Activision Blizzard

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. Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Topics covered include: Blizzard’s founding in 1991 as "Silicon & Synapse” by recent UCLA grads Allen Adham, Frank Pearce, and Mike MorhaimeThe team’s first projects making ports for other games, including Battle Chess on the Commodore 64Early success on the Super Nintendo with Rock & Roll Racing and The Lost VikingsOrigin of the Real-Time Strategy game genre (“RTS”) and Blizzard’s fist mega-hit, Warcraft Blizzard’s crazy corporate ownership changes over the yearsDevelopment of further legendary game franchises like Diablo and Starcraft, along with sequels to Warcraft and the rise of the rise of player moddingEmergence 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 todayBlizzard’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: Ben: Dick Costolo on Vanity Fair’s http://www.vanityfair.com/news/2017/06/dick-costolo-twitter-trump Inside the Hive http://www.vanityfair.com/news/2017/06/dick-costolo-twitter-trump podcast http://www.vanityfair.com/news/2017/06/dick-costolo-twitter-trumpDavid: Nellie and Joe's 100% Natural Key Lime Juice https://www.amazon.com/Nellie-Joes-100-Juice-glass/dp/B00142EXG0/?th=1 (tip: buy in bulk from Walmart/Jet https://www.walmart.com/ip/Nellie-Joe-s-100-Natural-Key-Lime-Juice-12-oz-Pack-of-12/17198261)

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:03David Rosenthal?

  We're getting like professional actors on here.

• 0:06Ben Gilbert?

  I know. The human torch was denied a bank loan.

• 0:22Ben Gilbert?

  Welcome back to episode 40 of Acquired, a podcast about technology acquisitions and IPOs. I'm Ben Gilbert.

• 0:29David Rosenthal?

  I'm David Rosenthal.

• 0:31Ben Gilbert?

  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, 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.

• 0:58David Rosenthal?

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

• 1:21Ben Gilbert?

  Oh, yeah.

• 1:22David Rosenthal?

  Back in the day, the holding company that owned Ramada and Days Inn Hotels in the US, and then the, 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, but.

• 1:38Ben Gilbert?

  We will. We will.

• 1:39David Rosenthal?

  This is gonna be fun.

• 1:40Ben Gilbert?

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• 2:01David Rosenthal?

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• 2:22Ben Gilbert?

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• 2:44David Rosenthal?

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• 3:02Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you. All right, David, you ready to dive in?

• 3:32David Rosenthal?

  Well, let's, uh, 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 and Synapse by three college friends from UCLA, right after they graduated in 1991.

• 4:12David Rosenthal?

  And they had all studied computer science together. Alan Adam, Frank Pierce and Mike Morheim. And they 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. Like, 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 didn't really know what they were doing. They started porting other people's games from platform to platform. So 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.

• 4:54David Rosenthal?

  And that both let them 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. And so they did the, I believe, the first title they released was Rock and 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 in these guys, like, they are quirky dudes.

• 5:37David Rosenthal?

  And Rock and Roll Racing, I believe, was the first video game, at least the first console game, to feature like, actual, you know, music, like licensed music in the game. And it was a racing game and had cars with like, you know, lasers on them and rocket boosters and kind of like fun stuff. And then Lost Vikings, I think, I believe the plot of this was that three Vikings, like, from, you know, ancient Norse mythology, get kidnapped by like, an alien space pirate and they have to escape. And both of them are incredibly successful and they win a bunch of awards and really establish this tiny little game studio down in Southern California as a premier game

• 6:21David Rosenthal?

  developer in the early 90s.

• 6:23Ben Gilbert?

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

• 6:35David Rosenthal?

  Yeah, a shadow of what would be to come, but this is where gaming was at in the early 90s and you know, Super Nintendo, that was the big, 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 2, which is based on Frank Herbert's classic sci fi novels, the Dune series, which are awesome, by the way, and Dune 2, the game, I don't think becomes super, super popular, but it's the first real time strategy game, first kind of top

• 7:16David Rosenthal?

  down perspective, you know, 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 and Conquer franchise, which I totally remember playing too, as sort of a, you know, more modern military themed sort of, you know, competitor to what Blizzard would ultimately develop, which is Warcraft and Starcraft.

• 7:38Ben Gilbert?

  Yeah, and for listeners, we should demystify some of the acronyms and a real time strategy game is commonly known in the 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.

• 7:57David Rosenthal?

  Yep, so we will, we will get to the MMO in a second, but that was 1992, Dune 2 comes out and the Blizzard guys, they're fans of it and they start playing it and say, hey, you know, we should, 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 Warcraft, the first Warcraft, they in 1994, go through a couple of things. Well, first, they changed 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 company that has another software developer that has Chaos Studios. So they have to change again, and they settle on reluctantly Blizzard. And they had actually

• 8:41David Rosenthal?

  changed, did that second name change after they got acquired. So the first time that they get acquired is by a company called Davidson and Associates, acquires them for $10 million, which is huge for, I mean, these kids are, at this point, three years, I think, out of college.

• 8:57Ben Gilbert?

  David, it really feels like you never want to be acquired by an and Associates.

• 9:01David Rosenthal?

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

• 9:23Ben Gilbert?

  Oh, nice.

• 9:25David Rosenthal?

  Which I totally remember playing on my really early PC in my room growing up in elementary school, and my parents popped for me. I was like, oh, it's educational. That must be okay for kids. But this was, 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 end up happening, which we'll get into in a minute, that result 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

• 10:08David Rosenthal?

  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. It becomes a huge hit. You can 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, it is sort of like precursor to the local networking, not on the internet, you could 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.

