Console Wars: Microsoft is All-in on Game Pass, Is this Game Over? | Pixels & Profits Ep. 2 Part 2

the market dynamics strategy and future outlook of console gaming Sony versus Microsoft versus Nintendo Microsoft is all in on Game Pass is this the last generation of Xbox features growth opportunities and more welcome to game makers I'm Joseph Kim episode 2 and part two of pixels and profits coming at you right now we could start with a discussion in terms of what do you guys think about my last comment about the impact of what we're really seeing as a vibrant PC gaming market right and so I think that Sony has shown relatively flat growth in a number of data research firms are showing relatively flat growth for console how do you guys think that the PC gaming Market impacts the console Market if at all in the future I think PC is interesting and I think that having cross-platform games makes it more interesting like for example

fortnite even when fortnite was on iOS a lot of the spending was still on PC and console and then people would play and consume those V bucks on mobile when they were gone right I'm kind of cynically cautious that all of this focus on PC is a coveted you know just it's a coveted thing and it's not sustainable you know and it's one thing when we all work from home and you have you build this super awesome computer for work and play but eventually as things normalize people are going back to the office you're not home as much as less time to play and sit down particularly the types of genres that historically have dominated PC MMOs MMORPGs things like that right we've seen more Shooters Battle Royale things like that you know come up on on PC Call of Duty great example never was on PC all of a sudden it's a huge PC game right so I think there are genre shifts that lend itself to being more sustainable but I also am cautious around the engagement not being

sustainable in the post-covered world that's interesting I think like Joe to your point the console Market isn't necessarily like robustly growing like it's uh call it 17 to 20 billion dollar using unit or dollar a year business but it's also a like a duopoly right let's set Nintendo Assad for the second so can two companies continue to exist in perpetuity inside a two-person duopoly and I think the answer is yes particularly when one is so entrenched in the notion that they're going to continue to make the best single player games on the planet and keep them on their system in perpetuity I think the interesting thing that to think about is like Sony is very vocal about increasing their mix of investment towards more persistent kind of like shooter games and live operations and in that scenario if there's a lag of say two to three years before those games are coming to Market and they are high quality I think gamers are going to thumb their nose the notion that they can only play those on

PlayStation and I think they're gonna have to to think about this more comprehensively as like the bigger calculus thing at play right so marathon is going to be an interesting test of that but if they're going to seed market share or revenue from a hardware basis they have to know that there's going to be be a bunch of Revenue coming in from a software and losing economics on the distribution is not an easy calculus problem to solve so I think that's certainly like worth keeping an eye on I don't think consoles is going away I don't think it's secretly a negative view on that at all but it's it's going to keep changing because again like fortnite changed everything in 2017 like it's no longer acceptable to just have great games that are multiplayer on a single platform I would also just point out you know on a price performance basis console is way better than a high-end gaming PC right the the the hardware specs of a console at 500 whatever they cost is more like a two three thousand dollar gaming PC with the ssds and the GPU built in right so

that's also a consideration that you know if you care about price performance and you care about High Fidelity that's a more affordable option yeah I would say that I actually think Microsoft's in big danger here for console because you know just and I don't want to generalize too much for my own anecdotal experience but when I watch my kids play and I've got a 13 year old 11 year old son it does seem like the new way that that kids are playing is in groups socially on PC on Discord talking together in groups of friends and it's not like how the old school people would like you know if you're playing on an Xbox by yourself or even if you've got two or three people playing an RPG on a console that I think the play patterns are shifting now and without exclusive content to lock you in like Nintendo has I don't know I I feel like Microsoft probably I like the promise of Game Pass but by not making things exclusive and

locking content down what possible reason do you have to own an Xbox today I just don't see it I think my kids and their friends are all telling each other get a PC get on Discord play valent with me right and so I really just think that this may this generation may be marking essentially like a big shift for Microsoft and for Xbox in the future bigger higher level question for Xbox and we can go there now is do they care right do they like do they care about at this point competing head to head on just Hardware with with Sony like I think if you ask Satya Nadella he doesn't want to be selling Hardware he wants to be putting these things inside of an Azure server somewhere and it's all run out of the cloud it's cloud gaming and you subscribe to Game Pass to access the content now the content needs to be there to drive subscriptions whether that's third party or first party I this is why I think star field is a huge test for them if star field

