The Breakdown - Microsoft Bets on Metaverse With $69B Acquisition of Activision Blizzard

Starting point is 00:00:00 the open metaverse is effectively saying, come spend your time in a new place because of a combination of, one, the economics being better for you, and two, the principles that we're building our metaverse around being better. Those aren't uncompelling. Certainly the economics are a rational economic incentive and don't require any principles to compel people to come participate. But ultimately, if games really are the entry point,

Starting point is 00:00:25 then the games of this open metaverse have to compete on their own terms. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Abra, and FTX, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, January 18th, and today we are talking about why Microsoft's acquisition of Activision Blizzard is all about the metaverse. First, however, if you are enjoying the breakdown, I would love it if you went and subscribe to the show, gave it a rating or a review, or if you want to dig deeper into the conversation, come join the Breakers Discord.

Starting point is 00:01:14 Over the weekend, we just hit 1,000 members, and the discussion is always really interesting. You can find the link in the show notes, or you can go to bit. .LY slash breakdown pod. Finally, one disclosure. In addition to them being a sponsor, I also work with FTX. So let's dig into our big news item. And boy, this is going to be a hell of a week already, I can tell. Usually when there's a big acquisition, there's a lot of debate and discussion about what it's

Starting point is 00:01:43 about. Not so today where the consensus narrative was that the big business M&A news of the day was entirely about the Metaverse. For evidence of this, look no further than the New York Times headline. Microsoft will buy Activision Blizzard for nearly $70 billion, a big bet on the metaverse. Let's talk the details first. Microsoft is buying Activision Blizzard for $68.7 billion in cash. This is the largest takeover in Microsoft's 46-year history. By the way, how absolutely crazy is it that Microsoft is almost a 50-year-old company at this point. Microsoft's previous biggest acquisition was their $26.2 billion purchase of LinkedIn. With this deal, they're

Starting point is 00:02:30 paying $95 a share for Activision Blizzard, which is 45% above the current stock price. Now, you guys probably already know this, but Activision Blizzard is best known for titles like Call of Duty, World of Warcraft, Diablo, Overwatch, Starcraft, Candy Crush. There's been a big push by Activision into the mobile game space over the last few years. Let's talk business argument. Well, for Microsoft, they get 400 million monthly gaming users, which is not bad. And for Activision, they get a huge amount of artificial intelligence, programming talent, resources in general to compete.

Starting point is 00:03:05 But of course, there is something bigger lurking. And to understand that, look no farther than last year's announcement that Facebook was changing its name to meta. So as I said, the dominant narrative in all business press is that this move for Microsoft is all about the metaverse. So what the heck does Activision have to do with the metaverse? There's no crypto or anything there. World of Warcraft hasn't all of a sudden switched to NFTs, right? I think the main conversation and the one that I want to start with this show is the idea of the corporate metaverse versus the open metaverse.

Starting point is 00:03:39 As we get into that, let's talk about how the metaverse is being built in the crypto space. First, you have platforms like Decentraland in the sandbox that are trying to really be open spaces for other people to build, to create, to do things, right? They're not really writing the rules per se, or at least they're not writing a lot of rules. Instead, they're saying, come here, bring your avatars, build things. Decentraland pitches to users, create, explore, and trade in the first ever virtual world owned by its users. And of course, that ownership, as we'll discuss in a minute, is really important. The Sandbox says the sandbox is a virtual world where players can build, own, and monetize their gaming experiences and assets inside an immense visual world.

Starting point is 00:04:27 Now, on top of these open platforms, you also have games, specifically games, which are designed from the ground up to be a different type of experience. Where players can own the in-game items, they can have a stake in the economy, the currency is not just relevant in the economy, but is also tradable on exchanges, where people actually earn money for the time that they take playing in the game. This is the whole play-to-earn phenomenon, and it's one of the most significant trends, at least with financiers going into 2022. Third and related, you have NFTs that are explicitly designed to be bridges into these digital worlds, items that can be part of your experience inside these virtual environments, and can even transport between them.

Starting point is 00:05:09 It is a fundamentally different type of experience to have in-game items transportable between different games and different properties. And that's exactly what NFTs enable. Now, one interesting note is that I think that we're seeing the beginning of a major shift in celebrity and brand thinking around NFTs from just memorabilia or cool collections to instead bringing their brand experience into the Metaverse and making it compatible with all these new platforms and places where people are going to be spending their time. Now, all of these kind of crypto-powered metaverses or open metaverses are designed from the ground up with crypto-industry principles in mind.

