What will we even be doing on video game consoles 10 years from now? What kinds of games will we be playing? What new monetization schemes will we be grousing about to our friends and in various subreddits and comment sections? There are so many concurrent innovations in the development and distribution of video games these days, and while not every one of these story lines (VR … NFTs …) has culminated in some big, game-changing breakthrough in video game culture, the cumulative shift in how players, as consumers, interact with publishers is very real. War has changed.
The future of console gaming, as big business, hinges in no small part on Friday’s resolution of Microsoft’s $69 billion acquisition of the video game publisher Activision Blizzard. This was a hard-fought upheaval. For more than a year and a half, Microsoft found itself in a three-way, transatlantic regulatory shoot-out with the Federal Trade Commission in the U.S., the Competition and Markets Authority in the U.K., and, briefly, the European Union. There were harsh words and hard feelings and, recently, all sorts of scandalous revelations in a massive leak of mishandled documents regarding Xbox, its competitors, Activision, and other potential acquisition targets.
This deal seemed very nearly destined to unravel until a federal judge recently ruled against the FTC in the U.S. and Microsoft worked out some additional concessions to regulators in the U.K. So now Microsoft gets to own one of the biggest video game publishers in the world. What, pray tell, does Microsoft Gaming CEO Phil Spencer plan to do with all that sweet, sweet content? Here are four key takeaways from the blockbuster deal.
Microsoft is stronger, but it still remains weak—for now.
It’s important to start our reckoning with the near future of console gaming with some understanding of Microsoft’s current position in the space. Microsoft is by far the video game industry’s biggest company, with its $2.6 trillion market cap, but Xbox is still the weakest brand of the three major consoles. Nintendo, with the Switch, is the market leader of the current console generation, but even just in terms of “high-performance” hardware, Sony’s PlayStation 4 and PlayStation 5 beat Microsoft’s third- and fourth-gen Xbox consoles, respectively, in lifetime sales. There are no real losers in the current console generation, and the latest Xbox is Microsoft’s fastest-selling console to date—but third place is still third place.
Microsoft broke into the console market in the first place with Halo and the game-changing online multiplayer capabilities introduced in Halo 2. It has been a very long time—a decade and a half, and counting—since Microsoft published anything as interesting as Halo or Gears of War or Mass Effect as an exclusive, console-defining release for the Xbox. What new opportunities for distinction of the Xbox brand might this new merger bring?
Everyone gets to keep playing Call of Duty.
The Microsoft-Activision deal brought the video game industry to a high-stakes stand-off over Call of Duty, the $30 billion series of first-person shooters launched in 2003 and published by Activision. The immediate fear: Microsoft would move swiftly, cruelly lock the PlayStation out of Call of Duty, and limit the franchise to players on Xbox and PC in order to strong-arm millions of players into buying an Xbox.
This, more than anything else, was the potential deal-breaker. It’s one thing for Sony to spend more than a decade developing (The Last of Us, Horizon Zero Dawn) and licensing (Final Fantasy XVI, Death Stranding) its own high-profile console exclusives to bolster the PlayStation against the Xbox. It would be another thing entirely—and a bleak future for gaming, indeed—for Microsoft to segregate a bunch of big preexisting online cross-play games.
So Microsoft made a big show of negotiating 10-year agreements with the other publishers to keep the series on other consoles. The judge in FTC v. Microsoft specifically cited the defendant’s commitments to keep Call of Duty on the PlayStation and in fact expand access to Nintendo as the court’s basis, in large part, for denying the motion for a preliminary injunction against the merger. In fact, Microsoft, per a statement from the company’s vice chairman Brad Smith, has specifically guaranteed Nintendo “full feature and content parity” with versions of Call of Duty released on the Xbox and the PlayStation. So this particular crisis seems to have been averted for the foreseeable future.
Microsoft is becoming a software company first.
Microsoft’s big success story of the past decade in the console market wasn’t any particular game or hardware launch but rather the more than 29 million sign-ups for Xbox’s monthly subscription service, Game Pass. Frankly: If Microsoft didn’t have Game Pass, then Xbox would likely be written off as a floundering also-ran platform that peaked more than a decade ago with the Xbox 360. But Game Pass, with its impressive launch-day titles and robust catalog of classics, represents Microsoft’s true edge over Sony in the video game business.
