Microsoft Corporation (NASDAQ:MSFT) stumbled with the current generation of gaming consoles. Its Xbox One has been outsold by rival Sony Corp (ADR)’s (NYSE:SNE) PlayStation 4 by a two-to-one margin. However, Microsoft has something Sony lacks: its Azure cloud services. Now MSFT has plans to leverage Azure in a big way, with the creation of a new Microsoft gaming cloud division.
If the company can pull it off, there’s a potential market of 2 billion gamers worldwide — a huge and potentially lucrative target that has big implications for MSFT stock.
The Microsoft Gaming Cloud
In an interview with The Verge, MSFT announced that it has created a new Microsoft gaming cloud division. The move includes an executive shuffle with former Xbox chief Phil Spencer becoming head of Microsoft gaming, and reporting directly to CEO Satya Nadella.
What is the Microsoft gaming cloud division? Essentially, it leverages the company’s vast and very successful Azure cloud services, for gaming. This includes the current effort to have game developers offload processing to Azure and Microsoft’s Game Pass subscription service for Xbox One, but builds on these foundations in a big way.
Ultimately, the company is looking to Netflix, Inc.’s (NASDAQ:NFLX) subscription model, with the idea of creating a “Netflix for games.” Azure hardware would do the processing and hosting, so the games could be streamed to virtually any connected device.
That lofty goal is bound to make Microsoft investors’ ears perk. Could this Microsoft gaming cloud division do for MSFT stock what video streaming did for NFLX?
The head of the new division is Kareem Choudhry and speaking to The Verge, he explained the potential: “We believe there is going to be 2 billion gamers in the world, and our goal is to reach every one of them.”
And at a 2017 shareholder meeting, CEO Satya Nadella told investors the company is: “mobilizing to pursue our extensive opportunity in a 100-plus-billion gaming market.”
In other words, MSFT sees gaming opportunity that is much larger than the 35 million or so Xbox consoles it has sold.
Building for the Future
It may sound like the Microsoft gaming cloud division came out of nowhere, but the company has been building up to this moment.
As pointed out by The Verge, the company has been quietly acquiring cloud-related gaming companies for the past three years. That includes PlayFab — a gaming-as-a-service platform currently powering over 1,200 games — which MSFT announced it had purchased in January.
The company has been continually expanding its Azure cloud services, and encouraging game developers to make use of the processing power and hosting capability to supplement Xbox One gaming. Its Xbox One Live online gaming service has hit 59 million users. And for the past year, the company has been pushing Xbox Game Pass, a $10 monthly subscription service that offers access to a library of games.
There has been a lot of talk about how Microsoft blew it in this round of the console wars, whether the new Xbox One X has what it takes to close the gap with the PlayStation 4, and what the next generation of consoles is going to look like.
With the Microsoft gaming cloud, MSFT is aiming much higher than the Xbox. In its latest earnings report, total gaming revenue had reached $3.92 billion — up 8%. But with total company revenue of $28.9 billion, that has a relatively small impact on MSFT stock. Imagine what happens if the Microsoft gaming cloud division comes anywhere near its lofty goals.
Xbox hardware revenue will still be there. But throw in potentially hundreds of millions of gamers worldwide (or even a few billion if you look at the total market Microsoft is targeting), all paying a small monthly subscription fee to access streaming games? That is big money, and it’s recurring revenue that’s not subject to the ups and downs of hardware sales cycles the way Xbox revenue is.
That’s Nadella’s “100-plus-billion” gaming market … if the company can pull this off, the potential upside for MSFT stock is huge.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
