Microsoft Is Doubling Down on Gaming—and Looking Beyond the Xbox - Barron's

Microsoft's Xbox Series X (left) and Series S gaming consoles.

Charly Triballeau/AFP via Getty Images

A lot is at stake for Microsoft ‘s videogame efforts this week. The lucrative interactive entertainment business isn’t an easy one, and the software giant has long been perceived as taking second place on the podium behind Sony Group and its PlayStation money machine.

Microsoft (ticker: MSFT) is seeking, yet again, to upend that reputation with a batch of announcements that coincide with the annual Electronic Entertainment Expo, or E3, videogame conference, which this year is being held virtually. For investors, the most consequential news Thursday is Microsoft’s plan to bring Xbox games to internet-connected TVs, through deals with manufacturers and dongles.

“As a company, Microsoft’s all in on gaming,” CEO Satya Nadella said. “We believe we can play a leading role in democratizing gaming and defining that future of interactive entertainment, quite frankly, at scale.”

To bring Xbox games to more devices, the company is leaning on its streaming technology, which involves placing the bulk of the computing load at a faraway data center and sending the rendered multimedia to whatever device a player chooses to use. Doing so lets people play the latest games at the best fidelity without the expense and, these days, effort of obtaining a powerful computer.

“Cloud gaming is truly a breakthrough experience,” Nadella said. “I love that I can go from my PC to my Xbox to my Duo, picking up on any game right where I left off and even using the touch controls on Duo. That is super well done, and I can use my controller, of course, on my PC.”

The strategy that underpins its Thursday announcements is the company’s interest in subscriptions. Long a software subscription business, Microsoft is less concerned than some of its rivals about what particular piece of hardware people use to play videogames than it is earning money on the games themselves. Hence it sells its flagship new console—the Xbox Series X—at a loss and encourages consumers to finance their purchase, much like people buy iPhones. The financing plan also includes a subscription to its catalog, called Game Pass, which Microsoft hopes will lead to more long-term subscribers.

By making its slate of Xbox games available on more screens, the company is aiming to grow its subscription base, which currently numbers at least 18 million, especially as the next-generation systems are nearly impossible to purchase, even seven months after launch.

Microsoft appears to be on to something. In its March quarter, the company reported videogame revenue rose 50%, to $1.2 billion, compared with a year earlier, helped by the launch of its new console. But its Xbox content and services revenue also grew at a healthy 34%, to $739 million, which includes its Game Pass subscription.

To drive people to purchase a subscription, though, Microsoft needs a catalog of high-quality titles. Its offerings have historically been overshadowed by the games produced by Sony’s (SONY) in-house and third-party developers for its PlayStation systems. Microsoft has tried to change that. Last year, it paid $7.5 billion to acquire ZeniMax, a company that houses Bethesda, the maker of well-loved game franchises such as Wolfenstein and Fallout.

Buying Bethesda, was one of the most significant acquisitions in the industry. On Sunday, Microsoft has scheduled press conference that is expected to include a showcase of forthcoming games. It is a crucial moment for the company’s long-term success selling its Xbox consoles, but also Game Pass and its cloud offerings. Gamers will pay for high-quality games, but it’s up to Microsoft—and now Bethesda—to make them.

On Thursday, shares of Microsoft gained 1.4% to close at $257.24. The S&P 500 was up 0.5%.

Write to Max A. Cherney at max.cherney@barrons.com

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