Starting point is 00:05:48 That means things like decentralized ownership, where users or players aren't just users or players, but are stakeholders, investors, and ultimately owners of the platforms that they're spending their time on. There's different economics in the form of play to earn, as well as true ownership of in-game items. And keep in mind, these have been the cash cows of the game world enclosed ecosystem. for a very long time. There is, as we were just discussing, portability of items across games and worlds, and these are pretty different than the corporate version of the Metaverse.

Starting point is 00:06:20 To me, it seems like the corporate version of the Metaverse so far is most inspired by the Marshmallow and Travis Scott concerts in Fortnite. So these were really groundbreaking when they happened. Marshmallow was in 2019.

Starting point is 00:06:32 Travis Scott was in 2020. Fortnite had exploded as the most popular game in the world, and its creator, had a sense that people, if they were going to spend so much time gaming in the world of Fortnite, they might be willing to do other things in the world of Fortnite as well. That was born out first when they had marshmallow do a live concert in Fortnite with 10.7 million attendees concurrent. And then that was up the next year when the Travis Scott concert in

Starting point is 00:06:57 Fortnite attracted 12.3 million concurrent listeners. 27 million people overall experienced that Travis Scott concert in Fortnite. These types of events basically showed that the quote-unquote game worlds that people spend time in don't just have to be for gaming. There are, in fact, lots of things you can do. And so, if the place where people are already spending a ton of their time in is World of Warcraft or Fortnite or Call of Duty, and the Metaverse is going to be built on top of those places where people are already spending a ton of their time, then the thing you buy to compete in the Metaverse is, of course, those super premium gaming properties.

Starting point is 00:07:36 And let's be super clear, this is a totally reasonable thesis. Nexo is a trusted and easy-to-use crypto platform, where you can buy cryptocurrencies at the touch of a button, and start earning up to 17% annual interest that is paid out daily. They support all of the major assets on the market, and even allow you to swap one asset for another, or borrow cash against your crypto without selling it. Nearly 3 million people in over 200 countries trust Nexo with their digital assets.

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Starting point is 00:08:53 The breakdown is sponsored by FTX. FTX is the safe, regulated way to buy and sell Bitcoin and other digital assets. Trade crypto with up to 85% lower fees than top competitors. FTX US is also the only leading exchange that supports both Ethereum and Solana NFTs. You can trade NFTs with no gas on FTXU.

Starting point is 00:09:13 and gas is subsidized when you withdraw off the platform. Help support the breakdown and visit FtX.us. Today, that's FtX.us. Cryptopowered metaverses, open metaverses, have a lot up against them. They're going to have to compete against the incredible network effects of the game titles people already like and spend their time in. It's not just economy lock-in in those games, it's also just the sheer joy of them and the number of friends and other colleagues that they have in those games. What's more, those games are going to have incredible budgets from companies like Activision,

Starting point is 00:09:55 now supercharged by Microsoft, that will experiment potentially with creating new types of compelling experiences for the people who are already playing there. Indeed, when it comes to the open metaverse competing with the corporate metaverse, you're dealing with a situation where the open metaverse is effectively saying, come spend your time in a new place because of a combination of one, the economics being better for you, and two, the principles that we're building our metaverse around being better. Those aren't uncompelling. Certainly the economics are a rational economic incentive and don't require any principles to compel people to come participate. But ultimately, if games

Starting point is 00:10:32 really are the entry point, then the games of this open metiverse have to compete on their own terms. I think here the lessons of crypto-powered social networks are instructive. How many times have be seen crypto social network startup where the whole premise is that you're paid for the content that you produce. So far, at least, that simply hasn't mattered. The thing that you're there to do in a social network is be social, and that means how many people are there matters. In other words, the different economics of crypto social networks can't beat the network effects of Web2 social networks. For what it's worth, we've also seen the same thing apply in social networks for principles. How many more of these anti-deplatforming channels are we going to try before we decide

Starting point is 00:11:15 that it's just impossible? Now, of course, I could be wrong. Maybe Getter actually gets there or something else that we haven't seen yet, but the point is that network effects are really, really hard to overcome. I do think that network effects in games are somewhat less of a barrier than network effects in social networks. People are already often playing multiple different games. And by their nature, gameplay matters a lot, too. It's this whole competing factor. But it's still really, really tough, and that's the point. I will say it's also worth noting that it's not clear that just because games seem like such a good candidate to be the first or even primary metaverse use case, that that's actually what will come to pass. There could be other

