Video games, once viewed as a nerdy hobby for children and anyone else spending a lot of time in their parents' basements. are now one of the most popular forms of entertainment right along with movies.
Playing video games, not just making them, is even becoming a legitimate career prospect with many streamers and professional gamers making more than enough money to make ends meet. With the consistent rise in popularity of gaming, tech companies such as Microsoft (MSFT) and Sony (SNE) have allocated more of their business to video-game console manufacturing.
Microsoft’s Xbox and Sony’s Playstation are two of the biggest players in the gaming market with Nintendo (NTDOY) in the mix as well. Investors would do well to invest in any of these companies as they are major players in a rapidly growing market that has plenty of room for more than one company to prosper. Right now is a very interesting time for investors to look at this market as a major power shift could be happening soon.
Microsoft, Sony, and Nintendo are the major players in gaming but the biggest rivalry is between Xbox and Playstation. Nintendo manages to not compete directly the other two given the nature of their games being geared more towards children with many older games playing for nostalgic reasons.. For the most part Nintento operates in its own world as games shared between the Xbox and Playstation frequently don't play on Nintendo’s Switch.
Nintendo has its own collection of games (you may have heard of a little Italian plumber named Mario). This is slowly changing as Nintendo looks to expand game selection to more realistic and graphically intense games. For the moment though, all eyes are on Sony and Microsoft as the next-generation of video game consoles prepares for release this holiday season.
Next-Generation Consoles
What investors should take note of is that these console launches often determine how a company's video game business is going to perform over the next half decade or so. Xbox and Playstation have been in a duel for three console generations now with Sony having the edge in two of the three contests. Microsoft’s best-selling console, the Xbox 360 was the exception.
The console with more sales at launch in three months will have a huge advantage going forward as people will want to buy the same consoles their friends are using due to the fact that online gaming is has been largely segregated by console. This has become somewhat less of an issue in recent years with the introduction of crossplay. Some games now allow Xbox players to compete with play with Sony gamers, but the issue remains as crossplay is not available for every game and player-to-player communication is not available across the two platforms.
So the major question is: Who is going to win this round of the console wars? Sony's Playstation outsold the Xbox convincingly in the current generation, helped by a cheaper initial price point and more extensive library of games. Microsoft seemed to focus more on the Xbox’s ability to be a media player as opposed to a gaming console, which kept of lot of people from buying it as their main gaming platform. This lead to a narrative that Sony was the console for gamers, which, when combined with a cheaper price point, made a Playstation purchase seem like a no-brainer.
An Exciting New Strategy
While Sony is sticking with its approach of supporting their game developers and making sure they have the highest number of quality titles exclusive to the Playstation, Microsoft is trying something a little different. In addition to its library of games, Microsoft is heavily advertising a pair of services: Xbox Game Pass and Xbox Play Anywhere.
Game Pass is a subscription service akin to Spotify or Apple Music that allows consumers to play any game available on the console for a simple monthly fee. There is a constant stream of deals for the service, such as offers to get the first month for $1. Although many are hesitant to enroll in another subscription, Game Pass is one of the best deals in gaming right now.
A new game usually costs $60, while Game Pass is a $10 monthly subscription that will save gamers (and their parents) money as long as consumers use it for more than two games a year. This business strategy has become dominant in both music and television and movies as Spotify, Apple Music, Netflix, HBO, Hulu and Disney Plus have made single-title purchases practically obsolete. Microsoft has also seen significant growth in its software business since moving to a subscription model.
Two is Better than One
Another thing that should be on investor’s minds is that there is a non-console way to play video games... computers. PC gaming (which is almost exclusively the domain of Windows machines) is growing in popularity with competitive landscape for professional players mostly being in the realm of computer games.
PCs are by far the best way to play video games in terms of performance and the number of games. The biggest problem with PC gaming is that it typically requires an expensive computer to run the most popular games and most consumers just wants to play games in their free time while relaxing on the couch.
Microsoft has always kept the Xbox separate from its computer business and the two competed against each other, even as part of the same company. Microsoft's new Play Anywhere service, will let consumers who buy a game for their Xbox play that title on their computer and vice versa. This is a huge deal, as many gamers like to play on a computer and console but don't want to buy a game twice. This service may be incrementally helpful to Xbox sales but it is likely to have an extreme impact on the PC gaming market.
This gives Microsoft a huge advantage over Sony as it actually owns two video game platforms that together can dominate the Playstation with their own unique advantages. Xbox players may decide to try playing their games on a computer and find a whole new world of gaming. It looks like Microsoft is has a whole-company strategy to take over the gaming world as opposed to just letting that be the domain of the Xbox division. This strategy of giving the Xbox fewer exclusive benefits may sound confusing at first, but this dual-pronged approach should help Microsoft as a whole even if Xbox loses some percentage of the total gaming market.
What Company to Invest In
Investors should note this combination of product lines and subscription services puts Microsoft in an amazing position going forward. The new Xbox may not see the immediate benefits of this strategy in November when it is set to be released, but over the long hall it will put Microsoft ahead. MSFT stock not take off right at launch, potentially making SNE stock might be the better short term play.
That said, Microsoft is a great investment for the majority of investors. Holding it for the long run has proven to be extremely profitable so far and that will more than likely continue to be the case as the company continues to grow and dominate the tech landscape. Sony will have to adapt and offer its own set of unique advantages as sticking with what has worked in the past may not be enough to win the future.
