The Big Story

Welcome to the next generation of gaming

Today's the day! In the video game business, this is as big as it gets: the debut of a new generation of centerpiece home consoles from the two technology and entertainment heavyweights that dominate the sector — Microsoft and Sony.

Today, Microsoft is launching the $500 Xbox Series X (which supports 4K resolution) and the smaller, less-powerful $300 Xbox Series S (which supports up to 1440p resolution). On Thursday, Sony will launch the $500 PlayStation 5 with an optical drive and a $400 PS5 without the drive; both versions support 4K.

But launch game lineups and immediate holiday sales figures are basically meaningless. That's for two reasons.

First, both consoles are going to sell out this year anyway. Some "preorders" may not even arrive until New Year's Eve. Both companies would surely love to sell as many units as possible; they are not artificially creating shortages.

• It's more important for Sony and Microsoft to maintain tight manufacturing tolerances (and minimize the risk of hardware failure once the units are in consumers' homes) than to maximize production yield right now.
• In any case, both companies share a dependence on AMD for the core processing and graphics chips at the heart of both the PS5 and the Xbox X/S, and AMD seems quite busy at the moment (in a good way).

Second, these cycles last years. With sell-outs assured this quarter, what really matters is how these consoles move next year once they are no longer supply-constrained. (Along these lines, read Dina Bass's great article on how Microsoft used its cloud engine to keep the Xbox launch on track amid quarantine.)

• The time to pay attention to sales figures arrives once the casual consumer can walk into Wal-Mart and see PS5 and Xbox boxes just sitting there. That's why Microsoft's delay of the much-anticipated Halo Infinite until next year may help the company in the long run. When Halo does arrive, it will be at a moment when more people can actually buy the machines.
• Moreover, Microsoft and Sony don't actually make any money until people start buying and playing games. Wall Street analysts have told me they estimate both companies could be losing as much as $80 to $100 on every new top console they sell. They only recoup that in game sales and licensing fees down the road.

So this is a long game. It may not be clear for a year or longer how Microsoft's subscription-heavy strategy truly stacks up against Sony's traditional retail focus.

- Seth Schiesel

Overheard

• "Most of Silicon Valley has said, 'Gaming, it's a hits business.' … But Fortnite and others look like SaaS businesses." — Rogue Ventures' Alice Lloyd George said game margins can outperform some SaaS companies, too.
• "[We] have significant[ly] more opportunity for engagement and monetization than we're presently doing with some changes to the organization and some changes to how we run those live services." — EA's Andrew Wilson said the company is focused on improving its mobile offerings, with the help of returning exec Jeff Karp.
• "It is not lost on us that the biggest hits in the mobile business are native to the mobile business. They're not based on licensed IP. They're not based on console IP." — Take-Two's Strauss Zelnick downplayed ideas of turning games like GTA into mobile titles.

JOIN US NEXT WEEK

Join Protocol's Seth Schiesel on Nov. 18 at 11 a.m. PT / 2 p.m. ET for a discussion on the evolution of gaming. He will be joined by Activision Blizzard President Daniel Alegre, EA SVP Samantha Ryan and Facebook Head of Gaming Vivek Sharma. This event is presented by Microsoft Azure. RSVP now for more details.

RSVP

Level Two

Can Take-Two accelerate Codemasters?

It was first announced Friday, and now it's official: Take-Two is set to buy Codemasters for $956 million, after both boards agreed to the deal.

• Unlike some deals, this one's pretty easy to get your head around. "They're buying something on a much lower profit multiple than their shares are trading on," Panmure Gordon analyst Alasdair Young told me today. Codemasters' profit, currently valued around 20x, will almost immediately be re-rated at Take-Two's ~30x multiple.

Take-Two should be able to eke out more profit from the racing giant, too. It will "have better economies of scale than Codemasters really has access to in their own right," Young said. Indeed, in its press release announcing the deal, Take-Two said that it thinks it can use 2K's "operating expertise in publishing, including live operations, analytics, product development, and brand and performance marketing" to improve Codemasters' performance. "As an entity within a larger publisher," Young said, "[Codemasters] will be able to be more profitable than as a standalone entity, in my view."

