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.

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

FWIW I don't endorse everything in the link to toms guide, I just wanted a reliable source for hardware specs

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.

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.

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.

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.

Another example right here: 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.

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.

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.

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