Activision workplace scandal turns gaming giant into prime target

Bobby Kotick’s trajectory as a young tech entrepreneur in the 1980s was shaped by remarkable encounters with two future billionaires: Apple co-founder Steve Jobs and casino magnate Steve Wynn.

While on a trip to Michigan in the early 1980s, Jobs met Kotick and persuaded him to drop out of college to run his software business full-time. And after a chance encounter in Texas in 1983, Wynn became a backer of Kotick’s ventures — including the $500,000 he and his partners invested in 1990 in a near-bankrupt video game company.

Thirty-two years later, Kotick has agreed to sell that company, Activision, to Microsoft for $75 billion in an all-cash deal that is expected to reshape the landscape of the gaming industry.

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The deal, if approved, will also cap a groundbreaking career for Kotick, an executive known for his keen instincts, well-timed acquisitions — and more recently — overseeing what California regulators have claimed. last year was a “pervasive workplace culture of fraternal boys.”

Concerns over allegations of harassment within the company persist, leading to questions about whether Kotick can stay once the deal is done.

He told the Financial Times earlier this week that Activision had “moved with speed and unlimited resources” to change workplace culture, adding that “it’s an ongoing job”.

But it’s sexual harassment allegations that have weighed on Activision’s shares, falling nearly 30% since the California lawsuit was filed in July. This provided Microsoft with an opportunity to pounce. Activision shares have jumped more than 25% since announcing the deal on Tuesday.

“There was a strong strategic rationale for Microsoft to enter into the deal, and they had the opportunity to do so because [Activision’s] the unrest was bleeding into public perception and even [affecting the] game franchises,” said Clay Griffin, games analyst at MoffettNathanson.

Kotick could stay on for a transition period, according to people familiar with the deal, but it’s clear Microsoft games boss Phil Spencer will lead the company.

Anyway, the head of Activision has already benefited greatly. Kotick’s $155 million salary package for 2020, which made him one of the highest-paid executives in the United States, sparked protests from some investors in June.

According to the company 2021 proxy filing, Kotick would receive $293 million if he were to be terminated following a change in control, but because the company’s stock met performance targets in March 2021, $270 million has already vested. No other equity was awarded, so any change in control payout would be closer to $15 million.

If the deal is approved by regulators, Microsoft will add money-making Activision titles such as Call of Duty, candy Crush and World of Warcraft to its games division, where the Xbox console is the crown jewel.

Microsoft’s gaming business is reportedly set to further challenge Japan’s industry-leading PlayStation owner Sony while expanding its presence in mobile gaming. It would become the world’s third largest game company by revenue after Sony and Tencent in China.

This would-be gaming colossus is a world away from 1979’s Activision, a start-up launched by former Atari programmers and music director Jim Levy.

Gamers play the latest Call of Duty video game during the Game XP event at Olympic Park in Rio de Janeiro, Brazil
If the deal is approved by regulators, Microsoft will add big-money Activision titles such as ‘Call of Duty’ © Carle de Souza/AFP/Getty Images

Activision had become the first company to sell “third party games”, developing titles for platforms and consoles created by others. But it struggled through the 1980s and tipped into insolvency in the 1990s.

Not for the last time, Kotick moved at the right time. “He had a sharp mind to seize a financial opportunity,” said Alexander Smith, a gambling industry historian. “He came in on the cheap.”

Kotick and partner Howard Marks laid off all but eight of the 200 employees and moved the company from Silicon Valley to Los Angeles – a reflection of Kotick’s belief that gaming was more about entertainment than technology. For much of the 1990s, the company was successful in exploiting its back catalog.

In the early 2000s, Kotick helped the industry figure out how to take a high-cost product success in Call of Duty in an annual blockbuster rather than taking years to release updated versions of the game.

Pelham Smithers, who runs his own research group, said sports titles such as Madden NFL could be released every season because the developers just changed the names and numbers on the jerseys. A first person shooter like Call of Duty was more complex, however, taking four years to develop. But Kotick cracked the code and started receiving annual revenue a decade before the streaming era.

“They staggered development, so there were three games in development at a time,” Smithers said. “It was genius, really.”

Around the same time, Activision embarked on a series of timely acquisitions. In 2006, Activision bought Guitar Hero publisher RedOctane for $100 million – a tiny sum for a game that would later make the top 10 best-selling lists of all time.

“He really understood the timing, not to please Wall Street but to have the patience to see high-quality assets,” said Baird analyst Colin Sebastian.

Two years later, Activision merges with Blizzard, the studio behind the PC hit world of warcraft, then owned by Vivendi, in a deal that valued the combined entity at $18.9 billion. The group then engulfed candy Crush Saga-maker King for $5.9 billion in 2015, earning it success in the growing mobile market.

These acquisitions enabled Activision to gain a major foothold in mobile, console and PC games. In its latest quarterly report, the Activision unit had nearly $800 million in sales, while Blizzard had $532 million and King – the top-grossing one – had $651 million in revenue. “It gives you a remarkably stable base,” Smithers said.

However, some of Activision’s innovations that have improved results, such as pushing to release updates more frequently, are also seen as the root of its problems.

Employees have complained of being overworked, leading to high staff turnover. Staff at Blizzard-owned developer Raven Software have been on strike since December. Quality Assurance Officers, whose responsibilities include checking for bugs and issues in Call of Duty: Warzonehave been on strike for five weeks.

Some gamers are complaining that the quality has gone down as the company looks for new ways to monetize playing its titles.

Activision’s aggressive push to release updates every year has led to “franchise fatigue,” or, as Smith puts it, “sinking some games into the ground.” He said that perceived declines in the quality of games such as the by Tony Hawk series of skateboarding titles had made gamers wary of Activision.

Some players say they hope these practices will change under Microsoft if Kotick leaves.

“Investors loved this guy,” Griffin said. “Very clearly there was a groundswell internally in the company, and the gaming communities saw him as public enemy number one, so this deal gives him a way out.”

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