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People may be flooding into vertical integration, though the history of that isn’t great. (Look at AOL/TimeWarner or Verizon/AOL/Tumblr/Yahoo) All it takes is

People may be flooding into vertical integration, though the history of that isn’t great. (Look at AOL/TimeWarner or Verizon/AOL/Tumblr/Yahoo) All it takes is missing one generation and the house of cards gets written down. Someone can create the next generation blockbuster for a lot less than $69bln. To argue against myself, they’ve become a lot better at picking trends since Balmer left too.

brightball 5y ago
It probably means more to keep the Blizzard catalog off of Oculus than anything else. IMO many games in their catalog would be ideal in that environment and keeping them off of it goes a long way towards buying time.
luckydata 5y ago
Nah, their model is different. They are building a Disneyland-like experience, where the public pays to "be there" and the attractions always change. Never been done before.
- awill 5y ago
  Exactly. They're going for quantity to ensure even if a bunch of stuff fails, they'll get a few hits. Sometimes all you need is a few hits.
- mathattack 5y ago
  That type of closed garden seems more like Apple, no?
  - monocasa 5y ago
    Microsoft has been understandably eyeing that 30% on all digital goods sales Apple gets for years now. They missed the boat on the Windows store, but they'll do just about anything to keep a similar financial structure on the Xbox side.
no_wizard 5y ago
I think vertical integration tends to win when the floor is built atop of commodities. The new consoles have similar hardware[0] and it really comes down to allocation of those hardware resources, which makes first party studios ways to differentiate your product from the competition, as you can justify the extra cost to make sure your first party console is optimized for in its unique ways, where cross publishing houses don't always do that, for example. This can differentiate gaming experience, even for titles that are cross platform, if one is optimized for say, the Xbox ecosystem, but its PlayStation port does not have the same kind of optimizations. How much this matters may remain to be seen, for now. Having highly optimized flagship titles though is what makes these vertical integrations so appealing in this market, in my estimation. [0]: https://www.tomsguide.com/news/ps5-vs-xbox-series-x https://www.tomsguide.com/news/ps5-vs-xbox-series-x FWIW I don't endorse everything in the link to toms guide, I just wanted a reliable source for hardware specs
bravetraveler 5y ago
Intel has also been feeling the pain of vertical integration. Like with most things, double edged sword. They fabricated their chips - not sure if they still do. Initially this was great, they owned the equipment and got things 'at cost'. However, they had trouble refining their tooling to get < 14nm for several generations. This made them less competitive for a while, while having a pile of expenses a more lean design house wouldn't have. They'll surely be fine, but it's not the same sprint they've had for quite a while.
- babypuncher 5y ago
  Intel still fabricates their own chips. Though notably, their new dedicated GPUs are made by a third party. Two years ago I would have expected this trend to continue and for Intel to stop in-house fabrication, but with their new CEO and some prodding from the US government, they are now investing many billions of dollars into new fabs.
mdasen 5y ago
AOL/TimeWarner was a failure because because it valued AOL at $200B and TimeWarner at $164B. AOL was just way over-valued. It wasn't really an integration failure so much as paying too much for something. If Time Warner had bought AOL for $2B, it would have been fine. The problem is that they merged valuing AOL at 100x that when it wasn't worth it and later sold for $4.4B to Verizon. Likewise, Yahoo/Verizon bought a lot of properties at inflated values. Tumblr wasn't worth $1.1B, but Yahoo wanted to buy one of the hot up-and-coming properties to feel relevant. I think the big issue is the price one is paying and whether one has a plan for the purchase or if the purchase is more "but if I don't make a big move, what am I doing? I can't go wrong following trends, right?" For example, AOL/TimeWarner was a situation of over-paying because TimeWarner was afraid that the internet was going to eat the world and they needed to stay relevant. AOL was so hot and it's easy to get swept up in the moment thinking "I need to get on board now or I'll miss it!" Likewise, Yahoo feared becoming irrelevant as Google took over the internet and thought buying Tumblr would make them the hip forward company once again. Activision Blizard seems like a reasonable add-on for Microsoft. $69B isn't that much money for it given it would represent a P/E ratio of around 26. Apple's P/E is 30, Amazon 62, Microsoft 34, Google 26. So they aren't paying an absurd amount given Activision's profits. Even if they did no integration or strategy, Activision could simply continue doing its thing and contribute favorably to Microsoft's bottom line. With a tiny bit of strategy, it seems clear Microsoft could get even more value out of the company. Maybe a few Xbox exclusive titles to push their console business. Maybe some stuff for their game streaming service. If Disney has shown us something over the past few years, it's that owning IP that people like allows you to keep spinning new versions of that IP. Activision has lots of that kind of IP in the gaming space so Microsoft should be able to use that to its advantage. I think there's a big difference between buying Activision at a price whose P/E ratio is better than your own and where there are clear strategies that could offer you even more value compared with the "omg, I'm getting left behind! I'll pay anything you want" panic purchases/mergers of other companies.
