The game industry’s great exclusivity race is all about securing the future

New hardware and subscription services will always need exclusive content.

A screenshot of PS5 exclusive Returnal from Sony-owned studio Housemarque.

Sony and Microsoft are scooping up new studios left and right to build out exclusive libraries.

Image: Housemarque

Video game exclusivity is more important than ever. The business strategy, a controversial one in the gaming community, involves acquiring the rights to software either through contract or acquisition to ensure it cannot be purchased or played on a competitor's device. For big console-makers like Microsoft and Sony, exclusive software is critical to obtaining and retaining people who buy the hardware. And increasingly, the best way to get such software is to buy established studios and then fund and oversee new projects, either using existing series or all-new ones.

In the context of, say, television, exclusivity is a perfectly normal approach to acquiring customers: Subscribe to Netflix for the latest season of "Stranger Things," and no one bats an eye. Historically, gaming fans have also flocked to their platform of choice, treating one distinct box's library as a matter of corporate identity to be enjoyed as a reward for consumer loyalty and years of dedicated spending.

But those boxes have become less differentiated over the years from both one another and the PC platform. That has in some cases made exclusivity feel more like a shrewd way to punish players who don't pony up for one platform over another, rather than build something that takes advantage of the platform's unique strengths. Buying a new console isn't like subscribing to a month of Hulu, after all.

Yet there's a good reason why exclusive games still dominate the industry, and why exclusivity will rule the post-hardware future once games can be streamed like TV shows and movies straight to your TV or streaming stick of choice. Being able to play, or watch, something you can't get anywhere else remains the largest motivator to buy into an ecosystem. And that means acquiring more and more intellectual property and the studios that can shepherd it from an amorphous idea into a consumer product.

Big game publishers, and especially platform owners like Microsoft and Sony, today operate more and more like multimedia ecosystems, diversifying their businesses across a variety of screens and content types in a way most reminiscent of streaming TV. Once a customer is inside that ecosystem, it's easier to sell them everything else — be it a subscription service, a Fortnite skin or a physical accessory. Additionally, having a robust series of subsidiaries making exclusive content is a smart way to ensure you can stay in business if, say, cloud gaming and subscription services turn the entire industry on its head in five or 10 years.

"Effectively, everyone is trying to reach enough scale to insulate their business from competition down the line. Intellectual property and consumer-centric infrastructure are critical components for Microsoft, Sony and others to future-proof themselves," said Joost van Dreunen, a video game analyst and investor who sold his market intelligence firm SuperData Research to Nielsen in 2018.

"Exclusive intellectual property signals to consumers that one catalogue is more deserving of their time and money than another," he added. "We see in streaming video, for instance, that a single successful documentary like 'Tiger King' or a series like 'Game of Thrones' can drive adoption among subscribers."

The exclusivity war never ended

A few years ago, it seemed like the walls of exclusivity were fracturing. Sony gave in and began enabling cross-play, which allows players on PlayStation consoles to play with their friends on Switch, Xbox and PC. Microsoft has for years now released new games on both Xbox devices alongside PC, often with the ability to move your progression and purchases across platforms.

But all the while, both Microsoft and Sony were quietly amassing ever-larger first-party empires. And with the launch of new console hardware in November, it's become impossible to ignore just how important exclusivity is to maintaining a competitive edge and getting consumers to buy hardware and subscribe to services.

Sony last year purchased Insomniac Games, a longtime partner and the studio behind the massively successful Spider-Man reboot. The company has since released another PlayStation exclusive, Ratchet & Clank: Rift Apart, and is working to further build out the Spider-Man franchise. Last week, Sony purchased Housemarque, another PlayStation partner and the developer behind the PS5 exclusive Returnal. And just days later, Sony announced its purchase of Nixxes, a studio known for creating PC ports so its exclusive games can, years down the line, expand beyond the PlayStation platform, but only at Sony's discretion.

Facebook has also gone on a studio buying spree in the virtual reality space, scooping up BigBox VR and Downpour Interactive in the course of the last three months. The company now owns five formerly-independent game developers that are all making Oculus exclusive titles.

"At the end of the day, you don't buy a PlayStation 5 because you like the chipset in there," said Survios CEO Seth Gerson. The developer, best known for VR titles, this year branched out beyond VR into traditional console development. "The same is true in VR. You're not buying it because of lock-in. You're buying it because it's the type of content, the type of experience and the type of presence."

