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Activision Blizzard

Season 1, Episode 40

ACQ2 Episode

July 12, 2017
January 6, 2019

Ben & David cover the creation of the gaming world's equivalent of the 70's rock supergroup: the 2008 merger of Blizzard and Activision. We tell the story from the Blizzard perspective, tracing the history of one of the most innovative companies in the business from humble beginnings at the hands of UCLA undergrads, to surviving multiple acquisition rollups (including at one point being owned by the French national water company), to joining ultimately with Activision to form the largest gaming company in the world, all while inventing multiple game genres that define the industry as we know it today.

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Topics covered include:

  • Blizzard's founding in 1991 as "Silicon & Synapse" by recent UCLA grads Allen Adham, Frank Pearce, and Mike Morhaime
  • The team's first projects making ports for other games, including Battle Chess on the Commodore 64
  • Early success on the Super Nintendo with Rock & Roll Racing and The Lost Vikings
  • Origin of the Real-Time Strategy game genre ("RTS") and Blizzard's fist mega-hit, Warcraft 
  • Blizzard's crazy corporate ownership changes over the years
  • Development of further legendary game franchises like Diablo and Starcraft, along with sequels to Warcraft and the rise of the rise of player modding
  • Emergence of the Multiplayer Online Battle Arena genre ("MOBA") from the Warcraft III modding community, and its growth into one of the biggest sectors in the games and esports industries today
  • Blizzard's role in developing the concept of online gaming, from early hacks to play against friends to World of Warcraft and Massively Multiplayer Online Role-Playing Games ("MMORPG's")
  • The 2008 merger with storied gaming company Activision 
  • Growth and success since the merger, including the launch of new game franchises Hearthstone, Heroes of the Storm and Overwatch

The Carve Out:



We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Season 1, Episode 26
LP Show
July 12, 2017

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
July 12, 2017


Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

Season 4, Episode 1
LP Show
July 12, 2017

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

Season 1, Episode 11
LP Show
July 12, 2017

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
July 12, 2017

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

Season 1, Episode 23
LP Show
July 12, 2017

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Season 1, Episode 20
LP Show
July 12, 2017

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

Season 1, Episode 7
LP Show
July 12, 2017

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Season 1, Episode 2
LP Show
July 12, 2017

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!


  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

David: ...we’re getting like professional actors on here.

Ben: I know. The Human Torch was denied a bank loan. [music] Welcome back to Episode 40 of Acquired, the podcast about technology acquisitions and IPOs. I’m Ben Gilbert.

David: I'm David Rosenthal.

Ben: And we are your hosts. Today we are covering the 2008 merger of Activision and Vivendi Games, the parent company of Blizzard Entertainment. We’ve got a pretty wild episode because these companies have had a crazy history. It’s got a lot of ins, a lot of outs, a lot of what-have-you’s, and it’s really been kind of a winding path, there’s a lot of confusing names. So, we will try and demystify the winding river that is Blizzard Activision.

David: Yeah, yeah. You look at this, like the merger happened between these two huge game companies, amd Blizzard and Activision. And probably Blizzard was like another public company like Activision; had a normal path there, you’d think, maybe IPO’d at some point. Nope. Turns out that they had been subsequently owned by the publishers of the Math Blaster software. Remember that, Ben?

Ben: Oh yeah.

David: Back in the day the holding company that owned Ramada and Days Inn hotels in the US, and then one of the French national water companies created by Napoleon III during the Second Empire in France. We’ll get into it on the show.

Ben: We will, we will.

David: This is going to be fun.

Ben: Indeed. Before we dive in, we are skipping the part today where I usually ask you for podcast reviews and the part where I tell you about our Slack with a very, very important message. We are doing our first annual Acquired audience survey. So whether you’re a first-time listener or a long-time fan, we would love to hear your thoughts, and this is incredibly important to us and the future of the podcast. So even moreso than any sort of sharing with your friends or reviews, this is the one thing that we are asking you guys to do, please, as listeners, to give us your feedback and you’ll be able to find that at Acquired.fm/survey.

So let me take a moment and say it’s incredibly important to us to understand you guys, our audience, for a few reasons. Number one is sort of the most obvious, is we need your feedback to make the show better. We need to understand what you like, what you don’t like, what sections do you skip. As we all know, as we’ve covered on this show, we don’t get great analytics so we don’t understand do you guys have the carve out, do you think the conclusion is boring? It’s going to be really helpful for us to sort of understand that from your feedback. We’d like to understand who you are so we can better tailor the content and the guests of each of our episodes to you guys. We want to learn more about who you are to share anonymously and without any identifiable information with our sponsors from a really high level. So we think that it would be a really great thing if we could talk with our sponsors and say “Hey, actually it turns out that only 20% of our audience is at startups and there’s this percent that are in VC and this percent,” you know, those sorts of things. So listeners, please help us out. Acquired.fm/survey – we’ll leave that open for a couple of weeks and please give us any feedback and sort of demography information as you have it. And to really sweeten the deal a little bit and show you guys how serious we are about this. We will be raffling off a pair of Apple AirPods to everyone who fills out the survey. So help us out. Acquired.fm/survey. Thank you so much.

David: Thank you, guys.

Ben: All right. Our sponsor for this episode is Silicon Valley Bank. This week, I got a chance to talk with Shai Goldman. Shai is a managing director at SVB out of their New York office and was previously a partner at 500 Startups. Shai, from what you’re seeing out there, what trends are going on recently with M&A?

Shai: “Well, I think this has been written up a lot but I’d say, you know, that you have a lot of these corporations that are not looked on as technology companies especially kind of older industries or retail that have had a hard time innovating internally, are now picking up companies externally and buying startups. So we’ve seen that especially with New York we’ve had a couple of recent acquisitions. We had Jet.com which was acquired by Walmart and then shortly after that, Walmart and the Jet team bought Bonobos. So you have a lot of things like that where you just have larger corporations, they have cash in their balance sheet. Every corporation now needs to have technology innovation, they understand that. And we’re going to see sort of continued momentum in that area.”

Ben: If you want to learn more about SVB or reach out to Shai specifically, you can click the link in the show notes or in the Slack.

All right, David, you ready to dive in?

David: Let’s do it, as always. So we’re going to tell the history of Blizzard, the Blizzard Entertainment side of Activision Blizzard, mostly because we think there’s kind of more interesting stuff both from tech themes going on in that regard and the story as I alluded to earlier is just crazy – yet another example of you can’t make this stuff up.

So Blizzard was started initially as a company called Silicon & Synapse by three college friends from UCLA right after they graduated in 1991, they had all studied computer science together: Allan Adham, Frank Pearce, and Mike Morhaime. They love video games and they wanted to get into the scene and they decided kind of “hey, rather than working for someone else, this industry is young, let’s start a company.” And so they did and they started out at first not actually making their own games because they just graduated from college, they really didn’t know what they were doing. They started porting other people’s games from platform to platform. Like one of the big titles that they ported was Battle Chess. I kind of vaguely remember this and they ported that version onto the Commodore 64, and that both led them to make some money as a baby startup but also got them experience with game development and they got kind of access to these code bases of what games look like.

