June 7, 2023

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Microsoft is sharpening its teeth on Netflix. A record deal is at stake

Since her promotion to the position of President of Microsoft in 2014, Satya Nadella loves to do expensive shopping. It started with the $2.5 billion acquisition of Mojang Studios, the company behind the hit game Minecraft. Later, Microsoft bought business social networking platform LinkedIn for $26 billion and Nuance, a speech recognition and artificial intelligence software company, this time for $20 billion.

Activision Blizzard – the second largest producer of computer games – was by far the largest purchase target. The value of the deal is 69 billion US dollars.

Then it turns out that this could be a problem. This year, Microsoft has been embroiled in a battle with US funds for the right to absorb such game product as the best-selling Call of Duty series. The problem is that Activision Blizzard, as you already know, is big, and Microsoft is the Xbox game console manufacturer. This leads to regulatory concerns about market dominance.

So it’s not surprising that the US Federal Trade Commission sued on December 8 to block the deal, arguing that the combination would hurt consumers because it would give the software company an unfair advantage over competitors in the Xbox console and cloud gaming business.

But where did the idea of ​​buying a streaming platform come from at this point? Well, even if Nadella loses his battle for control of Activision, absorbing Netflix would make strategic sense and would probably be easier to accept in Washington and Brussels. Reuters was the first to report the possible merger.

The two companies are already closely linked. Netflix has chosen Microsoft as an advertising partner for its new ad-supported subscription service. Microsoft CEO Brad Smith is also on the Netflix board. Part of the rationale behind the deal is that Microsoft wants to offer a video game streaming service across multiple devices.

In turn, Netflix has its own ambitious plans in the gaming field. In 2022, the company led by Reed Hastings acquires developer Spry Fox, the sixth game studio. Entering the Microsoft empire may intensify these ambitions. It’s not hard to imagine the combination of streaming TV and gaming.

With a market cap 13 times that of Netflix (Microsoft had a market capitalization of $1.8 trillion at the beginning of December), Nadella can clearly afford such an acquisition. Even assuming a 30% margin, Netflix’s valuation should not exceed $190 billion. However, it will be difficult to count on any cost savings after that.

After taxing the $8 billion in operating profit that Netflix analysts project in 2024, the implied return on investment will be small.

But Nadella has argued before that he is not a proponent of this kind of rough calculation in his investment strategy. Moreover, he is no stranger to the taste for risk.

Krzysztof Maciejewski

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