Last week I attended Microsoft’s E3 event, held virtually for the second consecutive year due to the pandemic. At the event, Microsoft made it very clear just how important gaming is to the 46-year old company. At a separate analysts-only event conducted before the official opening of E3, Microsoft’s executive team made the case to developers and shareholders that it takes gaming more seriously than its archenemies in the gaming space—Sony and Nintendo. Today I’d like to provide my perspective on the event.
During the analyst event, Microsoft CEO Satya Nadella and Xbox gaming business leader Phil Spencer claimed that gaming has been a part of Microsoft’s DNA since 1982 when it launched Microsoft Flight Simulator (three years before Microsoft launched the first version of Windows). Nadella went on to say, “Gaming is fundamentally aligned and woven into our mission as a company.”
You can’t blame Nadella for trying to talk up Microsoft’s “street cred” with game developers, as regular and vibrant content represents the key to success in the gaming space. Microsoft’s gaming business is healthy, but materially smaller than other parts of the organization’s overall business. As such, it’s part of his job to convince skeptics of Microsoft’s commitment. Developers are likely still smarting from Google’s similar Stadia pitch in early 2019. If the rumors are to be believed, Google may not be in it for the long haul.
Nadella believes that Microsoft has three competitive advantages over other players in the gaming space. First of all is Microsoft’s leadership in cloud computing via its Azure platform. Secondly, Nadella called attention to the enormous resources Microsoft has to expand and enhance the subscription significance of its Xbox Game Pass initiative. Lastly, Nadella touted Microsoft’s focus on emboldening game developers.
Spencer expanded on how he views the significance of Microsoft’s Azure cloud technology. He believes the various platforms’ cost and power requirements have historically limited who can play games, where they can play them and who they can play them with.
He also emphasized Microsoft’s continued substantial investments in cloud computing, as well as its embrace of more platforms (e.g. televisions, smartphones, tablets, etc.) to access more gamers. For example, Spencer teased that ultimately, Microsoft will embrace “smart” TVs. Later this year, Microsoft will also offer cloud-based gaming to subscribers of its Game Pass Ultimate program in Australia, Mexico, Brazil and Japan. Cloud-based gaming will supplement the Xbox app on both consoles and PCs later this year with an irresistible “try before you download” functionality. Browser support (even on iPhones) for cloud-based gaming is expected to show up later this year. The ultimate goal, which is still being tested, is to provide an immersive Xbox Series X experience via the Azure cloud.
Unquestionably, Microsoft puts considerable weight on its subscription games service. The company believes is already fundamentally changing gaming habits in a significant way. Microsoft’s data suggests that Xbox Game Pass members play 30% more genres and 40% more games. Most importantly, a whopping 90% of its subscribers indicate they played a game they would not have attempted without Game Pass. This data is likely music to the ears of Microsoft’s executive team as it is a clear demonstration of the value of Game Pass.
Nadella put it directly:
“With Game Pass, we are truly redefining how games are distributed, played, and shared. With Game Pass coming to the browser, the value of the subscription is going to transcend from the console to the PC to mobile, and it’s great to see the progress.”
It is not a secret that Microsoft spends huge dollars on developing hardware like the new Xbox Series X/S. But it underscores these investments with big wagers on content acquisition. The company has created or acquired over 23 worldwide studios over the past year, a necessary step if the company is to release one new, first-party game into Game Pass every quarter as intended. According to Microsoft, the company’s independent company developer program (ID@Xbox) has generated over $2 billion. Moreover, two thousand titles have been released since the program’s launch.
A few closing thoughts
With the cavalcade of new games at E3, it’s easy to get distracted from Microsoft’s strategic business objectives for the gaming space. Microsoft views gaming as an engine of growth. The company’s participation in the gaming space is a share acquisition play, which has to be appealing due to its global nature and size ($65.5 billion in the U.S. alone). During the pre-E3 event, it was interesting to hear Spencer discuss the way games bring people of dissimilar backgrounds together. On that note, Microsoft announced new accessibility features to its consoles and its Xbox Adaptive Controller, in an attempt to appeal to the estimated 400 million players worldwide with disabilities.
After digesting the messaging at this event, it’s clear that Microsoft views gaming as a multi-decade strategic play. Augmented by its success in the cloud space and with an eye on fulfilling the cross-platform potential of gaming, Microsoft appears to be firing on all cylinders in its Xbox business. Apple might even take notice.