• 10:54Ben Gilbert?

  Oh, is that like before, you know, the Xbox Live style?

• 10:57David Rosenthal?

  Yeah, so this is before.

• 10:58Ben Gilbert?

  You could like trick, tricked into thinking the WAN was a LAN?

• 11:02David Rosenthal?

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

• 11:23Ben Gilbert?

  These are desktop computers, right? Like, it's not like, I mean, I thought it was cumbersome enough bringing a, you know, little TV and Xbox. I think it was, it wasn't the 360 yet, playing Halo 2 and having.

• 11:35David Rosenthal?

  Yeah, yeah, yeah.

• 11:36Ben Gilbert?

  It's like, it was cumbersome enough to bring the, the console, but like a whole freaking tower.

• 11:40David Rosenthal?

  And people back in the day, I mean, I remember even in college, people doing this, which the internet was definitely around by then. So I don't understand why people did, but you know, lugging their like desktops from one another's rooms all together into a common room. To wire them up on LAN, I guess maybe to have lower latency.

• 11:57Ben Gilbert?

  Still happens.

• 12:01David Rosenthal?

  But, but yeah, Warcraft was one of the first games to really popularize this happening. So that's a big success. And then Davidson, the parent company says, you know, okay, great. And we give you a bunch more resources. They work on the sequel Warcraft 2, and that comes out in 1995, late 1995. And that becomes even a bigger hit. And this is the first time that it starts to like really strive the mainstream into getting into PC games. And I remember buying this, you know, like either CompUSA or Best Buy back in the day. Cause 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.

• 12:43Ben Gilbert?

  You used to have to actually pay for games like to buy them rather than get nickel and dimed along the way later.

• 12:49David Rosenthal?

  Yeah, I don't know what was better. Well, we'll get into this in a little bit with Blizzard's kind of come 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 a local area network. But the tools are more robust, and they can actually do 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, you know, many millions of fans of Warcraft, some portion of them that like it so much, they can design their own maps for the game,

• 13:31David Rosenthal?

  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 a major, major innovation.

• 13:43Ben Gilbert?

  You're talking about with the Warcraft III mods?

• 13:45David Rosenthal?

  Yeah, I'm talking foreshadowing Warcraft III mods. 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. And that spawns, you know, 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

• 14:30David Rosenthal?

  CUC International. And they buy Davidson and Sierra Online, which was another video game publisher, for about $1.5 billion, all in inflated internet company stock.

• 14:45David Rosenthal?

  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, you know, are cranking through this despite the ownership changes. In 1996, they actually contracted 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 loved 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

• 15:29David Rosenthal?

  going to be one of our core franchises. And 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 quote-unquote dungeon crawler genre. So this is sort of like the action RPG or role-playing game. And this had always been like a cornerstone of gamer and nerd culture. And I remember playing the Japanese RPGs like Final Fantasy and stuff on Nintendo and Super Nintendo growing up.

• 16:00Ben Gilbert?

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

• 16:06David Rosenthal?

  Yep, very much.

• 16:07Ben Gilbert?

  I see. Yeah, that makes sense.

• 16:08David Rosenthal?

  Very much. And this is like, you know, I'd say Diablo is the first or one of the first, you know, 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'd get to the end, you'd beat the boss, you'd save the world, and then the game's over. But with Diablo, it had this like insanely addictive leveling up system, and not just leveling system, but equipment system. So as you were playing through the game, you know, 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. And so even after you'd

• 16:50David Rosenthal?

  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.

• 17:03Ben Gilbert?

  Yeah, and for listeners, like, it's kind of crazy thinking that before that, games were completely finite. Like, we now know about, you know, World of Warcraft and these games that, you know, 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, you know, work collaboratively on, you know, teaming up to accomplish goals. And it just didn't exist until Diablo.

• 17:27David Rosenthal?

  Yeah, and this is, you know, 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. It's, you know, you want to play with and you can battle other people on the internet. But the bigger thing becomes this, you know, 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.

• 17:56Ben Gilbert?

  Yeah, pretty cool.

• 17:58David Rosenthal?

  So on the technical side, Blizzard had obviously 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 their games run on it. That is the like 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 publishers' 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.

• 18:41Ben Gilbert?

  Yeah, this really foreshadowed, you know, what every sort of game publisher who, or at least a lot of the 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 of every game that gets pumped out and control distribution because, you know, everyone already has Steam installed and that's where they go to browse games. And that screen real estate is incredibly valuable. Battle.net's the same way. Xbox Live really controlling the entire, all the API surface underneath all the games for, you know, a lot of the player management and matchmaking and all that. Really like paving the way for these other, um, other companies that would come later for what their product and business model look like.

• 19:22David Rosenthal?

  And so then, so that was 1997. And 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. And so CUC, which was the current parent company, merges with another holding company, internet holding company called HFS. And this is the company that owned the Ramada, and Howard Johnson, and Days Inn, and all these like, random hotel assets. The company

• 20:04David Rosenthal?

  gets renamed Sendent, and let's put a pin in that for a sec. We're gonna come right back to it. Immediately after that, Blizzard releases their next big title, which is Starcraft. And Starcraft just takes everything that we talked about with Warcraft and the success they'd had there, and Diablo, and starting to grow the whole gamer genre and bring more people into it. And Starcraft just like, 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 one and a half million copies right out of the gate. And it's basically Warcraft. It's a real-time strategy game like we talked

• 20:47David Rosenthal?

  about, but it's evolved. So the graphics are better. They have a sort of asymmetric view, which is sort of like a quasi 3D. It's kind of a three-quarters view down onto 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. And 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. So

• 21:21Ben Gilbert?

