Microsoft Could Upend Video Games Forever

Video games have always been a volatile business, for both console and game makers. Sales of consoles typically spike during the holidays, and games can generate a vast majority of their sales in just their first few days on the market.

That volatility isn't great for anyone in the business. New innovations like Valve's Steam platform have promised minor changes to the industry, offering a modicum of stability in game sales, but the general boom and bust has largely continued. That may be changing, though, as Microsoft (NASDAQ: MSFT) combines hardware and software to create a subscription model for video games.

Family playing video games together.

Image source: Getty Images.

The video game subscription model

Microsoft is trying to change things up by offering its Game Pass content library along with the new Xbox Series X and Series S in a single subscription model. Subscriptions -- technically financing for the hardware coupled with a subscription to gaming content -- start at $24.99 for the Series S console and $34.99 for the higher-powered Series X.

Subscriptions that include hardware could be a win for consumers, because they don't require the large upfront payments a console or game would usually demand. So it's a win for users. For Microsoft, it puts the company in a powerful position as the one building the customer relationship and putting together the content bundle.

This has been called the Netflix of video games, but it's actually more -- Microsoft is the hardware maker too, unlike Netflix. As Microsoft adds more content to the Game Pass library, it'll be the go-to hardware and software subscription for video games.

Electronic Arts going along for the ride

Electronic Arts (NASDAQ: EA) isn't going to be left out of Microsoft's new model -- EA Play will be included in the Game Pass library, including previews of upcoming games. However, while EA will sit alongside Microsoft games, it might not have the same long-term durability. If we're sticking with the Netflix analogy, EA is Starz when Netflix streaming launched, which was soon cut out of the picture as Netflix built more of its own content. This is what happens when you leave your fate up to someone else.

As weak a hand as EA is playing, Activision Blizzard (NASDAQ: ATVI) could be finding itself cut out altogether. The company's Call of Duty franchise has been its cash cow for more than a decade, but Halo, Fallout, and Gears of War are included in Game Pass. This may make buying another similar game a little less appetizing for consumers.

Activision Blizzard and Sony need a response

Sony's (NYSE: SNE) PS5 is launching in November, and will compete head-to-head with the Xbox Series S and X. But it's sticking with a more traditional sales model for consoles and games. You can get 0% financing with a Playstation credit card, and Playstation Plus gives you access to two new PS4 games every month -- but it's not exactly an all-you-can-eat subscription like Microsoft is offering.

Activision Blizzard is going to try to sell games to consoles the traditional way, but it may have a hard time generating the value it once did. With Game Pass and All Access, gamers can try games at their pleasure on Microsoft's platforms, including PC. If that's a compelling value proposition, Activision Blizzard could get squeezed out.

Microsoft is the one to watch in next-gen consoles

There's no guarantee that Microsoft's subscription hardware and software video game model will succeed, but I like that it's trying new ways to upend the market. This could give gamers a reason to try new games, developers more consistent economics, and the Microsoft platform a much-needed boost in video games.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Travis Hoium has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard, Microsoft, and Netflix. The Motley Fool recommends Electronic Arts and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, long January 2022 $75 calls on Activision Blizzard, and short January 2022 $75 puts on Activision Blizzard. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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