the height is not quite cyberpunk but it's it's definitely up there for for Starfield if this game does live up to expectations or comes close and is what we think it will be that will drive a lot of interest in Game Pass but I think especially on PC where it definitely lags versus console and if it if it does get 20 30 million subscribers on PC because of games like Star field why is Microsoft selling lost making boxes right that's that's the question that Satya will ask Phil Spencer and I think longer term like the series X and S could be the last boxes and console that Microsoft ever makes right so then to some degree you're saying Microsoft's gaming strategy is Game Pass robust is that I think it is I think that and again this is just quoting Satya he wants to build consumer subscription services I don't think he wants to be in the license software package software

selling 60 70 gains even with an MTX component I think he wants to be in the subscription business he wants that recurring Revenue in every single thing they do and I think Game Pass is the only way for them to do that I think they're all in on Game Pass so here's a ringer question for you if that's true and you're spending 70 billion dollars for let's call it four of the top 10 IPS on the market do you risk cutting that business run rate to like 2 billion to induce subscriptions yeah so that's where it gets Activision makes sense from the old strategy not from the new strategy right I mean if you take Call of Duty out I think it makes sense with a new strategy right Diablo like all of the blizzard stuff that's not World of Warcraft Diablo OverWatch Etc makes sense from a subscription perspective I think the only one that doesn't make sense is Activision is Call of Duty because two-thirds of the user base is on PlayStation that would be a massive move if that

were to happen and further like if they're already making these moves with Bethesda and locking down content I think that it's impossible to pull those kind of titles from Sony but like what a mess that would make in the gaming ecosystem if they just all of a sudden you can play this goes back to what I was saying like I think I think Phil Spencer and Satya if if Sony walked up to them and said okay fine here's a term sheet for game pass on on Playstation they would sign it like sight unseen like the and they would stop making boxes immediately because as soon as they let them put game pass on Sony you know whatever the economics are like they'll figure that out all the games are there and that and that's it and this this is this is why the argument the antitrust argument that they would pull the games I know certain titles star field is now going to be a timed console exclusive honestly it doesn't even make sense to me because it's an MMO like you need people in the world like that strategically just doesn't make sense and I actually think they're shooting themselves in the foot by doing that especially because they've kind of already lost this console war Phil Spencer has this this generation Phil

Spencer has said so so I don't know it'll come to Sony eventually it'll be bigger but I think that's a game that's built for PC anyways like if you look at Elder Scrolls five right I mean most of the most of the high engaged users are on PC anyways so maybe we can now talk about some of the trends that have been impacting the console of business I mean I think one obvious one is like a shift from physical to digital distribution which has been underway for a while but now I think it's it's really starting to accelerate just again I don't want to get too anecdotal here with singular data points but at least my kids when I told them I'd get them tears of the kingdom and they got mad when I took when I was gonna go to GameStop and buy them physical comments what are you doing no no no get the digital I'm gonna get the digital version we don't want a disc but in terms of like other longer term Trends I think one of the one of the interesting things to note the Sony presentation was like this shift that we're seeing from live services to in terms of the mix like I think that

presentation stated that in fiscal 2019 they had 12 live service to 88 traditional games and Sony expects that to kind of flip in 2025 to 40 60 and I believe it's 60 and 50 favor of live service right so so we've got live service happening and we also have the notion of the free to play business model and so I wanted to open up to you guys in terms of we have seen that some of these Trends can happen slowly or very quickly what happens if the industry does shift on Console more towards live service operated games or towards more of a free-to-play business model I think it already has to some degree I mean if you look at take if you take out the first party games for a second you look at the biggest third party games fortnite Call of Duty FIFA they all have massive live Services built into them in many cases they're free to play fortnite is free to play Call of Duty war zone is free to play right and those are huge MTX live

