Microsoft looks beyond the console wars as it releases new Xboxes alongside Sony’s PS5

Microsoft and Sony both released new video game consoles this week: Microsoft has the $500 Xbox Series X and $300 Series S, while Sony has two models of PlayStation 5, starting at $400.

The last generation of consoles released by both lasted about seven years. With the latest systems, Microsoft and Sony are employing different strategies to attract gamers and generate even more revenue from gamers.

A lot is on the line.

The pandemic has given people more free time to play games. Gamers could stay hooked for years to come, which means big business for both companies.

Gaming represents 24% of Sony’s revenue. It’s 8% of Microsoft’s revenue, but Microsoft is more widely held as the third most valuable public company, behind only Apple and Saudi Aramco, and any success in gaming can benefit many shareholders.

In 2013, when Microsoft introduced the Xbox One and Sony released the PlayStation 4, Sony shipped 4.2 million new consoles, ahead of Microsoft, which shipped 3.8 million, according to estimates from technology industry research company IDC.

Sony had set the price of the PlayStation 4 at $400, $100 below the $500 price of the Xbox One. Microsoft spent time promoting the entertainment capabilities of the Xbox, rather than focusing more directly on gaming. At first, the Xbox One came with the Kinect, a device that let people control the Xbox with voice commands and motion gestures. It wasn’t a major hit, and Microsoft wound up releasing a $400 Xbox package that left out the Kinect in 2014.

In later years, PlayStation 4 owners got access to exclusive games unavailable on other systems, including “Uncharted 4,” “Horizon Zero Dawn” and “Spider-Man.” The Xbox One got a few exclusives of its own, including “Halo 5.”

Still, each year the PlayStation 4 outsold Xbox One, according to IDC.

Microsoft has tweaked its gaming approach since the Xbox One launch. Phil Spencer, the executive vice president in charge of gaming at Microsoft, said in an interview with the Verge last year that console shipments, the usual measurement of success, were not as important as engagement, including the number of people are playing.

The shift follows revolutions in other Microsoft products under Satya Nadella, who replaced Steve Ballmer as CEO in 2014. The company stopped being so insistent on defending Windows. It released versions of its Office apps for Android and iOS, and it brought the Teams productivity app in the Office suite to Linux, the open-source operating system. Linux became accessible in Windows. Microsoft started migrating Office customers to subscriptions, and it gave away Windows 10 for free.

The new Xbox Series X and S have no slate of exclusive new titles like last time. So how will Microsoft stand out?

The answer is Xbox Game Pass, an online subscription service that gives customers a catalog of more than 100 games, spanning all three previous Xbox consoles, to download — all for as little as $10 a month. Microsoft plans to bolster the service with new titles over time, just as Netflix does with video.

Microsoft’s offering is broader than Sony’s new PlayStation Plus Collection, a similar service with 20 PlayStation 4 games people can play if they subscribe to the PlayStation Plus online multiplayer service, which costs $5 per month.

Game Pass subscribers who pay an additional $5 per month get access to a service for playing Xbox games on Android devices; the games are delivered over the internet from Microsoft data centers. (Microsoft wants to provide a similar service for iOS device, but says Apple’s App Store policies have prevented it from doing so.)

The mobile option represents an answer of sorts to the Nintendo Switch, which delivers powerful gameplay in a portable design. Sony’s PlayStation Now cloud gaming service does not support mobile devices.

More games are coming.

Microsoft’s gaming wing has been on an acquisition spree, with 23 game-development studios, including those stemming from the $7.5 billion Zenimax acquisition Microsoft announced in September. It’s up from 11 in 2018 and larger than Sony’s 14-studio collection. Microsoft has approached game developers in Japan, the home country of Nintendo and Sony, Bloomberg reported earlier this week.

Microsoft’s 343 Industries studio was supposed to release the next episode in its popular “Halo” series of science-fiction shooting games this holiday season to go along with the new Xbox consoles, but in August the company announced the game would be delayed until 2021.

In contrast, both the $500 PlayStation 5 and the $400 PlayStation 5 Digital Edition (which has no disc drive) can play exclusive games such as “Marvel’s Spider-Man: Miles Morales” and “Demon’s Souls.” The PS5 also boasts a software overhaul and major controller design.

Without any of these features in the new Xboxes, people are looking for hardware improvements as a reason to go with Microsoft.

They are there, but they might not be enough to topple Sony.

“I don’t see any technologies in this generation that provide an obvious bump to the content,” said Seamus Blackley, the former Microsoft employee credited as the father of the Xbox, who first pushed Microsoft to take on Sony.

Blackley has tried Microsoft’s new gaming hardware, and he said he thought that Sony’s PlayStation 5 will have the upper hand at least at first.

IDC concurs with Blackley’s expectation. Lewis Ward, IDC’s research director for gaming, said he expects Sony to sell as many as 5 million PlayStation 5 consoles this year, and he sees Microsoft selling 3.8 million Xbox Series X and S consoles. (Microsoft will sell every console it makes this year and expects a record holiday in terms of gaming usage, Jerret West, chief marketing officer of Microsoft’s Xbox business, told CNBC in an email. Tim Stuart, chief financial officer of Microsoft’s Xbox business, told Jefferies analyst Brent Thill on Thursday that he expects supply to outstrip demand in the fourth quarter and the first quarter.)

Investors are focusing less on Microsoft’s console sales anyway. Last year the company introduced a new metric: Xbox content and services revenue growth, which includes subscriptions to Game Pass and the longstanding Xbox Live service for online play, as well as sales of popular games such as Minecraft for non-Microsoft devices. That figure has been higher than overall gaming revenue growth in each of the past four quarters.

Moreover, higher console sales do not necessarily help Microsoft’s finances. The more console revenue Microsoft ends up with in its current fiscal year, which ends June 30, the lower the company’s total gross margin will be, Morgan Stanley analysts Keith Weiss and Josh Baer wrote in a note distributed to clients last month.

“I do think that Sony will probably come out of the gate more quickly with selling hardware, but I don’t think that Microsoft cares,” said Ben Throop, founder of Vermont game-development company Frame Interactive. He’s worked on several PlayStation games, and he expects to buy a new PlayStation and a new Xbox — just not right away. He said Microsoft is more focused on racking up Game Pass subscribers than moving consoles, unlike Sony.

West countered that Microsoft offers the most powerful console ever built, and claimed that it absolutely does care about selling consoles.

“But focusing solely on the console is an incomplete way to evaluate the gaming industry and how it will grow in the future,” he wrote. “Developers that work with us can reach gamers across PC, console, and mobile through the cloud. And all the new players picking up their games have just as many options for how to play.”

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