- dustintrex 5y ago
  Tumblr could easily have been Instagram, Yahoo just had no idea what to do with it and completely missed the boat on mobile. A lot of people thought Zuck was insane when he paid $1B for Instagram, and I think we'd all agree that bet paid off pretty handsomely.
babypuncher 5y ago
At least for Xbox, the biggest positive change in leadership has been the replacement of Don Mattrick with Phil Spencer in 2014. Xbox as a brand was in real bad shape when he took over.
- johnebgd 5y ago
  Don Mattrick might as well have been a plant by Sony he was so effective at destroying all the good will Microsoft had built with gamers during the 360 era. Introducing Xbox One as a media center with no ownership through physical media was a disaster. Then again, Xbox branding is a total disaster anyway. The Xbox Series X vs the Xbox One X vs the Xbox 1 are all very different things but aren’t that far apart in name…
  - pharmakom 5y ago
    Halo 3 and Gears of War were must have games of that generation and the big hits from Sony (e.g. Last of Us) didn’t come till a bit later. These games were so successful that many looked past the RRoD and loved the 360. In this context I think buying studios makes sense. I wonder if CoD will become XBox / Windows exclusive?
  - babypuncher 5y ago
    Don't forget one of the Xbox One's key innovative features: tight integration with your cable box. You know, that worthless piece of hardware tied to a $100/mo subscription that your Xbox 360 helped you replace entirely with its Netflix and Hulu apps. When they showed that off I knew nobody at Xbox had a single clue who their audience was.
dawsmik 5y ago
Gasprom, Dell and Tesla may be some examples of companies that have done will with vertical integration.
- AnthonyMouse 5y ago
  Tesla is kind of vertically integrated, but mostly because they were the first to make a popular electric car, so adequate supply chains for those components didn't previously exist. It remains to be seen whether it's still an advantage when most of the industry is making electric vehicles and competitive alternate suppliers for those components are common. Dell installs a Microsoft operating system on SSDs from the lowest bidder and puts them in a Foxconn motherboard with a CPU from AMD or Intel. Gasprom is a majority state-owned company in Russia. This can't really be an example of anything to do with a free market. The typical example is Apple, because they're currently very profitable. But they've been doing vertical integration for decades and their history is full of instances of almost going out of business. The previous "see how well vertical integration works" example was IBM.
  - tyfon 5y ago
    Tesla also makes components like seats internally. A lot of companies just outsource that and lose out on the profits, it is one of the reasons tesla has such high margins.
    - AnthonyMouse 5y ago
      > Tesla also makes components like seats internally. For the same reason. Vehicle seat are, for better or for worse, typically model-specific. Before there was Tesla there was nobody making Tesla seats. Would anybody be surprised if they start outsourcing that soon, given that they now have enough volume to attract third party suppliers and seat manufacturing is certainly not their competitive edge? > A lot of companies just outsource that and lose out on the profits, it is one of the reasons tesla has such high margins. Vertical integration increasing margins is just an accounting trick. It costs $5 to make a widget, the widget maker sells it to the car maker for $6, the car maker sells it to the customer for $8. The non-vertical car company has a $2 unit margin, the vertical car company has a $3 unit margin. But to get it they take on all the risks and expenses of the widget maker. If making widgets is a commodity market then the $1/unit is going entirely to fixed overhead (otherwise someone would charge less and gain market share). Taking on the fixed overhead in exchange for the $1 is breakeven and increases systemic risk by reducing supply diversification. But on paper your margins increase by $1.
lumost 5y ago
To argue in favor of your point. Big vertically integrated firms often become insulated from economic, technical, and business realities. This eventually leads to politics winning out over technical or business savvy. At the extremes you'll have companies burning 10s of billions on pet projects going nowhere, or software engineers producing 0 lines of code per year. I wouldn't be surprised if this effect could even be mathematically quantified.
kelp 5y ago
Another example right here: https://news.ycombinator.com/item?id=29980227 https://news.ycombinator.com/item?id=29980227 Intel is buying fab capacity from TSMC. Backing away from vertical integration to force their own fabs to compete on the open market.
BuckRogers 5y ago
Ballmer gets a bad rap but he was the one that got them moving towards Azure and cloud. He made MS a lot of money, they didn’t suffer under him. It was mostly just optics where he didn’t look good.
- mathattack 5y ago
  Look at the stock price under him, and then after.
  - missedthecue 5y ago
    Although it's plausible that had he stayed on for say another five more years, we would have seen the fruits of his early investments pay off and the stock appreciate accordingly.
  - BuckRogers 5y ago
    The guy who had Nadella in charge of cloud the entire time? Ballmer is the one that not only placed Satya, but made the call to push and fund it. For me your comment rings the same as saying look at the stock price of AMD under and after Lisa Su.

