Microsoft (MSFT 0.67%) has its hands in many different businesses. Most investors think immediately of the company's Windows computer software or Azure, its public cloud segment. But gaming has long been a part of the company, starting with personal computers and the Xbox gaming console that first launched in 2001.
Gaming remains a rapidly growing business today, and Microsoft is arguably more dedicated to the industry than ever before. Here is how Microsoft is battling for market share in the gaming sector and why it could benefit shareholders over the long term.
Gaming may be more significant than you realize
Most celebrities rise to fame through the film and music industries, long considered the pillars of entertainment. But you might not have known that the gaming industry's $180 billion revenue in 2021 was more than that of film and music combined.
What's more, the industry is still growing; research from Mordor Intelligence estimates that global gaming could grow to $340 billion in value by 2027, driven by increased accessibility through emerging gaming methods like mobile and cloud-based gaming.
Microsoft's broad exposure to gaming makes it a logical sector for the company to invest in further. For example, PC gaming is in Microsoft's wheelhouse, given that Windows has roughly 76% market share of the global desktop computer operating system market. Additionally, the company has built up its Xbox ecosystem, consisting of multiple console products and a subscription service for gaming content, including cloud-based gaming for phones, tablets, and laptops.
Borrowing a strategy from the streaming wars
Microsoft's subscription service, called Game Pass, is where it has put its financial muscle in recent years. Content has become king in the ongoing video streaming wars. Netflix was the first streaming platform to market, but a company like Disney has quickly built a rival service because its rich library of intellectual content draws eyeballs. Netflix initially licensed content from third parties but was forced to spend heavily to develop its own after these third parties figured out the importance of that content and launched their own streaming services.
It can work similarly in video games. Many people don't buy an Xbox or a Playstation console because they love the hardware itself; you buy whatever will give you access to your favorite gaming content. That's probably why gaming companies fight and spend to keep key game franchises exclusive to their consoles. You'll probably never see a game franchise like Mario, the second-highest-grossing game franchise of all time, on any hardware other than a Nintendo system.
Microsoft seems to be buying into this content strategy -- literally. It spent $7.5 billion in 2021 to acquire ZeniMax, the parent company of Bethesda Studios, which owns trendy game franchises like Elder Scrolls, Fallout, and Doom. More recently, it has a pending acquisition of Activision Blizzard for $68.7 billion, a deal still undergoing regulatory review. Closing that deal would give Microsoft ownership of some of the most popular gaming franchises in history, including World of Warcraft and Call of Duty.
Recurring revenue is the long-term goal
Microsoft wants Game Pass to be such a good value that it would be silly not to subscribe. The service currently costs $14.99 per month, includes instant access to nearly 500 games, and includes free access to cloud gaming and day-one access to virtually every game released by one of the 32 game studios that Microsoft will own if the Activision Blizzard deal closes (23 without the merger).
Microsoft revealed that Game Pass hit 25 million subscribers when it announced its deal with Activision Blizzard. There is a ton of room for growth -- 5G is helping bring the connectivity required for gaming to more areas of the world, including an estimated 3.24 billion gamers.
Microsoft is spending to acquire top-notch gaming content because Game Pass could eventually become a free cash flow geyser for the company. Getting Game Pass to 100 million subscribers paying $14.99 monthly would total $18 billion in annual recurring revenue, which would be far more profitable than selling gaming consoles alone. Gaming is a vast business, and Microsoft wants to be king of that hill.
There are plenty of reasons to like Microsoft as a long-term investment, but gaming might be its next big thing.