  And this is crazy important. Like this is the beginning of what we really see today in the esports world. Like you have nearly a third of the people who are watching esports in South Korea. It is the world epicenter for this. There is the, um, the South Korean government has rules and regulations around these live tournaments. I mean, it's a part of the public fiber of the company.

• 21:42David Rosenthal?

  Yeah. So

• 21:43Ben Gilbert?

  Or I'm sorry.

• 21:43David Rosenthal?

  Of the country. And this is, that's what we were getting to. This is the birth of, you know, 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, you know, relatively tiny country of South Korea that like television channels get devoted to showing StarCraft tournaments. People start like 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 they're just dedicated to their rows and rows of computers and you go there and you log in and you play StarCraft. And I've been to

• 22:26David Rosenthal?

  South Korea. It's a, is a really cool place. And, um, you know, our listeners that have been as well, you know, will be well familiar with this. And it's just one of the most surreal things you can imagine. And I went in 2013. So what's that? Like, you know, 15 years after it came out and it's still just as popular.

• 22:43Ben Gilbert?

  Crazy.

• 22:44David Rosenthal?

  Totally crazy. Um, so that happens. Blizzard is now enormous. And at the same time, I mentioned that the parent company has been rolled into this third holding company, Sendin. It 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. Like there was, you know, they're 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,

• 23:25David Rosenthal?

  and gets acquired by another French conglomerate called Vivendi, which started in 1853 as the Compagnie Generale des Eaux, uh, the National General Company of Water by imperial decree of Napoleon III. And it was like controlled all of the water utilities in, you know, most of France.

• 23:46Ben Gilbert?

  God, it is great, David, that you just spent all that time in France.

• 23:49David Rosenthal?

  I know.

• 23:49Ben Gilbert?

  It's really doing wonders for our pronunciation on the show.

• 23:51David Rosenthal?

  Literally preparing for this show.

• 23:54Ben Gilbert?

  And here, like, this is an unbelievable company history of just conglomerate to conglomerate, handing it off, rolling it into new divisions, 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 when, you know, after they bought Havas was actually buy Seagram's.

• 24:14David Rosenthal?

  Yep.

• 24:15Ben Gilbert?

  The, like, Seagram's.

• 24:17David Rosenthal?

  Like the gin.

• 24:17Ben Gilbert?

  You know, Seagram's, like, the beverage company.

• 24:18David Rosenthal?

  Which itself owned Universal Studios.

• 24:21Ben Gilbert?

  Yes. That's the best fact I've found.

• 24:23David Rosenthal?

  Amazing. I mean, and I, I mean, this, you know, is super personal throwback for me doing this and really fun because I, it was a few years later, but, 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, like, all these bankers were running around, like, you know, covering and going and talking to, you know, Vivendi, this French conglomerate, which owned Universal Studios, which made movies, obviously, and Blizzard, which was huge. And like, you know, trying to, you know, advise on these deals that were all happening. And, uh, you know, obviously it ended up happening with Activision, but, uh, so funny.

• 25:02Ben Gilbert?

  Yep, yep. It's funny, when I was reading through this, like, listeners, we were deciding whether or not we were going to sort of like 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 that part of the, like, for anybody who's read, like, the, the Old Testament, you skip over those parts that are like, so and so begat, so and so begat, so and so begat, so and so, and you're like, yeah, yeah, yeah, yeah. But, you know, it's, it's important to understand sort of the foundation of, like, they'd 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 on the distribution side, but as the developer studio over and

• 25:45Ben Gilbert?

  over and over again through all this, you know, corporate turnover.

• 25:49David Rosenthal?

  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 were saying, like, these guys are really not just best at spotting waves that are coming, you know, in terms of tech waves relevant to the gaming world, but like, they're actually generating waves. It was like,

• 26:17Ben Gilbert?

  Like executing on it. Yeah, yeah, yeah. Absolutely. And 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, you know, 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 discs 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, they're

• 27:00Ben Gilbert?

  sort of separate. And 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. And they do, or 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 is primarily as sort of that distributor, publisher, and capital source to fund these games.

• 27:20David Rosenthal?

  Yep.

• 27:21Ben Gilbert?

  All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is no longer the hard part.

• 27:35David Rosenthal?

  Yeah. The hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 27:49Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower.

• 27:59David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 28:17Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 28:33David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 28:50Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 28:59David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you.

• 29:10David Rosenthal?

  So we'll kind of accelerate here getting to the merger with Activision. But along the way, a couple of big things happened for Blizzard. First, Warcraft III comes out in 2002. And this is, when 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, the campaign editor that came with Warcraft III was even more robust. And you could do, you could really have sort of full control over the experience and it shipped just right with the game. Anybody could do this. And so people started making even more mods. It got really robust community for Warcraft III. And this one guy?

• 29:50Ben Gilbert?

  Yeah, David, I'm going to stop you real quick and say, why don't I propose, what if I were to build like a Warcraft III mod that 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, you know, the traditional map that we're going to play on.

• 30:05David Rosenthal?

  Build building.

• 30:07Ben Gilbert?

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

• 30:12David Rosenthal?

  Oh man, that'd be super cool. And like, you know, because Ben, you have, you know, the campaign editor that's just bundled in with Warcraft III, you can just do that. Isn't that really cool?

• 30:20Ben Gilbert?

  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?

• 30:26David Rosenthal?

  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. It's acronym, D-O-T-A. And then maybe it would just like transform the whole industry.

• 30:39Ben Gilbert?

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

• 30:47David Rosenthal?