Services EA makes more Revenue per user from Ultimate Team than from the actual seventy dollars you spend on the game up front now and that's been that's not news that's been the case for a long time now but you know so I mean I I think for the console makers themselves and this was kind of a point Brian made before right that this it's kind of like a rock and a hard place discussion and I abuse that term a lot I know I used it last week a lot but it's it's live Services games are based on Mal right you want the maximum audience you can get but you're getting it behind a hardware platform so you're not maximizing your audience like the reason that Call of Duty went up up a tier in 2020 was yes covid but also yes PC and Warzone right I mean that was massive for them and that that brought in so many gamers who then ended up actually buying the the full price game on top of that and it's been you know they think they continue to hit new records for sales for the Call of Duty franchise in the wake of really going hard on PC so fortnite right I mean I don't think fortnite is

what it is if that was gated just on Console right and so it's and even Roblox right Roblox is only on Xbox it's not on Playstation yet but still it's not gated behind a single platform so I think that's that strategy is at odds with who Sony is and maybe Bungie fixes that and maybe the people at Bungie you know have a lot of say and these have to be cross-platform but that's just not Sony's DNA I think it's instructive to look at Destiny again because like this is a game that was architected to be a live service but it was a box sale and then it eventually went you know free to play at one point in time and like the the way that they wanted to monetize was like every way you had to buy cosmetics in the game you had to buy a new pass every three months for the new raids and new content and I think there's there's almost like this point in time where Gamers just kind of throw their hands up and say like look I made a commitment to this game or and this could be any any

number of games you should be giving me content at a certain point in time and find which way you want to monetize and just kind of stick with it otherwise you know you'll find something else it's a very competitive market Sony is increasing their investment in these types of games but I would also just say that that's that's hugely suspect to just general hit rates in the industry right like 10 to 20 of the products you green light at some point in time were going to be really successful for them a bunch are going to die and a bunch are going to be flops and without that experience in DNA and producing those live service kind of games like it's going to be kind of tricky and in the meantime you have all these amazing Studios some of the best studios in the world making games like God of War or like Horizon zero Dawn things like that that easily do like 20 plus million units on an ecosystem that has 80 million to 100 million users what does that look like like do you push those teams to make a live service game in a game that really shouldn't be there in the first place and so you know it's going to be weird to see how these games mature and that's especially the key to

the company like Ubisoft right so you have like Assassin's Creed games that print 20 million units every year and you can do that maybe twice a year sometimes but how do you make that some persistent world with microtransactions and everything else and you know they tried to do that with division and things like that so it's it's going to be a maturing phase companies realize you make a lot more money with live Services games for all the reasons Matt mentioned you have a lot more users you have the ability to run Live Events and services and things like that but it's not the answer or the key to every franchise and you don't want to alienate the users that you have because like it's free money if you come back from every year and ask them for a new game otherwise it's just it's just gonna be vapor yeah I think for me the the biggest risk to console I see is if there is a much stronger concentration of live Services games then I think what I've seen is just higher player attention and concentration to specific titles right so like to the to the extent that you have companies like Riot with League of Legends or valorent that just takes up

so much player attention I think it will start to crowd out other titles now I do think you're still going to have great single player experiences that are more consumable in nature your God of War your Spider-Man games like that that people are going to still play but I do think it will be a little bit dilutive because I mentioned I bought tears of the Kingdom for my kids they played it for like a couple hours and they're they're playing Valiant they're too busy to play that game because and they played the out of breath of the wild which is you know before discovering valorant but yeah the danger I think well I don't know if it's a danger or an opportunity or just what's gonna happen is I I do feel like players are gonna start playing fewer games and if we have these bigger hits like League of Legends valorent these type of games are fortnite that take up so much player time it'll potentially crowd out a bunch of other titles and I mean we talked I talked about it last week a little bit but the other kind of 8 000 pound gorilla in the room is what are the Chinese companies doing

right because both tencent and Netties have said they want to make console games for the West and if they make free to play MMORPGs with all of these live services expertise that they have on mobile and PC like that's it it's over like Sony strategy is done at that point right because they have armies of developers that are trained in this stuff way more and way cheaper than what anyone else has and if they're successful Sony strategy to sell a 70 dollar live Services game with season pass DLC and cosmetics is dead yeah because these guys can just treadmill content and just do a Cosmetics live service that no one else can do and so like I that's still a few years out and so are some of these you know things in progress at Sony and others but if that works like just look out like that's that's terrifying right but to your point Matthew like you know holy reverse spent 100 million in the development of gentian impact even with an existing engine honkai 3 impact three and they're

