At E3 2018 — the year’s biggest video game conference — Microsoft (NASDAQ:MSFT) confirmed that it’s working on a streaming game service. The company also said that its engineers are currently designing the next generation of Xbox game consoles. But what if those two initiatives are actually one and the same? A website focused on all things Microsoft thinks that’s the case, after uncovering details pointing to “Scarlett Cloud,” Microsoft’s Xbox game streaming service and a new, low-cost Xbox console that would work with it.
If the pieces fall into place as predicted, Scarlett could be a game-changer (no pun intended) that shakes up the video game industry, and boosts MSFT stock.
Thurrott Report: Microsoft’s Xbox Scarlett Game Streaming
A report published on Microsoft-tracking website Thurrott.com (via TechCrunch) offers a detailed investigation of Scarlett, Microsoft’s forthcoming Xbox game streaming platform. We’re still at the stage where there’s considerable speculation involved — the next generation Xbox consoles aren’t expected until 2020 — but between official MSFT announcements, insider leaks and industry trends, a picture is beginning to emerge.
Here’s what Thurrott came up with when it connected the dots.
First, Microsoft has already confirmed that it is working on new Xbox game consoles, with an expected release date around 2020. Note the plural: consoles, not a single console. And these new consoles are being developed under the code name Scarlett. Second, at E3, Microsoft announced it’s working on a new cloud-based game streaming service.
According to Thurrott, the company will release the expected, next-generation Xbox video game console, packed with the latest in high powered technology. The successor to the Xbox One X. However, where things get interesting is the prediction that Microsoft will also release a low cost Xbox, designed to play games streamed from the Scarlett Cloud streaming platform.
This move would disrupt the video game industry, and could be a huge win for Microsoft’s gaming revenue and for MSFT stock.
Leveraging Azure, Moving to Subscriptions
Yesterday, I wrote about about the Q4 earnings that caused MSFT stock to pop, with the company’s bet on cloud services paying off. The big quarter was led by Azure revenue growth of 89%.
MSFT noted in its Q4 earnings report that the 39% growth in gaming revenue was “driven by higher revenue from Xbox software and services.” The company also spiked out the importance of Office 365 subscriptions to the growth of its $9.7 billion Productivity and Business Processes division.
Now for putting all these pieces together.
New Xbox consoles are coming, but Nintendo (OTCMKTS:NTDOY) has proven with the Switch that cutting edge, 4K graphics are far from a must-have for gamers. And the success of titles like Fortnite has shown that multi-player, online gaming is the future. At the same time, competing against Sony’s (NYSE:SNE) Playstation 4 in terms of raw power has led to low profit margins on Xbox sales, and having Sony run away with the crown for this generation of consoles.
However, Microsoft has a huge advantage in its Azure cloud platform. Sony and Nintendo have nothing on this scale and it would takes years of massive investment to come close.
Thurrott predicts that MSFT will release a low cost Xbox optimized for playing games streamed by the Scarlett Cloud service — which in turn would be powered by Azure. With global Azure coverage, latency would be minimized, but that low cost Xbox would also have enough hardware onboard to take care of the rest.
Microsoft would still be able to please hardcore gamers with the next generation Xbox. But it would also disrupt the gaming market with a low-cost Xbox option that undercuts Sony and Nintendo. That could lead to big sales increases compared to this generation. Streaming games via that Scarlett Cloud service would also mean consumers pay a monthly subscription access fee — a recurring revenue model that Microsoft has proven with Office 365, and with the Xbox services fees (like Xbox Live subscriptions).
Microsoft could win the numbers game in the next generation by attracting gamers who don’t want to fork over $500 for a new console and don’t want to pay $80 a pop for games. And a relatively low tech Xbox console would likely have higher margins since it wouldn’t need extreme components. At the same time, Scarlett Cloud subscriptions would mean a constant revenue stream.
It’s all upside for MSFT stock and the logic is solid, but we still have two more years to wait to see how Scarlett plays out.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
