Microsoft (NASDAQ:MSFT) made waves in the video game industry recently with the acquisition of Bethesda Softworks owner ZeniMax Media for $7.5 billion. It's a huge deal, given the top gaming franchises that Bethesda produces, which will bolster the exclusive titles that will be available on Microsoft's Xbox Game Pass subscription service.
Here are three reasons why Sony's (NYSE:SONY) PlayStation business may be in for a real battle in the next console war kicking off this holiday.
1. Microsoft's got cash and is willing to spend it
CEO Satya Nadella is not playing games when it comes to investing in the video game industry. As games shift to a subscription model, Sony's PlayStation Now and Microsoft's Xbox Game Pass are in a race to win new subscribers, and the primary way that is done is through offering the most compelling roster of exclusive titles for their respective cloud gaming services.
Microsoft is emerging as an early favorite in this race. It's got a massive financial advantage over Sony that it can use to go on a shopping spree for new studios. Microsoft ended the most recent quarter with $73 billion of net cash, compared to $17.6 billion at Sony. Microsoft also generated $45 billion in free cash flow over the last four quarters compared to Sony's $9 billion.
Microsoft has been quick to put this cash to work in the gaming industry under the leadership of Nadella in recent years. There have been a flurry of deals within the last few years to build up Microsoft's Xbox Game Studios with more game development talent.
In 2018 alone, Microsoft acquired several studios, including Compulsion Games, Undead Labs, Playground Games, Ninja Theory, Obsidian, and inXile. But these were small deals and nowhere near the magnitude of the Bethesda acquisition, which makes bellwether titles like Fallout and The Elder Scrolls exclusive to Xbox Game Pass.
2. Xbox Game Pass is already in the lead
It's telling that on the eve of launching the pre-order for the upcoming Xbox Series X, Microsoft announces that Bethesda is now part of Xbox Game Studios. It's a clever marketing tactic to let buyers know that Xbox Game Pass will be well-stocked with several of the industry's most popular titles, including Wolfenstein, Doom (2016), Dishonored, and Prey, among many others.
At the end of June, Sony's PlayStation Now streaming service stood at 2.2 million subscribers. But Xbox Game Pass had 10 million members. Microsoft is already winning the race and it's stepping on the gas with the acquisition of Bethesda.
3. Microsoft is building a wide selection of titles
Before the Bethesda acquisition, Xbox Game Studios had 15 studios under its wing. It now has 23. Sony increased its in-house studio count to 14 by scooping up Insomniac Games in 2019. Insomniac Games is the studio behind the hit title Marvel's Spider-Man, which was a PlayStation 4 exclusive.
Microsoft is aiming to stock its service with plenty of exclusives going forward. Sony has a long history of delivering quality first-party titles to gamers, which explains why Xbox has never managed to outsell a PlayStation console, but the tide might be turning in Microsoft's favor.
The future of the video game industry is gradually shifting away from console dependency. Nadella successfully transitioned Microsoft to a software-as-a-service model using cloud services. He is following the same playbook with games, which could open up the addressable market for the Xbox platform to more people.
Out of the roughly 100 million people who might be a PlayStation 5 or Xbox Series X over the next five years, there are approximately 2 billion people who play games worldwide. Microsoft is joining its xCloud gaming service with Xbox Game Pass, which will allow users to stream top titles to a mobile device, and therefore, open up the market to a wider audience.
The era of cloud gaming could significantly grow the market for big-budget games like the ones coming over from Bethesda. By scooping up more studios, Microsoft is trying to gain an advantage in the breadth of selection to provide plenty of games that appeal to everyone's taste. This strategy worked well for Netflix in video streaming, and it may lead to Xbox Game Pass becoming the must-have game streaming service.