Microsoft's purchase of Bethesda Softworks, the company behind huge hits like The Elder Scrolls and Fallout, for $7.5 billion was the most transparent and ambitious exclusivity play the industry has seen in years. Though the company waited months to reveal its strategy, Microsoft announced at E3 last month it would be putting all Bethesda games on Xbox Game Pass, its subscription offering modeled similarly to Netflix and other streaming media services. It's also keeping them off PlayStation platforms, though you can still play the titles on a PC (running Windows, of course).

The common theme here is that all three platform owners have an ecosystem they want to sell. Sony wants people to buy new PS5s and to pay for PlayStation Plus; Microsoft wants people to buy an Xbox (or a PC) and subscribe to Game Pass; and Facebook wants people to buy an Oculus Quest 2 and buy all their software through the Oculus Store.

With the pandemic-induced surge in game-playing among the general public combined with huge amounts of investment pouring into the space, it's reasonable to expect the rate of acquisitions to increase to ensure those ecosystems keep adding new users. "A combination of cheap capital, a surge in consumer spending on interactive entertainment, the entry of Big Tech into gaming and the launch of a new hardware generation has made it easier for incumbent platform holders to justify larger acquisitions and related expenditures," van Dreunen said.

Changing winds of exclusivity

It wasn't always the case that exclusivity meant snapping up as many studios as you could. A decade ago, third-party developers were more inclined to accept exclusivity contracts if it meant increased financial stability and a guarantee of marketing support. This was especially true for indie developers during the sixth and seventh console generations, with Microsoft and Sony often competing against one another to secure exclusive rights to high-profile indie titles at launch.

But as gaming has diversified across more platforms, including mobile devices and the Nintendo Switch, and the difference between platforms has reduced, fewer game developers are eager to restrict their potential audience to just one box and risk putting all their eggs in one basket.

"For a medium-sized studio to only distribute via one of the digital stores or consoles means they are making it that much harder to recoup their initial investment among a smaller addressable audience," van Dreunen said. "Commercial success in video games today is the result of an ongoing process of investing in content add-ons, specials, community efforts, sales and finding ways to increase a game's value." Games, van Dreunen added, have to act like assets that appreciate over time, and it no longer makes sense to pursue a business model of recouping development costs solely through selling units.

It's also simply safer to be acquired by a big platform owner these days. Severe dysfunctions in the U.S. labor market for gaming have resulted in routine studio closures, perpetual rounds of layoffs, and cost-cutting and restructuring that can often kill projects mid-flight. All the while, game development costs have continued to rise and game prices have remained static or dropped to zero, as studios now try to recoup costs and earn profit through in-game purchases and add-ons. Having Microsoft, Sony or Facebook writing the checks means months to years of reassurance.

"Game makers today are confronting increasing marketing costs and a fragmented market landscape between PC, console and mobile. To do well in such a market requires nerves of steel and loads of money," van Dreunen said. "For many it is then better to sell the studio and continue to focus on making games, rather than getting sucked into chasing novel technologies, get wrapped up in growing costs and complexity of marketing, and risk falling between the cracks as large tech firms seek to buy out the rights to your game and have it disappear in some opaque subscription lineup."

The remnants of the bygone exclusivity era can be seen in Sony's awkward State of Play presentation, in which the company dedicated a significant portion of its livestream event yesterday to a game developed by an Xbox-owned studio. Deathloop, created by ZeniMax-owned Arkane Studios, is a timed PlayStation exclusive, a deal that Microsoft is honoring despite now owning ZeniMax and all of its subsidiaries as part of the Bethesda deal.

Any future games developed by Arkane will surely be exclusive to the Xbox and PC platforms as part of Microsoft's Game Pass strategy. But you can be sure Sony is less likely to make such deals in the future in favor of investing in studios it may eventually acquire, like Insomniac and Housemarque.

Exclusivity was a hallmark of the very earliest game consoles, and it dominated the burgeoning video game industry in the '90s when Nintendo, Sony and Sega made drastically different hardware. Yet all these years later, exclusivity is still a dominating force in the industry for many of the same reasons, even though the available platforms today have few meaningful differences.

In an attention economy bursting at the seams with ways to spend our time and money, something unique will always win out over a commodity experience. And Microsoft, Sony and Facebook are spending big to make sure their ecosystems have as many unique experiences as possible.

Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.

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