So they did that for a little while and then in 1992, the next year, they sort of got some confidence in themselves and said, “okay, it’s time to make our own games.” So they did. I believe the first title of their release was Rock & Roll Racing for the Super Nintendo. It came out in 1992, followed quickly by The Lost Vikings. And I remember these titles and this is where Blizzard sort of really starts to develop its personality and these guys, like they are quirky dudes. And Rock & Roll Racing I believe was the first video game, at least the first console game to feature like actual music, like licensed music in the game, and it was a racing game and had cars with lasers on them and rocket boosters. Kind of like fun stuff. Then Lost Vikings, I believe the plot of this was that three Vikings from ancient Norse mythology get kidnapped by an alien space pirate and they have to escape. Both of them are incredibly successful and they win a bunch of awards and really established this tiny little game studio down in Southern California as a premier game developer in the early ‘90s.

Ben: Yeah. Early innings of computer gaming sort of after the original console wars but long, long way before the esports crazy MMORPG world we live in today.

David: Yeah, a shadow of what would be to come. But this is where gaming was in the early ‘90s, and Super Nintendo, that was the big platform.

Another thing happens in 1992 though that ends up having a big impact on the future Blizzard, and that is that another game developer called Westwood Studios releases a title for the PC called Dune II which is based on Frank Herbert’s classic sci-fi novels, the Dune Series which are awesome by the way. And Dune II The Game I don’t think becomes super, super popular but it's the first real-time strategy game, first kind of top-down perspective, resource management strategy game that comes out and it’s actually the predecessor, Westwood, the studio that developed it, they would go on to develop the Command & Conquer franchise which I totally remember playing too as sort of a more modern military theme sort of competitor to what Blizzard would ultimately develop which is Warcraft and Starcraft.

Ben: Yeah. And for listeners, we should demystify some of the acronyms. A real-time strategy game is commonly known in the gaming industry as RTSs and the phrase that I mentioned earlier, these MMORPGs are born out of RPGs which are role-playing games, and the MMO is massive multiplayer online.

David: Yup. So we will get to the MMO in a second. But that was 1992, Dune II comes out and the Blizzard guys, they’re fans of it and they start playing it and say, “Hey, we like this. We’ve got some ideas. We can do an RTS (real-time strategy) game of our own.” But before that comes out and that would end up being the first Warcraft, they in 1994 go through a couple of things. First, they change the name, not to Blizzard but to Chaos Studios which is what they want to be known as. But then it turns out that there’s already another software developer that has Chaos Studios, so they have to change again and they settle on, reluctantly, Blizzard. They actually did that second name change after they got acquired. So the first time that they get acquired is by a company called Davidson & Associates, acquires them for $10 million which is huge for when these kids are at this point 3 years out of college.

Ben: David, it really feels like you never want to be acquired by an “& Associates”.

David: Yeah, seriously. Well, so they get acquired for $10 million. And just a little future preview, Activision Blizzard of which they’re in the title, more than half of the company’s revenues trades at a $44 billion market cap today. But these guys, Davidson & Associates, they are the publishers of the Math Blaster educational software.

Ben: Oh, nice!

David: Which I totally remember playing on my really early PC in my room growing up in elementary school that my parents bought for me. It was like, “Oh! It’s educational. That must be okay for kids.” But this was mid-90s. The internet sort of bubble was just starting. The internet and the tech bubble was just starting to form. And this was but the start of a whole chain of crazy, totally nuts 90s stock deals that ended up happening, which we’ll get into in a minute that resulted in the crazy ownership that we talked about earlier.

But before that, later in 1994, Warcraft comes out and this is the first huge, huge hit that Blizzard has on their hands. Unfortunately, they kind of sold the company at the wrong time because they sold it before it comes out. But Warcraft was really the first game that popularized this real-time strategy genre among PC gamers, becomes a huge hit. You can play against the computer on your own which lots of people did. But it also had multiplayer over LAN. So if you had LAN parties and you could – local area network, sort of like precursor to the local networking not on the internet. You can play against other people who brought their own computers over, but you could also sort of through some third party software hack to – and I remember doing this with the original Xbox too, you could hack the multiplayer so that you could play online against other people who weren’t physically there with you.

Ben: Oh. Is that before the Xbox Live style thing?

David: Yes, this is before.

Ben: You could trick it into thinking the WAN was a LAN?

David: Yeah, somebody out there on the WAN over the internet that you could trick the console, the PC in this case, Warcraft into thinking that they were there on your local area network. So hacky but, like, these were the lengths people were willing to go to to play games against one another back in the day. This is before Xbox Live, before Battlenet that Blizzard would ultimately release.

Ben: These are desktop computers, right? I thought it was cumbersome enough bringing a little TV and an Xbox – I think it wasn’t the 360 yet – playing Halo 2. It was cumbersome enough to bring the console but like a whole freaking tower.

David: People back in the day, I remember even in college people doing this. The internet was definitely around by then so I don’t understand why people did. But lugging there like desktops from one another’s rooms all together into a common room to wire them up.

Ben: Totally still happens.

David: But yeah, Warcraft was one of the first games to really popularize this happening. So that's a big success and Davidson, the parent company, says “Okay, great. We’re going to give you a bunch more resources.” They work on the sequel, Warcraft II, and that comes out in late 1995. That becomes even a bigger hit and this is the first time that it starts to really strive the mainstream into getting into PC games. I remember buying this at either CompUSA or BestBuy back in the day because as we talked about on the Sound Jam episode, you used to have to buy software in a store in a box and games were no exception.

Ben: Yeah. You used to have to actually pay for games to buy them rather than get nickel and dime along the way later.

David: I don’t know what was better. Well, we’ll get into this in a little bit. Blizzard’s kind of come a little full circle now with Overwatch. But Warcraft II: Tides of Darkness comes out and that includes sort of more robust multiplayer. You still have to use a third-party tool to connect with people over WAN over the internet instead of on the local area network. But the tools are more robust and they can actually do the matchmaking so you can play against people you don’t know but who also want to play.

But the bigger thing that Warcraft II comes with for the first time is a map editor. So now, all these many millions of fans of Warcraft, some portion of them that like it so much, they can design their own maps for the game, their own levels and then release them on the internet for other people to play. And we’ll see in a little bit this comes back and actually spawns a whole new industry. But this is major, major innovation.

Ben: You’re talking about the Warcraft III mods?

David: Yeah. Foreshadowing Warcraft III mods and that comes a little later. But Warcraft II is the first game that isn’t just... There’s sort of three aspects to it. There’s like the solo single player campaign you can play against the computer, you can play against your friends over a local area network or online. But also, if you want to go even deeper into it, you can actually get in and start mucking around with the game itself and the maps and making your own versions of it and then releasing them. That spawns a whole big community of “modding”, as it comes to be called.

So later in the year back to the corporate drama in 1996, Davidson (the owner of Blizzard at this point) gets acquired by this early kind of internet conglomerate that had acquired a whole bunch of companies called CUC International and they buy Davidson and Sierra On-Line which was another video game publisher for about $1.5 billion all in inflated internet company stock. So, a huge portion of that, you know, obviously there are lots of assets within these conglomerates but Blizzard Entertainment is kind of one of the crown jewels of Davidson at this point and so we’ll see there’s yet more drama to come. But Blizzard, they’re still hard at work. They kind of are cranking through this despite the ownership changes. In 1996, they actually contract for the first time with a third-party studio up in Northern California called Condor Games and they contract them to make a game that they end up calling Diablo. And Diablo even before it comes out, the Blizzard guys love this game so much that they go to Davidson and CUC now and they ask for resources and they just acquire Condor outright and say “This needs to be part of Blizzard. This is going to be one of our core franchises.”

