Game On: How Microsoft is building a gaming empire

Following the recent developments in the potential acquisition of Activision Blizzard by Microsoft, the latter has been revealing further insights on how gaming logs itself in the group's strategic growth segments.

Confronted with potential market saturation for its primary Office and Windows products, Microsoft sought out alternative avenues for growth for already quite some time. Amid an uncertain economic climate and strong competition, questions abound regarding Microsoft's new console. Can they effectively challenge Nintendo and Playstation, deliver a sufficiently powerful console, offer compelling franchises, and capture market share from the industry leaders?

On November 15, 2001, Microsoft made its debut in the gaming market by launching the first Xbox . This marked the company's entry into the industry, and under the leadership of Robbie Bach, Microsoft established its gaming division with the ambition of becoming a significant player and surpass the competition. During this period, the gaming landscape was fiercely competitive, with Sony's PlayStation and Nintendo's consoles dominating the market and making it challenging for newcomers to find growth opportunities. There were many questions surrounding the new console, given the uncertain economic climate and formidable competition.

Let's go back to the fall of 2002, just one year after the release of Microsoft's first console. Microsoft was faced with the unusual challenge of entering an unfamiliar market relatively late. The company made the strategic decision that, instead of replicating a PC, it would position the Xbox as a direct competitor to the Sony PlayStation 2. Opting to develop a PC rather than an Xbox could have been a more straightforward choice for Microsoft, given their established proficiency in software and operating systems, primarily through Windows. It would have also facilitated smoother software compatibility, enabling the launch of PC games with minimal adjustments. Creating a PC likely would have entailed less resource-intensive efforts and lower costs in comparison to the development of the Xbox.

The fierce rivalry in the gaming console industry, coupled with a strong public interest for the latest game releases, has prompted console suppliers to adopt a "razor-and-blades" business model. Manufacturers are willing to generate minimal or even no profit from the sale of consoles, aiming to rapidly expand their user base and subsequently increase profits through the sale of games. The primary goal for Xbox was to outperform the competition with a high-performance console compared to what was offered by the market leaders, but consumers would assess their equipment purchases based on the quality and popularity of available titles. Indeed, in the past decade, Sony and Nintendo have established a thriving realm of gaming franchises and this would become the primary challenge for Microsoft's gaming division over the years.

Microsoft goes on an acquisition binge

To establish its position in the gaming sector, Microsoft thus decided to greatly invest in its Xbox division by developing its titles portfolio. Microsoft's roster of owned studios has now expanded to 24 (5 more than Sony), and had previously brought well-known names like Mojang (the creators of Minecraft), Bethesda Softworks and numerous other studios into its fold, in a significant effort to create Xbox-exclusive games. Microsoft's investments range from $100,000 to several tens of billion for the gaming behemoth Activision Blizzard.

In early 2022, Microsoft drew global attention with its announcement of a $68.7 billion acquisition bid for Activision Blizzard, a highly valuable company in the gaming sphere. This news sent shockwaves across the world and was swiftly dubbed as one of the most significant transactions in gaming history.

This deal will see Microsoft incorporate Activision and Blizzard into its portfolio, as well as independent studios making consoles and PC games like Infinity Ward, Raven Software, Sledgehammer Games, Toys for Bob, Beenox, High Moon Studios, Radical Entertainment and Treyarch. Through this acquisition, Microsoft is also bolstering its presence in the mobile gaming sector. In fact, Activision itself possesses two mobile game studios: Digital Legends Entertainment and King, which is renowned for the popular Candy Crush game series.

The merger has been significantly delayed primarily as a result of various legal challenges, lawsuits, and investigations initiated by governments around the world. Indeed, the CMA has voiced concerns over the merger’s possible outcome over restraining competition, potentially leading to rising prices for customers, and less innovation within the UK gaming market. However, on the 22nd of September 2023, the regulatory authority granted provisional approval for Microsoft's M&A move. In a statement, they noted "minor remaining concerns", for which Microsoft has put forward potential solutions. For example, Microsoft has committed to transfer the cloud streaming licensing rights for both existing and upcomming Activision Blizzard to Ubisoft - a competing game publisher - for a duration of 15 years. This measure should prevent Microsoft from keeping exclusivity over Activision Games for its own platform.