The success of Game Pass is interesting to me not because I’m necessarily convinced that the subscription model is the future of console gaming, but rather because it illuminates a lot of problems and possibilities in modern video game publishing. In one leaked memo, Spencer describes big publishers “struggling to refill their portfolio of hit franchises” and “riding the success of franchises created 10+ years ago.” He also sees these incumbents squatting at the top of the sales charts with licensed IP titles such as Spider-Man and Star Wars. Game Pass is a good deal for gamers, yes, but also an irresistible deal for game publishers, as they’re increasingly dependent on both Sony and Microsoft to absorb risk and cost.
This also brings us to the concern that nearly derailed the Microsoft-Activision deal in the U.K.: cloud gaming, a feature of Game Pass as well as of PlayStation Plus. Cloud gaming is often framed as a way of expanding the player base for bigger games to smaller devices, such as smartphone and tablets, and easing the storage needs of both consoles and phones. But it’s also, crucially, a way of expanding the content libraries of platforms and broadly solving the long-standing problem of backward compatibility. This is, once again, the sort of problem that game studios can’t really solve on their own. The tech is still a bit rough and the content libraries are still a bit too spotty, but the future likely will reward the first console publisher to truly get this right—and Microsoft, as a cloud company, has a decisive advantage here.
Microsoft must fight exclusives with exclusives.
So Microsoft isn’t going to use Call of Duty, specifically, to force me to finally buy an Xbox. But Microsoft can, of course, develop new titles and lock Sony out of those, much as Sony, in years of exclusivity with Square Enix, has locked the Xbox out of Final Fantasy. Welcome to the turnabout.
The Microsoft-Activision deal is endlessly amusing to me because in the months before it was announced, I remember hearing video game industry pundits insist that the PlayStation’s retail superiority over Xbox didn’t really matter. In their eyes, Microsoft could still beat Sony in subscription revenue and win the future just on the strength of Game Pass. This was probably overselling things a bit. Do you know how the Switch became the third-best-selling console of all time? With a nifty design and four megahits. The hardware matters, and so do the exclusives. Game Pass is great, but Microsoft still makes a video game console. Microsoft could be a formless cloud company selling subscriptions to the PC Master Race, but for now at least, it’s not. Microsoft produces the Xbox, and the Xbox needs to compete with the PlayStation. Microsoft CEO Satya Nadella has every reason to beat his chest about Game Pass, but he’d be naive to cede the console competition to Sony based on the risky long-term projections of the famously stable, drama-free business model that is streaming. But … that’s basically what Xbox has done for a long time. The Last of Us, Final Fantasy, Metal Gear Solid, God of War, Spider-Man: A lot of people want to play these games, and to do so, at least at launch, they must own a PlayStation.
The truth is, Microsoft could use a new Halo—breakout IP that births a new console mascot and also a novel gameplay concept, one that ideally demonstrates some technical superiority the Xbox has over the PlayStation. This is easier said than done—but now much easier done with Activision.
Microsoft doesn’t have a decade to patiently acquire small studios and the occasional Bethesda in hopes that one of them eventually produces the next The Last of Us. So Microsoft—the only company that could’ve just straight-up bought Activision—bought Activision.
Much of the anxiety about this acquisition concerned Call of Duty, but it also stemmed from a greater uncertainty about how so many concurrent, accelerated trends will shape the industry and the culture in the next decade or so. Things like the explosion of online multiplayer and the proliferation of its associated monetization models. Or the refinement of cloud gaming, the metaverse, and virtual reality.
Nineteen months ago, when the deal was first announced, Microsoft’s purchase of Activision seemed to be the unceremonious close of one era of gaming and the ominous dawn of the next. Suddenly, Microsoft would own Call of Duty, Overwatch, Warcraft, Diablo, and fucking Candy Crush. Sony would no longer be able to use console exclusives as a crutch—the company would have to figure out how to fight a cloud-based war with goddamn Microsoft. This was, effectively, the FTC chairwoman Lina Khan’s argument in opposition to the merger: Combined, Microsoft and Activision could remake the video game industry in their image. Gamers could possibly appreciate some of the results, for a time, but in the long run, we’d have installed an unkillable incumbent whose sheer scale and unchecked expansion would scare away new entrants and stunt the competitive dynamics of the industry. Twenty-two years ago, Microsoft entered into competition with Sony. No other competitor—unless you count Steam, with its popular handheld, I suppose—has since followed Microsoft into the console wars.
Justin Charity
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