How Sony can make a comeback in the console wars

OR THE uninitiated, which includes your columnist, there are two things to know about video gaming. The first is that some things never change. For all the virtual worlds they can create, gamers, a mostly male bunch, like nothing better than to blow their on-screen opponents to smithereens. The second is that everything else is in flux. Gaming is moving from consoles, PCs and smartphones to streaming and the metaverse. It is not just avatars that are being shot to shreds. Business models are, too.

Bear both points in mind when making sense of recent deals involving the two biggest rivals in the console wars, Microsoft, maker of the Xbox, and Sony, producer of the PlayStation (Nintendo is in its own orbit). To cater to those itchy trigger-fingers, both want to expand their bestselling “first-person shooter” rosters. Microsoft’s $69bn acquisition of Activision Blizzard, a publisher, would give the tech giant ownership of “Call of Duty”, one of the most successful shoot-’em-up franchises of all time. Sony’s $3.6bn takeover of Bungie brings it “Destiny 2”, another popular shooter.

The large sums of money changing hands highlight the second point: that everything is up in the air, even the relative strength of each firm. For years Sony has had the advantage. Its latest consoles, PlayStations 4 and 5, have far outsold equivalent Xboxes. It has more exclusive games, which draw in fiercely loyal players. Yet Microsoft’s acquisition of Activision, if it fends off antitrust concerns, could alter the balance of power. According to Newzoo, a data-gatherer, it could put Microsoft’s game-software revenue ahead of Sony’s, even combined with Bungie. It underscores Microsoft’s commitment to a subscription and streaming service, funded by a mountain of cash and supported by its Azure cloud business. It reflects a willingness to be open to a range of devices and business models, including free-to-play games and ad-supported ones. It could, literally, be a game-changer.

Like Netflix in video, Microsoft hankers after vast subscriber growth. That fits with the current zeitgeist that everything in business, from media to Microsoft’s Office 365 programs, should be based on subscriptions, rather than one-time sales—and reliant on the cloud. But while it is tempting to think Sony should chase after Microsoft, it has neither the money to outspend it on content nor, despite a foray into streaming called PS Now, the infrastructure to compete with it in the cloud. The Bungie deal, which is big for Sony, makes the gap between the two companies’ financial firepower starkly clear. Thomas Aouad of Drawbridge Research, an analysis firm, likens it to taking a spoon to a gunfight rather than a knife. To outmanoeuvre Microsoft, Sony must do something different—and uncharacteristically bold.

For starters, it could make the case that streaming and subscription services are no guaranteed road to riches. Yes, streaming dispenses with the need for a costly console, which could draw in casual gamers. But unlike Netflix viewers, players interact with streamed material, often at speeds measured in the milliseconds when their fingers are on the trigger. Low latency, or lag, over an internet connection is a life-and-death matter for a player’s avatar.

The business model is unproven, too. Sony and Microsoft have long used consoles as loss-leaders to sell high-margin games to which they often hold exclusive rights (think Gillette razors and razor blades). The approach has benefited their overall gaming businesses, as well as independent game developers. In contrast, selling blockbuster content via monthly subscriptions involves vast outlays and fewer barriers to entry. It may attract lots of new users. Microsoft’s Game Pass service, which grants access to a library of games to run on consoles for up to $14.99 a month, has 25m subscribers; Netflix is getting into games. But such services could face brutal competition and need constant replenishing with blockbuster titles to reduce customer churn. Indeed, Sony, with a deep catalogue of music and films, has profited from being the source of such replenishment for video- and music-streamers.

As an alternative gaming strategy, on February 2nd it outlined plans to double down on “live service” games such as “Destiny 2”, which are regularly upgraded and hence easy to monetise. That is not enough, though. It also needs to outline a strategy that draws on its efforts to break down the silos between its gaming, music, film, electronics and image-sensor businesses. As Kato Mio, who publishes on Smartkarma, an investment-research site, puts it, while other firms, such as Meta, talk of building the metaverse, Sony already has many of the ingredients for immersive entertainment (including virtual reality) at its fingertips. It needs to turn its conglomerate structure into a virtue.

That means cross-fertilising its entertainment business, by releasing games as films, for instance. More ambitiously, it should put its cutting-edge technologies in better service of the future of entertainment. Here, its small stake in Epic, a maker of hit games such as “Fortnite”, and gamemaking technology such as Unreal Engine, could be a building block. If Tencent, a Chinese tech giant, were ever minded to sell its 40% stake in Epic, Sony should consider raising its investment. With Epic as a partner, Sony could hold its own much better against Microsoft.

Mutually assured destruction

In the near term, Sony needs a strong enough slate of content to retaliate if Microsoft tries to deprive the PlayStation of Activision titles (Microsoft says it won’t). It has other problems to confront, such as a slowdown in PlayStation 5 sales due to the supply-chain crunch, and game developers’ demands that console-makers cut the commissions they charge. In the longer run, Sony’s strength is that gaming, which accounts for over a quarter of its revenues, is crucial to its future. For Microsoft, it is less existential. That is an incentive to think big—and laterally. Sony has a panoply of entertainment and technology businesses to turn to, as well as a potential partner in Epic. To safeguard its future, it should do so.

Read more from Schumpeter, our columnist on global business:

Lakshmi Mittal transformed steelmaking. Can his son do it again? (Jan 29th)
Making sense of the East-West divide in tech (Jan 22nd)
TikTok isn’t silly. It’s serious (Jan 15th)

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This article appeared in the Business section of the print edition under the headline “Epic battle”