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Microsoft redefined the console war. How will Sony respond?

Protocol Entertainment

Hello, and welcome to Protocol Entertainment, your guide to the business of the gaming and media industries. This Tuesday, we’re examining what Microsoft’s industry-shaking acquisition of Activision Blizzard means for the future of Sony’s PlayStation business and just how mainstream the metaverse really is. Also, we’re crossing our fingers that no giant game companies are bought this week.

Can PlayStation withstand the onslaught of Game Pass?

Last week, Microsoft made a historic play for the future of the game industry with its purchase of Activision Blizzard for nearly $70 billion, setting off a weeklong flurry of speculation and analysis that left us with more questions than answers. One of the most pressing right now is what it might mean for PlayStation.

For Sony, Microsoft’s central rival in the game business, the acquisition could prove to be an existential threat to its gaming business model. For years, Microsoft has been trying to chip away at its competitor’s enviable leading position in the home console market, but now it has at last amassed a formidable content empire large and popular enough to transform Xbox Game Pass into the powerful, industry-shaping tool Microsoft has always wanted it to be.

The Activision Blizzard purchase is a challenge to the traditional model. In a world full of ever-increasing competition for consumer attention, the company with the largest library of premium content at the best price stands a good chance of staying ahead. And Sony now has to contend with losing access to some of the most crucial gaming properties that would otherwise have kept customers from taking their purchases to competing platforms.

  • Sony’s approach to gaming, like Nintendo’s, has been to focus on nurturing studios to help produce exclusive hits that sell hardware and keep people locked in to the PlayStation ecosystem. This flywheel approach of using software to sell hardware has turned Sony into the second-biggest game-maker by revenue after only Tencent.
  • When players churn through Sony’s first-party library, they then turn to Fortnite or Call of Duty, both of which now monetize through in-app purchases, and they stick around longer if their friends are there, too. Sony takes a cut, and everyone wins — except Microsoft.
  • Game Pass, combined with Microsoft’s platform-agnostic approach to gaming, challenges Sony’s ecosystem lock-in strategy by offering players a deal too sweet to ignore: hundreds of games, now with potential Activision Blizzard exclusives, for just $10 a month. It’s made even better through its availability on PC and mobile, crossing platform divides Sony spent years vigorously defending to maintain its lead.

Sony has been slow to respond to Microsoft’s challenges. Thanks to Game Pass, Microsoft has put Sony in a particularly troublesome position of having to try to maintain its current course while also potentially responding with new products or acquisitions of its own.

  • Microsoft launched Game Pass back in 2017, and it now has 25 million subscribers. Sony, on the other hand, is only just now preparing its own version of a subscription service, which reportedly may not even contain newer PS5 games until many months after release.
  • Microsoft has been transparent in its attempts to redefine the console market after it lost badly to Sony in the PS4 era and was forced to pivot. It purchased Bethesda Softworks and its family of game studios for nearly $8 billion last year, and its investments in cloud gaming and cross-platform access have turned Xbox into a forward-looking gaming brand.
  • Sony has a cloud service and a membership subscription, as well as a successful virtual-reality business with a new headset on the way. But its various products don’t integrate like Microsoft’s, and Sony’s business has become increasingly reliant on trying to maintain and grow the PlayStation install base at a time of unprecedented supply shortages.

Sony’s strategy is still viable, but it’s not clear for how long. The PlayStation business is in a good position: The PS5 is outselling both its predecessor and the competition, and it has a strong couple of years of upcoming game releases on the horizon.

  • The game industry may not shift toward Microsoft’s proposed model for many more years, giving Sony ample time to find ways to diversify its gaming business. But the clock is now ticking faster than before.
  • Sony also has to contend with potentially losing Activision’s Call of Duty, which has been among the bestselling game series on PlayStation for more than a decade. Microsoft’s gaming boss, Phil Spencer, said last week the company has a “desire” to keep the shooter series on Sony’s platform. But just having Call of Duty and other future titles as bargaining chips puts Sony at a disadvantage.
  • Microsoft now gets to pick and choose when and under what circumstances it decides to support its rival with some of the most lucrative game franchises in the world, and having such leverage may create opportunities to squeeze Sony for concessions around revenue splits and other business deals.