spending 200 million a year in you know live Ops I mean yeah I I do think there is some risk there but it's only going to put 300 million dollars a year behind Destiny 3 which I'm assuming is in development at this point right like I don't know like that's that's a lot of money yeah all right maybe the next question I can ask is mobile so Phil Spencer has come out and said that mobile is really important for Microsoft and I think that you know he's made that the basis of part of the acquisition motivation behind the you know Activision Blizzard because of King and Sony in their presentation had mentioned that they want to expand meaningfully into a mobile they've talked about mobile publishing they've talked about developing internal Studio capabilities but realistically how much of this do you think is actually real

how how serious do you think Phil Spencer is or is that just an excuse for them to you know to close this Activision Blizzard acquisition long story short like how important is mobile 2A console maker what do you guys think I think not at all I think like this dream of console PC IP teleporting to mobile has like a really bad track record and I think there's a lot of reasons behind that it's probably another podcast entirely but like Tech is getting to a place now where like AAA games can be played on mobile in a variety of ways and I think that folks that want to engage this way are finding their path to doing so and like if you think about the the games that monetize really well on mobile it's like again it goes back to like design iteration and like differentiated ideas and mechanics and things like that and it's not a space where like IP really matters we've seen a bunch of instances of companies that with IP that didn't exist they got

purchased for billions of dollars or like supercell didn't need any kind of Ip to create like a new Clash game or whatever and I don't see that changing like the IP that these guys have a hold of is special for a reason and I think like we've discussed this with the consulars right if you stick to a plan and you find your plan and you find your Niche like don't go out of it too much like Microsoft has no idea what UA is and Sony has no idea like how to publish a mobile game and stuff and it just sounds like a recipe for shareholder destruction the the only caveat is if you believe that Activision can be successful in making their own Call of Duty mobile war zone mobile whatever they're doing internally right Call of Duty Mobile today is a 10 cent game co-developed with Activision but most of the work is done by tencent right Diablo Immortal is a neti's game you actually look it's basically just a reskin of an existing MMORPG they had in China with Diablo IP it goes back to what I said these Chinese companies can just

treadmill content that's why they can make these free-to-play massive scale AAA quality games do we think that Activision can do that I mean they've done it on Console so maybe but do they know how to do that on mobile that's a question if the answer is yes then then you can argue that yes the know-how and the expertise can carry over to other IP and other Studios within the Xbox ecosystem but I don't think the answer is yes I don't I know that there's some people that we know that are current or X developers on the mobile side at Activision Blizzard and you know they're excited about what's happening but I I'm skeptical until I see it in in the wild it's one thing to develop cool games it's an entire other thing to manage Mobile Live service to compete with what tencent can do case in point JK sorry to to dump on your uh you're one of your investors but Craft on right in Korea they decided they were going to make their own pubg mobile game to try to take back economics from the license to

tencent and they just got dumped on 10 cent just came out and dropped it on the table tons of content tons of UA spend right when that game came out and that went nowhere and do you think they're going to lie down and just take it when Activision decides to release Wars on mobile absolutely not although I think I'm hearing that Warzone mobile is really good but yeah we'll see how that plays out but yeah I overall I definitely agree with you and to your point Brian yeah I I personally don't think that mobile is as critical to a console maker as the console makers are currently suggesting I think they see a lot of growth in Mobile and I think the console makers want to tell a growth story because as we're seeing all the projections on console is relatively flat so I I can see the the financial motivations or the the the profit side of our of our podcast that motivation to suggest that they have a mobile strategy and that they're moving meaningfully in

that direction but yeah in terms of the synergies I I don't know it's it's a little a little bit weak maybe Sony has a better story there if you know we can talk about you know how they're creating a narrative around trans media and so from that perspective it kind of makes sense but otherwise I would agree with you guys I do think there's a certain sorry I would just say for Xbox I don't think anything to do with tongue sporting investors because it doesn't affect the stock it was purely in any trust thing okay they were just trying to tell any trust Regulators for Activision hey we need them and we don't just eat in the x billion dollar console Market we compete in the 100 x billion dollar gaming Market including mobile and we can't compete in Mobile without activate they that was purely a politics story it has nothing to do with yeah the stock price let's just say like success in Mobile has a few like indicative factors just like the console Wars had right and it comes down to like timing and differentiation in novel mechanics I