brightball 5y ago

It probably means more to keep the Blizzard catalog off of Oculus than anything else. IMO many games in their catalog would be ideal in that environment and keeping them off of it goes a long way towards buying time.

luckydata 5y ago

Nah, their model is different. They are building a Disneyland-like experience, where the public pays to "be there" and the attractions always change. Never been done before.

awill 5y ago
Exactly. They're going for quantity to ensure even if a bunch of stuff fails, they'll get a few hits. Sometimes all you need is a few hits.
mathattack 5y ago
That type of closed garden seems more like Apple, no?
- monocasa 5y ago
  Microsoft has been understandably eyeing that 30% on all digital goods sales Apple gets for years now. They missed the boat on the Windows store, but they'll do just about anything to keep a similar financial structure on the Xbox side.

no_wizard 5y ago

I think vertical integration tends to win when the floor is built atop of commodities. The new consoles have similar hardware[0] and it really comes down to allocation of those hardware resources, which makes first party studios ways to differentiate your product from the competition, as you can justify the extra cost to make sure your first party console is optimized for in its unique ways, where cross publishing houses don't always do that, for example. This can differentiate gaming experience, even for titles that are cross platform, if one is optimized for say, the Xbox ecosystem, but its PlayStation port does not have the same kind of optimizations. How much this matters may remain to be seen, for now. Having highly optimized flagship titles though is what makes these vertical integrations so appealing in this market, in my estimation. [0]: https://www.tomsguide.com/news/ps5-vs-xbox-series-x https://www.tomsguide.com/news/ps5-vs-xbox-series-x FWIW I don't endorse everything in the link to toms guide, I just wanted a reliable source for hardware specs

bravetraveler 5y ago

Intel has also been feeling the pain of vertical integration. Like with most things, double edged sword. They fabricated their chips - not sure if they still do. Initially this was great, they owned the equipment and got things 'at cost'. However, they had trouble refining their tooling to get < 14nm for several generations. This made them less competitive for a while, while having a pile of expenses a more lean design house wouldn't have. They'll surely be fine, but it's not the same sprint they've had for quite a while.

babypuncher 5y ago
Intel still fabricates their own chips. Though notably, their new dedicated GPUs are made by a third party. Two years ago I would have expected this trend to continue and for Intel to stop in-house fabrication, but with their new CEO and some prodding from the US government, they are now investing many billions of dollars into new fabs.

mdasen 5y ago

AOL/TimeWarner was a failure because because it valued AOL at $200B and TimeWarner at $164B. AOL was just way over-valued. It wasn't really an integration failure so much as paying too much for something. If Time Warner had bought AOL for $2B, it would have been fine. The problem is that they merged valuing AOL at 100x that when it wasn't worth it and later sold for $4.4B to Verizon. Likewise, Yahoo/Verizon bought a lot of properties at inflated values. Tumblr wasn't worth $1.1B, but Yahoo wanted to buy one of the hot up-and-coming properties to feel relevant. I think the big issue is the price one is paying and whether one has a plan for the purchase or if the purchase is more "but if I don't make a big move, what am I doing? I can't go wrong following trends, right?" For example, AOL/TimeWarner was a situation of over-paying because TimeWarner was afraid that the internet was going to eat the world and they needed to stay relevant. AOL was so hot and it's easy to get swept up in the moment thinking "I need to get on board now or I'll miss it!" Likewise, Yahoo feared becoming irrelevant as Google took over the internet and thought buying Tumblr would make them the hip forward company once again. Activision Blizard seems like a reasonable add-on for Microsoft. $69B isn't that much money for it given it would represent a P/E ratio of around 26. Apple's P/E is 30, Amazon 62, Microsoft 34, Google 26. So they aren't paying an absurd amount given Activision's profits. Even if they did no integration or strategy, Activision could simply continue doing its thing and contribute favorably to Microsoft's bottom line. With a tiny bit of strategy, it seems clear Microsoft could get even more value out of the company. Maybe a few Xbox exclusive titles to push their console business. Maybe some stuff for their game streaming service. If Disney has shown us something over the past few years, it's that owning IP that people like allows you to keep spinning new versions of that IP. Activision has lots of that kind of IP in the gaming space so Microsoft should be able to use that to its advantage. I think there's a big difference between buying Activision at a price whose P/E ratio is better than your own and where there are clear strategies that could offer you even more value compared with the "omg, I'm getting left behind! I'll pay anything you want" panic purchases/mergers of other companies.

