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24 January 2022

Redmayne Bentley Market Update

A blog post by Phil Spencer, the CEO of Microsoft Gaming and Xbox boss, has revealed Microsoft’s plans to buy video gaming company Activision Blizzard in a monumental US$75bn cash deal. Not only is this the biggest deal in Microsoft’s history, but it is also by far the biggest deal in gaming history, with its closest follower being Flutter’s US$13bn purchase of Stars Group back in October 2019. Activision Blizzard is home to the likes of Candy Crush, Call of Duty, and World of Warcraft – all very well-known names to even the most infrequent of gamers.

It has been clear for several years that Microsoft CEO Satya Nadella has been looking to make a deal of such size. Back in 2020, Nadella attempted to buy the viral short-video social media app, TikTok, yet this did not follow through. He subsequently moved onto Pinterest, but once again faced rejection. After repeated failure in social media acquisitions, a delve into the metaverse is what the company hopes will boost its dominance in digital entertainment. Microsoft already holds the top spot as the world’s largest software company; however, the Activision deal will make it the third-largest gaming company behind China’s Tencent and Japan’s Sony.

Activision Blizzard has not had an easy year with numerous reports of vulgar workplace conditions along with employee malpractice. Pressure only heightened when the Wall Street Journal published a damning report in November 2021, condemning CEO Bobby Kotick with allegations of sexual misconduct. A successive filing of a lawsuit against the company in relation to such matters led Activision’s shares to plummet 30%. Kotick has admitted that they are no longer strong enough to compete on their own despite their continuous work to change the workplace culture making Microsoft’s proposition a very welcome deal.

In the UK this week, Mastercard and four other payment companies have been fined £33m by the Payment Systems Regulator (PSR) for operating an illegal cartel regarding the provision of prepaid cards to local authorities. Supported by Mastercard, who have received the bulk of the fine, the National Prepaid Steering Group launched prepaid cards in 2011 in which councils preload funds onto the card and distribute them to vulnerable people, for example, those with a disability, the homeless and victims of domestic violence, as a welfare payment. The nature of the card means that they cannot become overdrawn as there is no credit facility, and they are not linked to a bank account.

There have been two cartels over the past decade: the first between 2012 and 2018 in which five companies - Mastercard, allpay, Advanced Payment Solutions (APS), Prepaid Financial Services (PFS) and Sulion – agreed to not target each other’s customers and used network events to allocate potential business contacts amongst themselves. The second cartel operated between 2014 and 2016 involving providers APS and PFS who agreed that when a contract was up for renewal, they would not target each other’s public sector customers.
This has meant that local authorities have likely been paying higher fees for the prepaid card schemes than in a competitive market. Additionally, the agreement between providers would have left very little scope for them to make service improvements, leaving a worse overall product. In this case, both the authorities and the end-clients have suffered from their misconduct, missing out on both cheaper and better-quality products.
It is the first time that the PSR has imposed a financial penalty. There have long been concerns that prepaid cards differential credit check treatment to other cards leaves potential for unreasonably high fees and little legal protection. Their increasing importance in the UK in which their existence allows approximately 1.5 million adults to access digital payments is likely to mean tighter supervision in the future.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
 
Redmayne Bentley Market Update
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