  Well, it does feel that way. So Blizzard, you know, they really mean it when they're giving everybody control. And so, you know, everything we just described, of course, did happen. And in 2003, a member of the mod community named Eul, I mean, be pronouncing that wrong, E-U-L, he creates a mod app 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. I mean, this is the roots of League of Legends, of Dota 2, of Heroes of the Storm, which Blizzard does itself. And it all just starts in the mod community.

• 31:26Ben Gilbert?

  Yep. 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, you're going to be like, your mind's going to be blown by that these are, number one, separate games. Number two, made by two completely different companies. Like, you look at these and you feel like they're indistinguishable. And then obviously you play them and 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.

• 32:03David Rosenthal?

  Well, and number three, your mind would be blown by Blizzard has no involvement with either League of Legends or Dota 2. But they really mean it. I mean, it was the IP that these people, you know, created. And neither of them are the actual IP of Defense of the Ancients, the first initial mod.

• 32:21Ben Gilbert?

  There's a long and very fascinating history that you can look at 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. And so they started creating League of Legends and then ended up founding the company Riot. Yep.

• 33:00David Rosenthal?

  Well, we'll come back to all of that in 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, quote unquote massively multiplayer online RPGs, MMO 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.

• 33:43David Rosenthal?

  And so to 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 on 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. Yeah. I mean, it's the best business model innovation to happen in games, you know, since games.

• 34:19Ben Gilbert?

  And they largely had it all to themselves. I mean, 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.

• 34:28David Rosenthal?

  Yep. 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. The reason 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. And so it really was brilliant that all this money they were making, of course, they were investing to keep the game, you know, running essentially, but the content and the experiences were coming from other people who were playing the game.

• 34:59Ben Gilbert?

  Wow.

• 35:00David Rosenthal?

  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.

• 35:15Ben Gilbert?

  Of course.

• 35:15David Rosenthal?

  The water company, the French water company, no less. No offense to France, of course. I love France. But they announced 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 assigning a close to $11 billion value to Activision, which is a 31% premium to where they had 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.

• 36:00David Rosenthal?

  There's just so much corporate transaction history around this company. Like, 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. This makes the structure more complicated, not even, not simpler.

• 36:25Ben Gilbert?

  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, you know, addressing real quick. Who are these Activision guys? And, uh, and you know, you know, why are they worth approximately? What did we decide?

• 36:40David Rosenthal?

  Eleven billion dollars.

• 36:41Ben Gilbert?

  Eleven billion dollars.

• 36:42David Rosenthal?

  Activision is a long time, uh, video game publisher conglomerate. They own some studios, uh, the Guitar Hero games. They publish those, all those cheap pieces of plastic you bought in the mid 2000s.

• 36:54Ben Gilbert?

  Call of Duty. Crash Bandicoot.

• 36:55David Rosenthal?

  Crash Bandicoot, Skylanders, which, you know, your kids probably play with now. Tony Hawk, all this stuff. And Activision's run by a guy named Bobby Kotek, who's been, I believe he actually bought the company himself in the super early days of the gaming industry in the eighties or nineties. And he'd been CEO forever and is just a total grizzled veteran.

• 37:16Ben Gilbert?

  Yep, exactly. And he's known to be, you know, passionate, ruthless, uh, true capitalist. Someone that, that a lot of, a lot of these articles described him as, um, the guy that gamers loved to hate.

• 37:27David Rosenthal?

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

• 37:32Ben Gilbert?

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

• 37:57David Rosenthal?

  So much business model.

• 37:58Ben Gilbert?

  Sorry, third-party game publisher. And it's worth noting that all those, those franchises that we listed off earlier have not one, but each one with a variety of, of development studios that Activision worked with to create those games and create all the sequels for those games.

• 38:13David Rosenthal?

  So, all right, let's, uh, let's bring this on home. I'm, I'm exhausted already.

• 38:19David Rosenthal?

  So when the merger happens Blizzard is projecting in 2007 1.1 billion dollars of revenue, 520 million dollars of operating profit. They have about 10 million subscribers on World of Warcraft at that point. Since then, a bunch of stuff happens. They released Starcraft 2, they released Diablo 3, they released 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 and went through rehab and I'm out of it now.

• 38:51Ben Gilbert?

  No, David, no, it's not. It's completely different. Why would you say such a thing? That's not...

• 38:56David Rosenthal?

  Yeah, right. Everybody respects IP in the video game world, or not.

• 39:00Ben Gilbert?

  Right, right. Well, it's an interesting point. I mean, 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 a very Disney-like way with their IP, and that's 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, and the, I think it's only like a 15 or 20 person, or initially it was like a 15 or 20 person development team, that just built Hearthstone in Unity, like, they have incredibly high margins on the, what are effectively the de minimis costs of creating a game like Hearthstone.

• 39:40David Rosenthal?

  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 stake, the 63% stake that Vivendi owned in it. They raise external capital, including from Tencent, which owns Riot Games, which makes League of Legends now. Interesting.

• 40:00Ben Gilbert?

  So wait, Tencent wholly owns Riot Games?

• 40:04David Rosenthal?

  I believe they own the majority of Riot Games at this point. Not 100%.

• 40:09Ben Gilbert?

  But then also have a minority share here in Blizzard Activision?

• 40:13David Rosenthal?

  Yes, they do.

• 40:16David Rosenthal?

  And net result of a few of those buybacks is Vivendi now owns just under 6% and 94-ish percent of Activision Blizzard is a publicly traded company. So, you know, no, no investment advice on the show, but if you want to invest in a publicly traded gaming company, there are basically two. There's Electronic Arts, there's Activision Blizzard. They are the main, you know, pure play gaming companies out there.

• 40:41Ben Gilbert?

