Microsoft recently reported earnings, with a notable focus on artificial intelligence (AI) and cloud segments. However, significant strides have also been made in the company’s Gaming division, which includes Xbox and first-party developers such as Activision, Blizzard, ZeniMax, and others.
Despite layoffs in the division earlier this year, Microsoft’s gaming strategy is evolving and appears to be on track. A decade ago, the top three largest video game companies were Tencent, Sony, and Microsoft. Last year, Microsoft shot to the top of the list following a merger with Activision-Blizzard, signaling a new strategy to dominate the gaming industry through focusing on hit titles.
As hardware sales gradually lose relevance and Sony’s PlayStation continues to outsell every generation of Xbox, Microsoft’s gaming division reported a modest 1% increase in hardware sales for Q2 2024. During the merger, Microsoft and Activision faced a legal battle with Sony and antitrust regulators. This was due to concerns that the popular Call of Duty franchise would become an Xbox exclusive.
Microsoft and Sony eventually agreed to keep Call of Duty on Sony’s consoles. Microsoft has always maintained it would keep Call of Duty on PlayStation, arguing it doesn’t make financial sense to pull the game from Sony’s consoles. The goal in acquiring Activision-Blizzard was to expand its collection of lucrative intellectual property, not to monopolize AAA titles for selling Xbox consoles.
Microsoft’s strategy has been shaped by acquisitions of studios like Rare, Bungie, Mojang, ZeniMax, and Activision-Blizzard. Sony, on the other hand, has followed a less organized approach to mergers and acquisitions. Sony currently has 21 first-party studios compared to Microsoft’s 15.
M&A activity in the gaming industry is expected to increase this year. However, Microsoft should be cautious not to overextend, as Sony has experienced layoffs in its gaming division due to mismanagement of budgets and overinvestment in acquisitions. The Activision-Blizzard merger has been beneficial for Microsoft and MSFT stock.
Activision contributed $2.08 billion in revenue for Q2 2024 and drove a 49% gaming revenue increase for Microsoft. The company’s gaming strategy now focuses on being everywhere with the biggest titles, moving away from console exclusivity. The industry is seeing changes, with companies like Warner Bros. Discovery and Embracer Group facing challenges due to their focus on free-to-play, mobile, and overextension in acquisitions.
Recent layoffs at Microsoft indicate that the company is “focused on the best opportunities for growth,” demonstrating fiscal and strategic discipline. For those investing in MSFT stock and hedging their bets on Microsoft’s AI and cloud endeavors, the Gaming division should provide some long-term reassurance.
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