The upcoming console battle between the Microsoft (NASDAQ: MSFT) Xbox Series X and Sony (NYSE: SNE) PlayStation 5 is just around the corner with both systems slated to launch this holiday season. However, unlike previous console cycles, this new generation may not be fought over unit sales but instead over subscribers.
The ability to digitally download a game was a defining experience of the current generation of PS4 and Xbox One users. But cloud gaming will be the focus of the next era, and the only way these companies can differentiate their respective platforms is much like how Netflix stands out from the competition -- with exclusive content.
The cloud gaming race is on
It's telling that Microsoft and Sony are focusing more on users and subscribers when reporting results to investors than disclosing how many console units they have sold.
In Microsoft's fiscal fourth-quarter earnings call, CEO Satya Nadella touted the company's nearly 100 million Xbox Live players, as well as the company's launch of xCloud, which lets Xbox Game Pass subscribers stream games to mobile devices and access more than 100 titles for a monthly fee.
Sony could tout its 112 million PS4 units sold, which is twice the volume of the Xbox One, but instead, the company boasted to investors last quarter that it now has approximately 45 million subscribers to PlayStation Plus, a service that provides free games each month and is required to play many games online.
The challenge for Sony in the next console cycle will be competing with Microsoft's prowess in the cloud. Sony's PlayStation Now game streaming service had 2.2 million subscribers at the end of April, and it lets users play PlayStation games on a PC. Meanwhile, Xbox Game Pass has over 10 million members from 41 countries.
Across its entire PlayStation network, Sony has 113 million users, which is more than Microsoft's base of Xbox Live players. Yet Microsoft's Xbox Game Pass has far more members than PlayStation Now, which is indicative of Microsoft's ability to deliver a competitive streaming experience.
The launch of Xbox Series X will be the first console launch that Nadella, who has expertly transitioned Microsoft's core software business to cloud services, will oversee as CEO. Microsoft made a few acquisitions in the last few years to bolster its first-party studio lineup as Nadella knows that game consoles are only as successful as the exclusive franchises available for them.
Microsoft now has more first-party game studios than Sony
Sony's PlayStation has managed to outsell every Xbox since Microsoft got into console gaming nearly 20 years ago. PlayStation fans will say that's because Sony usually has a better selection of first-party titles that are exclusive to its platform.
While Sony has pledged that there will be plenty of games only playable on the PS5, Microsoft has its own arsenal of exclusives in development.
Microsoft's recent acquisitions include the game studios Obsidian and inXile in 2018, bringing the number of studios under Microsoft's Xbox Game Studio banner to 15. This exceeds Sony's roster of 14 game production studios.
However, Microsoft still has its work cut out for it to match Sony's mastery of making games that millions of people want to play. Sony has been good at this for years, helping to put the PlayStation brand in the company of other industry leaders like Netflix and Spotify. Sony most recently scored a big hit with Ghost of Tsushima.
Sony acquired Insomniac Games in 2019, which made the critically acclaimed Marvel's Spider-Man (2018) exclusive for PS4. This acquisition nicely synergizes with Sony Pictures' exclusive rights to the Spider-Man cinema franchise and is a huge win for the company.
Microsoft trying to outflank Sony on price
While Sony has yet to announce a price for its upcoming launch, Microsoft has already fired a shot across Sony's bow by announcing that the high-powered Xbox Series X will be $499, while the digital-only edition, Xbox Series S, will be $299.
The PS4 was priced $100 below the Xbox One at launch in 2013, which helped Sony get off to a head start last time around, so price is a big factor.
Regardless of which console is cheaper, it's still about delivering video games that console buyers want to play. History is on Sony's side here, but Microsoft is still on the hunt for more studio deals. Microsoft's expertise in cloud services and deep pockets give it the option to acquire talent and new franchises that will likely make the Xbox a more formidable competitor to the PlayStation over the next five years.
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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. John Ballard owns shares of Microsoft. The Motley Fool owns shares of and recommends Microsoft, Netflix, and Spotify Technology and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.
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