So later in 1997, 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 “dungeon crawler” genre, so this is sort of like the action RPG or role-playing game. And this has always been like a cornerstone of gamer and nerd culture. I remember playing the Japanese RPGs like Final Fantasy and stuff on Nintendo and Super Nintendo growing up.

Ben: Yeah. So David, does that come out of like the physical RPG culture like Dungeons & Dragons?

David: Yup, very much.

Ben: I see. That makes sense.

David: Very much. I’d say Diablo is the first or one of the first sort of... this has always been, like I said, a cornerstone of nerd and gamer culture. But to make it just like an insanely addictive experience and one of the key innovations to Diablo is it's kind of infinite. Like most RPGs before that, you’d play them, you get to the end, you’d beat the boss, you’d save the world, and then the game is over. But with Diablo, it had this insanely addictive leveling up system and not just leveling system but equipment system. So as you’re playing through the game, you’d find swords and armor and stuff, and there were all these levels of equipment and it kind of became like a treasure hunt. So even after you’d beaten the game and you could play online with other people too, you could then acquire and find more and better equipment, and then you could trade it with people online. So this whole sort of economy started to emerge on the internet around Diablo.

Ben: For listeners, like it’s kind of crazy thinking that before that, games were completely finite. We now know about World of Warcraft and these games that you can sort of play indefinitely and have not only a sort of infinite feeling experience for you but also an infinite feeling experience for everyone else, and you can work collaboratively on teaming up to accomplish goals. It just didn’t exist until Diablo.

David: Just as sort of unintentionally, Warcraft popularized this idea of like playing against your friends and even people you don’t know on the internet. Diablo is one of the first games that popularizes, like I said, this economy. You want to play with and you can battle other people on the internet. But the bigger thing becomes this sort of trading of items and kind of taking a lot of sort of real world dynamics and they’re just starting to get recreated in a game online.

Ben: Pretty cool.

David: So on the technical side, Blizzard obviously had been observing all that had been going on with Warcraft and they built their own and all the third-party tools that were enabling people to play against one another online. They build their own service called Battle.net which is still a huge part of Blizzard today. All of their games run on it. That is like the Xbox Live version. It's their way of owning and controlling how people play online against one another and it also becomes a pretty huge revenue generator for them. First, as they sell advertising on the service for other games, for their own games, for other publisher’s games. But then they also start to monetize it later with World of Warcraft which we’ll get into, monetize it directly in a minute.

Ben: Yeah. This really foreshadowed what every sort of game publisher or at least a lot of large game publishers would go on to do and become a cornerstone of their business model. Like Valve does this with Steam, and Steam is this incredible distribution channel where they basically can take a cut off every game that gets pumped out and control distribution because everyone already has Steam installed and that's where they go to browse games, and that screen real estate is incredibly valuable. Battle.net is the same way. Xbox Live really controlling all the API surface underneath all the games for a lot of the player management and matchmaking and all that. Really, like paving the way for these other companies that would come later for what their product and business model looked like.

David: Yup. So that was 1997. Then 1998, things start to really snowball here both on the momentum for Blizzard and their games and all these innovations that they’re driving. And on the internet tech bubble era here. So first thing that happens at the very end of ’97, CUC, the new parent company, merges with another holding company called HFS. So CUC which was the current parent company merges with another internet holding company called HFS, and this is the company that owned the Ramada, Howard Johnson, and Days Inn and all these like random hotel assets. The company gets renamed Cendant. And let’s put a pin on that for a sec, we’re going to come right back to it.

Immediately after that, Blizzard releases their next big title which is StarCraft. And StarCraft just takes everything that we’ve talked about with Warcraft and the success they had there and Diablo and starting to grow the whole gamer genre and bringing more people into it, and StarCraft just 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 1.5 million copies right out of the gate. And it’s basically Warcraft. It’s a real-time strategy game like we talked about but it’s evolved. So the graphics are better, they have sort of an isometric view which is sort of like a quasi 3D. It’s kind of a three-quarters view down under the battlefield instead of just a straight top-down. They have three character races/classes you can play as so it’s really balanced and it’s super, super deep. So this comes out and people love it so much and it's all around the world. And actually, randomly, in South Korea over its lifetime it sells 1 million copies in South Korea. There are only like 50 million people that live in South Korea.

Ben: This is crazy important. Like this is the beginning of what we really see today in the esports world. You have nearly a third of the people who are watching esports in South Korea. It is the world epicenter for this. The South Korean government has rules and regulations around these live tournaments. It’s a part of the public fiber of the country.

David: That's what we’re getting into. This is the birth of which is now being ironically sort of re-exported back to the US and the rest of the world with what’s happening in esports now. But this is the moment that's the birth of esports and it becomes so popular in this relatively tiny country of South Korea. Like television channels get devoted to showing StarCraft tournaments. People start quitting their jobs and playing StarCraft professionally. There are all these what otherwise would be called internet cafes that pop up all around the country that are called PC bangs and there are rows and rows of computers and you go there and you log in and you play StarCraft. I’ve been to South Korea. It’s a really cool place and our listeners that have been as well will be well familiar with this. It’s just one of the most surreal things you can imagine. And I went in 2013. So what’s that, like 15 years after it came out and it still just as popular.

Ben: Crazy.

David: Totally crazy. So that happens. Blizzard is now enormous and at the same time, I mentioned that the parent company had just been rolled into this third holding company, Cendant. Turns out that they were cooking the books on their accounting. They were a public company and like total Enron style. Like they are basically the Enron of the tech sector and the company totally implodes. They were falsifying revenue and earnings and just making up all sorts of stuff. And as a result of that, they end up divesting all their assets and they sell all of their games division to a French publishing company called Havas. And then, Havas turns around. This is still 1998. And it gets acquired by another French conglomerate called Vivendi which started in 1853 as the Compagnie Générale des Eaux (National General Company of Water) by Imperial Decree of Napoleon III. And it controlled all of the water utilities in most of France.

Ben: God. It’s great, David, that you just spent all that time in France. It really did wonders for our pronunciation on the show.

David: It’s perfect. I was just literally preparing for this show.

Ben: This is an unbelievable company history of just conglomerate to conglomerate handing it off and rolling in a new division, spinning it out as its own. And to really put the cake topper on it, I didn’t even realize this when I was doing the research because it seemed so out of left field, but the next thing that Vivendi did after they bought Havas was actually by Seagram’s.

David: Like the gin.

Ben: You know, Seagram’s. Like the beverage company.

David: Which itself owned Universal Studios.

Ben: Yes! That's the best fact I found.

David: Amazing. This is a super personal throwback for me doing this and really fun because it was a few years later but it was right before the Activision and Blizzard merger happened. Right out of college my first job was doing media investment banking on Wall Street and like this is what everybody, what all these bankers were running around covering and talking to Vivendi, this French conglomerate which owned Universal Studios which made movies obviously and Blizzard which was huge, and trying to advise on these deals that were all happening. Obviously, it ended up happening with Activision. But, so funny.

