On the surface, Microsoft MSFT 0.74% is lagging behind its big rival in the videogame business. But the company is succeeding where it counts.
Such was on display Sunday as the company showcased its coming videogame offerings as part of the annual E3 conference in Los Angeles. The company previewed 50 game releases, 18 of which will be exclusive to its Xbox console. The latter included major new iterations of “Halo” and “Gears of War” that have been marquee franchises for the company but haven’t seen a significant new release in at least two years. The company is also boosting its subscription-based Game Pass service with new offerings.
What Microsoft didn’t do was slash the price of its Xbox One consoles, despite some earlier leaks to the contrary. The company held fast even though Xbox One is now trailing Sony ’s PlayStation 4 by roughly 2 to 1 in unit sales, according to most estimates. Estimates are required because Microsoft itself decided to stop reporting sales about a year after both consoles first went on sale in late 2013. Sony last reported global lifetime sales of 73.6 million units for PlayStation 4 at the end of last year. Electronic Arts reported the two consoles combined had sold 103 million units globally by that point, leaving Xbox One with a little less than 30 million units sold since its launch.
But today’s videogame business is more than just selling consoles and plastic disks. Digital services driven by subscriptions, downloads and in-game sales are the industry’s biggest growth drivers now. And Microsoft will continue to capitalize on that shift. The company reported a record 18% year-over-year jump in gaming revenue to $2.3 billion for its fiscal third quarter ended March 31, and its Xbox Live service now claims 59 million monthly active users and has grown 13% in the last year.
That service benefits both from games owned by Microsoft as well as those owned by others. The popular “Fortnite” owned by Epic Games was a big driver in the most recent quarter. But adding more of its own blockbuster properties to the mix will allow Microsoft to capture a greater share of the economics enabled by its Xbox Live service. The gaming business also drives more usage of the enormous global network Microsoft has built to serve its growing cloud business.
That would also reduce the company’s reliance on lower-margin console sales. Morgan Stanley analyst Keith Weiss estimates that hardware would account for just 16% of Microsoft’s gaming revenue by the 2021 fiscal year, compared with 28% for the current year. In that light, maybe second isn’t such a bad place to be.
Write to Dan Gallagher at dan.gallagher@wsj.com
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