Some game analysts have speculated whether Sony might buy a big publisher of its own to counter Microsoft, or whether PlayStation could open its doors to Game Pass. These feel like farfetched outcomes, but not out of the realm of possibility if Microsoft continues its assault on the traditional console business model.

For Microsoft, the goal is no longer to beat Sony at an outdated game, but to challenge Apple, Meta, Tencent and other tech giants for the supposed metaverse that could dictate not just how and where we play games, but the hardware and operating systems and stores we use to access the entire internet. To exist in that future, Sony needs a gaming vision that goes well beyond selling a lot of boxes that go under your TV and putting out a handful of bestsellers every year.

— Nick Statt (email | twitter)

On the calendar

How to build the metaverse, and build it right

Join Protocol Entertainment's Janko Roettgers, Nick Statt and a panel of experts at 10 a.m. PT today where they'll explore what the metaverse could be, what it'll take to build it the right way and what it actually means for your industry. RSVP here.


That’s how many U.S. adults said they’re not familiar with the concept of the metaverse, according to a Harris Poll conducted by Protocol. And even after reading a description of what it is, 52% of U.S. adults said they feel overwhelmed by the metaverse.

But as always, the younger generations will save us: 60% of millennials are at least somewhat familiar with the metaverse. And around half of them agree the metaverse will be more fun than real life and would make their lives better.


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In other news

Google is getting serious about AR again. The company is building a new mixed-reality device called Project Iris, according to a report from The Verge, to compete with Apple, Meta and Microsoft. Let’s hope it fares better than Google Glass.

A metaverse rave goes viral, for the wrong reason. A live “rave” happened last week in virtual real estate platform Decentraland, which went viral on Twitter after NFT enthusiast Alex Moss tweeted a video of the event. It didn’t look so hot, and crowds of crypto skeptics rushed in to dunk on the event and its community as lame copycats of Second Life, Fortnite and others.

The studio behind Lego games has a crunch problem. An investigative report from Polygon into Lego developer TT Games revealed extensive crunch and other workplace issues. The studio, owned by Warner Bros., is often responsible for making tie-in games to big film franchises like “Star Wars.”

Bobby Kotick finally speaks. The Activision Blizzard CEO, who is expected to depart Microsoft when the deal closes some time next year, spoke to VentureBeat last week in a rare interview. He revealed his thoughts on the sexual harassment and discrimination issues at the company and also revealed why he ultimately decided to sell.

NetEase taps Yakuza producer for a new studio. The Chinese gaming giant has given Yakuza executive director Toshihiro Nagoshi his own studio, which he formed with a handful of other developers from Sega and Yakuza maker Ryu Ga Gotoku Studio.

A new studio from Blizzard and Ubisoft developers. New Tales is a newly established Paris-based game-maker with a collection of talent from across the industry, including Activision, Blizzard, Lucasarts, Sega and Ubisoft.

Cord cutting is killing Trump’s favorite TV networks. Pay TV operators are cutting ties with Newsmax and OAN to save costs, reports The Los Angeles Times.

Google is developing a low-end Chromecast. The new streaming stick will use the company’s Google TV interface, but not support 4K streaming. The upside? It will be cheaper.


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Epic and Unity’s engine war gets even hotter

Epic Games and Unity are increasingly competing for more than just game developers. On Monday, Unity acquired visual effects studio Ziva Dynamics, which has supplied technology for games, film and TV like HBO’s “Game of Thrones” and Ninja Theory’s Senua's Saga: Hellblade II. This follows Unity’s biggest-ever acquisition last fall, when it purchased VFX studio Weta Digital for more than $1.6 billion.

Epic has also been staffing up on Hollywood and VFX expertise, buying photogrammetry company Capturing Reality, as well as ArtStation and Sketchfab. Epic last year released a new tool for creating photorealistic faces called MetaHuman Creator, and its upcoming Unreal Engine 5 is being pitched as an unprecedented transmedia platform for making all kinds of virtual worlds, be it for film, TV, video games or all-new hybrid experiences like the company’s impressive interactive Matrix demo.

For both companies, which are competing to sell the software platforms and tools that could help create the metaverse, the stakes couldn’t be higher.

— Nick Statt

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