Microsoft Corporation (NASDAQ: MSFT) released its third quarter earnings report. The company reported a net income of $10 billion from a revenue of $34 billion in the quarter. Across its revenue segmentation, except Gaming, all other verticals grew by an average of 12.8%. Overall Gaming revenue decreased by 1% but the Xbox content and services revenue increased by 2% with increased engagement due to pandemic’s stay-at-home guidelines.
Recently, the Redmond, Washington-based company also announced its latest Xbox Series X and Xbox Game Pass. Statistics support the claim that the Game Pass service can be the Netflix for Gaming. For past four quarters, the gaming revenue may not have followed the growth trend of the company but here’s why Microsoft Gaming Division can still thrive.
The Gaming Industry
The global video gaming industry is projected to grow at (CAGR) 12% during 2020-2024. As of 2020, the gaming industry is around $120 billion. It is projected to grow around $190 to $200 billion industry by 2022. During the current pandemic the game industry has seen more than $1.5 billion dollars of revenue from consoles, game cards, subscriptions etc. The industry depends heavily on technology. With the advent of virtual and augmented reality, tech giants like Microsoft, Sony and even Apple & Google are entering into the industry. These companies are offering games from consoles, mobiles & in near future cloud.
People are more connected across the globe than ever before. Streaming a live game play across different regions opens up new challenges for gamers to explore without compromising on quality. Gamers have a cultural shift of competing in a real-time gaming environment across the world. The games are not only played but are also streamed. With more than 2 billion gamers across the world the opportunity presented by cloud gaming & streaming may be a game changer.
Microsoft’s Take On The Industry
Microsoft Corporation has been in the gaming industry since the early 2000s. The company provided a complete entertainment system with Xbox consoles, state of the art motion capture system (Kinect) and game titles like Halo. Since the inception of Xbox, the face of Microsoft’s gaming division, the company has won more critics and title awards than any of its competitors. But the cash inflow from its gaming division was not a steady and comparable to its other services. With a shift from on device gaming to cloud gaming Microsoft has bet on latter focusing on gaming services while not abandoning its hardware division.
In the third quarter of 2020, the overall revenue of Microsoft Corporation increased by 20% on a year on year basis. From first quarter of 2017 to third quarter of 2020, the revenue share generated by services grew from 31.74% to 54.68%, a 72.20% surge in revenue by services. It is evident that the company is shifting from product-based business model to services (subscription) based business model. Office 365, LinkedIn and Microsoft Azure are examples of the successful services offered by Microsoft.
Microsoft’s shift to gaming service started in early 2017 when the company announced its Game Pass, a subscription-based gaming service which provides access to more than 100 titles including some award-winning titles. At the time the service was limited to Xbox and PCs having gamers to download games without any hidden fees. Recently the Game Pass subscription crossed 10 million users across 41 countries. But the business model of subscription based gaming is not unique and is being copied by tech giants like Google’s Stadia & Sony’s PlayStation Now. What differentiates Microsoft’s Game Pass is the company’s developer relationship in the gaming industry and financial as well as technical flexibility to innovate and deliver games over the cloud. Also, Microsoft is one the leaders in the cloud based service providers.
Recently, Microsoft announced its latest gaming console Xbox Series X along with a game streaming service called xCloud for later this year. With upcoming new consoles Xbox Series X, Microsoft promotes high performance gaming (with new hardware) along with cloud streaming and backwards compatibility. This means that Microsoft’s upcoming consoles, gaming and streaming services will not only support current and upcoming titles but also some notable titles which has a cult like following such as Halo & Age of Empire. Microsoft has also partnered with multiple top tier game developers to release titles both on cloud and on devices. Microsoft’s xCloud has already impressed critics with huge on demand library with popular titles along with low latency during gaming.
Microsoft’s Xbox and Sony’s PlayStation are supposed to witness significant growth due to the popularity of multi-functional gaming consoles. Microsoft is supposed to have an advantage among its competitors. Microsoft has an established cloud service platform Azure which will enable developers to provide a more integrated but flexible gaming experience to the gamers. The company has an established Xbox user base, mature gaming studios, acquired more than 40 top-tier game developers & Mixer, Game Pass & xCloud Service. As a game company, Microsoft is having both the capability to hyperscale and deliver cloud-based gaming.