Microsoft (NASDAQ:MSFT) announced a major acquisition today to acquire ZeniMax Media, the studio behind video game franchises Doom and Fallout for $7.5B.
Strategists and analysts highlight this acquisition as more indication that Microsoft is moving further away from console based gaming and cementing its future as a digital game subscriber. And the key to increasing subscriptions is to focus on acquiring content/games. Similar to Disney+, Microsoft is forging ahead with acquiring game properties to increase the value of its subscription offering.
The console gaming market is a $57B industry in 2020. In the console market, the primary players are Microsoft (Xbox), Sony (PlayStation), and Nintendo (Switch). Console was the first iteration of gaming back in the 1970s and it remains a key pillar of the $160B video gaming market today.
In console gaming, Xbox is in 3rd place with 48M units sold since its inception behind Nintendo (55M units) and Sony (109M units). Console gaming platforms seek to attract consumers to its respective ecosystem primarily based on the library of content (game titles) that are included, or even exclusive, to its platform. For example, exclusive titles such as Halo (Xbox), God of War (PlayStation), or Mario Kart (Nintendo). This is not too dissimilar to the competitive dynamics between OTT platforms like Netflix, Hulu, or HBO:GO.
Similar to the printer/cartridge model, console gaming manufacturers do not make the majority of their revenue by selling the console hardware itself (the “printer”). They make the majority of their revenue on the backend selling subscriptions, in-game purchases, and more (the “ink cartridges”).
Xbox is in 3rd place by a wide margin compared to Nintendo and Sony. Also, their business is very focused on North America with a less prominent market position internationally. Here are a few interesting stats:
We believe that this next generation for Xbox will be the last console generation where Microsoft sells a physical hardware console for consumers to have in their homes.
With the next generation of Xbox coming out in December, 2020, Microsoft is going all in on subscription revenue (bundling services) with a keen focus on cloud services. We believe this is a part of a multi-year plan to eventually eliminate the in-home hardware component. This would dramatically reduce the cost to the consumer on the “entry-fee” to get access to the Xbox ecosystem, thus allowing them to capture more market share against Sony and Nintendo.
Today, they are taking these first steps by including the hardware purchase into a subscription model alongside Xbox Game Pass (access to 100+ games). This is likely to work exceedingly well vs past generation due to the more affordable Xbox Series S ($299).
Microsoft’s strategy in this upcoming console generation launch is paving the path for a local hardware-free ecosystem for console gaming. This is a great step forward.
Furthermore, Microsoft has a significant market share in PC operating systems via Windows. This is a unique strategic advantage that Microsoft has versus Sony or Nintendo. Just this year, Microsoft released their premier exclusive franchise, Halo, on PC. Additionally, Microsoft is leveraging their cloud service, xCloud, by including it in the new Xbox Game Pass Ultimate subscription ($14.99). Microsoft’s xCloud will even be available on Android phones in September (read more here).
In the near future, you may not even have to have an Xbox to have access to all Xbox games via PC (Windows) and mobile (Android). With this innovation, we believe the number of players within the Microsoft gaming ecosystem is poised to grow exponentially and could even overtake Sony and Nintendo.