Mobile gaming makes up for most of the studio’s revenue mix. In 2022, mobile video game earnings made up precisely half of Activision Blizzard's global revenue, while console and PC revenues accounted for only a quarter (25%). Undoubtedly, the acquisition would bolster Microsoft's step into the mobile segment and boost its advertising revenues while also providing crucial expertise in developing and marketing such games. Newzoo's data suggests that in 2023, global spending on video games is projected to reach a substantial $188 billion. Approximately 50% of this expenditure is allocated to mobile gaming, while another 20% is directed towards PC gaming. The remaining 30% will be captured by console gaming.

Mobile gaming plays a pivotal role in Microsoft's gaming strategy, and the company is actively preparing to launch its mobile Xbox gaming store in the upcoming year. This move aims to compete with the dominant positions of Apple and Google in the mobile gaming store market, and the potential for success is further bolstered by the inclusion of content from Activision Blizzard. But Microsoft appears to be considering multiple strategies and cloud gaming is another avenue for further development.

Investing in its gaming services to make it more accessible

In June 2017, Xbox unveiled the introduction of Xbox Game Pass, a subscription service that provides gamers with access to a library of over 100 downloadable games that can be played on their Xbox console or PC. This monthly subscription offers gamers a wide selection of titles, including new releases, well-known franchises, and independent game creations and has inspired other gaming companies to emulate a similar model to varying degrees. Although the Xbox Game Pass already boasts nearly 25 million subscribers, Microsoft contends that significantly higher numbers are required for the company to achieve sustained success in the gaming industry. And their strategy is clear: broaden their range of products/services in order to expand their market reach and enhance their revenue.

Following the introduction of Game Pass, Microsoft experienced a growth of more than 40% in its revenue from the Content & Service sector from 2017 to 2022, with Hardware contributing to only approximately 20% of the total revenue. The console alone isn't the decisive factor, and Microsoft knows that diversifying Game Pass with a range of content and usage options will increasingly draw in new customers.

Xbox Cloud Gaming, a component of the Xbox Game Pass Ultimate subscription service, was officially launched on September 15, 2020, and the tech giant has recently made a concerted effort to promote and advance the service.. Microsoft considers a future where cloud gaming is widely adopted, enabling individuals to access high-quality games on various devices, regardless of their hardware requirements.This vision aligns with the company’s consistent commitment to cloud technology, with Azure, their cloud computing platform, standing as a robust global infrastructure and service provider for businesses and developers. Microsoft’s increasing focus and grasp on the cloud gaming segment is also raising concerns for regulatory bodies, and the UK’s CMA has quoted game exclusivity and cloud gaming as specific pain points in the upcoming merger with Activition Blizzard.

Microsoft gaming is destined for a great future... Dotted with obstacles?

Given the recent significant acquisitions and the continually shifting dynamics within the gaming industry, Microsoft's outlook for the future is undoubtedly bright. However, there are still lingering instabilities, and the road to surpass its primary competitor, Playstation, remains quite lengthy. February 21st saw Brad Smith, President of Microsoft, unveiling a set of global market share statistics for the year 2022, specifically concerning PlayStation and Sony. The figures were quite striking, with Sony commanding a dominant 70% of the global market share, leaving Xbox with a modest 30%. And Sony's recent strategic announcement won't make it easy for Microsoft to stage a comeback. Indeed, Sony aims to address its lag in the cloud gaming sector and has recently revealed its intention to pursue "aggressive plans" in cloud gaming. They plan to release the details of their strategy in the coming months. Meanwhile, the Japanese company has been striving to extend its reach beyond its traditional gaming console domain and establish a presence in the PC market.

Another blow hit Microsoft as they suffered an unintentional disclosure of confidential documents to the FTC during the antitrust review of its acquisition of Activision Blizzard. These documents revealed sensitive information about its gaming business and strategic plans, including details about upcoming consoles, new controllers, and potential acquisitions.

As Microsoft persists in investing in its gaming ecosystem and extending its influence, it must confront these challenges directly. Thriving in this dynamic industry necessitates not only technological advancements but also astute strategic moves. The fate of Microsoft gaming depends on its capacity to overcome these obstacles while remaining committed to its vision of delivering accessible and enjoyable gaming experiences for everyone. Although the path forward may be marked by obstacles, it is precisely these challenges that will assess Microsoft's determination and gauge its influence on the future of gaming.

This research highlight is based on our data coverage of Video Games worldwide. Please contact us to get a demo and see the depth of our service. Discover Nextv Series Europe, the event that focuses on the trends, innovation and strategies driving Pay TV, Telecom and OTT in an increasingly connected ecosystem.

Nicolas Valentin


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Published on: Thursday, 19 October, 2023

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