Ben: It's funny when I was reading through this, like listeners, we were deciding whether or not we were going to sort of do this part of the show where we talk about they bought this, and then they bought that, and then they bought that because it’s almost like for anybody who’s read the Old Testament, you skip over these parts.

David: This is literally like the Old Testament.

Ben: So and so beget, so and so beget, so and so. It’s like yeah, yeah, yeah. But it’s important to understand the foundation of they’ve been incredibly – like the narrative to take away here is that incredibly 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. And not even so much in the distribution side but as the developer studio, over and over and over again through all this corporate turnover.

David: Yeah, it’s pretty incredible and really a testament to both the creativity and just the pure sort of IP and franchise value of these franchises - Warcraft, StarCraft, Diablo and then later Hearthstone and Overwatch that Blizzard has created. But also, exactly what you’re saying like these guys are really not just best at spotting waves that are coming in terms of tech waves relevant to the gaming world, but they’re actually generating.

Ben: Executing on it, yeah. Absolutely. It’s worth at this point mentioning to listeners. David and I were talking about this before the show that the way the games world work is very similar to the way that the movie world works and I think it sort of borrowed the same playbook when people realized how many analogues there were as the industry was growing up. But there are really publishers who are responsible for marketing, distribution, in the old days physically printing the disks and capitalizing projects and then there’s developers who are kind of the studios that actually often initially have the creative insight themselves, build the games, and like the movie industry, sometimes these are smashed together in one where you have somebody doing their own kind of creative work and development and distribution, and sometimes they’re sort of separate. The way you can think of Blizzard is, a lot of their genius really is in all of the games that they are able to develop in-house themselves or they historically did some of their own distribution and the way that – we haven’t really talked about it yet but you can think of Activision as primarily as sort of that distributor, publisher, and capital source to fund these games.

David: Yup. So we’ll kind of accelerate here getting to the merger with Activision. But along the way, a couple of big things happen for Blizzard. First, Warcraft III comes out in 2002 and this is what I alluded to earlier, sort of the map editor that came with Warcraft II, allowing gamers to make their own versions of the game. It was the version of the campaign editor that came with Warcraft III was even more robust and you could really have sort of full control over the experience and it ships just right with the game. Anybody could do this. So people started making even more mods, it got a really robust community for Warcraft III and this one guy –

Ben: David, I'm going to stop you real quick and say why don’t I propose, what if I were to build like the Warcraft III mod, like you can have a base sort of in the lower left-hand corner and I’ll make a base for me in the top right-hand corner and rather than the traditional map that we’re going to play on.

David: Strategy stuff. It’s not building and stuff.

Ben: No, no. How about we just play sort of a capture the flag style thing where we just try and go after and blow up each other’s base?

David: Oh, that would be super cool. And because Ben, you have the campaign editor that’s just bundled in with Warcraft III, you can just do that. Isn’t that really cool?

Ben: Yeah. Do you think I could invite other people and sort of get them to play it with me and kind of give it my own name and brand name and all that?

David: Yeah. Maybe you could call it “defense of the ancients” and then maybe it would get really popular and people would call it just DOTA, its acronym, D-O-T-A. Then maybe it would just transform the whole industry.

Ben: David, it kind of feels like you Blizzard, feels like you should have maybe maintained a little bit more control over that.

David: Well, it does feel that way. So Blizzard, they really mean it when they’re giving everybody control. And so everything we just described, of course, did happen and in 2003 a member of the mod community named Eul, he creates a mod 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 is the roots of League of Legends, of DOTA 2, of Heroes of the Storm which Blizzard does itself. It all just starts in the mod community.

Ben: Yup. It is over 50% between League of Legends and DOTA 2 and for listeners out there, if you’ve heard people throw around these games but you’re not a gamer yourself, if you ever want to Google a Screenshot of League of Legends and a screenshot of DOTA 2 and look at it, like your mind is going to be blown by these are number one, separate games. Number two, made by two completely different companies. You look at these and you feel like they’re indistinguishable and then obviously you play them, you start to understand the differences. But it is just mind-blowing to me that the format was so popular and yet, the way that it all played out, it didn’t consolidate on one single game.

David: Well, and number three your mind is going to be blown by: Blizzard has no involvement with either League of Legends or DOTA 2.

Ben: Zero of them.

David: But they really mean it. It was the IP that these people created and neither of them are the actual IP of Defense of the Ancients, the first initial mod.

Ben: There’s a long and very fascinating history that you can look in some really great Reddit threads for about this. But the short story of what sort of happened here, is DOTA got really popular. It was a Warcraft III mod, it was Blizzard’s IP. People wanted to build a second DOTA and started to build what became DOTA 2. Actually, I'm not sure if I'm getting my timeline right but somewhere along the lines there, some people sort of spun out and decided that they wanted to start creating their own DOTA-like game but that sort of didn’t have a lot of what they believed to be the flaws of DOTA. So they started creating League of Legends and that ended up founding the company Riot.

David: We’ll come back to all of that and a little bit. But super interesting. I mean, this is all starting in 2003 and Blizzard is completely not focused on it. They’re focused on what comes out in 2004 which is World of Warcraft. Which is just another, and again, it’s kind of mind-blowing like so many huge waves in the gaming industry all come out of Blizzard. World of Warcraft, there had been “MMOs” (massively multiplayer online) RPGs before World of Warcraft. But this becomes just an enormous phenomenon and it comes out in 2004 and grows over time to over 12 million monthly subscribers that are playing World of Warcraft. So the play, it also revolutionizes the business model of the game industry. It’s actually a subscription fee to play this game online. You pay between $12 to $15 a month. So at its peak when it had over 12 million subscribers, Blizzard was making over $1 billion a year. Every year, recurring just from this game. And the company basically goes to full-on just all World of Warcraft support mode. They don’t release any other games until 2010. They’re just running this one game.

Ben: Yeah. Would you?

David: Yeah. I mean, it's the best business model innovation to happen in games since games.

Ben: They largely had it all to themselves. This was a time when yes, they had the business model innovation but you want to talk about value creation, value capture, they were capturing all of it.

David: Yup. And while they were working hard on both supporting the servers to keep this game going and releasing new content that they were making at Blizzard for the game. It really was a community. But the reason that people played and the reason they kept coming back year after year after year wasn’t the content that Blizzard was putting out, it was the other people in the game and this community. So really, it was brilliant that all of this money they were making, of course they were investing to keep the game running essentially. But the content and the experiences were coming from other people who were playing the game.

Ben: Wild.

David: Totally wild. So this is all the backdrop to the merger that happens, gets announced in December 2007 which is that Vivendi, the parent company, the French conglomerate, the water company announced – I still can’t get over this, the water company. The French water company no less, no offense to France of course. I love France. But they announce that they are doing a deal with Activision which is a large, publicly traded video game publisher 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 and then the total new combined company will be valued at $18.9 billion, so signing a close to $11 billion to Activision which is a 31% premium to where they’ve been trading and that combined, Vivendi is also going to invest close to $2 billion in cash into the combined company and then also fund a share offer. There’s just so much corporate transaction history around this company. It’s mind numbing even to myself to say it. The net result of which is that Vivendi is going to own 63% of this combined company and the other 37% is going to trade in the public markets. So this makes the structure more complicated, not even simpler.

