Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) have been battling each other in the gaming industry for 16 years. Gaming is far more important to the livelihood of Sony than Microsoft, and therefore the stakes are much higher for Sony.
The console war between Sony's PlayStation (PS) and Microsoft's Xbox has grown more heated with time. The first round was no contest. Sony's PS2 -- launched in 2000 -- outsold the original Xbox by more than 100 million units. In the next cycle, the PS3 barely edged out the Xbox 360. So far in the current cycle, Sony's PS4 has dominated, selling over 50 million units compared to Microsoft Xbox One's 28 million.
But Microsoft is planning a major counterattack
Things started going Microsoft's way in 2016, when Xbox One began to outsell PS4. To a degree, this may stem from some games receiving higher ratings on Xbox One than PS4.
However, Microsoft's momentum was halted in its tracks in the fall when Sony released two new versions of its console -- the PS4 Slim and PS4 Pro. The Slim is cheaper than the launch version and is more compact, while the PS4 Pro features enhanced processing power in order to display games in 4K resolution.
The console landscape will change again later this year when Microsoft launches a new console codenamed "Scorpio." Reports show Scorpio's technology to be far superior to PS4 Pro. A developer for some Microsoft exclusive games has even claimed that Scorpio is not an intermediate upgrade like Sony's console and instead Scorpio is taking a much bigger leap and is a full-blown, next-generation console.
How can Sony defend its lead?
Typically, there is not much that differentiates competing consoles. If you set up a PS4 and Xbox One on two TVs side by side, you would be hard pressed to notice a difference while viewing the same game.
The way console makers differentiate themselves is mainly through exclusive first-party games. Arguably the three best franchises that are exclusive to Microsoft's Xbox are Halo, Forza, and Gears of War. However, Sony's exclusive game portfolio is generally considered more attractive than Microsoft's; this is possibly partly why Microsoft's Xbox has never managed to outsell PlayStation through an entire cycle.
A console is a hit or flop based on the breadth of quality games available for it. With this in mind, there are several titles Sony has in development for release in 2017 that could keep gamers choosing PlayStation over Xbox.
Three in particular are Horizon Zero Dawn, Gran Turismo Sport, and a new installment in the popular Uncharted series. There's a long list of others, but these three games could each be contenders for Game of the Year.
In contrast, Microsoft doesn't have anything in its arsenal to match this lineup. In fact, one of Microsoft's most anticipated exclusive games in development was recently canceled. It might have been better planning to release Gears of War 4 (released this past fall) in fall 2017 to give Microsoft a quality exclusive game to show off Scorpio's graphical prowess. In the end, I wouldn't put it past Sony to discount the PS4 Pro around the time of Scorpio's launch.
So this begs the question: What kind of financial impact can a hit game provide Sony?
Let's take a look at Uncharted 4, a Sony exclusive, which was released in May 2016 and was one of the year's top-rated games. For the quarter it was released, Uncharted helped Sony's gaming segment drive year-over-year revenue growth of 14.5%, and operating income more than doubled to 44 billion Japanese yen.
This isn't to say that the games releasing this year will each turn out like Uncharted 4. We can't know for certain how well each game will sell. But Sony appears to have several exclusive titles scheduled for 2017 that are designed to sell more PlayStations and provide a buffer against the invasion from Microsoft's Project Scorpio.
Gaming is in Sony's DNA
With other Sony divisions struggling, Sony is highly dependent on its PlayStation business. It's crucial that Sony invest in a steady stream of high-quality exclusive games, and this involves high risk. To a great extent, Sony's past success at beating Microsoft, in both game development and console sales, can be explained by Sony's dependence on gaming.
Therefore, my bet is Sony will hold its own in the ongoing console wars.