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How Sony’s Bungie Acquisition Affects Microsoft Gaming

How Sony's Bungie Acquisition Affects Microsoft Gaming

In 2020, as the pandemic took hold, 50 million Americans took to gambling, a 31% year-over-year increase, according to research by investment firm Morgan Stanley. The following year, US games set a sales record of $60.4 billion, an increase of 8% over the previous year.

The unbridled growth of the industry has triggered a wave of acquisitions. The biggest was the purchase of Activision Blizzard, Inc. (ATVI) in January by Microsoft Corporation (MSFT) for $68.7 billion. Rival Sony Group Corporation (SNY) retaliated by buying Washington-based Bungie Games, maker of Halowhich found success on Microsoft’s Xbox platform, and destiny.

Their moves matter as the two companies are the second and third largest gaming teams in the world. What does Sony’s latest acquisition mean for Microsoft’s gaming ambitions?

Key points to remember

  • Recent acquisitions by Microsoft and Sony are part of a growing trend of consolidation in the gaming industry.
  • Sony is ahead of Microsoft in games.
  • Microsoft will likely make more acquisitions in the future to catch up with Sony and bolster its gaming unit offerings.

A battle of two giants

Sony’s acquisition of Bungie is part of a growing trend of consolidation among game companies. As the industry explodes in popularity, its players are busy finding rivals and game studios. Already, this year has seen three multi-billion dollar acquisitions. The motivations for these acquisitions are diverse. Further on, a metaverse looms. But the most immediate concerns are the phenomenal growth of the gaming industry over the past two years.

While Microsoft’s acquisition of Activision Blizzard is bigger than Sony’s acquisition of Bungie, the Japanese company is ahead of Microsoft in the industry. Sony’s games and network services division posted record-breaking $25.03 billion in revenue in fiscal 2020. Microsoft’s gaming revenue for fiscal year 2021 was $15.4 billion.

More importantly, a significant portion of Sony’s revenue from games came from content and services on its PlayStation consoles. This significant increase [in profits] was primarily due to the impact of the aforementioned increase in game software sales and an increase in network services sales, primarily PlayStation Plus,” the company said in its earnings report.

This is an important distinction. With overall sales of around $6 billion, hardware sales made up a fraction of overall gaming industry revenue. The majority, around 85%, consisted primarily of software sales. Microsoft’s Xbox may be a bestseller, but the company has some catching up to do when it comes to gaming software and services.

For example, the best-selling games of December 2021 were both from Activision Blizzard. Call of Duty franchise. Marvel’s Spiderman and Sony’s MLB series placed sixth and ninth respectively, while Microsoft Minecrafta $4 billion acquisition made in 2017, was a distant 13th. The ranking difference suggests that Sony’s game development unit has a much more robust presence compared to Microsoft.

This could affect Microsoft’s future revenue. Console companies, which also act as publishers for some games, derive most of their revenue from licensing. A vertical integration strategy in which companies control the production, marketing and release of their games could increase revenue. Previous research has shown that vertically integrated games generate higher revenue and sell more units at higher prices than indie games. “…consumers value vertical integration features in their games for between $4 and $34 per game,” the authors wrote.

Microsoft’s landgrab for Activision may have been a masterstroke in vertical integration, but Sony has enough ammunition to strengthen its lead. For example, Sony’s investment in Epic Games, developer of the smash hit fortnite, gives it considerable leverage. Microsoft will likely have to make future acquisitions to compete with Sony on an equal footing.