Starting point is 00:11:52 experiences that we don't really understand yet, or that we don't have any proxy for that could become extremely significant. And if you're skeptical of that, but also a Twitter user, I'll only remind you that before Twitter, no one was standing around saying, I wish I could text message everyone my thoughts about everything all day, every day. But here we're we are. Back to this deal with Microsoft and Activision. If you had any doubts that this was about Metaverse, Microsoft CEO Satya Nadella said, 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. So there you go. What do others think of this? It's a little hard to parse through the

Starting point is 00:12:31 chatter on Twitter as there's so much engagement farming just with the headlines themselves, but this is a major conversation that people are having. And people have been making pretty bold statements on the space as a whole recently. For example, yesterday, Alexis O'Hanian, the co-founder of and now venture capitalists made news and was written up in a game spot piece called Reddit co-founder says play-to-earned crypto games will be 90% of gaming market in five years. The exact quote came from the Where It Happens podcast and was, 90% of people will not play a game unless they are being properly valued for that time. In five years, you will actually value your time properly and instead of being harvested for advertisements or being fleece for dollars

Starting point is 00:13:08 to buy stupid hammers you don't actually own, you will be playing some on-chain equivalent game that will be just as fun, but you'll actually earn value and you will be the harvester. That GameSpot piece has some skepticism. They argue that AXE is having problems with its in-game economy, saying that, quote, player returns from the game are slowly diminishing over time

Starting point is 00:13:27 due to players cashing out earnings instead of investing them back in the game. The game also has a minimum buy-in of around $300, a high barrier to entry for many players with lower-level players, often earning well below minimum wage. There was also a lot of skepticism about these comments from Alexis on Twitter, but he responded and basically said that his take is based on the efforts of game builders that he's actually engaging with.

Starting point is 00:13:49 He tweeted, What's so telling is that I'm regularly taking pitches from AAA game professionals who are starting new gaming companies on chain. It's an exciting time to be building games alongside your community of players. Meanwhile, it's not just Alexis that is interested in funding the upstarts. CoinDesk's lead headline today the same day of the Microsoft news is Anamoca brands valuation more than doubles to $5.5.5 billion in three months. So Anamoka raised a huge $360 million round, double the valuation. They raised that in October.

Starting point is 00:14:19 Soros Fund Management was an investor, among others. And Anamoka calls itself the global leader in branded blockchain gaming. They're an investor and publisher that is coming directly at an alternative vision of the corporate Metaverse that is an open version. They own the sandbox and Rev Racing, but also invest in Metaverse and blockchain companies such as OpenC, Dapper Labs, Axi Infinity's parent company. And just today, even announced an investment in Metaplex, which is the company that builds and support standards for Solana-based NFTs. So in his thread about the announcement of this big round, Anamoka Chairman Yatshu wrote,

Starting point is 00:14:53 Our vision is to help build and construct the open metaverse based on important concepts such as openness, equity, digital property rights, and non-zero-sum approach where users become citizens with actual ownership and rights. The threat to building a metaverse that is owned by a majority interest comes from those who want to build a closed Metaverse, who already have control of all of our data and are monetizing off the data we gave up for free.

Starting point is 00:15:15 Now, this is particularly relevant on this day that Microsoft seems to be getting in the game, and it harkens back to a tweet from Udi Warthimer in October of last year. Udi writes, Facebook's insistence on launching a cryptocurrency and becoming a Metaverse means one thing. Zuckerberg has had enough of running a company.

Starting point is 00:15:32 He wants to run a country. The word Metaverse was coined by Neil Stephenson in the book Snow Crash, and it originally described a virtual world owned by corporations where end users were treated as citizens in a dystopian corporate dictatorship. What if Neil was right? This is the question, right? Michael Lebelito from Blockwork says, I can't wait for all these corporates to realize that the metaverse won't look like Ready Player 1. I'm not so sure that that's the case, and I'm pretty sure that they're going to spend a lot of money to make it so.

Starting point is 00:16:02 But it also seems to me like a fight worth having. I want to say thanks again to my sponsors, nexo.io. Abra and FTX, and to you guys for hanging out and listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Microsoft Bets on Metaverse With $69B Acquisition of Activision Blizzard

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