think that would be my top three if I had to pick and if you put like a special IP on top of that that's just like icing on the cake and a really good example of this would be like Pokemon go I do think there's opportunities for console in pcip to like transition to mobile if those three things are present but I would say the hit rate of a mobile game with those three qualities and a special IP is way lower than them just sticking to what they know how to you know they know what they're doing right I mean JK you spend more time in the space but like I don't see Xbox making a Halo branded Candy Crush Match 3 game right like they want to make Halo mobile right but like how big is the mobile shooter mark because we're not talking about these guys going after the entire mobile market they're not making Social Casino games they're not making match three games they're not going into hyper casual they want to just take what they're doing and make it cross-platform or console Plus mobile where they keep all the economics okay and I thought I

could maybe we could end with two last questions and maybe the next question would be just a general question about growth so if you go through the Sony presentation there's a lot of things that they talk about right whether it's a project queue with handheld which we've already discussed a bit you know they seem to be fairly bullish with VR although from my perspective it does still seem limited there are some discussion about going cross-platform with first party titles you know the subscription business IP expansion things like that of those potential areas for growth what what are your what's your outlook for growth in any of those areas is there anything you guys are excited about or should we just believe that that kind of flatish growth that we're seeing from all the research firms and from the the console makers themselves is what we should expect from console I think of those things that you mentioned the most impactful or the most

potentially impactful would be subscriptions and then proliferation of live Services if they can apply the same Sony discipline and quality that like Microsoft is lacking those would be my picks yeah I mean I agree if Sony can make a successful live Services game without killing its moat so they can somehow figure out all the things we said they probably can't figure out about maximizing now then that would be the most impactful absolutely because you know MTX is is a huge portion of the revenue you can go into the supplement you can see like the add-on content but most of that is like them clipping coupons on fortnite right they get 30 of every dollar spent on PS4 and 5 by kids playing fortnite in Call of Duty right that in FIFA that's not first party add-on content it's probably effectively zero for all intents and purposes right now and so that that that's that would be a massive thing both for the top and the bottom line of the company and the same goes for Xbox

I'm just I'll be skeptical that they can do it until they do it right subscriptions has really found money like they have a they're basically charging now for things that they gave away for the first three generations right and that's that's going to continue to grow yeah for me I think of all the stuff mentioned in terms of potential growth areas I I am a little bit negative in terms of whether it's handheld or VR or mobile and things like that but one of the things we see is that Sony is betting big on IP right and so one of the things that was mentioned in the presentation is kind of shifting from you know from in in fiscal 19 I think it was 20 of new of their game Investments went to new IP and now it's going to go to 50 and fiscal 25 estimated and so the ability for the value of Ip from gaming I think gaming to some degree are the new comic books right and so similar to how you know we're seeing the The Witcher TV show and kind of like The

Last of Us TV show I think that's just going to continue to increase into movies television and things of that nature and so like the IP expansion transmedia I can see that becoming pretty big and so to the extent that you've got like the Marvel Cinematic Universe having like a Sony gaming Universe I think makes sense and I think of the things mentioned for growth for me that's the one area that I would probably look out for the flip side of that argument is that the hit rate on new IP is a decimal point over from existing established IP right like a new single player RPG game that takes place in you know the nordics and his Vikings has probably a five percent chance of being successful but if it's got divorce 50 right like whatever the odds are right you know but the decimal place is one point over like I don't think that's like an exaggeration and so you're going to spend all this money on much lower hit rate titles

I don't necessarily think that that's a good thing I would actually rather them say we're going to spend 90 of our money on known IP and we're just gonna double down on it and make it even make it twice as big because that's tended to be a more successful strategy for Content houses and it's not just games that's pretty much every Media company right look at Disney look at nbcu they when they doubled the HBO and they doubled down on existing IP it tends to be way more successful and way more profitable than investing in new IP okay and final question what's your outlook guys for the console Wars like who do you think wins here do you have any specific predictions for Sony Nintendo Microsoft what do you guys think Sony's on a really good Cadence right now they if you look at like a map over map of PS4 generation over PS5 PS5 has dragged a little bit because of component shortages and shipping difficulties throughout the pandemic but they expect that to surpass that this year I think this generation looks a lot