  Yeah. And this is pretty interesting to make a point on. So, you know, I don't want to take us too far forward, but as a quick flash forward, you know, esports is enormous today. There's over 300 million people a year that can 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 tight lipped and sort of their own very special company. And so really the only way that public company investors can really

• 41:14David Rosenthal?

  Get a exposure to this.

• 41:15Ben Gilbert?

  You know, bet on this wave is, is through Blizzard Activision.

• 41:18David Rosenthal?

  And I think it, you know, 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. But so Blizzard finally gets in the act on MOBAs itself, the League of Legends style, Dota style games. They released Heroes of the Storm in 2015, which gets some market share, but is still less than Dota, Dota 2 and League of Legends. But in January, two things happened 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 and

• 41:56Ben Gilbert?

  Right. It's basically making the bet that, you know, competitive video gaming is going to start to look more and more like real sports and 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.

• 42:11David Rosenthal?

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

• 42:20Ben Gilbert?

  Yeah. David, have you played Overwatch?

• 42:22David Rosenthal?

  I'm scared. This stuff is like, we should put a warning label on this episode. Like, this stuff is like

• 42:28Ben Gilbert?

  Highly addictive.

• 42:29David Rosenthal?

  Opium, like it is opioids. It is like, if you start playing this stuff, you will get addicted. It is designed to addict you and you will, you know, spiral into a vortex. So like, you know, use with caution.

• 42:41Ben Gilbert?

  And more and more so now, unlike, 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, you know, not only fun to play, but are optimized for, you know, basically the top of the funnel. Like, how can we get people to enjoy watching this as a competitive sport so that they'll eventually?

• 43:02David Rosenthal?

  On Twitch and YouTube and elsewhere. Yep.

• 43:05Ben Gilbert?

  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.

• 43:14David Rosenthal?

  Yep.

• 43:15Ben Gilbert?

  So everything that is successful-

• 43:16David Rosenthal?

  Like Halo meets League of Legends.

• 43:17Ben Gilbert?

  Exactly. So you're on that very same arena-style battlefield that has a very capture-the-flag mechanic to it, but you, 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.

• 43:36David Rosenthal?

  And not just an attempt, like, a success. Like, 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. And what's super interesting about that is Blizzard made, I would love to, 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 Dota 2 and the other MOBAs are completely free to play. You can log on, you can play them, you can compete, you know, at a level playing field with everyone else without paying a dime. But if you want to get special, you know, sort of aesthetic items for your character,

• 44:20David Rosenthal?

  or special characters or whatnot, you have to pay money to get those sort of add-ons. They don't really affect, you know, your skill at the game, but they like, you know, look cool. And that's been a hugely successful business model. I mean, again, billions of dollars of money made from, from these things, just from sort of, you know, 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 gotta 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 Magic the Gathering, as sort of like, you know, booster packs you can buy for your, for your characters.

• 45:05David Rosenthal?

  And so they make money on that, too. And yeah, totally.

• 45:08Ben Gilbert?

  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 that over and over again. And 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 of observations out of them. The first one is that there's incredible 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% of the monthly esports hours viewed on Twitch, which incredibly is exactly the same percentage as Starcraft 2.

• 45:52Ben Gilbert?

  Like that is an old, old game that is still highly revered and

• 45:57David Rosenthal?

  Seven years old at this point?

• 45:58Ben Gilbert?

  Yeah, everywhere, but still a lot in South Korea. And if you look at the two biggest games, we were mentioning these MOBA style games. Seven year old League of Legends still commands 23.3% of the viewing hours. And Dota 2 has 32.2%. And it's like, you know, there's these newer games that are coming out that are really tuned to take advantage of this wave. But what 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.

• 46:26David Rosenthal?

  Well, I think this is, we'll get into this more in tech themes, but starting really with the modding community for Warcraft 2 and Starcraft, then Warcraft 3, 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, 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, you know, sort of startup company like business models to the game space.

• 47:01Ben Gilbert?

  Yep. And it actually, to make another parallel to the movie industry, these games, when they come out, are making as much money as movies are when they come out, but they have an incredible tail of the ability to continue making money. So like a Star Wars comes out and it'll be, I forget if that was like a billion dollars or $2 billion or, you know, something huge. And then, you know, 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 $1 billion into retail. Like, 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.

• 47:36David Rosenthal?

  Yeah. So, you know, to wrap it up, at year end 2016, at the end of last year, Blizzard, 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.

• 47:53Ben Gilbert?

  The growth on that huge number is insane.

• 47:56David Rosenthal?

  Yep. Did over $1 billion 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 one and a half times the amount of time that people spent in Snapchat. So like, acquired listeners, if you think that, you know, this episode is like, "Man, this is a lot of crazy games company stuff, like this is small fry, why is acquired covering this?" Like, nope. This company is, had one and a half times the total attention of Snapchat last year.

• 48:39Ben Gilbert?

  And it's distributed in such a different way. Like, when you think about Snapchat bragging about, what was it, 20 to 25 minutes a day in Snapchat? It's 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 a big, like a big League of Legends player, and someone will say, "No, I only play like two or three hours a night." And you're like, "What?" And then you talk to the people, they're like, "Yeah, I'm really into it. Like, I play probably six, eight hours a day."

• 49:04David Rosenthal?

  Yeah. Well, then you have professionals that, you know, literally, it's their job.

• 49:07Ben Gilbert?

  Yep, yep.

• 49:09David Rosenthal?

  It's, it is crazy. It makes Facebook look like, you know, some app that you, you know, open like, you know, once a month.

• 49:17David Rosenthal?

  Yeah, it's true.

• 49:20Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 49:33David Rosenthal?

  Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 49:49Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 50:04David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 50:28Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 50:47David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 51:17Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at logora.com/acquired and just tell them that Ben and David sent you.

• 51:42David Rosenthal?

  All right. Should we move on to category?

• 51:45Ben Gilbert?

  Yeah. So I'd like to do category a little bit different today. I'd like to do a little bit of discussion for beforehand of sort of like, you know, why did this merger happen? Like, what did they see in each other? And, you know, why did Activision sort of make this play to make it happen? Because, you know, Vivendi Games, which Blizzard probably wanted Activision's kind of marketing and distribution. And Activision, obviously, you know, looked over and Blizzard had hit after hit after hit of online games, games that really were, you know, they were not these sort of console games that you'd play through once and be done. I mean, it was, and 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, you know, so it's really trading sort of marketing and distribution in exchange

• 52:29Ben Gilbert?

  for the ability to do these MMORPGs.

• 52:33David Rosenthal?

  Well, and 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, you know, monetized over time and things that grow and don't, you know, fade, which, you know, in the, the knock on the video game industry has always been, oh, it's a hits-driven business. It's like Hollywood, right? And like, to a certain extent, it still is in that before a game comes out, you don't really know how well that game is going to do. But with what has happened and this innovation in the industry, once it has an audience and is working,

• 53:15David Rosenthal?

  it doesn't fade, it grows, you know, like, and that's, I think, what Activision saw. I have to imagine what Activision saw in Blizzard.

• 53:25Ben Gilbert?

  Yeah. And for Blizzard, it's kind of a hedge, right? It's the ability that, you know, 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, you know, well-funded, sort of, you know, cushy way to smooth out the hits-driven business.

• 53:46David Rosenthal?

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

• 54:12Ben Gilbert?

  Yep, yep, yep. All right. So I'll take a stab at acquisition category and call this a business line. This is one that, you know, 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, um, 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, the secret sauce within Blizzard allows it to happen over and over again.

• 54:40David Rosenthal?

  Well, and I think the proof's 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, you know, business line as a separate segment. So that's true. But I think there is also an element though of, I forget what we category we assign to all of our Disney series of acquisitions, but there's definitely a Disney element here too.

• 55:03Ben Gilbert?

  Yeah, it feels like Disney buying Pixar, right?

• 55:05David Rosenthal?

  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, you know, merch and other, you know, just like the Disney flywheel got created around Disney IP, you know, being Mickey and, and others over time and all the movies, you know, a similar thing is starting to happen around these franchises at Activision Blizzard.

• 55:28Ben Gilbert?

  Yeah, absolutely.

• 55:30David Rosenthal?

  All right. What would have happened otherwise? I feel like we talked about that, you know, sort of a little bit just now. And I can't imagine that Blizzard was super happy, you know, being part of Vivendi.

• 55:39Ben Gilbert?

  Right, right.

• 55:40David Rosenthal?

  And yeah, they would have continued, you know, creating and doing their thing. But seeing all of the, you know, it almost feels like the fruits of the labor that resulted from all of the game and product driven innovations throughout the 90s and kind of 2000s 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.

• 56:04Ben Gilbert?

  Yeah. And here's the question, coming at it from both sides. One, on the Blizzard side, you know, would they have produced something like Overwatch without Bobby Kotick? Like, would, would we see, you know, these very aggressive, you know, business first games rather than sort of like?

• 56:21David Rosenthal?

  Yeah.

• 56:22Ben Gilbert?

  Creative.

• 56:22David Rosenthal?

  And I mean, make no mistake, it is aggressive. Like, they are monetizing both ways.

• 56:26Ben Gilbert?

  Yep.

• 56:27David Rosenthal?

  You pay for it upfront and you have microtransactions over time.

• 56:30Ben Gilbert?

  Yep. And they're aggressive about building the ecosystem around it. I mean, the buy-in to have an Overwatch team in the Overwatch League, the rumors are that it's like a $20 million buy-in per team.

• 56:40David Rosenthal?

  Wow.

• 56:41Ben Gilbert?

  They're building up this game and the ability to buy a franchise in, you know, 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. And I think that, you know, this is of 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.

• 57:01David Rosenthal?

  Yep. It might be interesting. And again, I don't think I know enough about the industry to really speculate here, but, um, you know, Valve and Riot, Valve obviously does many things within gaming, as we've talked about in episodes past, but with Dota 2 that they control and then Riot with League of Legends, they've become huge companies and so powerful. But had Blizzard not been, you know, kind of put into its own sort of independent gaming-focused company with Activision, maybe Valve and Riot would be even more powerful, you know, and Blizzard wouldn't be even part of the picture.

• 57:31Ben Gilbert?

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

• 57:44David Rosenthal?

  Yeah, really, they did. I mean, and it's not to say that, 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, you know, like you're 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, you know, a window and then it fades. So like, they still would have done fine, right? But all the growth and the innovation and the better business model that Blizzard has, they would have missed out on.

• 58:21Ben Gilbert?

  Yep. 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, 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, you know, had a, as we, 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, you know, it was, it was killed. And the question is, in my mind, if it were just Blizzard, like, would they have believed in it and persevered through it and shipped it anyway? Or, you know, would the expensive project have, have just, would they have continued to pour money onto it and would it have seen the light of day? I don't know, but I speculate that that has more to do with Activision than Blizzard.

• 59:05Ben Gilbert?

  And then the, 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. And I'd also love to hear-

• 59:13David Rosenthal?

  Well, I don't know if it was a flop. I mean, it was, I think it was successful, but just not to the degree of these other franchises.

• 59:19Ben Gilbert?

