Microsoft’s Play for Xbox Domination

Between Game Pass and streaming, Xbox seeks to end the console war early this generation.

Microsoft agreed to purchase Activision Blizzard on January 17th, making the recently scandalous videogame publisher the largest ever acquisition for Microsoft. In a cash deal valued at about $75 billion, Microsoft is throwing its gigantic piles of wealth against the heads of the competition to bolster its videogame offerings. In the announcement, Microsoft said the purchase would make it the third-largest gaming company by revenue, behind Tencent and Sony. After accounting for the $7 billion in cash held by Activision Blizzard, the deal represented a significant premium above the current stock price, which has been depressed due to allegations and investigations of sexual misconduct by California regulators.

The acquisition is not a lock for passing regulatory approval, even in the current era of lax regulation. Microsoft is vertically integrating, purchasing a company that offers complementary services to its other products like Xbox and Game Pass, which is typically not often the type of acquisition that the modern FTC blocks. Matt Zoller, the anti-monopolist author over at the substack Big, has a good article on the landscape of the Biden FTC on the potential regulatory approval of the acquisition. It is a massive acquisition and could get blocked over antitrust concerns, but at this point, I would bet on the purchase going through.

This purchase is Microsoft’s ninth time visiting the videogame store since June 2018. Since then, the company has purchased Ninja Theory, Undead Labs, Compulsion Games, Playground Games, inXile Entertainment, Obsidian Entertainment, Double Fine Productions, ZeniMax Media, and now Activision Blizzard. In addition to the stable Microsoft had already built in-house or bought in prior years, those companies add to an incredible number of popular intellectual properties. Including Activision Blizzard, Microsoft now owns the following IP:

Halo

Gears of War

Minecraft

Hellblade

State of Decay

Pillars of Eternity

Wasteland

The Outer Worlds

Psychonauts

Fallout

The Elder Scrolls

Doom

Starfield

Call of Duty

Diablo

Overwatch

World of Warcraft

There are way more franchises than those listed, but those are the top-selling series now under Microsoft’s banner. The older IP isn’t nearly as valuable to most companies, but they may be pretty beneficial to Microsoft after going all-in on Game Pass. Call of Duty is the heavy-hitter from the Activision deal as the first-person shooter is the third-highest selling franchise of all time. If Microsoft can get Overwatch and Diablo sales back on track, those games also have a strong sales history with over 50 million copies sold.

Sony, Microsoft’s main competitor for many years, has far fewer top-selling franchises and this acquisition certainly puts Xbox above PlayStation going forward in the number of best-selling first-party games (although, Horizon and Spider-Man for Sony are strong bets to join best-selling franchise ranks in the future). PlayStation has been the king of first-party, exclusive games in both quantity and quality – the Sony console has been the better purchase for many years based on the games available exclusively on its console. Xbox sought to ameliorate those differences for the past decade by buying successful developers after a string of in-house failures.

Sony should be worried about the future of its consoles. Horizon, God of War, Uncharted, and Spider-Man were compelling reasons for many fans to go with the PS5 vs. the Xbox Series X, but the new games added to its portfolio can finally push Xbox over the top. Microsoft and Sony have had discussions about the future of Activision Blizzard games on PlayStation, with Sony executives saying they “expect that Microsoft will abide by contractual agreements and continue to ensure Activision games are multiplatform.” Microsoft’s Phil Spencer tweeted the following:

That is… not entirely satisfying, but it also is as good a commitment any business would expect to get out of a competitor. Microsoft has the “intent to honor all existing agreements” which implies that a falling out could occur and, even more worrisome, that once current deals lapse the company could move on from PlayStation entirely. I wouldn’t say it is a given that Call of Duty ever leaves the Sony platform – the reason Activision Blizzard was worth so much was partially due to strong sales on PlayStation. Regardless, Microsoft has a lot of new monopolistic power that they can hold over Sony to arrange more lucrative deals in Microsoft’s favor.

It is difficult to gauge how bad this deal is for Sony partially due to the focus of Microsoft on Game Pass and how much the company still views its gaming platform as a direct competitor to PlayStation. Microsoft could go for the kill by yanking all games in its arsenal from PlayStation and making XBOX the sole home to many exclusive games. The company would have to be willing to hedge short-run losses due to losing out on game sales from a console that has sold over twice as many units, but Microsoft has shown a willingness to become a loss leader in the past to gain market share. Xbox has never had Sony’s first-party game quality, but these acquisitions would put Xbox above PlayStation for many gamers. If Microsoft wanted to win the console war, they have a good shot after these recent moves.

Microsoft is a competitor of Apple and Google but still published an Xbox Cloud Gaming web application on iOS through Safari and an application on the Android Store. The Xbox platform is transitioning toward cloud gaming, whereby anyone could play their Xbox Game Pass games through any browser and several other platforms. For instance, Microsoft has already announced its plan to release cloud gaming apps on smart TVs. Add streaming devices like Apple TV and Roku, and you pretty much only have PlayStation consoles excluded at that point.

Microsoft may have enough games in its arsenal to corral a deal with Sony, resulting in Game Pass appearing on PlayStation. Sony typically receives 30% of all sales on its platform, and Microsoft would most likely want to arrange a greater take for itself. But, in exchange, Sony would be allowed to continue selling Microsoft games on its consoles. While Xbox fanboys may balk at the idea of allowing “their” first-party games on rival PlayStation, this would likely be a huge growth driver for Game Pass. The subscription service captured 70% of all gamers who use the latest Xbox consoles. Offering the service as merely an alternative to $70 games through the PlayStation store would likely convince a sizeable number of PlayStation’s (much larger) consumer base to subscribe to Game Pass.

It seems improbable for Game Pass to appear on Sony consoles anytime soon. Microsoft doesn’t need PlayStation to make Game Pass a success – publishing more AAA games for the service would likely be the best bet to increase subscriber count, and it will take many years for Game Pass to become more ubiquitous in the streaming realm. If Game Pass ever appears on PlayStation, it would not be for many years. Even then, Sony is often reluctant to partner with competitors. This deal could result in a significant loss of sales revenue by offering another platform for gamers to get their games from.

Microsoft is likely looking ahead to the impending console-less future and currently looks in excellent condition to push gaming in that direction whether Sony is willing or not. PlayStation hasn’t begun to bleed yet and will likely continue to reign supreme in sales for this console generation, but we are witnessing a division in trajectories. Sony is rumored to be showing up late with a subscription service of its own but lacks the spending power to acquire content for the platform. Microsoft is focused on a subscription model and streaming-based future – and it has already released praiseworthy early versions of each.

Sony seems to be doubling down on hardware by developing the PSVR2, slated for release later this year. Attempting to move on to the next “big thing” in videogame hardware with VR headsets makes a lot of sense for one of the preeminent consumer electronics companies. While Microsoft has tinkered in many hardware fields, its largest success in recent years has been the Azure cloud computing system. We may be witnessing the beginning of the end of competition between the two consoles as Xbox transitions to the cloud. The path to long-term success is more straightforward for Xbox; we’ve already witnessed compelling versions of a streaming Game Pass future.

Whether PlayStation has staying power beyond as a videogame publisher relies on the future of virtual reality and whether a significant number of consumers adopt the platform. Cloud computing reaching performance equal to high-end PCs and consoles would likely be the end of new gaming hardware. VR headsets are an exception and could eventually be more analogous to a television or monitor. Either way, I would wager on VR headsets dominating the video game hardware market by 2030.