Microsoft (NASDAQ: MSFT) recently agreed to buy privately held ZeniMax Media for $7.5 billion in cash. ZeniMax's core subsidiary, Bethesda Softworks, publishes popular video game franchises like Fallout, The Elder Scrolls, Doom, Wolfenstein, and Dishonored.
This marks Microsoft's biggest gaming-related acquisition ever, and dwarfs its $2.5 billion takeover of Minecraft-maker Mojang six years ago. Microsoft expects to close the deal in the second half of fiscal 2021, which started on July 1, and expects it to bear a "minimal impact" on its non-GAAP operating profits throughout fiscal 2021 and 2022.
Why did Microsoft buy ZeniMax?
Microsoft plans to add Bethesda's games to Xbox Game Pass, which offers unlimited downloads and installations from a library of over 100 games. It also stated that Bethesda's future games, including its upcoming space epic Starfield, will launch simultaneously on Xbox Game Pass, the Xbox, and PC.
In the press release announcing the ZeniMax deal, Microsoft announced that Xbox Game Pass now reached over 15 million subscribers. It's also bundling Game Pass with its cloud gaming platform xCloud in its Xbox Game Pass Ultimate subscriptions.
Those announcements, along with the recent introduction of its two new Xbox Series consoles, indicate Microsoft is beefing up its digital library of games ahead of a fierce holiday season battle against Sony's (NYSE: SNE) new PS5 consoles.
A battle for exclusive games
Many top video games are now simultaneously launched across multiple consoles and PCs. To pull gamers toward their new consoles, Microsoft and Sony lean on exclusive titles.
In recent console generations, Sony launched memorable first-party games like The Last of Us, God of War, Horizon Zero Dawn, and Spider-Man, and secured exclusive third-party games like Square Enix's Final Fantasy VII Remake. Microsoft's top exclusive franchises included Halo, Forza, and Gears of War -- but those series arguably lacked the luster of Sony's blockbuster titles.
But Microsoft's purchase of ZeniMax will add more iconic franchises to its first-party portfolio. It's unclear if Microsoft will turn all of ZeniMax's top franchises into exclusive games, but it could turn a lot of heads if it exclusively releases the next Fallout or Elder Scrolls games for Xbox consoles and Windows PCs.
Funding the development of new Bethesda games
Prior to Microsoft's bid, Bethesda had been struggling to maintain a steady stream of hit games. Bethesda's Fallout 76, an online-only expansion of the single-player Fallout universe, was poorly received and forced it to reassess its launch of Doom Eternal. Wolfenstein: Youngblood was also met with mediocre reviews last year.
Bethesda also brews its top-tier games for years before launching them. Skyrim, the fifth Elder Scrolls game, was launched in 2011 -- five years after the previous game, Oblivion. Bethesda is developing a sixth game, but warns that it could still be "years away" from launching.
Meanwhile, there's plenty of pent-up demand for a sequel to Fallout: New Vegas, the beloved spin-off of Fallout developed by Obsidian Entertainment and published by Bethesda in 2010. Microsoft's takeover could accelerate the development of these games and others -- which could attract a lot of gamers as Xbox and Windows exclusives.
What's at stake for Microsoft?
Microsoft's total gaming revenue grew 2% to $11.6 billion in fiscal 2020, or 8% of its top line. The growth of its software services, including Xbox Live and Game Pass, offset its slower hardware sales, which faced postponed purchases ahead of the new Xbox launches later this year.
Microsoft has only shipped 48.3 million Xbox Ones since late 2013, while Sony shipped 113.3 million PS4s during the same period. Microsoft trailed behind Sony for two main reasons: The Xbox One initially cost $100 more than the PS4, and Sony secured over twice as many exclusive games as Microsoft.
Microsoft is addressing both failures this time around. Its all-digital Xbox Series S will cost just $299, compared to the PS5 Digital Edition's price tag of $399. It also announced new exclusive titles, including Halo: Infinite, a reboot of the Fable franchise, Obsidian's Avowed, and new State of Decay and Forza games. If those games aren't enough, the addition of Bethesda's games to Xbox Game Pass might tilt the scales in Microsoft's favor.
The key takeaways
Microsoft's takeover of ZeniMax is a bold move which could win over hardcore gamers and widen its moat against Sony. If Bethesda launches new games in its top franchises exclusively for the Xbox and Game Pass subscribers, it could lock more gamers into Microsoft's expanding software and services ecosystem.
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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft 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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