like the last generation frankly I think Sony's going to announce through Microsoft bought at least 2X and I think the the next generation is going to be interesting to watch whenever we see what the Nintendo has in store but I think you think you said I just don't see how any rational human being looks at those two boxes and picks the Xbox these days despite like the notion that there's like hard strings involved right like I know like a a slew of dads and moms that buy an Xbox because that's what they had or like but that doesn't that doesn't last forever that's not the strategy I think Sony continues to eat their cake I would point out that up till now the Gap has narrowed like it was two and a half ish to one it's like one and a half is to one but that was also the case in the 8th gen cycle before Sony software just blew him away and I do think we're on track for that and I think the the tail on Xbox will be a lot shorter than the tail on the PS5 just given the outlook for software unless the quality of what comes out of Xbox Studios turns around miraculously starting with Starfield but I also think

okay I'll make some grandiose statement the console Wars are dead long live the console Wars like I said Microsoft I don't think cares about selling boxes anymore and if they want I think in an Ideal World game pass is so successful it's ubiquitous they don't care about the boxes they're playing a different game their strategy is much different Sony strategy is keep doing what worked we make amazing content you have to buy our box to play our amazing content and at some point in the future that may not be a viable strategy that I just is this the last console generation I remember being at E3 in like 2018 and there was a certain CEO from a French gaming company who was telling me that cloud gaming this is the last generation of consoles and I almost puked I almost like spit up on the street because I was laughing so hard I think that as as we look ahead there is technology coming about that eventually means that cloud

gaming can comparably rival a console experience and at that point what is Sony's strategy do they continue to sell boxes to sell their content but now Microsoft is saying the gating price to our content is not a 500 box it's now a 15 a month subscription right like at what point and we saw this with like film and DVDs when Netflix shift to streaming right I don't know when we get there when it's comparative on a technology and quality basis I think every time we try to say it's this generation it's not but at some point you can theoretically envisage a point where the box is irrelevant and at that point what is Sony strategy because everything they're doing everything they laid out for the next couple years is how the world is today and what Phil Spencer is at least talking about is where the world is tomorrow okay I do think I agree with you in the sense that maybe the console Wars are

dead I do think in my opinion Sony's one they're gonna be the market leader for consoles but it's going to be more of a two-way race to your point Matthew like yeah I just don't think Microsoft cares and maybe they don't even care about the Xbox in the future Nintendo's safe because people are going to play you know people are going to want to play Pokemon forever so wherever they put that you know if they put it on a handheld people are going to buy handhelds if they put that on whatever that's where people are going to go to play Pokemon although I think if they just sold Pokemon red on the Apple App Store like they would make a billion dollars yeah I don't know people remember but there were like fake Pokemon games that didn't do anything that just like broke records on on mobile on the IOS app store but I do think that I'm more I am really worried about Microsoft I mean I mean Microsoft fan I hope they pull things out but I just think that game pass is such a dangerous strategy and if I'm being honest with you like if you ask me

would I rather have Game Pass and all of the content behind it or Riot you know just League of Legends and balance I'd say give me Riot so I am hoping that this is not the beginning of a decline for Microsoft but that's kind of where it looks like the market is heading and yeah at least this point in time Sony's won and I expect to be buying Sony consoles for the foreseeable future 10. I'm looking forward to getting to PS5 someday so much stuff to play that I haven't played yet foreign all right well I think that's it we've gone a little bit long again but definitely always an interesting conversation Matthew got last point and any final point from you as well Brian one more final comment Sony and Microsoft people out there make your boxes smaller next time please they're way too big I know you're cramming in

power just find a way to shrink the form factor that's that's not just me that's every gamer everywhere especially when I was in my little 445 square foot apartment in Hong Kong make your boxes smaller please yeah you don't like cooking cooking your eggs on it no parting comments for me I think that was good discussion thanks guys awesome all right and so for our audience we will catch you next time thanks guys hey guys I'm back well there you have it the console Wars our take both myself Joseph Kim Matthew contraman Brian peganov and you gotta let us know did you like this episode or not you made it to the end if you like this content if you want to see more please do like subscribe comment let us know if you don't know if we don't get that feedback we may just stop doing these episodes but if you do like it please do let us know and I will catch you next time