sauce within Blizzard allows it to happen overnight."

• This quote reflects the strategic value Activision recognized in Blizzard's ability to generate continuous revenue through its gaming franchises.

• The discussion opens with the cancellation of a major gaming project.
• Speculation arises whether Blizzard alone would have persevered with the project.
• There's a belief that Activision's involvement may have influenced the cancellation.
• The financial burden and potential risk of continuing the expensive project are considered.

"And the question is in my mind, if it were just Blizzard, would they have believed in it and persevered through it and shipped it anyway or would they have continued to pour money onto it and would it have seen the light of day?"

• This quote raises the question of whether Blizzard's independent decision-making would have led to the continuation of the project, highlighting the potential impact of Activision's merger on the project's fate.

• Diablo III's launch is characterized as a flop.
• There is a debate about the success of Diablo III in comparison to other franchises.
• The high stakes in the gaming industry are mentioned, emphasizing the need for significant success to be relevant.

"And then the, the other thing I want to point out is the next big thing was also supposed to be Diablo III and that was a total flop."

• This quote introduces Diablo III as a topic, framing it as a major disappointment in the context of expectations for it to be the "next big thing."

• The conversation turns to the importance of franchises in the gaming industry.
• A game's success is now measured against the performance of major franchises.
• The high investment and revenue potential of successful franchises are acknowledged.

"Yeah. And I mean, the stakes are high. Are so high now. That if you're not like one of these other franchises you just don't matter."

• This quote emphasizes the high-risk, high-reward nature of the gaming industry, where the success of a franchise is critical to a company's relevance.

• The discussion considers the adaptability of games to esports and viewing models.
• Diablo is viewed as a core franchise with potential for growth, especially in terms of online item trading.

"I think it's less well adapted to the, you know, esports and, and viewing model that these other franchises have been so successful with."

• The quote suggests that Diablo's potential has been limited by its adaptability to esports and viewing models, which have contributed to the success of other franchises.

• The power of enabling user creativity through platforms is discussed.
• Blizzard's modding engine and campaign maps editors are credited with creating a new industry.
• The conversation touches on parallels with Apple and other platforms that empower users.

"One that I think is super powerful is just this idea of creating, enabling, building and then creating, enabling a platform for users of all types of it to then be creative themselves."

• This quote highlights the theme of user creativity and its importance in building a successful ecosystem around a product or service.

• Blizzard's efforts to expand their intellectual property (IP) into various mediums are discussed.
• The potential for Blizzard to emulate Disney's success with character development and merchandising is considered.
• The acquisition of Major League Gaming and its role in Blizzard's strategy is mentioned.

"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, you know, these games are doing for the, you know, 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, you know, the characters in their universe."

• This quote introduces the idea of leveraging game IPs across various channels, questioning whether Blizzard can achieve a level of success comparable to Disney's model.

• The acquisition of King Digital by Blizzard and its impact on the company's structure is examined.
• The potential for cross-divisional IP sharing within the company is explored.
• The discussion acknowledges the missed opportunity in the MOBA genre.

"And so, yeah, to your point, David, I'll be curious to see how those divisions really start sharing more ip around inside of them."

• This quote addresses the strategic considerations following the acquisition of King Digital and the potential for internal synergy within the company's divisions.

• The podcasting business model is contrasted with that of movies.
• The unique customer retention aspect of podcasting is highlighted.
• The potential for a follow-up discussion on the podcasting ecosystem is suggested.

"But unlike a movie, where their relationship with their customer sort of ends by going to the theater and then that person leaving the theater, it's not like Disney has my email address because I went and saw a movie at Regal Cinemas that was created by them."

• This quote draws a comparison between the customer retention strategies in podcasting versus the movie industry, emphasizing the continuous engagement with the audience in podcasting.

• The evolving role of distributors in the digital age is discussed.
• The shift towards direct customer relationships and retention is noted.
• The concept of an ecosystem view of customers is introduced, where ongoing engagement replaces single transactions.

"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 discusses the shift in distribution strategies, where companies can maintain long-term relationships with customers through direct digital engagement.

• The merger's success is evaluated based on the combined enterprise value over time.
• The potential growth of Activision and Blizzard as separate entities is considered.
• The discussion acknowledges the challenges of achieving significant growth at a large scale.

"You know, they're at $44.9 billion market cap today. They're a. They were a $19 billion company. Upon combining the two companies, you know, they grew over two."

• This quote sets the stage for evaluating the merger between Activision and Blizzard, considering the financial growth and market cap as measures of success.

• The hosts provide their final grades for the merger, with reservations about the financial performance.
• The future positioning of Blizzard and potential growth opportunities are contemplated.
• The hosts agree to revisit the topic in the future to assess the long-term impact of the merger.

"But at the same time, I completely agree with what you said, which is they have kind of fumbled the ball here in that they could be another two x or three x bigger than that."

• This quote reflects on the merger's outcome, suggesting that while the growth has been substantial, there may have been missed opportunities for even greater success.