Ben: It's worth pausing for a minute. So listeners, we’ve covered a ton about Blizzard. We’re not going to do the history and facts of Activision but it's worth addressing real quick who are these Activision guys and why are they worth approximately... what did we decide here –

David: $11 billion.

Ben: $11 billion.

David: So Activision is a long-time videogame publisher conglomerate. They own some studios. The Guitar Hero games, they published those, all those cheap pieces of plastic you bought in the mid-2000’s – Call of Duty, Crash Bandicoot, Skylanders which your kids probably play with now.

Ben: Tony Hawk.

David: Tony Hawk, all this stuff. And Activision is run by a guy named Bobby Kotick who I believe he actually bought the company himself in the super early days of the gaming industry in the ‘80s or ‘90s. And he had been CEO forever and is just a total veteran –

Ben: Yeah, he’s one of the longest. Yup, exactly. And he’s known to be passionate, ruthless, true capitalist. A lot of these articles described him as the guy that gamers loved.

David: Yup. He is a capitalist amongst the idealists of the video game industry.

Ben: In fact Activision, they’re quite old for this industry. They were founded in 1979. They’re the first video game publisher and they’re the first people to publish games for video game platforms that are not the platform themselves. So Nintendo obviously made Mario and Super Mario. The Activision, you can think of as sort of the first third-party game developer to ever exist.

David: Yeah. Somewhat business model.

Ben: I'm sorry. Third-party game publisher and it’s worth noting that all those franchises that we listed off earlier have not one but each one with a variety of development studios that Activision worked with to create those games and create all the sequels for those games.

David: Yup. All right. Let’s bring this one home. I'm exhausted already. So when the merger happens, Blizzard is projecting in 2007, $1.1 billion of revenue, $520 million of operating profit. They’ve got 10 million subscribers on World of Warcraft at that point. Since then, a bunch of staff happens. They release StarCraft II, they release Diablo III, they release Hearthstone which is basically a video game online version of Magic: The Gathering which I probably lost a year of my life being addicted to it and went through rehab out of it. No.

Ben: No, David. No, it’s not, it’s completely different. Why would you say such a thing? That's not –

David: Yeah, right. Everybody respects that idea the video game world or not.

Ben: Right, right. Well, that's an interesting point. We’ll talk about this in tech themes later, but listeners, Hearthstone is basically using a lot of the very same game mechanics from Magic: The Gathering but doing what Blizzard does best in every Disney-like way with their IP and that let people play a new game with the existing World of Warcraft characters that they know and love. And when you think about the incredible complexity in building a game like World of Warcraft, I think it’s only like a 15 or 20 person or initially was like a 15 or 20 person development team that just built Hearthstone in unity, like they have incredibly high margins or effectively the de minimis cost of creating a game like Hearthstone.

David: The Disney parallels are apt here. We’ll come back to that in a minute. So 2013, Activision Blizzard ends up buying back most of the 63 percent stake that Vivendi owned in it. They raised external capital including from Tencent which owns Riot Games which makes League of Legends now. Interesting.

Ben: Wait. Tencent wholly owns Riot Games –

David: I believe they own the majority of Riot Games at this point. Not 100 percent.

Ben: But then also have a minority share here in Blizzard Activision.

David: Yes, they do.

Ben: Interesting.

David: Net result of a few of those buybacks is Vivendi now owns just under 6 percent and 94-ish percent of Activision Blizzard as a publicly traded company. So no investment advice on this show but if you want to invest in a publicly traded gaming company, they’re basically two. There’s Electronic Arts, there’s Activision Blizzard. They are the main peer play gaming companies out there.

Ben: Yeah, and this is pretty interesting to make a point on. So I don’t want to take us too far forward but as a quick flash forward, esports is enormous today. There’s over 300 million people a year that watch other people play video games competitively. Investors are often trying to figure out how to make bets in this space and EA is not a major player in esports. Riot Games is privately held mostly by Tencent. Valve is privately held, incredibly tightlipped and sort of their own very special company. And so, really, the only way that public company investors can really, you know –

David: Get exposure to this, yup.

Ben: –bet on this wave is through Blizzard Activision.

David: Yeah. And I think it’s all because of Blizzard being part of the company like Activision itself would never I think have innovated on this level of stuff. So Blizzard finally gets in the act on MOBAs itself, the League of Legends style, DOTA-style games. They release Heroes of the Storm in 2015 which gets some market share but is still less than DOTA, DOTA2 and League of Legends. But two things happen in 2016. First, Activision Blizzard acquires Major League Gaming which Ben probably knows more about than me but is sort of a play at another level into esports at the actual kind of league end.

Ben: Right. It’s basically making the bet that competitive video gaming is going to start look more and more like real sports and it’s starting to kind of vertically integrate there and not just owning the IP of the game itself but start to own some of the kind of league structure and broadcast of the games as well.

David: Yup. And the second thing that they do in 2016 is they release a totally new franchise called Overwatch. Overwatch is also –

Ben: David, have you played Overwatch?

David: I haven’t. This stuff is like, we should put a warning label on this episode, like this stuff is like opiate.

Ben: Highly addictive.

David: Like opioids. Like if you start playing this stuff, you will get addicted. It is designed to addict you and you will spiral into a vortex. So, use with caution.

Ben: And more and more so now. Unlike the old days where they were wholly optimized for the playing experience, these games are starting to be optimized for the viewing experience as well. So games that are starting to come out now are not only fun to play but are optimized for basically the top of a funnel, like how can we get people to enjoy watching this as a competitive sports so that they’ll eventually...

David: On Twitch and YouTube and elsewhere, yup

Ben: Exactly. And so Overwatch, for our listeners out there, is very intentionally designed to be like a love child of a MOBA but from a first-person shooter perspective. So everything that is successful –

David: It’s like Halo meets League of Legends.

Ben: Exactly. So you’re on that very same arena-style battlefield that has a very capture-the-fly mechanic to it but the camera is mounted as a sort of first-person shooter and you are on the ground and it has the best of both games. So, it is a very intentional attempt to capitalize on everything that's going on in the esports world today.

David: And not just an attempt, like a success. It comes out in May of last year of 2016, 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. What’s super interesting about that is Blizzard made – I wish I knew more about the industry and the history of how this decision got made. They sort of go with a hybrid business model for Overwatch. So League of Legends and DOTA2 and the other MOBAs are completely free to play. You can log on, you can play them, you can compete at a level playing field with everyone else without paying a dime. But if you want to get special sort of aesthetic items for your character or special characters or whatnot, you have to pay money to get those sort of add-ons. They don’t really affect your skill at the game but they look cool, and that's been a hugely successful business model. I mean, again, billions of dollars of money made from these things just from sort of aesthetic add-ons. But Overwatch, Blizzard decides to actually go back to their roots and charge money for the game. So if you want to play Overwatch, you got to pay either $40 or $60 depending on the version you want to buy the game. But then they also have sort of Diablo inspired, they have loot boxes that you can buy that contain items that you can essentially sort of also magically gather as sort of like booster packs you can buy for your characters. And so they make money on that too and yeah, totally.

