Amazon and Sony: Could They Join Forces in Gaming?

After Activision’s acquisition by Microsoft, Jefferies analyst Andrew Uerkwitz believes more blockbuster deals are ahead within the game industry. And who will be the main players making those deals? Amazon and Sony.

Game publisher Activision Blizzard’s acquisition by Microsoft was the largest transaction in tech history. Microsoft paid $68.7 billion paid in cash for the gaming giant, whose shares had been hammered over the previous six months (Activision had faced a slew of issues, including reports of mismanaged harassment allegations, worker walk-outs, and several delays in key game releases). According to Business Standard, once the deal is closed, Microsoft’s share of the gaming market will increase from 6.5% (as of 2020) to 10.7%.

Now Jeffries analyst Andrew Uerkwitz believes Amazon (the top cloud player) and Sony (one of the largest game publishers) are two companies most likely to make new acquisitions or strike new deals. What can investors expect in the coming months?

Figure 1: Big Moves In the Game Industry: Could Amazon and Sony Join forces?

Why Amazon?

According to data analytics firm Newzoo, the global gaming market generated $180.3 billion of revenues in 2021 — expected revenues for 2027 are $314.4 billion with an assumed 9.6% CAGR.

Being a well-established game developer with a long and successful track record, it’s not surprising that Sony is on Uerkwitz’ watch list. But what about Amazon?

Amazon has been trying to grab a piece of the lucrative game market as a game publisher. New World, its latest project,has produced satisfactory, if not outstanding, results. But Amazon’s real strength does not lie with its own gaming ventures but rather with AWS; cloud computing is expected to play a central role in the game industry and in the metaverse, and game publishers such as Sony and Nintendo are unlikely to build their own cloud infrastructures from scratch.

“When you talk about Nintendo and Sony, we have a ton of respect for them, but we see Amazon and Google as the main competitors going forward. I don’t want to be in a fight over format wars with those guys while Amazon and Google are focusing on how to get gaming to 7 billion people around the world. Ultimately, that’s the goal”, said Phil Spencer, Microsoft’s head of gaming and Xbox.

New M&A coming?

As the dominant cloud player, Amazon's best shot at overthrowing Microsoft’s reign is by closing new deals and making new acquisitions. And Jeffries’ Andrew Uerkwitz believes the Seattle-based company will start that sooner rather than later.

“We believe the other large publishers are likely acquisition candidates,” Mr. Uerkwitz said. “We do not expect there will be an over-the-top bid on Activision. If large tech is serious about interactive entertainment, the next few months will surely answer those questions. We view Amazon and Sony as the most likely to be acquisitive.”

Given Amazon's cloud dominance and Sony's game publishing resources, we personally believe it may not even be out of the question that the two companies join forces for future gaming or metaverse projects.

Nasdaq in free-fall

But larger market forces may prevent any acquisition sprees during the first few months of this year.

Macroeconomic issues — such as inflation fears and unease around the impact of a possible military conflict in Russia — are driving investors away from risky, high-growth companies and leading them towards more conservative investments.

That means that a fresh wave of M&As may not be in Amazon’s best interest — not in the short term, at least. When Microsoft announced its Activision acquisition, for instance, the market largely balked, and shares of MSFT dropped 2.6% (though ATVI, as the acquiree, soared 26% on the day of the announcement).