  Yeah. And I mean, the stakes are high, are so high now that if you're not like one of these other franchises, you just don't matter.

• 59:25David Rosenthal?

  Yep.

• 59:25Ben Gilbert?

  Right? Like in these businesses that have incredibly high capital requirements and then incredibly high revenues after that.

• 59:31David Rosenthal?

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

• 1:00:09Ben Gilbert?

  Yep. Great point. Tech themes?

• 1:00:11David Rosenthal?

  Tech themes. Oh, man. Per usual. I think we've covered a lot of them.

• 1:00:16Ben Gilbert?

  Yeah.

• 1:00:16David Rosenthal?

  You know, I think for me, there's, we've talked about a lot on this show already, but one that I think is super powerful is just this idea of creating, enabling, building and then creating, enabling a platform for users of all types of it to then be creative themselves. And if you can execute that well in whatever domain and essentially create a marketplace around-

• 1:00:44David Rosenthal?

  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 released. I mean, it literally created this, you know, industry that is tens of billions of dollars now in combined in esports and MOBAs. And I think about in other, you know, I think Apple was like this in a way, like, you know, the industry that was created around software, you know, was really Apple enabling. And then next, you know, in object oriented programming, enabling people to, you know, build things and release it on the platform or iOS or, you know, even sort of like Square

• 1:01:29David Rosenthal?

  in a way, enabling people to go into business and be merchants or Stripe.

• 1:01:33Ben Gilbert?

  Yep. I think so. Another big one that we keep touching on is really his concept of sort of the IP flywheel that Blizzard released the Warcraft movie recently. And it'll be interesting to see that, you know, how well they're able to parlay the IP from these games into, you know, physical locations, into cinema, into TV shows, into toys. You know, 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, you know, these games are doing for the, you know, 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, you know, the characters in their universe.

• 1:02:16David Rosenthal?

  Yeah. Well, and you can start to see the pieces falling into place with, you know, the Major League Gaming acquisition and the analogies to Disney and all of the assets Disney owns that are part of its flywheel. You know, and I'm thinking in particular of ESPN, you know, the challenge, I think, for Blizzard is, and Activision Blizzard is, is, you know, they don't own Twitch, right? You know, Amazon owns Twitch and is Twitch the ESPN here, you know? And I think that obviously the dynamics will be slightly different as it's a different world, but, you know, the- As we've pointed out throughout the show with as they sort of were late to the game with MOBAs, you know, sort of laid the groundwork for the MOBA genre to emerge, but then didn't participate

• 1:02:57David Rosenthal?

  in 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'll be interesting to see like, do they continue trying to build them, you know, in-house? Do they buy things? I wouldn't be surprised at all to see, you know, more acquisitions coming down the pipeline for Blizzard.

• 1:03:17Ben Gilbert?

  Yeah, it's worth noting, listeners, they also bought King,

• 1:03:20David Rosenthal?

  Yeah, right, of course.

• 1:03:21Ben Gilbert?

  maker of Candy Crush for what? It's like

• 1:03:23David Rosenthal?

  Close to

• 1:03:23Ben Gilbert?

  5.9 billion dollars.

• 1:03:25David Rosenthal?

  Yep.

• 1:03:26Ben Gilbert?

  And so their, 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. And 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, in the world of MOBAs at all.

• 1:03:52David Rosenthal?

  Yep. Yeah, the King one is curious. Well, well, we'll have to do another episode on it at some point, but

• 1:03:56Ben Gilbert?

  On King, yeah, yeah.

• 1:03:57David Rosenthal?

  You know, the quick take, again, not being an expert on the space and not having done the research is it doesn't feel as lasting or transformative or sort of future wave looking as Blizzard. Um, you know, but anyway, another topic for another day.

• 1:04:12Ben Gilbert?

  Yep. And I got one more.

• 1:04:14David Rosenthal?

  Hits just keep on coming here. We're a hits-driven business at Acquired.

• 1:04:17Ben Gilbert?

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

• 1:04:22David Rosenthal?

  It is not true.

• 1:04:23Ben Gilbert?

  And the reason it's not true is really awesome. The nature of podcasting is that when people subscribe, they're sort of pushed 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, you know, listeners of Acquired know that a new episode comes into your podcast feed every time. You don't have to get re-acquired as a customer and it really helps keep longevity around. So, cool thing about podcasting as an ecosystem. And I think, David, Probably do to do a podcasting ecosystem part two here at some point soon.

• 1:05:02David Rosenthal?

  Yeah, we should do a follow up.

• 1:05:03Ben Gilbert?

  We should. Alright, so the one more that I'm gonna amend, I wrote in my notes, the decreasing power of distributors in the internet era, but it's really the changing nature of 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. Like, once they establish a customer relationship once, and they have a battle net, 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, they actually, you acquire a customer once, and you can retain them for a long time. It really inspires more

• 1:05:45Ben Gilbert?

  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. And so, I look at this, like, Activision sort of had to make a play into the content world, because, you know, if they were, not that they were dumb pipes, like a Verizon or something, but like, or the way a lot of people think of Verizon, but not that they were just, you know, 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 the, it almost gets into aggregation theory here, where, you know, all of video games are not aggregated into a single place, the way that all of, you know, information and advertising is starting to get aggregated into Facebook. It's still kind of fractured among multiple

• 1:06:30Ben Gilbert?

  game publishers, but you really do see this incredible concentration of power, because distribution is done differently now, and it becomes winner take most.

• 1:06:39David Rosenthal?

  Yep, aggregation theory.

• 1:06:41Ben Gilbert?

  Hard at work. Alright, should we grade it?

• 1:06:43David Rosenthal?