• Plus there's the fact that racing games have been on a tear this year, and have great potential to be a key part of subscription models going forward — even if that isn't something that Take-Two is a fan of.

Given all that potential, there was some consternation around the price. Many current shareholders don't have a mandate to hold U.S.-listed shares, Young noted, so they may not be able to benefit from Codemasters' future growth under Take-Two. But it looks like things are going ahead anyway: Gaming consolidation truly does not care about borders.

- Shakeel Hashim

Lootbox

• Microsoft is looking to buy Japanese game studios, Bloomberg reports. The publication cites multiple anonymous developers who said they've been approached as part of Microsoft's big push to gain market share in Japan.
• EA shares plunged after its outlook missed estimates. Take-Two fared better, as did Nintendo, Zynga and Konami. Square Enix did not. Things are also pretty bad at Sega Sammy, which sold off its arcade business and laid off over 600 people.
• Griffin Gaming Partners raised $235 million for gaming investments. It already has stakes in Discord, Subspace and AppLovin. And speaking of investments, Tencent led a $25 million round in Lockwood Publishing.
• Enthusiast Gaming Holdings plans to list on Nasdaq. The company owns seven esports teams and a bunch of gaming media properties. In other esports news, Immortals Gaming Club raised $26 million and sold off its Call of Duty League franchise to 100 Thieves; esports contract platform Edge raised $1.5 million; and a League of Legends player was fined by Riot and his team for hate speech.
• Angela Hession is Twitch's new global VP of trust and safety. Other moves this week include Greg Fischbach, who founded new publisher Accelerate Games; Jeremy Bondy, taking over as Vungle's CEO; and Phil Greenspan, who's running Maze Theory's new LA office.
• Fortnite might return to iOS. The BBC reports the game is set to be featured in a new mobile web version of Nvidia's GeForce Now streaming service, providing a way to get around Apple's App Store restrictions.
• Speaking of Fortnite, Roblox announced its own virtual in-universe rap concert, coming up Saturday and featuring Lil Nas X.

Five Questions For …

Wallace Santos, CEO of Maingear

In honor of the new console generation, we welcome the CEO and co-founder of Maingear, one of the top makers of high-end gaming PCs. Santos recently received a new CPU personally autographed by AMD CEO Lisa Su.

What was your first gaming system?

My first console was an NES, gifted to me by my aunt, and it made me a Nintendo fanboy for the rest of my life. I've owned every Nintendo console since then except the GameCube, and I even owned the ill-fated Virtual Boy.

What is the most important trend in the game business in 2020?

I think more and more people are realizing the importance of reducing latency in games, especially in competitive esports titles like Valorant and CS:GO. Let's also not forget high refresh rate 4K gaming becoming a reality with Nvidia's RTX 30 series and AMD Radeon 6000 series graphics card.

What has been the most overlooked aspect or development in the game business over the last year?

VR is still alive and kicking! With incredible titles like Half-Life: Alyx and the release of the Oculus Quest, VR is only getting better and more accessible. We've also seen the arrival of 8K gaming on the PC with the Nvidia RTX 3090.

What new technology or technical development are you most looking forward to?

The road to 1,000 Hz monitors. 360 Hz monitors are already a reality, and the experience is impressive. Desktops took a huge leap forward this year, and I expect notebooks to do the same next year.

What games are you playing recently?

I'm constantly playing Rocket League (you should see it at 8K), and I still need to finish Half-Life: Alyx and Red Dead II before Cyberpunk 2077 comes out.

You Tell Us

Paralysis of choice

This is the busiest week for new games in a long time, and the choices are almost overwhelming. We want to know what you're playing. All in on Spider-Man? Rediscovering your Xbox catalog? Conquering Valhalla? Looking forward to staring at Ronald Reagan? Let us know by replying to this email; we're sure you've got opinions.