dustintrex 5y ago
Tumblr could easily have been Instagram, Yahoo just had no idea what to do with it and completely missed the boat on mobile. A lot of people thought Zuck was insane when he paid $1B for Instagram, and I think we'd all agree that bet paid off pretty handsomely.

babypuncher 5y ago

At least for Xbox, the biggest positive change in leadership has been the replacement of Don Mattrick with Phil Spencer in 2014. Xbox as a brand was in real bad shape when he took over.

johnebgd 5y ago
Don Mattrick might as well have been a plant by Sony he was so effective at destroying all the good will Microsoft had built with gamers during the 360 era. Introducing Xbox One as a media center with no ownership through physical media was a disaster. Then again, Xbox branding is a total disaster anyway. The Xbox Series X vs the Xbox One X vs the Xbox 1 are all very different things but aren’t that far apart in name…
- pharmakom 5y ago
  Halo 3 and Gears of War were must have games of that generation and the big hits from Sony (e.g. Last of Us) didn’t come till a bit later. These games were so successful that many looked past the RRoD and loved the 360. In this context I think buying studios makes sense. I wonder if CoD will become XBox / Windows exclusive?
- babypuncher 5y ago
  Don't forget one of the Xbox One's key innovative features: tight integration with your cable box. You know, that worthless piece of hardware tied to a $100/mo subscription that your Xbox 360 helped you replace entirely with its Netflix and Hulu apps. When they showed that off I knew nobody at Xbox had a single clue who their audience was.

dawsmik 5y ago

Gasprom, Dell and Tesla may be some examples of companies that have done will with vertical integration.

AnthonyMouse 5y ago
Tesla is kind of vertically integrated, but mostly because they were the first to make a popular electric car, so adequate supply chains for those components didn't previously exist. It remains to be seen whether it's still an advantage when most of the industry is making electric vehicles and competitive alternate suppliers for those components are common. Dell installs a Microsoft operating system on SSDs from the lowest bidder and puts them in a Foxconn motherboard with a CPU from AMD or Intel. Gasprom is a majority state-owned company in Russia. This can't really be an example of anything to do with a free market. The typical example is Apple, because they're currently very profitable. But they've been doing vertical integration for decades and their history is full of instances of almost going out of business. The previous "see how well vertical integration works" example was IBM.
- tyfon 5y ago
  Tesla also makes components like seats internally. A lot of companies just outsource that and lose out on the profits, it is one of the reasons tesla has such high margins.
  - AnthonyMouse 5y ago
    > Tesla also makes components like seats internally. For the same reason. Vehicle seat are, for better or for worse, typically model-specific. Before there was Tesla there was nobody making Tesla seats. Would anybody be surprised if they start outsourcing that soon, given that they now have enough volume to attract third party suppliers and seat manufacturing is certainly not their competitive edge? > A lot of companies just outsource that and lose out on the profits, it is one of the reasons tesla has such high margins. Vertical integration increasing margins is just an accounting trick. It costs $5 to make a widget, the widget maker sells it to the car maker for $6, the car maker sells it to the customer for $8. The non-vertical car company has a $2 unit margin, the vertical car company has a $3 unit margin. But to get it they take on all the risks and expenses of the widget maker. If making widgets is a commodity market then the $1/unit is going entirely to fixed overhead (otherwise someone would charge less and gain market share). Taking on the fixed overhead in exchange for the $1 is breakeven and increases systemic risk by reducing supply diversification. But on paper your margins increase by $1.

lumost 5y ago

To argue in favor of your point. Big vertically integrated firms often become insulated from economic, technical, and business realities. This eventually leads to politics winning out over technical or business savvy. At the extremes you'll have companies burning 10s of billions on pet projects going nowhere, or software engineers producing 0 lines of code per year. I wouldn't be surprised if this effect could even be mathematically quantified.

kelp 5y ago

Another example right here: https://news.ycombinator.com/item?id=29980227 https://news.ycombinator.com/item?id=29980227 Intel is buying fab capacity from TSMC. Backing away from vertical integration to force their own fabs to compete on the open market.

BuckRogers 5y ago

Ballmer gets a bad rap but he was the one that got them moving towards Azure and cloud. He made MS a lot of money, they didn’t suffer under him. It was mostly just optics where he didn’t look good.

mathattack 5y ago
Look at the stock price under him, and then after.
- missedthecue 5y ago
  Although it's plausible that had he stayed on for say another five more years, we would have seen the fruits of his early investments pay off and the stock appreciate accordingly.
- BuckRogers 5y ago
  The guy who had Nadella in charge of cloud the entire time? Ballmer is the one that not only placed Satya, but made the call to push and fund it. For me your comment rings the same as saying look at the stock price of AMD under and after Lisa Su.