Hi all,

You’ve probably read about it this week: Microsoft acquired Activision Blizzard for $75bn, making it the third-largest gaming company. It has the potential to shake up an industry that is already twice the size of the movie industry.

📃Here’s what I think is worth sharing this week:

Have a great week!

With the gaming industry growing rapidly the competition is intensifying. In previous generations of consoles, the “console wars” between Microsoft and Sony were focusing on getting as many “exclusives” (titles you can only play on that console) as possible. Because of this strategy, the Playstation 4 came out as the clear winner in that generation. Now, Microsoft has been on a spending spree to make sure it’s different this time.

Although sales numbers of the new console generations don’t lie, with the Playstation 5 taking a clear lead, I’d argue that the “console wars” belong to the past. Sony and Microsoft are now competing in a larger gaming market, one of subscriptions & mobile gaming. Both have an “all you can eat” subscription, essentially a “Netflix for games”. Sony has Playstation Now and Microsoft has Xbox Game Pass. These subscriptions give users access to games through consoles (PS Now & GP), PC (streaming through PS Now, download on GP), or virtually any device through on-demand streaming.

The decoupling of revenue from console sales means that the “console wars” belong to the past. Instead, it becomes a “subscription war” where exclusives will be used to attract users. The intellectual property included in the acquisition includes iconic titles such as Call of Duty and Warcraft, but also mobile games such as Candy Crush. Microsoft previously acquired ZeniMax (parent of Bethesda) bringing titles such as Fallout and Wolfenstein to Game Pass. Although Microsoft has promised not to restrict current titles to the Xbox ecosystem, there are no guarantees it will not do so in the future. Sony has been warned.

Some highlights of the coverage:

Naturally, the Financial Times has an outstanding analysis of the gaming market & the impact of this deal in a larger context.

The biggest valuation treasure-trove on the internet is probably Dr. Aswath Damodaran’s website. Every year he recalculates many important valuation “assumptions”, such as the Equity Risk Premium (ERP), or how much investors in stocks expect to be compensated for risk (on top of the risk-free rate). In this video, he goes over his approach and how the newly calculated implied ERP of 4.24% fits into the historical trends. He also uses it to value the index.

If you’ve ever touched corporate finance, you’re probably familiar with the Discounted Cashflow method (DCF). This week I discovered this rather old but still very insightful article published in the May-June 1997 issue of Harvard Business Review. It goes over how managers can expand their knowledge of valuation methods to better serve their decision-making needs. It’s a long read but definitely comes recommended to anyone wanting to broaden their perspective.

I do not particularly like discussing politics in a format like this, however recent tensions surrounding Ukraine can have a great impact on the European Union, its stability, climate strategy, and consequently the energy market.

Not too long ago, the European Union moved ahead with plans to label natural gas as ‘green’. A surprising move that gives Russia, which supplied 47% of the EU gas imports in the first half of 2021, more leverage.

Unsurprisingly, the US is now preparing a Plan B in case Russia decides to restrict the supply of LNG to the EU. If it comes to it, this may even put additional pressure on European countries to adopt “green” energy sources that do not rely on Russia. The future of the European energy market becomes more uncertain.

BrewDog, a “disruptive” brewer from Scotland has expanded aggressively in recent years. It appears the company has cut some regulatory corners in its expansion to the US, shipping products containing ingredients that had not been approved for the US market. Today, 22nd Jan, BBC One will air an episode of Disclosure covering the scandal.

Have a great week!