Ben: It's incredible to watch everybody sort of steal from each other’s mechanics here and what’s old is new again, and people sort of reinventing that over and over again. David, as you were saying that Overwatch has been phenomenally successful, I pulled up some stats that are worth mentioning and there’s a couple observations out of them. The first one is that there’s incredibly staying power in what people care about. So in the very same way that baseball is the American pastime and even though attention is waning on it a little bit, it’s still like a huge fiber of what people grew up with. You have this in esports as well and so even though Overwatch has sold quite well, they’re really only 1.9 percent of the monthly esports hours viewed on Twitch which incredibly is exactly the same percentage as Starcraft II, like that is an old, old game that is still highly revered.

David: Seven years old at this point.

Ben: Yeah, everywhere but still a lot in South Korea. If you look at the two biggest games, we were mentioning these MOBA style games, 7-year-old League of Legends still commands 23.3 percent of the viewing hours and DOTA2 has 32.2 percent. It’s like there’s these newer games that are coming out that are really tuned to take advantage of this wave but it still has the majority of the attention share and it’s unclear if this will wane in the future or not, is these games that people have sort of been playing for a while now.

David: We’ll get into this more in tech themes but starting really with the modding community for Warcraft II and Starcraft and Warcraft III and then especially with World of Warcraft, Blizzard really brought this new approach to the video game market where it’s not about just publishing a piece of software and people buying it and then that being the end. It’s that these games grow and get bigger and more in-depth and make more money over time. And really brought very sort of startup company-like business models to the game space.

Ben: Actually to make another parallel to the movie industry, these games when they came out are making as much money as movies are when they come out but they have an incredible tale of the ability to continue making money. So like a Star Wars comes out and it will be – I forget if that was a good billion dollars or two billion dollars. Something huge. And then it was only in theaters for so long. But for example like 2013, Blizzard Activision released Call of Duty: Ghosts and on the first day sold a billion dollars into retail. That's insane. It’s for a video game and then they continue to make money on it for quite a bit of time after that.

David: Yeah. So to wrap it up, in yearend 2016, at the end of last year, just Blizzard within Activision Blizzard did $2.4 billion in revenue, which by the way was up from 1.6 in 2015, so the growth is insane.

Ben: The growth on that huge number is insane.

David: Yup. Did over a billion dollars in operating income. And this just blew my mind. So combined between Activision properties like Call of Duty and the like and Blizzard, also Skylanders within Activision, in 2016 consumers spent approximately – this is a quote from their earnings release – 43 billion hours playing and watching Activision Blizzard content which is on par with Netflix and over 1 ½ times the amount of time that people spent in Snapchat. So Acquired listeners, if you think that this episode is like, “Man, this is a lot of crazy game company stuff, like this is small fry. Why is Acquired covering this?” Like, no. This company had 1 ½ times the total attention of Snapchat last year.

Ben: And it’s distributed in such a different way. When you think about Snapchat bragging about, what was it, 20 to 25 minutes a day in Snapchat, these short little bursts, like when you talk to people that really like to play these games a lot of the time you’ll ask someone if they’re like big League of Legends player and someone will say, “No, I only play like 2 or 3 hours a night.” What? And then you talk to people that are like, “Yeah, I'm really into it. I play probably 6 to 8 hours a day.”

David: Yeah. Well, then you have professionals that literally it’s their job. It is crazy. It makes Facebook look like some app that you open once a month.

Ben: That's true.

David: All right, shall we move on to category?

Ben: Yeah. So I’d like to do category a little bit different today. I’d like to do a little bit of discussion beforehand on sort of like why did this merger happen. What did they see in each other and why did Activision sort of make this play to make it happen? Because Vivendi Games which is 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. Games that really were they were not sort of these console games that you play through once and be done. When I say online games, I mean World of Warcraft at that time where it’s just an incredible behemoth that kept going, kept generating revenue at an incredible scale. So it was really trading sort of marketing and distribution in exchange for the ability to do these MMORPGs.

David: Yup. I think not just World of Warcraft, even though that was very much the focus of Blizzard. Like maybe this is retrospective history but I think with all the Blizzard properties, you could see the potential for because it was already happening in the modding community with DOTA. You could see the potential for all of them to be what they’ve become which is monetized over time and things that grow and don’t fade. Which the knock on the video game industry has always been, oh it’s a hits-driven business, it’s like Hollywood, right? To a certain extent it still is and that before a game comes out you don’t really know how well that game is going to do. But with what has happened in this innovation in the industry, once it has an audience and it’s working, it doesn’t fade, it grows. And that’s I think what Activision saw, I’d have to imagine what Activision saw in Blizzard.

Ben: And for Blizzard it’s kind of a hedge. It’s the ability that, number one, they don’t have to pay like a separate entity anymore to actually publish and release their games. They can sort of do all of that as one entity. But the other thing is that when there’s a drought between titles, like if their next title didn’t really hit, they have this well-funded sort of cushy way to smooth out the hits-driven business.

David: Well, and also, like we said earlier in the show, I think it’s a huge testament to the creative energies at Blizzard that through all of this not-so-90s era ownership changes and ups and downs, they stayed focused on what they did and made great products. But I got to imagine for them too, they must have been thrilled to get out from the former French national water company and be part of just a games company.

Ben: Yup, yup. All right. So I’ll take a stab at acquisition category and call this a business line. This is one that Activision was kind of in the business of doing their own game development with some studios in-house but none nearly as successful as the scale of Blizzard and really, yeah, there’s some synergies in combining and we can get to that later. But I really think that the big thing they saw here is “Holy crap, this is a revenue-generating business line” and the secret sauce within Blizzard allows it to happen over.

David: Well, I think the proof is in the pudding in that if you look at the reporting segments of Activision Blizzard as a public company and their financial results, they report Blizzard as a business line, as a separate segment. I think there is also an element though of, I forget what category we assigned to all of our Disney series of acquisitions but there’s definitely a Disney element here too.

Ben: Yeah, it feels like Disney buying Pixar, right?

David: Exactly. It's like these are franchises that there is value both to the core games themselves but now they’re doing movies around these and merch and just like the Disney flywheel got created around Disney IP being Mickey and others over time and all the movies. A similar thing is starting to happen around these franchises at Activision Blizzard.

Ben: Yeah, absolutely.

David: All right. Well, what have happened otherwise. I feel like we talked about that sort of a little bit just now and I can’t imagine that Blizzard was super happy being part of Vivendi. And yeah, they would have continued creating and doing their thing. But it almost feels like the fruits of the labor that resulted from all the game and product driven innovations throughout the 90’s and kind of 2000’s are really being harvested now by Activision Blizzard in terms of businesses that they’re building on top of them and that probably would have been hard within Vivendi.

Ben: And here’s the question. This is coming at it from both sides. One, on the Blizzard side, would they have produced something like Overwatch without Bobby Kotick. Would we see these very aggressive business first games rather than sort of creative people games.

David: I mean, make no mistake, it is aggressive. They are monetizing both ways. You pay for it upfront and you have microtransactions over time.

Ben: And they’re aggressive about building the ecosystem around it. The buy-in to have an Overwatch team and the Overwatch league, the rumors are that it’s like a $20 million buy-in per team.