  Let's do it.

• 1:06:45Ben Gilbert?

  Alright, so listeners, the way that, you know, 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, and I think the framework that we're gonna use is the combined enterprise value, like, far down the road, so let's say the 2017 combined enterprise value, more than The combined enterprise value, or I'm sorry, the separated enterprise value. So put 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 value destructive?

• 1:07:27Ben Gilbert?

  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 2Xed on their own? And David, what do you think?

• 1:07:52David Rosenthal?

  Yeah, 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, I mean, this merger happened in 2008, so almost 10 years ago, and that they've only grown kind of 2X since then.

• 1:08:30Ben Gilbert?

  I mean, yeah.

• 1:08:30David Rosenthal?

  I mean, now 2X on a huge base, like adding $20-plus billion of market cap. Like, that's not easy to do, for sure.

• 1:08:38Ben Gilbert?

  What if I would, I mean, the years are a little loaded, but what if in 2008, I had put $19 billion into an index fund?

• 1:08:45David Rosenthal?

  Yeah, right. Or $19 billion into Apple or Facebook. You know, well, you couldn't have done Facebook then. But I'm actually a little surprised that the growth hasn't been larger. I mean, think about, like we talked about, this is one and a half times Snapchat in terms of engagement. And Snapchat itself is a $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...

• 1:09:27David Rosenthal?

  A minus I'm going to go with just because I do think it would have been really hard to do this value capture and some of the business model and pricing decisions that they've done, you know, around the product innovations separately. But I'm, but it's a, you know, A minus question mark from me, given that I'm just a little puzzled on the finances.

• 1:09:51Ben Gilbert?

  Yeah, I've been a little, 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 when, 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 up otherwise. And then how other competitors were performing. So it is probably worth noting that they, they're really the biggest sort of gaming company. They became the behemoth in the 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-

• 1:10:29David Rosenthal?

  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.

• 1:10:38Ben Gilbert?

  Exactly. But I'm like, thinking from a growth perspective, I mean, they were started seven years ago, like they were started after this transaction. And I feel like Blizzard Activision or Blizzard let a huge amount of value creation go elsewhere. Like, I think that sure, there was a lot of goodness created by combining these companies, but I can't believe that-

• 1:10:55David Rosenthal?

  They actually, it actually has not been, you know, anywhere near a flawless execution.

• 1:10:59Ben Gilbert?

  No, no. And I don't know, you 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 mean, I think that the way that the future is going, 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 a primarily capital and distribution-

• 1:11:27David Rosenthal?

  Twitch or Riot, you know?

• 1:11:29Ben Gilbert?

  Yep. Yep. And so, uh, you know, I'll go with a B minus. Like, I think they did great, but like, our bar on the show is not, you know, 2 point whatever X-ing in 10 years.

• 1:11:41David Rosenthal?

  Great point. Okay. 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 they have, it's only 2 Xed in 10 years, right? But, but 2 X-ing on $20 billion is really hard. I mean, you're talking $20 billion of value creation. And it sounds trivial when you say 2X, you know, over 10 years and for us in startups and venture land, like, you know, but 2X-ing, you know, on, on that is, is really, really hard. So, 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.

• 1:12:25Ben Gilbert?

  And what we're not considering today is how well positioned they are. So, you know, let, let's say that their bets are right and that Overwatch is the franchise of the future, that becomes the competitive sport that everyone's watching, teams are paying $20 million for these spots, um, 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 setup for the future. So I guess stay tuned for another episode in three to five years. But yeah, I think we've set our pieces.

• 1:12:56David Rosenthal?

  All right. Whew. That was a, that was super, both super fun and exhausting. It's funny, in the research, you know, I was doing for this and watching a bunch of videos and reading articles and like, all of these pieces are like, well, here's the corporate history, you know, go, if you want to take a nap, like read through all this and like, uh, man, I get it now, having just done it. Like even for, by acquired standards, like this stuff is crazy.

• 1:13:21Ben Gilbert?

  Yep, totally agree.

• 1:13:22David Rosenthal?

  All right, what's your carve out?

• 1:13:24Ben Gilbert?

  Carve outs? All right, so my carve out is Dick Costolo appearing on a podcast on at Vanity Fair called Inside the Hive, and it's Twitter's former CEO talks about Trump's midnight tweets. And I love Dick Costolo, like, 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. And, you know, 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, highly recommend listening to that podcast.

• 1:14:09David Rosenthal?

  That's awesome. Mine, 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, but, so I haven't had much time for, you know, media consumption or anything, but haven't had much time for anything. But Jenny and I had our annual summer bash, you know, backyard party last weekend. And the cocktail that we served, because we always have a cocktail at our parties, was mint margaritas. And, and the problem with margaritas for the summer, you know, is they're great, but you need a bunch of lime juice. And that's like, really

• 1:14:53David Rosenthal?

  exhausting if you're making, you know, 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.

• 1:15:19Ben Gilbert?

  Wow.

• 1:15:20David Rosenthal?

  Key pro tip.

• 1:15:22Ben Gilbert?

  Yeah, I think we found our next sponsor. Should reach out after this and let them know the first one's free.

• 1:15:28David Rosenthal?

  Really, you know, audience overlap there. Tired.

• 1:15:32Ben Gilbert?

  That's right.

• 1:15:33David Rosenthal?

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• 1:15:40Ben Gilbert?

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• 1:15:50David Rosenthal?

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• 1:16:11Ben Gilbert?

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• 1:16:23David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 1:16:34Ben Gilbert?

  Thank you so much, and we hope you have a great day.

• 1:16:36David Rosenthal?

  We'll talk to you soon.