Microsoft games boss Phil Spencer drove $69 billion Activision deal

When Phil Spencer took the helm of Microsoft’s gaming division in 2014, he and newly appointed CEO Satya Nadella weren’t sure if the company should keep investing in the Xbox, which was losing to Sony.

Less than a decade later, Spencer and the Xbox are at the center of the software company’s largest acquisition ever. With the close of the $69 billion purchase of video game publisher Activision Blizzard on Friday, Microsoft has made clear that gaming is no longer a question mark and is, in fact, central to the company’s future.

“It is an extraordinary amount of money for Microsoft, whose core business is not gaming,” said Don Coyner, who was the first person to work on marketing inside the company’s Xbox unit. Coyner, who left Microsoft in 2018, said he’s confident that smart people at the company can explain the high price.

Spencer’s profile at Microsoft has grown immensely in a short period of time. He told an interviewer from gaming website Shacknews in 2020 that he only got to become head of Microsoft’s gaming division because so many other people had left, and he was still there.

Activision marks one of the priciest deals ever in technology. In addition to the hefty costs, it’s also been extremely time-consuming.

Regulatory pushback from the European Commission and agencies in the U.S. and U.K. kept the deal at bay for nearly 21 months and forced Microsoft and Activision to extend the deadline to close, which had been mid-July, by three months.

There were numerous moments of uncertainty along the way. In July, Spencer sat in on five days of hearings before a federal judge in San Francisco, who ultimately denied the Federal Trade Commission’s attempt to quash the deal. The FTC took its effort to an appeals court, which refused to grant a motion that would have temporarily stopped the transaction from closing.

Until now, gaming has been a small piece of Microsoft and a relatively slow grower. Revenue increased 1% in the latest quarter, while the company as a whole grew by about 7%. In the most recent fiscal year, gaming revenue was $15.5 billion, accounting for 7.3% of total Microsoft sales.

Rather than ceding the market to Sony and Nintendo, Microsoft’s highest-ranking managers decided to sacrifice most of the software maker’s $111 billion cash pile on a game company.

Spencer has been vocal in touting Activision’s strengths and was a key force in driving the deal. He’s enjoyed a yearslong relationship with Activision CEO Bobby Kotick, even though the companies have had some tense moments. For example, Microsoft failed to secure the publisher’s titles for the subscription-based Game Pass library during negotiations in 2020.

In November 2021, Spencer approached Kotick and said Microsoft was interested in discussing strategic opportunities between the two companies. His outreach came just three days after The Wall Street Journal reported that Kotick hadn’t told his board what he knew about misconduct inside the company. Activision shares tumbled 11% in the next three trading sessions.

According to a regulatory filing, Spencer asked if Kotick would talk with Nadella, and Kotick agreed. The CEOs spoke the next day, and Nadella conveyed Microsoft’s interest in buying Activision. Some 59 days later the two companies announced their intent to combine.

Microsoft didn’t make Spencer available for an interview.

Spencer arrived at Microsoft as a software development intern in 1988. Two years later, after graduating from the University of Washington with a bachelor’s degree in technical and scientific communication, he accepted a full-time job at the company as an engineer. He worked on Encarta, Microsoft Money, Microsoft Works and other products.

Spencer has long understood the importance of top-shelf content. He was instrumental in getting Nadella onboard with the purchase of Minecraft developer Mojang, which Microsoft acquired in 2014 for $2.5 billion. Minecraft has since become the bestselling video game, with more than 300 million copies sold as of this week.

Spencer also took on a big role in the $8.1 billion purchase of ZeniMax Media, the publisher of Doom and Fallout games, in 2021. And at one point he was working on a bid for Warner Bros. Games, whose titles include the Batman: Arkham games, he told two marketing executives in a 2020 email. That deal never materialized.

Spencer and his Microsoft peers then turned to mobile gaming. They considered FarmVille publisher Zynga, Pokemon Go developer Niantic and others before going much bigger with Activision Blizzard.

“Mobile is the largest segment in gaming, with nearly 95% of all players globally enjoying games on mobile,” Microsoft said in its press release announcing the deal. While Activision is known for franchises such as Call of Duty and Overwatch, it also publishes Candy Crush puzzle titles that are among the most popular games on Android and iOS.

Spencer, a lifelong gamer, plays Candy Crush, he said during the July hearings. In total, he plays video games for about 15 hours per week, he told Bloomberg in an interview last year. He’s a fan of Banjo-Kazooie, a game from Microsoft’s Rare studio, and Halo Infinite. In 2021 he played Bungie’s Destiny 2 while another participant streamed the action live on Twitch.

While Microsoft dominates in PC operating systems and productivity software, Xbox remains smaller than Sony in gaming, even after two decades of battle.

“I feel we are in a huge hole with our games lineup both for platform marketing/differentiation and our Gamepass content,” Spencer wrote in a 2022 email to Xbox executives that was made public in the FTC case. This year Xbox has gained a handful of well-received titles, including Zenimax’s Starfield and Forza Motorsport, published by Xbox Game Studios.

Spencer has also recognized some improvements. In 2020, as Sony revealed details of the PlayStation 5, Spencer wrote in a message to Nadella and Microsoft finance chief Amy Hood, “After almost 12 hours of soaking in their unveil, taking apart their specs and looking at the community responses I just wanted to say that I’m proud of our team.” Microsoft had better gaming hardware, software and services, Spencer wrote.

He likes to recognize the achievements of others.

David Hufford, who works in communications and analyst relations at Microsoft, recalled asking Spencer to speak at an event in 2021 honoring the 20th anniversary of the original Xbox launch. Hufford told CNBC in an email that Spencer declined because he wanted to focus on Robbie Bach, who ran entertainment and devices until 2010, and Jeff Henshaw, an Xbox co-founder.

Hufford said that Spencer “preferred we spotlight” those people, “who played more visible leadership roles back then.” Even Bach, once Microsoft’s chief Xbox officer, couldn’t talk Spencer into offering on-stage remarks, Hufford wrote.

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