David: Wow.

Ben: They are building up this game and the ability to buy a franchise in the competitive world of esports as being like the next big thing and you’d be a fool to miss out and it’s extremely expensive because of that. I think that what would have happened otherwise, I don’t think we would see Overwatch and I don’t think we would see a lot of the character of Blizzard Activision as it is today without that Activision component.

David: Yup. It might be interesting, and again, I don’t think I know enough about the industry to really speculate here but Valve and Riot, Valve obviously does many things within gaming as we’ve talked about on episodes past. But with DOTA2 that they control and then Riot with League of Legends, they’ve become huge companies and so powerful. But had Blizzard not been kind of put into its own sort of independent gaming focused company with Activision, maybe Valve and Riot would be even more powerful and Blizzard wouldn’t be even part of the picture.

Ben: Yeah, that's interesting. That's interesting. What do you think Activision would have done if they didn’t buy and emerged with Blizzard? Because they really missed MOBAs. I mean, they missed this enormous way. It’s almost like Microsoft missing mobile.

David: Yeah, really they did. I think this is also a dynamic that happens with these waves that I think is super interesting, is that the old paradigm of video games didn’t go away either and Activision’s great at that, like Call of Duty, like you were saying, makes billions of dollars. But it just makes it in a way that is an inferior business model because it's like you invest hundreds of millions of dollars in creating the content just like movies and then you release it and then you monetize it for a window and then it fades. Like they still would have done fine but all of the growth and the innovation and the better business model that Blizzard has, they would have missed out on.

Ben: And then two other things that I want to point out that I think are questions that I don’t have answers for. And listeners, if you know about the video games industry, join us at Acquired.fm in the Slack. We would love to hear your answers to these. But Blizzard Activision, as we put it at Pioneer Square Labs, when we work on something for a long time and don’t create a company out of it, a very expensive kill called Titan where they worked on this game for a long time and it was supposed to be the next big thing and it was killed. The question is, in my mind, if it were just Blizzard, like would they have believed in it and persevered through it and shipped at any way? Or would the expensive project, would they have continued to pour money onto it and it wouldn’t have seen the light of day? I don’t know. But I speculate that that has more to do with Activision than Blizzard. And then 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.

David: Well, I don’t know that it was a flop. But I think it was successful but just not to the degree of these other franchises.

Ben: Yeah. And I mean the stakes are so high now that if you’re not like one of these other franchises, you just don’t matter and in these businesses that have incredibly high capital requirements and then incredibly high revenues after that.

David: Yup. No doubt. Well, I think it's less well adapted to the esports and viewing model that these other franchises have been so successful with. So it just has less potential. But, you know, I think Blizzard views Diablo as a core franchise and it will be super interesting to see what directions they take it in. I see huge potential like original Diablo sort of created this idea of an economy around items and like people loved trading stuff online. So I see huge potential for that going forward.

Ben: Great point. Tech themes?

David: Tech themes. Oh, man. Per usual, I think we’ve covered a lot of them. I think for me, we’ve talked about a lot on this show already but one that I think is super powerful is just this idea of building and then creating, enabling a platform for users of all types of it to then be creative themselves. 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 and so specifically I'm talking about the modding engine and the campaign and maps editors that Blizzard releases. It literally created this industry that is tens of billions of dollars now combined in esports and MOBAs. I think about in other... I think Apple was like this in a way. The industry that was created around software was really Apple enabling and then NeXT and object-oriented programming, enabling people to build things and release it on the platform or iOS or even sort of like Square in a way enabling people to go into business and be merchants or Stripe.

Ben: Yup, I think so. Another big one that we keep touching on is really this concept of sort of the IP flywheel that Blizzard released the Warcraft movie recently and it will be interesting to see how well they’re able to parlay the IP from these games into physical locations, into cinema, into TV shows, into toys. It’s nowhere near the level that Disney is now but 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.

David: Well, and you can start to see the pieces falling into place with the Major League Gaming acquisition and the analogies to Disney and all of the assets that Disney owns that are part of its flywheel and I'm thinking in particular of ESPN. The challenge I think for Activision Blizzard is they don’t own Twitch, right? Amazon owns Twitch, and is Twitch the ESPN here? I think that obviously the dynamics will be slightly different as it’s a different world but as we pointed out throughout the show as they sort of relate to the game with MOBAs sort of laid the groundwork for the MOBA genre to emerge but then didn’t participate until too late, there are several elements of the flywheel that are kind of missing that are holes in the chain for Blizzard right now. So it will be interesting to see like do they continue trying to build them in-house, do they buy things? I wouldn’t be surprised at all to see more acquisitions coming down the pipeline for Blizzard.

Ben: It's worth noting, listeners, they also bought King, the makers of Candy Crush for, what...

David: Close to...

Ben: It was like $5.9 billion.

David: Yeah, close to $6 billion.

Ben: So their divisions now the way they’re internally structured are Activision Blizzard, Activision Blizzard Studios which is the movie-making arm, Media Networks, and then King Digital is its own independent subsidiary inside. So yeah, to your point, David, I’ll be curious to see how those divisions really start sharing more IP around inside of them and yeah, it is mind-blowing to me that they are not really participating in the world of MOBAs and all.

David: Yeah. The King one is curious. Well, we’ll have to do another episode on it at some point.

Ben: On King, yeah.

David: The quick take, again, not being an expert on this space and not having done the research is it doesn’t feel as lasting or transformative or sort of future wave-looking as Blizzard. But anyway, another topic for another day.

Ben: And I got one more.

David: Let’s just keep on coming here. We’re a hits-driven business at Acquired.

Ben: Yes. I'm going to amend what I... actually, that's not true.

David: It is not true.

Ben: The reason it’s not true is really awesome. The nature of podcasting is that when people subscribe, they sort of push an episode and they have an opportunity to decide if they want to listen or not. 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, but listeners of Acquired know that a new episode comes into your podcast feed every time. You don’t have to get reacquired as a customer and it really helps keep longevity around. So, cool thing about podcasting as an ecosystem and I think, David, we’re probably due to do a podcasting ecosystem part 2 here at some point soon.

David: Yeah. We should do a follow-up.

Ben: We should. All right, so one more that I'm going to amend. I wrote in my notes the decreasing power of distributors in the internet era. But it's really the changing nature distribution in the internet era because I think that if you look at the power that Activision had historically and then you look at the power that Blizzard has had more recently, the nature of these studios is that they can kind of do their own distribution once they get scale. Once they establish a customer relationship once and they have a Battlenet, they have a steam, like they don’t need to incur a new cost every time of going and printing a bunch of CDs and then putting them in boxes and then putting them on shelves and getting people to go to the stores. Like actually, 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. So I look at this like Activision sort of had to make a play into the content world because not that they were dumb pipes like a Verizon or something or the way a lot of people think about Verizon. But not that they were just dummy distribution but the importance of what they did changed and they sort of had to adapt their business model and do something different because it almost gets into Aggregation Theory here where all the video games are not aggregated into a single place the way that all of information and advertising is starting to get aggregated into Facebook. It’s still kind of fractured among multiple game publishers but you really do see this incredible concentration of power because distribution is done differently now and it becomes “winner take most.”

