A little less than a year ago, yours truly underscored the idea that Microsoft (NASDAQ:MSFT) was getting very serious about video games. Though it had been in the business for decades to various degrees, it had never been a priority that made a meaningful impact on MSFT stock. Not even the launch of the first Xbox in late-2001 proved to be major piece of its revenue puzzle.
Every few months though, the company takes a solid leap forward down the gaming path. The latest leap? Microsoft says it’s no longer going to release any “Xbox exclusive” games for rival consoles like the Switch, from Nintendo (OTCMKTS:NTDOY), and the Sony (NYSE:SNE) PlayStation.
Tuesday’s announcement superficially answered a lingering question about Microsoft’s recent acquisition of game publishers like Double Fine and Obsidian. Both had been platform-agnostic, developing titles for any platform of their choice. From now on, they’ll only be making video games for the Xbox.
Exclusive Plans
The announcement admittedly calls into question Microsoft’s understanding of the word “exclusive.” The message delivered goes beyond the words, though. The fact that the company made a point of saying anything at all on the matter makes it clear the software giant has a very specific plan for its video game business. It wants to cultivate its own gaming ecosystem, so to speak.
That’s part of a significant evolution, too, namely Microsoft’s relatively nascent willingness to bring in outside coders, publishers, and ideas into their inner circle and then close the gate. It’s not only a financial risk, but a reputational one as well.
It’s the shape of things to come for the video gaming industry though, now that websites like Steam have democratized the business, and now that sites like GOG.com (Good Old Games) have made a universe of older but still play-worthy titles available at a fraction the original game prices. Protectionism is the new norm because it has to be.
Just ask game publishers like Activision Blizzard (NASDAQ:ATVI) and Electronic Arts (NASDAQ:EA), both of which have rethought their business models from the ground up.
EA is wading deeper into subscriptions and streaming, while snagging outfits like Industrial Toys, GameFly and Respawn Entertainment. Activision Blizzard has seemingly figured out where it went wrong with gamers last year as well. Even Nintendo, which is generally considered a console maker but also develops many of the games played on its console, has rolled out the red carpet for indie game developers, and has introduced subscription-based products
In all cases, video game companies are slowly moving towards a model that excludes other hardware and software providers, and cultivates self-serving, one-stop shops.
Potential Impact on Microsoft Stock
Refusing to offer its home-grown games on other platforms isn’t an earth-shattering development. There were only a couple of games from Microsoft that crossed that line — Ori and the Blind Forest, along with Cuphead, for example — and Microsoft never suggested it would be otherwise.
Still, the company has proverbially burned the boat. It won’t be readily facilitating any sort of revenue growth for any sort of rival.
It’s not the first step the Redmond-based outfit has taken in this direction. Less than a year ago, it launched a subscription-based service called Xbox All Access, which included a lease-to-own Xbox console. By that time it was already offering Game Pass and Live Gold, both of which also made gaming affordable on a relatively expensive Xbox console.
Then in June of this year, the company revealed that its next Xbox would be able to play games that were playable four versions of the Xbox ago. The generous retro-playable option makes a huge vault of older and largely inaccessible titles suddenly playable again, further drawing gamers back into the ecosystem where they can be monetized in multiple ways.
It still won’t make a meaningful dent, for better or worse, in the value of MSFT stock. The company is still mostly about cloud-based productivity software and Azure. Though the company doesn’t disclose much in the way of details, it was willing to divulge $10 billion worth of annual gaming revenue had been generated as of the middle of last year. That’s roughly one-tenth of its total business.
By doubling down again on becoming a self-contained soup-to-nuts gaming name, though, this piece of Microsoft’s total revenue could readily ramp up to a fifth of its top line in the foreseeable future.
Looking Ahead for MSFT
Gaming is not a reason to buy Microsoft stock … at least not yet. And, it’s certainly not a reason to hold your breath waiting for the day video games become the breadwinner for the company.
The clear decision to leverage the addition of indie developers Double Fine and Obsidian for its own (and only for its own) purposes, though, is another piece of evidence of Microsoft’s gaming ambitions. If this works out as well as other efforts made by the company, like the penetration of the cloud computing arena on the back of Azure, there’s much for current and would-be owners of MSFT stock to be excited about. At stake is a bigger piece of a video gaming market that’s expected to be worth
Shareholders just need to be patient.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about him at his website jamesbrumley.com, or follow him on Twitter, at @jbrumley.
