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.

During a trip to Michigan in the early 80s, Jobs met Kotick and successfully persuaded him to drop out of university to run his software company full time. And after a chance meeting in Texas in 1983, Wynn became a backer of Kotick’s ventures — including the $500,000 he and his partners invested in 1990 on a near-bankrupt video gaming company.

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

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 alleged last year was a “pervasive frat boy workplace culture”.

Concerns over harassment claims at the company linger, leading to questions as to whether Kotick can remain once the deal closes.

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

But it was allegations of sexual harassment that have weighed on Activision’s shares, falling almost 30 per cent since the California suit was filed in July. That provided Microsoft with the opening to pounce. Activision’s shares have jumped more than 25 per cent since the deal was announced on Tuesday.

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

Kotick could stay on through a transition period, according to people familiar with the deal, but it is clear that Microsoft’s gaming boss Phil Spencer will run the business.

Regardless, the Activision chief has already profited handsomely. Kotick’s $155m pay package for 2020, which made him one of the highest-paid executives in the US, prompted protests from some investors in June.

According to the company’s 2021 proxy filing, Kotick would be paid $293m if he were to be terminated as a result of change of control, but because the company’s stock hit performance targets in March 2021, $270m of that has already vested. No other equity was granted, so any change of control payment would be closer to $15m.

Should the deal be approved by regulators, Microsoft will add money-spinning Activision titles such as Call of Duty, Candy Crush and World of Warcraft to its gaming division, where the Xbox console is the crown jewel.

Microsoft’s gaming business would be poised to further challenge Japan’s Sony, which owns the industry-leading PlayStation, while also expanding its presence in mobile gaming. It would become the world’s third-largest gaming company by revenue after Sony and China’s Tencent.

This potential gaming colossus is a universe away from the Activision of 1979, a start-up launched by former Atari programmers and music executive Jim Levy.

Gamers play the latest Call of Duty video game during the Game XP event at the Olympic Park in Rio de Janeiro, Brazil
Should the deal be approved by regulators, Microsoft will add money-spinning 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 teetered toward insolvency by the 1990s.

Not for the last time, Kotick moved at the right moment. “He had a keen mind for seizing a financial opportunity,” said Alexander Smith, a game industry historian. “He got in cheaply.”

Kotick and partner Howard Marks fired 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 found success in mining its back catalogue.

In the early 2000s, Kotick helped the industry work out how to take an expensively produced hit in Call of Duty into 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 developers merely changed the names and numbers on the jerseys. A first-person shooter game such as Call of Duty was more complex, however, taking four years to develop. But Kotick cracked the code and started receiving annual revenues a decade before the age of streaming.

“They staggered the development so there were three games in development at once,” said Smithers. “That was the genius, really.”

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

“He really understood the right timing, not for the sake of satisfying Wall Street but in terms of having the patience to see high-quality assets,” said Colin Sebastian, an analyst at Baird.

Two years later, Activision merged with Blizzard, the studio behind PC hit World of Warcraft, then owned by Vivendi, in a transaction that valued the combined entity at $18.9bn. The group later gobbled up Candy Crush Saga-maker King for $5.9bn in 2015, giving it a hit in the fast-growing mobile market.

These acquisitions gave Activision major footholds in gaming for mobile, consoles and PCs. In its last quarterly filing, the Activision unit recorded almost $800m in sales, while Blizzard had $532m and King — the most profitable — had $651m in revenue. “That gives you a remarkably stable base,” Smithers said.

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

Employees have complained they are overworked, leading to high staff turnover. Staff from Blizzard-owned developer Raven Software have been striking since December. Quality assurance workers, whose responsibilities include checking for bugs and glitches in Call of Duty: Warzone, have been on strike for five weeks.

Some gamers complain that quality has declined as the company seeks new ways to monetise playing its titles.

Activision’s aggressive push to release updates every year has led to “franchise fatigue”, or, as Smith puts it, “running some of the games into the ground”. He said perceived drops in the quality of games such as the Tony Hawk’s series of skateboarding titles had led players to become suspicious of Activision.

Some gamers say they hope these practices will change under Microsoft should Kotick depart.

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


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