David: Aggregation Theory.

Ben: Hard at work. All right, should we grade it?

David: Let’s do it.

Ben: All right. So listeners, David and I have never really done a merger before in this way, really a merger of pseudo equals and so we were talking before the show about the way that we feel we should evaluate this I think the framework that we’re going to use is the combined enterprise value like far down the road, so let’s say the 2017 combined enterprise value more than the separated enterprise value. So put it a different way, if they had stayed separate and executed and both grew in value versus if they had combined and achieved dare I say synergies and were compared against what their actual combined value is today, was it a good idea for them to combine or was it valued destructive. And David, we were sort of talking, it’s tough to know like it’s tough to really identify, they’re at $44.9 billion market cap today. They were a $19 billion company upon combining the two companies. They grew over 2x and the question is, from 2008 until today over a 10-year time horizon, would they have 2x-ed on their own? And David, what do you think?

David: I don’t know. This is a tough one. Like going through the episode and thinking, I think we’ve been very laudatory of Blizzard certainly and the merger and we’ve talked about how sort of in our expert opinion it would have been hard for a lot of this innovation and value capture really of that innovation that they realized to happen separately for both companies. On the other hand though, this merger happened in 2008 so almost 10 years ago, and that they’ve only grown kind of 2x since then. I mean 2x on a huge base like adding $20+ billion of market cap. That's not easy to do for sure.

Ben: The years are a little loaded but what if in 2008 I had put $19 billion into an index fund?

David: Right. Or $19 billion into Apple or Facebook. You couldn’t have done Facebook then but I'm actually a little surprised that the growth hasn’t been larger. Think about it, like we talked about, this is 1 ½ times Snapchat in terms of engagement and Snapchat itself is 20 billion-ish market cap company. So, I don’t know, for me, without knowing enough about the ins and outs to understand why that’s the case from a valuation perspective, I think just purely from the perspective we usually take here at Acquired which is a more operational and product focused one, I think I’d give it a A-, I'm going to go with just because I do think it would have been really hard to do this value capture in some of the business model and pricing decisions that they’ve done around the product innovations separately. But it’s an A- (?) for me given that I'm just a little puzzled on the finances.

Ben: I've been a little bit stumped too because I think on an absolute basis, it’s been fine like the growth has been what you would hope for out of a 10-year investment. I think that so on an absolute basis, it’s not like they did anything revolutionary. But then let’s compare it on a relative basis to where they potentially could have ended otherwise and then how other competitors were performing. So it is probably worth noting that they’re really the biggest sort of gaming company. They became the behemoth in this space. There were competitors that rose up incredibly fast in that time period. I mean, Riot Games sold to Tencent for a huge amount of money. I mean, estimates were that –

David: Yeah, but sold way too early though for not that much money relative to what we’re talking about and relative to how big they are today.

Ben: True. Exactly. But I'm like thinking from a growth perspective, they were started 7 years ago. They were started after this transaction and I feel like Blizzard Activision or Blizzard let a huge amount of value creation go elsewhere. I think that sure, there was a lot of goodness created by combining these companies but I can’t believe that –

David: It actually has not been anywhere near flawless execution.

Ben: No, no. And I don’t know, I’d be more of a bull on let’s say they didn’t combine, I would be much more likely to invest in Blizzard than Activision on their own. I think that the way that the future is going is like you look at where the value creation is, it is very much a smiling curve argument. It’s the last place to touch consumers or the originator of the content or the IP or the components and very little in the middle and as primarily capital and distribution.

David: Twitch or Riot.

Ben: Yup, yup. And so, you know, I’ll go with a B-. I think they did great but like our bar on this show is not 2 point whatever X-ing in 10 years.

David: Yeah, great point. So I'm going to revise my grade and I'm going to take it down to a B+ partially for the arguments you just made but also, I do think I'm coming in higher than you because as I thought about it more, like it’s only 2x-ed in 10 years but 2x-ing on $20 billion is really hard. You’re talking $20 billion of value creation and it sounds trivial when you say 2x over 10 years and for us and startups in venture-land. But 2x-ing on that is really, really hard. 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 2x or 3x bigger than that.

Ben: And what we’re not considering today is how well-positioned they are. So let’s say that their bets are right and that Overwatch is the franchise of the future that becomes the competitive sport that everyone is watching, teams are paying $20 million for these spots and that all goes fantastically well, that the flywheel continues, that BlizzCon gets more popular, that the Warcraft movie does phenomenally well, that they’re able to create even another franchise. I mean, there’s all these things where you could argue they’re one of the best, if not the best set-up for the future. So I guess stay tuned for another episode in 3 to 5 years, but yeah, I think we’ve said our pieces.

David: All right. Whew! That was both super fun and exhausting. It’s funny, in the research I was doing for this and watching a bunch of videos and reading articles, I'm like, all of these pieces are like, well, here’s the corporate history. If you want to take a nap, read through all this and like man, I get it now, I have just done it. Like even by Acquired standards, this stuff is crazy.

Ben: Yup, totally agree.

David: All right, what’s your Carve Out?

Ben: Carve Outs? All right, so my Carve Out is Dick Costolo appearing on a podcast at Vanity Fair called Inside the Hive, and it’s Twitter’s former CEO talks about Trump’s midnight tweets. I love Dick Costolo. Listening to that guy talk about leadership and management and storytelling and comedy is just so good and there’s a lot of very interesting insights to be gained there about the process of taking your company public which I'm sure you guys would love listening to. But there’s just so much great stuff in there about Dick’s experience being in the writer’s room for Silicon Valley and his time at Second City doing improv in Chicago. That guy, he’s just learned so many great lessons along the years and you get to pick up a lot of really great sort of leadership insights. So, I highly recommend listening to that podcast.

David: That's awesome. Mine is out of left field today. I have been super busy lately working on a bunch of new stuff which is exciting, more to come later on that. But, so I haven’t had much time for media consumption or anything, or I haven’t had much time for anything, but Jenny and I had our annual summer bash backyard party last weekend and the cocktail that we served, because we always have a cocktail at our parties, was mint margaritas. The problem with margaritas for the summer, they’re great but you need a bunch of lime juice and that's like really exhausting if you’re making cocktails for 50 or 60 people and putting it in a cooler. So thanks to the internet and to Amazon, found Nellie and Joe’s 100% Natural Key Lime Juice. This stuff is amazing. It is literally lime juice from like 100% natural organic limes in a bottle that you can use in margaritas and it is perfect. So for your summer cocktails, key pro tip.

Ben: Yeah, I think we found our next sponsor. We should reach out afterwards and let them know the first one is free.

David: We should. Really an audience overlap there.

Ben: That's right. Well, before closing the show, listeners, I want to say one more time we would love, love, love if you could go to Acquired.fm/survey. Take the survey. You can do it from your phone. If you are walking to work or driving or whatever right now, please before you walk into work or do whatever you do next, pop open your phone. It will take you more than 3 and less than 10, let’s call it 7 minutes. You can do it on your phone. It's very easy, it's very quick. Acquired.fm/survey. We would love to know more about who you are because we in the podcasting ecosystem are starved for information. So please give us your feedback, Acquired.fm/survey and thank you so much. We hope you have a great day.

David: We’ll talk to you soon.

Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

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