Microsoft's Bethesda Buyout to Intensify Console Gaming War
Microsoft MSFT is leaving no stone unturned to make the launch of the highly awaited next-generation Xbox Series X gaming console, which is scheduled to release on Nov 10, 2020, a blockbuster hit.
The tech giant recently announced its intentions to acquire leading video game developer Bethesda Softworks’ parent company ZeniMax Media for an all-cash deal valued at $7.5 billion.
The deal will help boost the subscriber base for Xbox Game Pass service as Microsoft will be adding Bethesda’s popular AAA titles to its Game Pass roster. At present, the subscription service has 15 million users.
Rockville, MD-based Bethesda Softworks boasts a robust IP portfolio and exclusive AAA console and PC game content, with popular video titles like The Elder Scrolls, DOOM, Quake, Wolfenstein, and Fallout, under its banner.
Moreover, Microsoft, currently carrying a Zacks Rank #3 (Hold), is likely to make the upcoming Bethesda game titles available on Xbox, the same day these are released. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
With this agreement, the company is well poised to disrupt Sony’s SNE PlayStation 5 ambitions, which is priced at $499.99 and set to release in Nov 12 in the United States and a few other select countries. Markedly, Microsoft has announced estimated retail price for Xbox Series X at $499, which takes the console war a notch ahead.
Per VGChartz data, PlayStation 4 dominated the console market in terms of total sales through August 2020, with 50.3% market share, outpacing Nintendo's NTDOY Switch and Xbox One market shares of 28.2% and 21.5%, respectively.
Year-to-Date Price Performance
Nevertheless, Microsoft is constantly integrating its Azure cloud’s capabilities into its gaming segment. This will facilitate it to improve gaming strategies and develop better content and provide it a competitive edge over Sony and Nintendo in console gaming space.
Moreover, Sony is reportedly facing some manufacturing issues with its SOC with production yield as low as 50%. In other words, about half of the products were not up to the desired quality standards and were not fit to be shipped. Although the yields have started to improve, they are yet to reach an optimum level, forcing Sony to lower its production estimate by 4 million. At present, Sony carries a Zacks Rank #3 (Hold).
Content Strength to Boost Market Presence
Microsoft has been doubling down on its console, cloud and PC gaming endeavors to seize a larger share of this lucrative market. The latest acquisition will enable Microsoft to gain access to all ZeniMax’s creative studios like Bethesda Softworks, Bethesda Game Studios, ZeniMax Online Studios, and Roundhouse Studios along with all their video game franchises. This brings the number of in-house development studios to 23 from 15 for Microsoft.
Moreover, the company recently launched its cloud gaming service for Xbox users across 22 markets in North America and Europe, simultaneously, bundled with the company’s Xbox Game Pass Ultimate subscription.
Gamers will be able to access more than 100 game titles including the likes of Minecraft Dungeons, Halo, Sea of Thieves, Gears 5, Destiny 2, and Tell Me Why, as part of their Xbox Game Pass Ultimate subscription.
Prior to that, Microsoft introduced its smallest Xbox ever — Xbox Series S, at a price of $299 to lure more customers, especially non-gamers who do not like to splurge on consoles.
Further, Microsoft announced its in-house developed gaming studio, The Initiative, in 2018 with an aim to enhance the exclusive gaming content. In fact, The Initiative, is hiring engineering and design experts from well-known gaming studios, in a bid to develop a “blockbuster-level video game.”
The company has also acquired Playground Games, Compulsion Games, Ninja Theory and Undead Labs, gaming studios in the past.
We believe the acquisitions will significantly expand gamer base. The company is well poised to benefit from the operational efficiencies and the combined innovative skills. These factors are likely to bolster originality in its gaming content. Furthermore, the expanding game portfolio bodes well.
Market Prospects Aplenty
The growth in the video game market is being driven by COVID-19 induced stay at home trends, rapid uptake of mobile gaming as well as the launch of newer Xbox and PlayStation console devices. Per Fortune Business Insights data, the gaming console market is envisioned to hit $51.51 billion by 2027 from $34.27 billion in 2019, at a CAGR of 5.3%.
Also, rising interest in esports, amid shelter-in-place guidelines, is expected to lead to higher gaming spend. Mordor Intelligence report cites that the worldwide gaming market is expected to hit $256.97 billion by 2025 at a CAGR of 9.17% between 2020 and 2025.
We believe that the latest developments and robust initiatives to boost player engagement and provide immersive experience, amid rapid growth in gaming industry, will help Microsoft to bolster its gaming revenues in the quarters ahead.
Markedly, Gaming revenues increased 66% at cc in fiscal fourth quarter, driven by increased engagement led by stay-at-home wave. Xbox content and services revenue increased 68% at cc year over year, driven by solid growth in Xbox Game Pass subscriber base, third-party transactions and Minecraft. Notably, Minecraft recorded a new high of nearly 132 million monthly active users during the fiscal fourth quarter.
Robust market prospects have allured major players into the gaming arena. It is important to note that Nintendo is reportedly working on an upgraded version of its Switch console and plans to ship it in 2021.
With more computing power and 4K graphics, it has created quite a buzz in the gaming space and aims to derail the hegemony of PS and Xbox models. Nintendo has particularly flourished during the pandemic with its social simulation game titled ‘Animal Crossing: New Horizons’ selling 22.4 million copies since its release in March. Sales of its Switch and Switch Lite consoles have also improved significantly during this period. Currently, Nintendo carries a Zacks Rank #3 (Hold).
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