Game On: Exclusive talk with Wedbush analyst Michael Pachter

For this special edition of “Game On,” The Fly spoke with Wedbush Securities analyst Michael Pachter about a number of topics in the video game sector, particularly some of the headlines around the Microsoft (MSFT) and Activision Blizzard (ATVI) merger as well as potential new hardware from Nintendo (NTDOY). The following interview has been edited for clarity.

MICROSOFT/ACTIVISION CLOSE: When asked if there is any way the Microsoft-Activision deal does not close by its October 18 date, Pachter said there is a very tiny chance, but he believes it will close as planned. “There’s a way (it doesn’t close) if the U.K. decides that they’re going to be intransigent, which is unlikely,” the analyst told The Fly. “I could see a less than 1% chance the U.K. doesn’t like the new plan and wants to litigate. That’s a very low probability. If (the U.K.) were to do that, Microsoft would then have to say, ‘We care so much about complying with U.K. regulators demands that we’ll withdraw from the deal,’ which is also a very low probability. So I would say a 1% chance the U.K. doesn’t agree to what Microsoft proposes (or doesn’t engage in good faith in negotiations), and a 5% chance of Microsoft punting the deal if that happens. So 1% chance times a 5% chance is an infinitesimal chance, but there is a chance.”

RAMIFICATIONS OF DEAL: In terms of any potentially negative ramifications of such a transaction on the industry or consumers, Pachter said he doesn’t think anybody should be concerned, as “nobody actually knows or cares who owns anything.” “As long as the service is good and they remain competitive, who really cares who owns what? Did movies get worse when Disney bought Fox? I don’t think so,” he said. “I don’t think it matters.”

“As far as a wave of other mergers, there’s a limited number of big companies that have the potential of being purchased, and an equally limited number of potential purchasers,” Pachter added. “You have to really want to be in this industry to pay that kind of money. If you want to buy Electronic Arts (EA) or Take-Two (TTWO), you have to really want to be in the games business, and I don’t know that Amazon, for example, wants to be in it badly enough to make that big an acquisition.”

The analyst added that he doesn’t think any major tech player outside of Microsoft really wants to be in the games business badly enough to buy a big company like Activision. “We could argue whether Google (GOOG), Apple (AAPL), or Amazon (AMZN) really care enough to do that, but I don’t think so,” he said.

WHAT ABOUT SONY?: “Does Sony (SONY) counter? They’ve been doing it piecemeal (with some smaller acquisitions) in the aggregate about as big as Activision, so no,” Pachter said when asked about Sony potentially making a similar deal in the space. “Maybe somebody buys Nintendo because of the crossover appeal of its brands. Now that we’ve seen the “Mario Bros.” movie and the new theme park, maybe they’re in play, but that’s the only one I could see anyone buying, and that would have to be someone like Disney or Comcast. But I don’t really see it, I don’t think so.”

“I don’t think Sony can afford (EA or Take-Two),” Pachter added. “Sony’s never been in mobile. The Activision deal was a bit baffling to me because they were big into mobile, but then Microsoft said they wanted to get into mobile. Sony has never hinted they want to be in mobile.”

ANOTHER MICROSOFT DEAL?: On the topic of whether Microsoft could potentially pursue another major takeover after the closing of the Activision Blizzard deal, Pachter said he doesn’t believe Microsoft is done, but that there’s only so far they can go from a regulatory standpoint. “I don’t think they’re done, but again, but each brick that they purchase makes them bigger and bigger, and eventually government regulators are going to win,” he told The Fly. “They could (potentially) buy Sega (SGAMY). (Microsoft) has basically zero presence in Japan, and Sega is big in Japan, so they could do that. They could buy a Chinese developer if it was legal. But I don’t think they buy an EA or Take-Two, I think that would be a problem.”

NEW SWITCH HARDWARE: When asked if he expects Nintendo to release a new console available next year, as has been rumored, the analyst said, “They’re pretty much on a seven-year or less cadence between console releases. We’re kind of at that seven-year mark right now. I think based on their history, they’re planning (a new console) for next year. Whether it comes out or not, maybe they decide to wait another year, but I expect a Switch 2 next year. They can position it side-by-side with the Switch, continuing to sell catalog titles and upscaling the titles for the new platform. So they’ll be fine.”

“They can keep the Switch Lite in production for another five years at $99 as a starter kit, and have the Switch 2 (as the new hybrid),” Pachter added. “I expect that they’ll probably announce something next year, I just think that they’re waiting for an industry event, like maybe they announce it in June 2024 and launch in fall 2024.”

“Game On” is The Fly’s weekly recap of the stories powering up or beating down video game stocks.