Microsoft's battle to secure Activision Blizzard is huge commitment to future of gaming

While cloud gaming is still nascent in terms of technology and available content, some analysts and executives think it could eventually make consoles less relevant

Sony has been a staunch opponent to Microsoft’s deal for Activision Blizzard, accusing the company of seeking to 'lock in many consumers to Xbox' and leveraging its other products to 'foreclose cloud gaming at a critical point of its evolution'. Reuters
Beta V.1.0 - Powered by automated translation

Microsoft’s $69 billion acquisition of Activision Blizzard has focused attention on the decades-old paradigm of console-exclusive games played on its Xbox and chief rival Sony Group’s PlayStation, but anti-trust officials seeking to block the deal are potentially more concerned about the future of gaming in the cloud, which is still in its infancy.

Most video games, from Activision’s Call of Duty, to Elden Ring, developed by FromSoftware, are purchased individually for about $70 each and downloaded onto a console or computer. But Microsoft, one of the leading cloud computing service providers, is seeking to change that.

It has focused its significant gaming efforts on building up a subscription service, Xbox Game Pass, which offers a library of more than 300 titles for about $10 a month for gamers who want to download games to play on the Xbox or PC.

A higher tier of the subscription, at $15 a month, includes cloud gaming, which enables subscribers to stream certain games onto any device, even tablets and phones.

While cloud gaming is still nascent in terms of the technology and content available today, some analysts and executives think it could eventually make consoles less relevant. And Microsoft is in pole position with the infrastructure and content to increase its share.

By bringing Activision titles like Candy Crush and Call of Duty under its roof, Microsoft is betting that it will be able to offer more games to its Game Pass subscribers. The Federal Trade Commission's concern — and Sony’s too — is that Microsoft will take an early lead in the cloud by adding Activision’s games, eventually making them all exclusive to its own platforms.

“We seek to stop Microsoft from gaining control over a leading independent game studio and using it to harm competition in multiple dynamic and fast-growing gaming markets,” Holly Vedova, director of the FTC’s Bureau of Competition, said in a statement accompanying the agency’s complaint.

Game Pass, which launched in 2017, has grown quickly and now has more than 25 million subscribers, far more than a similar offering from Sony, called PlayStation Plus. Microsoft added cloud gaming to Game Pass in 2020 and according to the FTC, more than 20 million gamers have streamed games from the cloud with the service.

Microsoft has said that cloud gaming subscription services are essential to reach its goal of expanding to 3 billion gamers worldwide, and its vision of enabling gamers to play games across Windows, Xbox and smartphones.

The cloud lets gamers stream and play graphically rich and technically complicated titles such as Assassin’s Creed Origins and Halo Infinite on less sophisticated devices like smartphones or tablets that otherwise lack the computing power or storage to support the games.

The technology has proven tricky and has yet to take off more widely because of the high-quality graphics involved in games and the dependency on ultra-fast data processing necessary to make sure that every press of a button immediately corresponds to a movement in the game, with no lag, known as low-latency.

Microsoft has an edge over Sony here, since Microsoft’s cloud division Azure owns more than 200 data centres, which support the lower-latency cloud gaming services for its stable of titles on Game Pass.

Sony doesn’t own data centres from which it can run its subscription service, PlayStation Plus. Sony launched a revamped version of the service in June, which offers similar subscription tiers with access to popular titles like Spider-Man and Returnal, but doesn’t offer new releases in the subscription package, as GamePass does.

Other tech majors have tried to to build up cloud gaming service without much success. Alphabet’s Google had Stadia, the search giant’s attempt to take on the video game console giants with a platform of its own. But after failing to gain traction with gamers, it will shutter next year.

Amazon’s Luna+, which provides streaming access to more than 100 third-party games has also struggled to attract users. Nvidia’s GeForce NOW cloud gaming offering, which is much pricier with its top tier at $100 for 6 months, allows gamers to stream titles they already own.

The struggles to gain traction in cloud gaming make the FTC even more concerned that Microsoft can quickly dominate the market. Phil Spencer, head of Microsoft Gaming, has de-emphasised the role consoles will play in Microsoft’s future.

The company loses from $100 to $200 on every Xbox it sells, according to Spencer. Meanwhile, cloud gaming is forecasted to bring in $5.1 billion revenue in 2022, according to industry analyst Omdia, and rise to $12.7 billion by 2027. That accounts for about 3 per cent of the $172.7 billion in total gaming revenue expected this year.

FTC Chair Lina Khan has specifically highlighted her concern that Big Tech players may seek to leverage their power in adjacent markets to dominate emerging ones and is seeking to to avoid a repeat of the agency’s acquiescence when Facebook parent Meta Platforms bought Instagram and WhatsApp.

“By now, regulators understand that big tech firms will seek to use their power in one market to capture downstream markets,” said Vili Lehdonvirta, Oxford University professor of economic sociology and digital social research.

“Microsoft doesn’t quite dominate the public cloud market, but they have a big edge over cloud gaming rivals who don’t own their own infrastructure and have to rent it from the cloud providers.”

Quote
Microsoft doesn’t quite dominate the public cloud market, but they have a big edge over cloud gaming rivals who don’t own their own infrastructure and have to rent it from the cloud providers
Vili Lehdonvirta, professor of economic sociology and digital social research at Oxford University

The FTC is currently in court arguing its lawsuit against Meta over its proposed acquisition of Within Unlimited, a virtual reality startup that makes a popular fitness app, Supernatural. In an unusual case, the FTC has alleged that Meta sought to buy the app in an effort to monopolize the nascent virtual reality industry. Experts see similarities with the Microsoft case.

“Meta says ‘we want to move to the metaverse, we need to have apps to populate it and Within and Supernatural fit into that,” Yale School of Management’s Florian Ederer said. Microsoft argues the future is cloud gaming and they “need content for that cloud service. The Activision transaction is a road for populating that".

Sony has been a staunch opponent to Microsoft’s deal, accusing the company of seeking to “lock in many consumers to Xbox” and leveraging its other products to “foreclose cloud gaming at a critical point of its evolution".

Analysts question whether Sony’s criticisms come from insecurity that the Japanese tech company lags behind Microsoft in diversifying away from console gaming. Sony typically releases its best first-party games onto PlayStation long before they appear anywhere else.

“If Sony is doubling down on its PlayStation business, that’s potentially very problematic,” said Joost Rietveld, an assistant professor of strategic management at the UCL School of management who has spoken to Microsoft and Sony representatives about the deal.

But Sony’s concerns about Microsoft shutting it out by making best-selling games like Call of Duty exclusive to Microsoft have a precedent that the FTC has said it won’t ignore. After Microsoft’s purchase of ZeniMax Media was cleared by the European Commission in 2021, the company said it would release three future titles exclusively on its own products, according to the FTC’s complaint.

Updated: December 11, 2022, 5:04 AM